Rethinking the Ground Rules for an Open World Economy

Just as farmers might react to the end of a long drought, I and presumably every other Minister of Finance have been heard to issue a collective sigh of relief at the first clear signs of a U.S. recovery. This incipient recovery and the successful rescheduling of the largest debtor countries seem to have averted, for the time being at least, the very real danger of a collapse into global depression, financial crises and wholesale disruption of world trade flows. I understand "implosion" of the world economy is the current favored term to describe that particular chain of events.

It would be as well to keep in mind the extent of uncertainty that prevailed even late last year. Consider the mood at the last annual meetings of the International Monetary Fund and World Bank. If there is a banker's equivalent to the whiff of cordite, I think I detected it in the corridors and lifts of the Sheraton Hotel in Toronto last September. By all means let us admire the speed, flexibility and finally the total pragmatism with which the Federal Reserve, the U.S. Treasury, the IMF, the Bank for International Settlements (BIS), the major international banks and the biggest debtor countries put together the reschedulings. My concern now, however, is that we should not forget how close we came to teetering over onto the other side of the knife edge.

It would be consistent with everything I understand from roughly 20 years of experience with the politics of international finance for the mood to swing 180 degrees in the opposite direction. We must resist the temptation to believe that the tentative recovery and financial rescue operations relieve us of the obligation to consider a number of fundamental long-term political and economic issues. I do not mind in the slightest being regarded as a Jeremiah on this subject. One of the advantages of being the Minister of Finance of a very small country is that I do not feel compelled to share the onerous responsibility of talking up the recovery.

Economic analysis tells us change is better managed in times of growth; political analysis gives us a somewhat different message. Change normally occurs only after an existing system sustains a series of severe shocks. The art in all of this is to find a time and a way of reconciling the two points of view.