Global free market is good for all

All of us around the globe, developed and developing countries alike, share a vital interest in defeating terrorism. But business leaders have an additional responsibility: to build on the prosperity reaped from globalisation - prosperity that thrives on peace and stability, and in turn reinforces it.

The danger is that the world economic slowdown, exacerbated by September's attacks, will increase pressure on nations to delay further moves towards the creation of open, market-driven economic systems. This would hinder economic recovery and jeopardise the gains achieved through globalisation.

Liberalisation, domestic and international, is good for economic growth, which is good for everyone, especially the poor. Anti-globalisation activists are attacking a phenomenon that is an essential part of the solution to world poverty. There is a close correlation between the level of foreign direct investment a country attracts and its citizens' economic well-being.

The protesters who blame global corporations for not doing more to reduce the gap between the haves and the have-nots do not understand the role and limitations of corporations. They should aim much of their criticism at the bad governments under which so much of the world's population live.

What are the principles that define a good government? The first is stability, with commitment to the rule of law and economic progress for all, through empowered people and an educated workforce.

The second is a commitment to pursuing market-driven reforms - including deregulation and fostering competition in free markets. Other considerations include a commitment to market and governmental transparency, and minimising corruption.

In the developed world there is also much to be accomplished by the private and public sectors, none of which seems to be particularly easy right now. Competition is always resisted by vested interests but only competition can foster the individual effort and entrepreneurial drive that raises incomes and creates wealth. Competition lies at the root of the free-market system. And globalisation is merely the free-market system on an international scale.

There is huge scope for wide-ranging economic reform within the European Union. With its traditional emphasis on social cohesion, Europe's economic transformation will differ in important respects from that of the US. Reform, however, remains critical.

Europe must restructure its inadequate pension systems while finding the right mix of regulation and taxation. It needs less intrusive government regulation. It needs to liberalise and integrate its capital and labour markets, and to promote development of continent-wide clearance and settlement systems. And it needs more accountable corporate governance.

These are daunting challenges. Regrettably, it is unclear if Europe is willing to meet them. The failure of the European Takeover Directive squandered 12 years of efforts. Governments, including those in France and Germany, have recently taken some backward steps in deregulating labour markets. Even in Britain there are worrying signs that regulation is becoming more intrusive in areas such as financial services, telecommunications, water and electricity.

Moreover, mergers are under assault across the EU. There are, indeed, legitimate grounds for stopping some mergers; but the EU must be careful to avoid giving the impression of rigidity that risks inhibiting competition rather than enhancing it.

Such challenges are a call to leadership. We must do a better job of making the case for further liberalisation across the world. And the most powerful way of doing so is to run our companies for our shareholders. Once again, the key is competition. Companies must be willing to tackle new markets, new technologies and difficult economic conditions in those countries where there is an environment that makes success possible.

Let us have no illusions: globalisation will not transport us into a world of democracy and peace overnight - or even in our lifetimes. But it remains perhaps the most effective tool we have to make the world not just more prosperous but also a freer and more peaceful place. The argument for globalisation remains as compelling as it was before September 11th and it is up to business leaders to make that argument.

Henry Paulson is chairman and chief executive of the Goldman Sachs group