Henry M. Paulson, Jr., Chairman and Founder of the Paulson Institute and 74th Secretary of the Treasury, today delivered a keynote address at the 2021 New Economy Forum, where he laid out why global cooperation is vital to addressing climate and biodiversity crises and ensuring not just recovery but greater resilience and higher quality, more inclusive, and more sustainable growth.
Ladies and gentlemen, it’s a pleasure to be here.
First, a big thank you to Prime Minister Lee for his gracious welcome.
And, of course, to Mike Bloomberg and his star team of organizers.
We’ve faced challenges together these past two years.
But we’ve also seen resilience, tenacity, and sheer heroism.
Now, we need governments, businesses, market participants, and citizens in every country to grapple not just with the challenges of building “back” those things we feared we’d lost, but also of building “beyond” the national and global economies we once had.
We should build beyond what we had to ensure not just recovery but greater resilience and higher quality, more inclusive, and more sustainable growth.
And we should build beyond to harness more innovation, foster greater equity, and create more opportunity for all.
It gives me no pleasure to say that I fear we are not on the path to do that.
Covid-19 exposed dangerous flaws and added fuel to the trends that are de-integrating the global economy.
It was a badly needed wake-up call to changes already occurring in the world.
But too few countries are responding with necessary structural reforms.
And too few countries are cooperating to assure a robust and resilient future global economy.
Instead of maximizing healthy competition and mitigating some of the debilitating effects of strategic competition, the pandemic exacerbated the underlying tensions that have roiled markets, put the global economy at risk, and interrupted flows of people, goods, technology, and capital.
Indeed, some countries have made non-cooperation with actual and prospective rivals a central plank of their economic policies.
They’re imposing new tariffs or recommitting to the old ones.
They’re erecting across- and behind-the-border barriers.
And they’re threatening wholesale decoupling as the basis of their technology policies.
In that sense, too few countries are un-learning the worst lessons of the past few years about how protectionism ultimately hurts prosperity, how barriers to trade ultimately stifle opportunity, how restrictions on capital flows ultimately scare away investors, and how attempts to stifle cross-border innovation ultimately undermine the potential for scientific breakthroughs.
The spirit of non-cooperation is embedded in politics and in a reaction to real economic disruptions.
This is anchored in the real experiences of people who have been left behind. We can debate whether the cause is technology, trade, China, or a combination of these—the effect is the same.
But the solution is not to upend an open economic system.
While capitalism is imperfect, there is simply no better system for generating growth, opportunity, and prosperity.
For all its flaws, that system, rooted in market principles, is still the best way to achieve broad prosperity and ensure rising living standards.
But we also know that capitalism must be constantly upgraded to meet changing economic and societal circumstances.
So, we need to re–learn the lessons of the past – and rework policies to expand economic opportunity for our citizens.
That won’t come from cutting off flows of trade, technology, capital, or undermining global institutions – no matter how politically popular these ideas become.
Because what’s politically expedient is often in conflict with what leads to economic prosperity over the long term.
So, we need to mitigate the erosion of the basic pillars that are essential to well-functioning global and national economies. These are:
- Effective and trusted government.
- Well-functioning markets.
- And international cooperation.
Today, all three of these pillars are being sorely tested.
What Governments Need to Do to Build Back Trust and Effectiveness
Let’s start with trust in government – the very foundation of well-functioning societies.
Virtually everywhere, that trust is at devastatingly low levels.
In a recent survey of 28 countries, trust in government is down almost 10 percent.
In the United States, trust in the federal government hit rock bottom in 2020.
In China, one survey says citizens’ trust is down almost 20 percent.
I believe this erosion of trust stems from governments’ own failure to keep up with the pace of change and act to address the needs and concerns of those who are being left behind.
So, governments must build back trust by being more transparent, delivering opportunity by investing in people, upgrading and enhancing education and social programs — including social safety nets — investing in infrastructure, and stewarding the environment for future generations.
Investing in people is probably the most critical because human capital is what differentiates one economy from another. It is a critical ingredient in bolstering productivity and economic resilience.
Big economies thrive when they have labor market and immigration policies that attract, educate, and train skilled labor.
This is a huge competitive advantage for open economies like the United States, and a competitive disadvantage for closed economies, like China’s, that don’t allow for immigration.
Ultimately, countries should want to attract the best minds from around the world and integrate them into their economies.
Physical capital is also essential.
The world needs more, improved, and cleaner infrastructure—built and financed by all major economies, not just one or two, and not on the basis of exclusivity, or the conditioning of finance on demands to become part of someone or other’s economic bloc.
More connectivity in more directions will be a net benefit to the world.
