Economics Update (July-December 1996)

Corrigan's Hypothesis of Optimism

E. Gerald Corrigan is chairman, international advisers at Goldman Sachs & Co. In July 1993 he stepped down as president and chief executive officer of the Federal Reserve Bank of New York after 25 years' service. As president and CEO of the New York Fed he was a permanent voting member of the Federal Open Market Committee (FOMC) and was also named chairman of the Basle Committee on Banking Supervision by the governors of the central banks of the Group of Ten countries in July 1991. He offered these comments to a gathering of Atlanta Fed directors, local business executives, and community leaders.

orrigan's hypothesis: the present time in history offers the most optimistic outlook in terms of freedom and economic prosperity in the history of mankind. He argued that today there are fewer people governed by oppressive regimes than ever before. And he suggested that this situation offers unparalleled opportunities for economic change and growth.

To support this hypothesis he took his audience on a quick world tour, highlighting some issues and developments. Here's his food for thought:

Europe, he argued, remains a two-part story: the European Union (EU) and the emerging eastern countries. In his view the challenge for the EU is how to bring unemployment down (currently about 9 percent), stimulate growth, and reduce government spending (around 50 percent of GDP on average) while addressing the issues of enlargement and adherence to Maastricht guidelines.

In eastern Europe he sees phenomenal change occurring, both economic and political. In particular, Corrigan noted that growth rates in countries like the Czech Republic and Poland remain impressive. He also reflected that the economic transformation of much of the region has been amazing, given the relatively short period of time since the collapse of Soviet communism.

On a micro level he described the change in Russia as extraordinary. Indeed, Corrigan argued that if the microeconomy could somehow be measured, we would already see rising GDP. He also noted that the appearance of critics of the current regime—from the right and the left—actually brings healthy input and diversity to the government. And he believes this dialogue signals a maturing phase in the psyche of the Russian government and politics in general. Corrigan described the very high levels of voter turnout as signs of the fundamental changes that have occurred.

E. Gerald Corrigan, chairman, international advisers at Goldman Sachs
& Co.
In Africa, improvement is under way in spots, he observed, especially in some of the northern economies. He described South Africa as doing satisfactorily despite currency problems and noted that even the Saharan countries are not in the dire straits they were 10 years ago.

Turning his attention to southeast Asia, Corrigan observed that these countries have been growing at strong (7 percent to 8 percent) rates in the past few years. But, he noted, problems are building up such as large current account deficits.

He also noted that Latin America has come a long way in terms of restructuring. He was fairly optimistic about economic growth and future prospects. But he described the rates of savings in Latin America as far too low compared with Asian savings rates, particularly in light of the demographics: the average age in Mexico, he said, is about 15 years.

Corrigan noted that the recent U.S. record has been fairly good in terms of employment, particularly when compared with Europe. And he suggested that the level of government spending in the United States as a percentage of GDP (around 33 percent) remains low in comparison to most of the industrialized world. He reiterated that savings rates remain far too low and consumption remains far too high in the industrialized nations—particularly the United States.

He noted several other causes for concern: the lack of a U.S. oil policy, the lack of a U.S.-China policy, and the isolationist tendencies surfacing in the United States. He described the lack of an oil policy—in light of heightened tensions in the Middle East—as bewildering. And he observed that today the United States is more dependent upon Middle East oil than in the 1970s.

The lack of a perceptible China policy he deemed equally confusing. Corrigan argued that specific issues (human rights, trade, and pirating) must balance as part of an overall constructive policy.

He was equally critical of isolationist tendencies, citing the Helms-Burton Act as an example. Corrigan emphasized that the act seeks to establish the United States as overseer of the world business community—in effect, telling the international markets what they can and cannot do. In his opinion this position conflicts with the U.S. role as lead participant in the global community.

Another issue that he said must be addressed is the growing gap between the "haves" and the "have-nots." He noted that the alarming widening of differentials between rich and poor could pose very serious social and political challenges in the near future. This gap, coupled with overconsumption (and the corresponding debt levels) by the G7 nations, remains a serious issue to be addressed. He also suggested that the next five to seven years will be economically more difficult for the emerging market economies, with the benefits coming only after this period.

In order to take advantage of the opportunities presented today, he stressed that these problems need to be remedied via enlightened political leadership, particularly on the part of the United States.

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