than half a century ago, leaders who were still engaged in war took the time to prepare for peace. In a breathtaking leap into a new era, the world created not just new international institutions – the IMF, The World Bank, the GATT as well as the UN - and a whole set of new rules for a new international economy but gave expression to a new public purpose based on high ideals.

     One of the signal events was the Bretton Woods Conference. Bretton Woods defined a new public purpose characterised by high ideals. The conference was about more than exchange rates, the mechanics of financial arrangements or even new institutions. As the American Secretary of the Treasury said at the very start of the opening session: “Prosperity has no fixed limits. It is not a finite substance to be diminished by division. On the contrary, the more of it that other nations enjoy the more each nation will have for itself”. In short, prosperity to be sustained had to be shared. Practicality and morality went hand in hand.

     So the post-war arrangements were founded on the belief that public action on a new and wider stage could advance a new and worldwide public purpose of high ideals rooted in social justice; to achieve prosperity for all by each co-operating with every other; new international rules of the game that involved a commitment to high levels of growth and employment. In short, the job of every economy was to create jobs for all.

     The founders of Bretton Woods resolved that the failed policies of laissez-faire which resulted in vast inequities and recurring depression from the 1870s to the 1930s would not be repeated. Untrammelled, unregulated market forces had brought great instability and even greater injustice. In the post-war era, governments had to work collectively if they were to achieve either justice or stability.

     The initiatives and institutions of that era were shaped to the conditions of the time – a world economy of protected national markets, limited capital flows, and fixed exchange rates. For nearly 30 years, the system worked for hundreds of millions who enjoyed unparalleled prosperity. Bretton Woods took us a long way. Yet even in the 70s with hundreds of millions still in poverty, we had still a long way to go.

     But over the next generation, that new world, too, became old, as the existing order of nation states and collective international action was increasingly bypassed by the growth and eventually the sheer force of international financial flows, successively ending dollar convertibility into gold, the fixed exchange rate system, and post-war Keynesian certainties, bringing in its wake an outbreak of inflation and then stagflation that spread across the Western world.

     The 1980s saw a new consensus emerge, essentially an attempt to return to laissez-faire. It focussed not on what governments should do, but on what governments should not do, emphasising private pursuits almost to the exclusion of public purpose. Enlightened self-interest gave way to sheer self-interest. Instead of rising to the challenge of applying the high ideals of the post-war world to a new world, instead of aiming for high levels of employment and prosperity for all, sights were lowered, the vision was narrowed. The new right consensus focussed almost entirely on inflation and minimal government.

     The new right consensus did understand the importance of liberalizing economies from excessive regulation and bad government. But they confused means with ends and said, in effect, that inflation alone, not jobs and growth also, were exclusive concerns. And they said that all government was bad: that government can’t make a difference, at least not a positive one, in jobs and growth, and that global markets have to be left entirely to market dogmas which have no place for the public pursuit of high ideals. But this consensus failed even in its own stated purpose. The Reagan administration brought the largest fiscal deficit in American history. The Thatcher government reduced Britain to inflationary boom-and-bust.

     By 1997, an increasingly turbulent and inadequately supervised international financial system threatened to create boom and bust on a global scale. Now both of the Bretton Woods objectives – not only prosperity for all but stability for all – were at risk. The post-war hope for an indivisible prosperity was replaced by the sudden fear of indivisible instability. The new right consensus could not endure.

     In 1998, we experienced events that were unthinkable just two or three years ago: free enterprise Hong Kong taking publicly owned stakes in all its private companies; Japan nationalising its banks; Russia going into default; in America, the mounting of one of the biggest ever emergency refinancing - not for a bank but for a hedge fund; most damaging of all, the biggest growth economies of the last decade in East Asia suffering larger contractions in output even than experienced in the Great Depression of the 1930s.