In the US, I’ve argued for a modern-day domestic Marshall Plan that includes massive private and government investment to rebuild and create the American infrastructure of the future.
America needs to repair and maintain roads and bridges but also create best-in-class national digital infrastructures. And the Biden Administration’s bipartisan infrastructure bill is an important step toward doing just that.
And we need to recognize that our environment is vital to long-term prosperity.
We need to protect biodiversity and natural capital.
And we must mitigate the huge risks of climate change by investing in clean energy and the technologies necessary to accelerate the decarbonization of a global economy.
These investments—in human capital, in physical capital, and in natural capital—are tangible things that people can touch and feel.
They are things that materially improve lives today and life chances for our children and grandchildren.
They are necessary investments. And they are ways for governments to win back public trust.
We also need a second pillar to thrive — well-functioning, safe, financial markets, and good government policies to facilitate them.
Today, cross-border financial disruption is a major and growing risk.
Financial crises are inevitable.
And so, it is critically important to reduce their frequency, severity, and to enhance our ability to mitigate their damage.
In 2008, we saw how a crisis in US markets disrupted the entire global economy.
In 2015 and earlier this year, we saw how disruption in China rippled through global markets.
There are those in America who are trying to compel financial decoupling with China.
They are succeeding in some areas, and there will be more pressure for decoupling in the future.
But wholesale financial decoupling is impossible, and partial decoupling is likely to make the United States, China, and the world more susceptible to financial crises.
We need my friend and successor, Secretary Janet Yellen, to continue her communication with Vice Premier Liu He aimed toward transparency, greater harmonization, and coordination of financial regulations and accounting principles.
It’s crucial that we have mechanisms for the world’s first and second-largest economies to coordinate.
But I’ve told my colleagues in China this: these mechanisms will be much more effective if US financial institutions are operating on a level playing field in China, and if China establishes and enforces a world-class regulatory structure.
And I’ve told my colleagues in the United States something too: these mechanisms will be much more effective if Chinese companies aren’t banned from listing in the US market.
The only way to put out the next big fire will be with global coordination.
And I can tell you from first-hand experience, it sure worked in 2008, particularly with China.
We also need to recognize that capital markets are a core element of a country’s competitiveness.
And while I know banks and asset managers aren’t popular in Washington these days, the fact is the US benefits by having its premier financial institutions operate in China but on a level playing field.
Chinese capital markets will be safer when world-leading institutions bring best-in-class risk management, accounting, and governance.
And when the inevitable disruptions occur, US regulators will have first-hand market knowledge.
And if US firms don’t operate there, it will be difficult to maintain their global leadership when the British, European, and Japanese firms do. And when these nations, and Hong Kong, welcome the best Chinese companies to list on their exchanges, it will be harder for New York to remain the world’s financial center.
People in Washington like to criticize China’s opaque accounting and murky corporate governance rules. And I agree: they need a lot of work.
But the calls to restrict cross-border capital flows are not “just” about accounting standards and corporate governance.
A truly honest assessment should admit that this is also about strategic competition.
But competing strategically shouldn’t mean making it harder to compete economically.
We don’t want to lose the foundations of our economic competitiveness in the bargain.
The Challenge of Decoupling
And there lies the challenge of decoupling.
At a time when governments should be cooperating on two of the most important challenges we have faced in generations—ending the pandemic and rebooting growth—rancor and antagonism stand in the way.
Nowhere is this clearer than the current state of US-China economic relations.
Some in my country say we shouldn’t do any business with China—that it’s impossible to compete and collaborate at the same time and that business is somehow “unpatriotic” unless it brings wholesale political change in its wake.
But this is a false choice.
American multinationals set high business standards and the world’s second-largest economy, China, could learn much from seeing American corporate social responsibility and business integrity in action.
We have seen selective decoupling, and we will see more—some is essential to protect advanced technologies. And no country, including America, can afford to be over-reliant on another country for a critical product.
But some of the de-integration has been counterproductive, and I fear that more is on the way.
Is it really in the American interest not just to selectively decouple but to walk headlong down the path of a wholesale decoupling from China?
I hardly think so. Let’s be clear about what will happen if we do:
The rest of the world isn’t going there, so the US would be breaking global supply chains and cutting off US businesses and workers from participation in some of the largest and fastest-growing markets of the future.
And without some level of cooperation in the international system, there will be chaos.
The acute challenges facing the globe — pandemics, economic growth, climate change, cybercrimes –will be virtually impossible to meet.
And we can’t address chronic challenges either, like harnessing technology and governing data flows, if there is no cooperation.
So, in the short term, we need to take some venom out of the rhetoric, take a deep breath, and get more clarity around how the US. and China will interact.
