Global Prospects In An Interdependent World

GLOBAL PROSPECTS IN AN INTERDEPENDENT WORLD Global Prospects in an Interdependent World Paul Streeten Dominance: the condition for an international order? As one born into the expiring Austro-Hungarian empire, who spent most of his life in post-imperial Britain, and who came to the post- Watergate, post-Vietnam United States in 1976, I regard myself as something of an expert in imperial decay. This is a useful vantage point for examining the present post-hegemonic world. What functions do we expect to be characteristic of a working international order that is concerned with developing underdeveloped regions, in the context of a growing world economy, and with an equitable distribution of the gains from growth? I think we can name at least three or four. First, it is helpful, if not essential, that there should be a centre that generates balance of payments surpluses, an excess of exports over imports, for the benefit of the developing regions. Second, there should be financial institutions that convert these surpluses into long-term loans or equity investments on acceptable terms. This requires banks, corporations and aid agencies. In addition to the need to convert an excess of exports over imports into long-term financial instruments, certain additional financial functions are useful to support these loans and investments. For example, the foreign lending should be counter-cyclical, so that when the centre contracts the periphery can expand and contribute to the stabilization of the system. It is also helpful if the centre acts as lender of last resort and as the provider of the means of payment for international transactions. Third, there must be the industrial capacity to produce the capital goods or intermediate products required for industrialization, on which the loans are spent, and which contribute to the trade surplus. This capacity will be, at least in the early stages of the development process of the periphery, mainly in the centre, from which the surpluses and the loans originate. countries, on whose exports some of the recycled loans will be spent; and the vast idle or underemployed unskilled manpower of the South. And all this in the service of a growing world economy. 2. A World Central Bank Bankers are not the most popular species of men. And it is not obvious that we should hand over our fate to a new group of global central bankers. John Kenneth Galbraith wrote, 'The sense of responsibility in the financial community as a whole is not small. It is nearly nil. (The Great Crash, 1929, Penguin Books, 1961, p. 20.) John Maynard Keynes, once listening to an astonished complaint about the stupidity of a banker, replied, 'Remember, they only compete with each other. And in Essays in Persuasion he wrote, Bank and bankers are by nature blind. They have not seen what was coming...Lifelong practices...make them the most romantic and least realistic of men...if [the bankers] are saved, it will be, I expect, in their own despite. (Macmillan, London, 1931, pp. 176, 178.) In spite of this bad press, bankers fulfil an important function. Long- term capital-intensive investments are needed for economic growth and development. Fluctuating exchange rates discourage this form of investment, because it cannot be known which will turn out to be profitable. In the past the stability of the currency of the dominant economy has played the role of an international standard and store of value. The attempt to move towards a world currency with the creation of Special Drawing Rights has been so far not altogether successful. But if we wish to move in the direction of a pluralistic, democratic world order, a world currency will have to be an important part of it. After the last War. Maynard Keynes proposed the creation of bancor, the name he gave for a world currency. The International Monetary Fund is, of course, not a global Central Bank. Such an institution would have to be given the power to conduct open market operations to regulate the world currency for transactions purposes, to prevent panic runs on deposits, and to maintain the stability of the financial system. Even a small possibility of a financial break down should lead to our making provisions against it. 3. An International Debt Facility Much has been written about the international debt, and I can therefore be brief. The proposal of international debt relief combined with government guarantees of the reduced debt is perhaps different from some of the other proposals, because it applies to the present situation, from which it would be hoped that a lesson would be learned and that it would not be repeated. On the other hand, since the possibility of repetition cannot be excluded, some global equivalent of a bankruptcy facility might well constitute a permanent feature of the global landscape. On the assumption that some part of the outstanding international debt will have to be written off and relief will have to be granted to the borrowers, two questions arise that call for a coordinated, global solution. First, there is the free rider problem. There is a kind of Laffer curve at work. A debt reduction would lead to increased domestic investment in the debtor countries, both because more resources would become available and because the incentive to invest would be improved. Higher investment would lead to higher growth, and this in turn to a larger amount of debt service payments. But although all banks would benefit from such a general debt relief, because growth and exports could be resumed by debtor countries, each bank has an incentive to let others make the concessions. Relief by only one