Wall Street was the last place on earth I thought I would end up. After all, in the spring of my senior year, I had boycotted every round of corporate interviews on campus, opting instead to take a job in Argentina writing for a human rights newspaper. But that was more than 10 years ago--a time when I was inspired by revolutionaries like Che Guevara and Emiliano Zapata, a time when my criticism of capitalist society was uncompromising.
It was only later that I began the metamorphosis--first inching, then crawling and finally running pell-mell into the arms of capitalism. It seemed to make so much sense. And suddenly there I was, in a 38th floor office, vice president at a major money management firm, with nothing between me and the Hudson River but glass, steel and millions upon millions of dollars.
I thought about how I got there and how, it seemed, I had so egregiously violated the heartfelt tenets of my college days. Was I still the same person or had the real world squashed the idealistic enthusiasm and principled decision making of youth? The world had changed, I realized, and so had I.
* * *
I still remember being thrilled as a Stanford sophomore in 1982 to learn I had things in common with several Latin revolutionaries. Like them, I came from an upper-class family and pursued higher education, where my awareness of social issues deepened. I found that I shared their sense of injustice, even anger, that life in Latin America could be so unfair. There were sprawling haciendas of unimaginable luxury, beautiful landscapes and vast natural resources--yet more than 90 million people, some one-quarter of the region's population, were trapped in desperate poverty.
I'm still not sure what pulled me from pre-med and pre-law. After all, I was a wealthy kid from the Oakland hills; my parents had whispered "doctor, lawyer, businessman" into my ear since I was 12. I thought then it was largely compassion, but suppose now that championing the poor also fed my self-righteousness, that facet of idealism that few young people acknowledge. Still, something resonated, it felt meaningful, and I had found a cause. In 1983, as I entered my junior year, I resolved to study development economics.
The development field was born of the chaos and soul-searching after World War II, when the United States became aware of the pain and upheaval that poverty in far-off places could unleash. Scholars, politicians and even business leaders began to coalesce behind a central goal: to forge a path to long-term economic progress in less-developed countries.
Though consensus was far from complete, the field's early days were marked by deep suspicion of the free market. Citing the prolonged recession and massive unemployment of the Depression years, many academics warned that the market alone would not break the cycle of poverty in the developing world. They identified indus- trialization as the key to growth and prosperity and, in a nod to British economist John Maynard Keynes, argued that government should lead the effort. In the postwar years, the Marshall Plan was launched, and at the Bretton Woods Conference, the World Bank and International Monetary Fund (IMF) were created to help countries rebound from the war and build up their economies.
Leaders of many developing countries endorsed the pro-government agenda. During the 1950s, prices were altered, exchange rates fixed, trade barriers erected and "infant industries" coddled. State enterprises and government control mushroomed. And when rapid economic growth followed for many nations in the 1960s, the case for state intervention seemed watertight.
But in the late 1970s, rising oil prices hit developing countries hard. As the world economy slowed under growing inflation and higher interest rates, prices for their commodity exports fell sharply. In many countries, the state's appetite for regulation seemed unlimited and government spending unchecked. Though state intervention had powered growth, the cost was dear; industries that were highly protected were inefficient, uncompetitive and terribly expensive.
* * *
Just how expensive became clear in the summer of 1982, when Mexico failed to make payments on its foreign debt and triggered an avalanche of defaults by other developing countries. Commercial banks and private capital fled these countries, leaving institutions like the World Bank and IMF to clean up. During the 1980s, these institutions imposed strict conditions in exchange for loans and support and pushed hard for "structural adjustment" of economic policy. They demanded cuts in government spending, looser controls over exchange rates and the breaking down of trade barriers: The development field was taking a giant step toward the free market.
As these changes were unfolding, I graduated from college and spent three years in Latin American development, first as a journalist in Argentina, then at Duke University as a research analyst in the department of public policy. In the fall of 1989, I enrolled at Harvard's Kennedy School of Government, planning to learn from the best and carry the torch of good government forward.
Once inside the red-brick walls, I found that government-based career options, both at home and overseas, were fast disappearing. The Soviet Union was dissolving, the Marxist-socialist development model collapsing and governments from Mexico City to New Delhi were rushing to develop free markets. I gazed down into the Washington beltway and saw pot-bellied bureaucrats, downsizing agencies and pandering politicians. With no desire to become an ivory-tower academic, I felt my career choices narrow further. My angst grew.
* * *
At Harvard, privatization was the rage. A leading scholar of Margaret Thatcher's anti-state revolution had just flown in from London to teach the Kennedy School's first course on the subject, and I signed up. The next semester, I piled on accounting, finance and business classes. I wanted a job.
I found one in Washington with Price-Waterhouse, a firm that adapted with Darwinian efficiency to the latest trends in U.S. foreign aid by launching a high-profile program to privatize state enterprises in Central Europe. It turned out that I was the only one hired who didn't have an MBA. The world was changing fast, and business skills were suddenly essential. I felt like Indiana Jones rolling under a crashing gate in the Temple of Doom. I had made it.
But in my drift toward private sector solutions, I couldn't help feeling like a weather vane--an empty reflection of changed social trends, a passive follower driven by ambition and ego. On the other hand, I reasoned that financial skills would make me more effective and allow me to make larger contributions to development in the future. But deep down, I also knew I was no martyr and that success and influence were inner needs that I was not prepared to ignore.
