Andrew D. Crockett is president of JPMorgan Chase International and former general manager of the Bank for International Settlements.  Previously, Mr. Crockett held senior positions at the Bank of England and the International Monetary Fund. He is currently a member of the Group of 30.

Washington Profile: In the last few decades we have seen sweeping changes in socio-economic and political formations worldwide. One of the most widely discussed and debated is the global shift toward the free market economy. What is your evaluation of this shift? What, in your view, are the strengths and weaknesses of the free market system?

Crockett: The free market economy, by comparison with other systems of economic organization, has really shown itself to be more resilient and more efficient. The natural alternative is central planning, which of course your Russian readers would know a lot about. There is no real question now that free market economies perform better than centrally-planned economies.

Within the Western group of countries, it is also the case that over the last several decades, countries have been moving towards deregulation and the freeing up of their markets. You can think of a number of examples: exchange rates, which used to be fixed and managed by governments and now are determined in open markets; interest rates used to be controlled in many countries or had ceilings and floors, and those have now been made free; competition, which, in the financial sector was somewhat limited, has become much freer. So, in countries that already had market systems, markets have been increasingly freed up and in those that had centrally-planned economies, nearly all of them have moved to some form of market system.

Now, you are asking also what are the benefits and drawbacks, and what’s the balance sheet. While I would say that a free market system works better than the alternative, it’s nevertheless the case that there are ways in which a purely free market system can malfunction that need to be controlled. It’s always been recognized that monopolies can operate to the detriment of efficient resource allocation and to the detriment of the consumer. So, we’ve moved towards a situation in which monopolies are controlled.  They are either broken up, and you can have competition, or if there is what is called a natural monopoly because the economies of scale make it much simpler to have a single supplier, then you have the regulatory mechanisms that tend to set price tariffs in such a way as to balance the incentives to efficiency by the producer with fairness to the consumer. So that’s in the area of competition.
Then we see that you could have market failures as a result of inadequate information to market participants, and so we’ve come to the conclusion that transparency must be mandated, so that participants in markets have adequate information to make right [decisions]. Markets can go wrong, and probably the most obvious example is in financial markets we see periodic financial crises.  Financial variability is not necessarily a bad thing, obviously: markets come and go, but sometimes you see market failures that result in crisis.  We must learn lessons from that to make the system more resilient.

Washington Profile: Some critics point to the lack of corporate responsibility in the free market economy, arguing that within a system which limits government involvement and regulation, a country’s future may depend on the good will of financial organizations.  Are there widely accepted standards of responsibility in the current system?

Crockett: We have laws, internationally agreed standards that determine, or at least, set limits on corporate activities. Mostly these laws, standards and regulations are put there in order to protect the users of services. For example, in the financial services industry, every country has got regulators and supervisors that look at the way in which financial services institutions behave, and they set standards both to protect the safety and soundness of financial institutions, and therefore to protect the interests of depositors and the users of the services, and also to make sure that market practice standards are observed, and that means being adequately transparent to customers about prices and so on, and not exploiting advantages of inside information and a variety of things like that.

You talked about countries being dependent on international financial institutions. I am not sure I see it that way. A country might become dependent as a result of economic mismanagement or misfortune, but generally speaking, I believe that if a country’s economic management is good, then it is unlikely that it would be beholden to international financial institutions. The international financial institutions will want to be present in those countries and will want to participate in their markets, but I don’t really see that they would exercise an undue influence over the country.

Washington Profile: There are arguments that free markets leads to disparities not only among countries, but also within countries. The economic organization of the Nordic states, with its extensive social safety nets, is sometimes proposed as an alternative.  Your thoughts?

Crockett: It’s probably factually true that in recent decades income disparities within countries have gotten larger. That’s to say the gap between the rich and the less rich or the poor, in some cases, is bigger than it was before, and that may be partly a result of a free market system that rewards according to the marginal product of people, and it’s partly the result of deliberate policies of taxation and of encouraging mobile factors of production to be present in a country.  That is to say, taxes may be reduced to induce highly skilled individuals and capital to stay within a country, because of the presumed benefits to those other residents of the country of having them there. Those people would argue that even if you pay those at the top high salaries, the benefit of having them in the country means that lower down the income scale, salaries can be higher even if disparities widen.

It’s a social choice of countries how much they are prepared to accept that disparity of incomes. As you rightly point out, in Europe it’s less accepted than it is in the United States, and in the Nordic countries it is less accepted than in other parts of Europe to have large income disparities. So, progressive taxation is certainly a means of doing that. That’s not, by the way, a denial of the free market model: it’s really adapting the consequences of the free market model to have more benign or more egalitarian social consequences. I think you’d find that in Nordic countries the essence of the economic organization is competition and free markets, but they use the tax system in order to provide a more comprehensive safety net than elsewhere. The argument by those that favor low taxation is that if you have high taxation you’ll drive productive resourses out of the country and the whole country will be worse off because its more talented people will go elsewhere. I think that was the case in the Nordic countries when taxation levels were 80 or 90 percent. You discover that it was hard to get highly talented individuals to perform within the tax system when they were going to have to give up 80 or 90 percent of their income. So [the Nordic countries] lowered their marginal tax rates.