or some means that the remainder of the payments goes to pay interest to those not having made the concessions, and thus frustrates the purpose of the exercise. Each bank has an interest in not giving relief, whether others give relief or not. At present, banks already sell their claims at discounted values to other institutions, including to some debtor countries, but this is no help to the debtors, unless the debt reduction is passed on to the debtor country. The buying back by the debtor country at lower value tends to be inflationary, since it involves a large current liability. But the free market does not solve the problem of this passing on of debt relief to the debtor, because of the logic of collective action. Concerted action to forgo part of the claims by all lenders is necessary. Second, after part of the debt has been forgiven, multilateral guarantees are needed for the remaining debt. In this lies the attraction to the creditors to forgive part of the debt. Here again, concerted action by the US, the Fund, the Bank, the creditor governments and the debtor governments is needed. Only then can normal lending be resumed. Neither the market nor the uncoordinated actions of governments can bring about this solution of the debt problem. It is in the interest of any one government not to guarantee, whether others guarantee or not. 4. Commodity Price Stabilization The failure on the part of the developing countries and UNCTAD to reach agreement on a working scheme of commodity price stabilization is due partly to absence of political agreement, and partly to the weak analytical basis on which it was presented. The case had been based largely on micro-economic arguments about stabilizing or raising producers' or consumers' incomes, or improving incentives. In my view a much stronger case can be made on macro-economic grounds. Lord Kaldor. Ravi Kanbur and others have shown that different pricing methods for primary and manufactured products, combined with the fact that primary products are imported inputs into manufactured goods, lead to alternations of inflation and unemployment with fluctuating and depressed incomes in the exporting countries. Commodity price stabilization schemes can contribute to reduced inflation and unemployment in advanced importing countries, and to income stabilization and enhancement in developing exporting countries. This nexus depends, however, on the continuing link between raw materials and manufactures. Peter Drucker has expressed doubts about this. He has argued that recent advances in technology have weakened or even broken that link, as well as those between employment and production and between finance and trade. But the volatility of commodity prices with the swings in manufacturing activity suggests that the link still exists. The proposal then is, in line with J. M. Keynes's proposal after the last War, to establish an International Trade Organization with the mandate to stabilize the prices of primary products. 5. Global Energy Policy Nobody can call the events since 1973 in the area of global energy satisfactory, either from the point of view of exporters or importers of oil. We have suffered from wild zig-zag movements of oil prices, leading to periods of conservation, high cost exploitation and exploration of alternatives, followed by periods of waste, closing down of high-cost wells. and cessation of conservation. Not only are the wrong signals and incentives given in the energy sector, but the high oil prices lead to inflation, which, if countered by monetary contraction, is followed by deflation, unemployment and underutilized capacity, and deprives industry further of incentives and means to spend on conservation and the exploration of new sources and alternatives. A more sensible course would be for selling and buying countries to agree on a future price of oil in, say 20 years' time. This might require a gradual, agreed increase by, say, 2 per cent per year. Investment would be stabilized, based on stable predictions. Inflationary and deflationary impulses and unemployment would be reduced, and the exploration of alternatives would be encouraged, while the resources for this would be made available. 6. An Industrial Investment Board At present the world economy lurches between excess capacity and scarcity in the products of industries the plant of which takes a long time to construct and, once constructed, lasts a long time. Steel, fertilizer and ship building are examples. At a minimum an exchange of information about investment plans, on the pattern of the British National Economic Development Offices, would help to introduce greater stability. A further step would be to coordinate the planning of investment decisions, although this must not be permitted to degenerate into cartel-type market-sharing arrangements. An institution such as a board for fixed investment in durable plant with long gestation periods would provide the forum to discuss such matters. 7. A Global Progressive Income Tax In the current climate of retreat from global commitments, this item will appear even more utopian than some of the others. Nevertheless, it is worth exploring how such a scheme might work. The main principle would be to move towards a system of automatic collection, but not automatic disbursements. These would remain conditional not only on obvious factors such as size of population and level of poverty, but also on performance in economic policy, human rights, and similar areas. 