     The ultimate price of all this is profound human suffering. In Korea, unemployment has trebled in one year; in Indonesia, ten years of growth have been wiped out; and in the Asian crisis countries as a whole, the number of people in poverty is set to double by 2000.

     So now the responsibility falls on this generation to be present at a new creation – of new rules that break with the past and both effectively and fairly meet the demands of the new global economy.

     Our aim must be an international financial system for the 21st Century that recognises the new realities: open not sheltered economies; international not national capital markets; global not local competition. It must be one that captures the full benefits of global markets and capital flows, minimises the risk of disruption, maximises opportunity for all and lifts up the most vulnerable, in short, the restoration in the international economy of public purpose and high ideals.

     The consensus of the 1980s with its narrow focus on inflation, privatisation and deregulation must involve into a new 1990s consensus with a new and broader emphasis on competition, supervision and the right conditions for growth and employment.

     I believe that the third way, initiated and developed by Tony Blair, has profound relevance for the challenge we now confront on the global stage. The issue is not one of either markets or government but how markets and government can best work together. The way forward for the new global economy is not to retreat from globalisation – into either protectionism or old national controls – or to retreat into a failed laissez faire. It is to ensure global markets can work in the public interest. Transparency in policy-making is one way to develop the informed and educated markets we need.
In a world where the new frontier is no frontiers, we must rediscover the public purpose and high ideals of 1945 with four major reforms that add up to a transformation of the international financial system - a new economic constitution for the new global economy.


New Rules of the Game for the Global Economy

First, internationally agreed codes of conduct for transparency and proper procedures that ensure educated markets. These would cover monetary, financial and fiscal policy and corporate governance and would be applied by all countries, rich and poor, as a condition for participation in the international financial system.

Recall that the first constitutional settlement of the world economy in 1945 was not simply about institutions but about rules of the game. We must now return the international financial system to this idea of rules of the game. While the founders of Bretton Woods devised rules for a world of limited capital flows, we must devise new rules for a world of global capital flows. But our guiding principle remains the same – the promotion of global economic stability and international co-operation to promote growth and employment.

     The codes will require accurate reporting to the international community, by each national economy, of all relevant information - for example the size of a budget deficit, the state of bank reserves and the level of currency liabilities.

     The codes will require not only this flow of information but the adherence to specific timetables and proper standards for transparency and disclosure.

     By requiring exposure of deteriorating conditions, the codes would prevent the temptation for countries to deliberately mask problems, which is what happened in Thailand and Korea with consequences felt across Asia and then the world.

     We should not be so complacent as to assume that codes of conduct are needed only in other countries and not our own. Given that the most recent threat to global stability came from lack of transparency in hedge funds in both the United States and Britain, we need tougher standards and requirements for disclosure all round.

     These new rules of the game are not incidental to the financial architecture for the new global economy: they are the financial architecture for the new global economy. They require countries to pursue self discipline with the prospect, if they do not, of imposed discipline.

     National governments should not pick and mix which standards they choose to meet and which standards they choose to ignore. So proper implementation of the codes should be a condition of any IMF and World Bank support. In the global economy, national governments have rights but they also have responsibilities they must meet.


Global financial regulation

Because today’s financial markets are global, we need not only proper national supervision but also a second fundamental reform – global financial regulation. That is why Britain has proposed bringing together the IMF, The World Bank and key regulatory authorities – a new permanent standing committee for global financial regulation charged with delivering the global objective of a stable financial system.

     The Standing Committee’s work would make co-operation between international institutions and national regulators a fact of international economic life. In short, the Standing Committee would be the world’s early warning system for regional and global economic risk.


Global crisis prevention and resolution

We need, thirdly, a modern mechanism, rooted in transparency and reliable surveillance and built on public and private sectors both accepting their responsibilities which can identify potential problems at a stage where preventative action can be effective.

     The new mechanism for crisis prevention must deal with imbalances as result of global capital flows.

     We need a process of active and transparent surveillance that is a matter of course for all countries, operating in normal times, all the time; not one triggered only by the warning signs or onset of crisis in a particular region or country.