The Biden-Xi summit is an important step in the right direction. But let’s not kid ourselves that one leaders’ meeting will resolve the real strategic and competitive tensions between our countries.
We need more certainty around how the US and China are going to compete, where we’re going to cooperate, and how we’re going to manage conflict.
Otherwise the world is heading for a very dangerous place.
We shouldn’t dismiss what a failure to do so might mean for the world. Great powers rarely desire to go to war. But history is replete with horrifying examples of how they stumbled into it, nonetheless.
We can’t just count on cool heads and better angels.
And so, it’s important we act now, not when the crisis comes, to prevent strategic competition from turning into terrible conflict.
And lest you think I’m putting the entire burden on the United States and China, let me be clear—every country needs to do better in facilitating the coordination and cooperation the world needs.
What needs to happen to restore international cooperation
One core task for every country is to reform and update global institutions.
These institutions play an essential role, but their charters and structures have stretched beyond their sell-by date.
Their recent failures are the result of nations failing to do the hard work to make them effective.
The World Trade Organization, for example, has not kept up with today’s modern trading world.
And the Bretton Woods institutions are underfinanced and over-governed.
The forces of closure will resist strengthening and reinvesting in these forums for global cooperation. But that will only increase the risks to our citizens.
At the same time, the US-China power rivalry will inevitably make this challenge more complex.
But there are a number of important problems where our individual countries’ self-interest would be better served by working with one another rather than at cross-purposes.
Climate change is a case in point.
Here, despite the dire circumstances – or perhaps because of them – we have an opportunity and incentive to work together.
China is ground zero for climate change, and its success in decarbonizing its economy would make a major difference in improving the world’s climate outlook.
Failure will doom us to some disastrous outcomes.
China is by far the biggest carbon emitter and it faces the huge challenge of increasing its energy efficiency and reducing overcapacity while it decarbonizes sprawling, inefficient industries that produce steel, cement, and petrochemicals.
And despite announcing a massive renewable energy project that’s bigger than all of the wind and solar power in India, China has since resorted back to financing coal power during recent power shortages.
We should all hope to see China accelerate its investments in clean technologies, and environmental goods and services. However, it is essential that it be done in a fair fashion with a level playing field.
China has emerged as a leader in clean technology — solar panels, lithium-ion batteries, even new energy vehicles. Yet often this leadership is built on a platform of unfair trade practices. Climate cooperation can easily fuel commercial conflict.
Technology is the core of US-China tensions, but green technology can benefit all of us. So, it is important that we create a larger framework to manage cooperation but also to manage competition.
The threat of climate change is so great that, hopefully, necessity will be the mother of cooperation.
The US-China agreement to establish a climate working group with a focus on reducing methane emissions and illegal deforestation sends a sorely needed positive message.
And we can do more now:
An innovative idea is for the US to negotiate with the major economies to eliminate tariffs on environmental goods and services.
We should start with our allies like the UK, the European Union, and Japan.
Free trade in the clean solutions of the future could generate global growth and job creation – not to mention its positive impact on our planet.
With China’s market alone estimated to be over $16 trillion in this sector by 2060, hopefully, this time, China will join.
To build back beyond, we’ll have a lot of work to do in narrowing the trust deficit, updating market principles so they work in today’s world, and repairing fractured global relationships.
But I know that much of the audience today comes from the business community—and you offer a reason for optimism.
In my judgment, business largely outperformed governments over the past two years.
From the corporate leaders to the researchers to the factory workers to the logistics managers, the people of the world’s businesses innovated and distributed life-saving vaccines.
They developed the technologies that made remote work possible during the lockdowns.
And they’ve created the very foundation on which we can build back beyond.
Because of these achievements, companies and workers will be center stage in determining whether we succeed or fail in addressing the challenges we’ve talked about today.
Companies and workers will be at the forefront of creating the products and services that will save our planet from the climate and biodiversity crises.
They will be central in creating the mechanisms that make markets work.
And how they conduct themselves will be vital in determining whether societies have trust and confidence in markets and capitalism.
But business cannot and should not make the policies or regulations that govern economic activity.
Only governments can do that.
But governments must do that with business, or it will be to the detriment of their citizens.
In cooperation with governments, business leaders will need to help shape a US-China economic relationship, and an international order that works for today’s world—not just for their individual companies, but for the people in the countries in which they operate.
The problems we’re talking about are difficult. But not intractable.
We can’t solve every problem, but we can make progress.
We should advocate for solutions that demonstrate how market-based principles can improve people’s lives.
Almost every major breakthrough is spawned by a big problem.
And the pandemic has been our wake-up call.
We have a generational opportunity to step up to this historic challenge, to this mission, to responsibility.