Every signal told me the energy had shifted to the private sector. The fast-growing economies of newly reformed developing countries had caught Wall Street's eye, and private capital flooded to countries that had been outcasts a decade earlier. After averaging about $1 billion a year in the 1980s, the flow of private money to developing countries jumped to $20 billion a year from 1990 to 1995. In 1996, roughly $230 billion in private capital poured into these countries' stock exchanges, automobile plants, steel factories and mining projects.
Investors' dollars also flowed into infrastructure, power and water projects--the home turf of development agencies. The surge dwarfed the agencies' impact. Their lending, dominant in the mid-1980s, fell sharply and, by 1996, "official" flows amounted to just $8 billion--less than 4 percent of the total.
Waves of downsizing and budget cutbacks followed until, all told, American foreign aid fell to less than 0.1 percent of the gross domestic product (GDP), leaving the United States in last place among all major industrialized countries.
So why should I care, I asked myself one cool New York afternoon, if private capital and the free market were displacing development agencies and government programs? Things change--I'd kept pace and was positioned well in the new world. Still, I was troubled. As days turned into months, I began to see how Wall Street really worked and grew increasingly aware of its limitations in fostering development.
* * *
I had arrived on Wall Street in mid-1993, when the stampede to developing markets was at its height. U.S. investors wanted to make money, and we were more than happy to oblige. In just two years, we launched mutual funds, hedge funds and elite investment pools in Asia, Central Europe, Latin America and beyond; hundreds of millions of dollars were cascading through our doors.
As the fund craze slowed, I moved from investment banking to asset management and began to see how the pools of capital themselves were controlled. It was startlingly simple: Money follows returns. Put differently, we channeled investments to firms earning the highest return on capital--firms that were most efficient, most productive and not too expensive. I realized that investment money is genetically encoded to do one thing--seek out more money and multiply. To be sure, as Adam Smith observed, the process has important benefits. Cash-starved countries gain access to the resources needed to invest, expand and grow. And the market's insistence on competitiveness and profitability sharply limits unproductive spending. Still, I came to realize, for the manifold challenges of development, the free market and its money are no panacea.
Mexico is a case in point. From 1990 to 1994, the country received a fifth of all capital flowing to developing countries, a sum that propelled its fledgling stock market up about 100 percent a year. As the money flooded in, the country's already low savings rate fell 9 percent. With roughly 40 percent of the stock market owned by foreigners (largely American), most of the returns never touched local hands. And what did trickle down helped to fuel a spending binge on foreign cars, washing machines, stereos and TVs. Less than a quarter of it was spent on production assets.
Increased foreign investment also brought heightened scrutiny of Mexico's finances. And when high local inflation forced the government to devalue the peso at the end of 1994, investors fled. In the aftermath, the stock market collapsed, Mexico's GDP tumbled 7 percent, more than a million laborers lost their jobs, and unemployment reached 25 percent. For those who kept their jobs, real wages sagged more than 40 percent below 1988 levels, leaving two-thirds of the labor force below the poverty line. Today, there are 22 million people in extreme poverty--an increase of almost 60 percent--yet the number of Mexican billionaires has risen twelvefold since 1988.
It would be nice to think that Mexico is unusual, but private capital has been a mixed blessing for much of the developing world. Foreign investors inject new money, but they also take profits home; some $40 billion has been transferred from developing to developed countries each year since 1985. Developing countries are finding private lenders now, but their overall debt, more than $1.2 trillion, is nearly half their GDP. Moreover, many countries have seen little private capital. From 1990 to 1994, just a dozen countries captured 90 percent of capital flowing to the developing world. In 1995, the poorest 48 countries received less than half of 1 percent.
Poverty remains a tremendous problem. In Latin America, throughout the 1980s, the number of poor increased both in absolute numbers and as a percentage of the total population. Worldwide, about 1.3 billion people live in poverty, nearly half of them just several hundred calories a day away from starvation. Demographic trends offer little support to those who expect the free market to lift these people out of poverty. In roughly 40 years, the world population will double, and nine-tenths of it will be in the developing world.
On reflection, sadly, much of what government did in the name of development was both inefficient and inequitable. It benefited a precious few at the expense of a great many. Watching the free market supplant government and agency intervention, I got the sense that people felt that the cavalry had arrived, so we could all go home.
Yet, even from Wall Street, the free market's failings were hard for me to miss: The MBA and the spreadsheet were not designed to mitigate poverty or inequity. Public policy was still needed to ensure universal access to education, health care, housing and basic infrastructure.
* * *
In the summer of 1996, as the rumbling subways began to fill with humid Manhattan air, I left New York. I hadn't felt terribly happy there but I had learned some valuable things about the ways of Wall Street. When a friend from Harvard offered me a job in her environmental consulting firm, I felt I'd come full circle. She and her group were pursuing business-based solutions to global environmental problems like tropical deforestation, and they needed someone with hard-nosed investment skills. I wasn't sure where the path would lead, but I knew the struggle to balance my ideals and my desire for success would continue.
Charlie Webster, '85, works at Bechtel Enterprises in San Francisco, where he manages equity investments and corporate finance, principally for projects in developing countries.