     The short-hand phrase for these creditor-to-country arrangements is country clubs but these are not exclusive clubs, old boy networks, an informal means of defending privilege. These are modern investor networks that can bring real benefits in return for real responsibilities: networks that every country should form and every creditor should join.

     The G7 have proposed greater openness from The World Bank, the IMF and other international financial institutions. Their monitoring tells them much of what is happening in every national economy. Clearly in exceptional cases some policy discussions will have to be kept confidential but I strongly support the publication of the IMF’s country surveillance reports under Article IV. The case for an exception must be made and justified, while openness should be the norm. Put simply we should establish an international right to know that is not occasional or voluntary but ongoing and mandatory.

     With a right to a greater flow of information comes greater private sector responsibility. We need a system of debtor-creditor agreements – crisis resolution procedures signed up to in normal times with private sector responsibility clauses, such as agreement on collective representation and majority voting when creditor decisions are being made. When trouble hits an economy, the private sector must be prepared to do more than simply pull money out and accelerate the panic.

     With these three changes – transparency, enhanced surveillance and investor networks – we can establish a markedly lower threshold for effective response than the old ad hoc, crisis-triggered system.

     In the new framework, it should be the duty of the public sector to inform, the duty of the international financial systems to monitor and the duty of the private sector to engage.

     With the reforms we propose, we have a real opportunity to move the emphasis of international financial governance from one of crisis resolution to one of crisis prevention and crisis containment.


Global principles on social policy

There is a fourth reform: we propose a global set of principles of best practice which will ensure that when the IMF and World Bank help a country in trouble, the agreed programme of reform will preserve investment in the social, education and employment programmes which are essential for growth.

     For too long it has been assumed that the cost of crises will inevitably be paid by putting more burdens on the poor - by cutting health, education and basic social services.

     This is wrong in the short term and it will not work in the long term because it erodes both the economic and the political foundations of a society. For reasons of self-interest as well as conscience, we cannot accept a worldwide regime of the well-off in the castle and the vast majority at the gate.

     In their October statement, the G7 recognised the urgent need for a set of general principles for good practice in social policy and asked the World Bank to work with countries and with the IMF and others to develop the principles as a matter of urgency.

     This is an historic opportunity to realise the enduring public purpose, the high ideals of 1945. We should not see this set of principles in narrow terms as merely creating social safety nets. We should see it as creating opportunities for all by investing more not less in education, employment and vital public services.


Conclusion

So what we must together create is a new economic constitution for a global economy, born out of new realities, grounded in new rights and responsibilities, enshrined in codes of conduct that are agreed nationally and applied internationally, rediscovering public purpose in the international economy and bringing to life again the high ideals of 1945.
We need to build quickly, not debate indefinitely.

• Agreement on the codes of conduct should be reached at the IMF meetings in April 1999.
• A new system of global financial regulation should be in place by Summer 1999.
• The new mechanism for crisis prevention and crisis resolution should be agreed in principle this summer and the detail should be the subject of intensive discussions between the private sector and national and international institutions to reach agreement by the end of 1999.
• The principles for best practice in social policy should be considered at the next World Bank meeting in Spring 1999.

     This is a programme of reform for our generation. It is more than simply a collection of proposals. It rests on a modern vision of government, doing the right thing but not everything; of markets working but not always perfectly; of principles of economic and social justice that reflect our best values and ultimately determine world stability and growth.

     This project is indivisible. Each element is essential to the success of the whole. All of it is built on the understanding that increasingly we are part of both one global economy and one moral universe.

Rt. Hon. Gordon Brown is Chancellor of the Exchequer in the UK. He has been a Labour Member of Parliament since 1983. This is an abridged version of a speech, and printed with permission, which was delivered at Harvard University in December 1998. For a full copy of the speech, please contact his Press Office, fax: 44-171-270-5244.