8. A Global Anti-Monopoly Policy In the US the Webb Pomerane Act encourages firms to band together in monopolistic action against foreigners, while the Sherman Anti-Trust Act forbids similar action in the domestic market. It is true that not many companies are registered under this Act, partly because they do not wish to reveal their proprietary knowledge, as would be required, and partly because domestic anti-trust prosecution has greatly declined. But the asymmetry in treating monopolistic exploitation of citizens and that of foreigners, especially weaker foreigners, is glaring. A global order based on fairness, equality and human solidarity would apply the same principles to international transactions as are applied to domestic ones. A global monopolies commission may be required to examine the scope of competition, restrictive practices and similar problems. 9. A Global Environmental Protection Agency Just as in an uncoordinated world each country has an incentive to pour its problem of unemployment, metaphorically, into the yards of others, so does it, literally, cast its muck into the neighbouring gardens or into the oceans, the atmosphere or the land which are the global commons. Acid rain that kills forests, the emission of chlorofluorocarbons that destroy the ozone layer, the global warming resulting from the burning of fossil fuels, overfishing in common waters, are examples of global abuse that can be stopped only by global agreements that limit national sovereignty. The domestic environmental problems of rich countries are often in conflict with poverty reduction in developing countries, while the domestic environmental problems of poor countries both arise from, and contribute to, poverty. But the global environmental problems are shared by the whole of humanity and call for global solutions. Desirable and Feasible? Two types of objection can be made to these proposals: one on grounds of desirability, the other on grounds of feasibility. First, it may be said that creative institutions are not designed on a drawing board, but are the spontaneous responses to challenging situations. Designed institutions, such as the League of Nations, the World Economic Conference of 1933, the International Trade Charter, the Special Drawing Rights, all failed, while the multinational corporation, the Eurocurrency market, the globalization of the 24 hour capital market and the swap arrangements between central banks, none of which sprang from grand designs, are great successes. The Bretton Woods institutions are the exception, but they were born after a world war and the complete breakdown of a previous order. My reply would be that these spontaneous institutions themselves need designed institutions to regulate them. The current debt crisis is a direct result of the unregulated recycling of OPEC surpluses by greedy lenders to profligate borrowers. Had something like the proposed International Investment Trust been in place in the seventies, we would have been spared many of the present pains. So much in reply to the charge that the proposals are undesirable. A different criticism is that, though desirable, they are not feasible; they are utterly unrealistic and utopian. There are three replies to such criticisms. First, the utopian vision gives a sense of direction, which can get lost in approaches that are preoccupied with the feasible. Second, excessive concern with the feasible tends to reinforce the status quo. In negotiations, it strengthens the hand of those opposed to reform. Third, it is sometimes the case that the conjuncture of circumstances changes quite suddenly and that the constellation of forces, unexpectedly, turns out to be favourable to even radical innovation. Unless we are prepared with a carefully worked out, detailed plan, that yesterday may have appeared utterly utopian, reforms will lose out by default. Nobody would have expected only a few years ago the dramatic changes in Central and East Europe, the Soviet Union and China. Although the subsequent fate of the Special Drawing Rights was disappointing, when they were established the creation and acceptability of an international liquid asset came as a surprise to many. It is for these three reasons that utopians should not be discouraged from formulating their proposals in the same detail that the defenders of the status quo devote to its elaboration. Blocks In spite of my plea for the utopian exercise of the institutional imagination, for the practice of informed fantasy, I would be the first to agree that the likelihood of any of these steps towards a global order, based on plurality and equality, being implemented is minuscule. I therefore turn now to a more probable scenario, the formation of blocks. The most recent precedent is that of the inter-war period. There was the Ottawa Agreement of 1932 and the Sterling Area or, as it was then called, the Sterling Block. There was the French Union; and the USA with the Monroe doctrine. The fragmentation of the world into blocks gave scope for the ruthless rather than the strong. Trade between blocks had been minimized. The exclusion of the Japanese from South and Southeast Asia by the British, French and Dutch was a major cause of Japanese aggression. The exclusion of Germany from the Western blocks contributed to World War 2. The multilateral system that had been built in the quarter century after the war has been undermined by the formation of the Group of 5, Group of Seven, and the Summits. What we may see emerging is something that resembles Orwell's picture in 1984: Oceania, Eurasia and Eastasia. Lester Thurow has recently pronounced that 'Gatt is dead', and that multilateralism will be replaced by blocks. The liberal world order that the USA had advocated after the war had never been accepted by Europe and Japan. Germany yielded to open