Washington Profile: China and India are becoming increasingly powerful as actors within the global economy, yet major differences exist between the West and these countries, both in terms of political organizations and even their economic systems.  In this light, how are economic relations likely to evolve between the West and these new global players?

Crockett: I think India and China are very clearly on track to becoming major economic powers in the world. If you look at the studies that people do in futurology - looking at who the main actors would be in the world economy 20, 30, 40 years from now - nearly all projections show that India and China will be probably in the top three countries by the middle of this century. China is growing very rapidly; India has now started to grow very rapidly, though its per capita income is smaller. So, no question about it: India and China will be major economic powers.  As far as their economic systems are concerned, I am not so sure that they are so different from those in the West. India is a country of democracy and it has basically a competitive system. Of course it has a lot more bureaucracy, and they still have the legacy of the license system that used to get in the way, but especially after the reforms of the 1990s, they have a system that is fundamentally based on an open, competitive, free market system.

China is probably further away from being a free market system; it is certainly further away from being a democracy, as we understand it in the West. Nevertheless, the economic arrangements in China are very open to the rest of the world. It competes internationally in world markets; it has financial arrangements that are moving towards those in the West, which include stock markets; developing bond markets; a financial system in which companies can borrow and lend. So, I think in its economic organization, China is set on a course that, within a relatively few years, 5 or 10 years, will make it look much, much more like the economic systems of Europe or America. The old centrally planned communist system of 20 years ago has moved a long way already in the economic sphere, and I think it’ll move further.

Washington Profile: After enduring the crises of the 1990s, Russia is now experiencing stronger and more stable economic growth. Despite some political disagreements, there are strong economic links between Russia and some European countries. However, we seldom hear about U.S.-Russia cooperation in terms of the economy: are there any significant initiatives in this area? What are the prospects for closer economic relations between the U.S. and Russia?

Crockett: I think U.S. based corporations are very well aware of the enormous potential in Russia. Of course, Russia’s economy is very energy-based at the moment: its main sources of income are the energy sector, and the rest of the economy is very dependent upon the incomes generated within the energy sector, which spill over to the other sectors. There is the U.S.-Russia Business Council, which is quite active in promoting exchanges and ideas.  Cooperation does not have to be led by government or official initiatives. It can be led by the private sector doing the kinds of thing that it wants to do. If I were to characterize a concern that American enterprises have about Russia, and possibly Europeans too, it revolves around property rights, because, as you know, a number of episodes have raised questions about the security of property rights. Since we were talking about the free market system earlier on, what one has to realize is that the bedrock of a free market system is the security of property rights, the exchangeability of property rights, which is something that comes out of the 18th century Enlightenment movement in Western Europe. But there is no question that all companies, including my own, see enormous potential in Russia and would like to participate in the growth.  Now with the wealth coming out of the energy sector, it’s a tremendous platform for the country to develop other forms of manufacturing industry and other trade links. Although, if you look at it, and I don’t know quite what the figures are, but you probably find that Russian exports that were not energy related were still pretty small.

Washington Profile: Since the break up of the Soviet Union, the newly independent states have chosen varied economic and political paths. Some countries maintain positive and strong political and economic relations with Russia, while others, like Ukraine, for instance, are oriented towards the EU and the United States. How do you see the place of these states on the current global economic map?

Crockett: It is natural when a close union breaks apart or changes its form, that different participants in the union go their different ways. You didn’t mention the Baltic countries; of course, they actually joined the EU. And Ukraine being close and also having had a relationship of rivalry with Russia has also chosen a slightly independent path. But each country, dependent on its own domestic political considerations, will find different channels. Indeed, if you look to the south of the Unites States, to South America, you’ll find exactly the same cross-section: countries which maintain very close and friendly relations with the United States and other countries that are much more distant or in the position of rivalry.

Washington Profile: What is in store for the future of the global economy?

Crockett: I am not sure if you are talking about short term or long term. In the short term, of course, you have markets focused on whether the expansion that has been going on for the last, at least, 5 years, and if you ignore a couple of mild recessions, for 25 years, whether that will continue or be interrupted. I think the evidence is quite strong that in the absence of any major adverse developments, the world can overcome the potential disruptions of high oil prices or credit market turbulence and maintain relatively good growth in the coming year or so. This is just the short term forecasting that we do. And we at JPMorgan expect next year will be a year of good growth, not as strong perhaps as 2007, but nevertheless, quite satisfactory.

If you look at the longer term, which way is the world going? I think it is moving toward market-oriented systems. China is certainly rapidly moving in that direction. Nearly all countries that have successfully pulled their way out of poverty have done so on the basis of integrating themselves into the global economy and using export-led growth as a means of raising domestic employment, domestic investment, and domestic living standards. There are a few countries that have stood aside from that, but I think that the general trend is towards using a market system to underpin economic growth and poverty reduction. You put your finger on an important point, when you say, what about the ability of the market system to achieve social objectives? Obviously, just having a market system doesn’t deal with some of the real pressing problems like poverty in Africa, but I do think it’s probably true that these really pressing social problems can be solved better in a context of strong economic growth, and free markets, generally speaking, have proved their superiority in generating growth.