While the Clinton years will long be remembered for boom growth and economic strength, Robert E. Rubin’s book ‘In an Uncertain World’ paints a picture less an ambitious programme of opportunity driving great prosperity, but rather more of one maintaining prosperity through deftly and consistently averting economic crisis. It chronicles his tenure as Clinton’s Secretary of Treasury as ‘one of the stewards of the longest economic expansion in United States history.’ In the account, he paints a vivid picture of a Manager executive paragon who ‘minimises downside risk.’ The very title alludes to the central role risk plays in executive decision making and his memoire is an insightful look at how one of the top executives in the US grappled with those risks at a global scale.
The book opens with the first crises to confront him nearly the very day he stepped into the office: the Mexican financial crisis and their threat to default on government loans. The chapter is titled ‘The First Crisis of the Twenty First Century.’ The matter was fraught with devastating downside risks:
“If Mexico defaulted on its foreign obligations…the flow of capital out of Mexico would probably accelerate and the peso would collapse, likely triggering severe inflation, a deep and prolonged recession, and massive unemployment. And that would surely have a substantial impact on the United States. Mexico was our third-largest trading partner, which meant that many American companies and workers would be hurt. We presented estimates that a Mexican default could increase illegal immigration by 30 percent, a half-million additional refugees a year. The flow of illegal drugs could intensify as well.”
He didn’t just understand the immediate downsides, but also examined the secondary and tertiary implications.
“Fears of a Mexican default were already producing wobbles in developing markets throughout the hemisphere, a phenomenon that came to be known as the ‘Tequila Effect.’ Such a chain reaction could lead investors to pull back from emerging markets indiscriminately. That in turn, could affect economics conditions in the United States – since roughly 40 percent of our exports went to developing countries. According to an estimate made by the Federal Reserve Board, a Mexican default and the consequent contagion’ that was possible could, in a worst case scenario, reduce growth in the United States by ½ to 1 percent a year.”
In the end the Clinton administration opted to make a bold move to support Mexico which did end up tipping the balance for the government to sort out many of its problems. Crisis was not only averted , but the Mexican finances were back on their feet with a reasonable direct return to the US (“When the Zedillo government completed the repayment in January 1997, more than three years ahead of schedule…Mexico paid us $1.4 billion dollars in interest and left the ESF with a profit of $580 million.”)
The book is filled with examples of such crises bravely, deftly and creatively minimised – Southeast Asia, Korea, Russia, government debt ceiling. It is a superb portrait of a Manager executive dealing with the biggest risks – billions of dollars as well as political and economic stability – and the skills and considerations required. Curiously, his successor, Larry Summers – who worked with him closely throughout his terms – is the subject of my entry 11 August 2006 describing Summers’ distinctive ‘Leader’ executive qualities. Perhaps as with Bill and Steve at Microsoft, Rubin and Summers created a complementary partnership central to the administrations’ exceptional success.
The portrayal of these most complex and challenging macro issues highlights a number of misconceptions common to ‘Management.’ First, Management is often viewed as passive and almost timid. It is the ‘scaredy-cat’s mode of executive.’ In actuality, Rubin’s accounts illustrate just how much courage was required to tackle these downside risks. Management is not running from the downside, rather it is facing it head-on and taking it down. Second, Leadership is typically more associated with making ‘big, bold bets,’ but Rubin’s scenarios demonstrated poignantly just how big and bold the bets were that were required as well.