October 26, 2001	Friday	Shaba'an 8, 1422

WASHINGTON, Oct 25: The threat of terrorism could reverse the gains from globalization, especially if it hampers freedom of movement across borders, according to Federal Reserve board chairman Alan Greenspan.

A global society reflects an ever more open economic environment in which participants are free to engage in commerce and finance wherever in the world the possibilities of increased value added arise, Greenspan said late Wednesday in a speech at the Institute for International Economics.

Fear of terrorist acts, however, has the potential to induce disengagement from activities, both domestic and cross border. If we allow terrorism to undermine our freedom of action, we could reverse at least part of the palpable gains achieved by postwar globalization, he said.

It is incumbent upon us not to allow that to happen, he added.

Greenspan said that developing countries need more globalization, not less.

Such a course would likely bring with it greater economic stability and political freedom, he said.

The Fed chairman acknowledged that there have been periodic financial crises under the globalization system. He said that developing countries need to maintain larger foreign exchange reserves and unused financing capacity than developed countries.

Too often, countries have “bridged the difference” between their financial demands and limited real resources by borrowing from foreign investors.

Periodically, as an economy borrows its way to the edge of insolvency with debt denominated in foreign currency, government debt-raising capacity appears to vanish virtually overnight, Greenspan said.

It is this vanishing capacity that characterizes almost all financial crises, he said.

Thus, an economy’s necessary condition for solvency, indeed, a necessary condition for the stability of global finance, is the maintenance of significant unused financing capacity, Greenspan said.

Two critical criteria are a legal system that protects property rights of the lender and, if the debt is denominated in a foreign currency, a fiscal and monetary regime that is presumed to be sufficiently responsible to ensure repayment in equivalent real resources, he said.—AFP