World Economy Under Stress

The year 1985 saw progress on several important fronts. The American recovery entered its fourth year; inflation continued its impressive decline and interest rates fell significantly. Washington took a more constructive approach toward the resolution of international economic problems. In much of Europe, wage and price increases were further slowed, business profitability was improved, budget deficits were cut and cumbersome regulations were loosened. Japan took new steps to liberalize trade and finance. The United States joined with Britain, France, Japan and West Germany to reduce exchange rate misalignments and bring greater order to the international monetary system. Growth picked up in some Latin American countries, and the world’s two most populous nations, China and India, substantially increased market incentives.

But there were ominous trouble spots. The large U.S. budget deficit endangered future prosperity. A still very strong dollar penalized American industry and agriculture, and the U.S. trade deficit reached another historic peak. The United States became a net debtor to the rest of the world for the first time since World War I; by the end of 1986, U.S. foreign debt will likely exceed the foreign debts of Mexico and Brazil combined. Europe’s efforts to cut joblessness also proved disappointing, and structural rigidities there slowed investment. The international trade picture grew more dangerous, as nations imposed import restrictions and increased subsidies, U.S.-Japanese frictions sharply intensified, and only limited progress was made toward beginning new multilateral trade negotiations. Latin America’s debt remained a barrier to its development, a threat to its political stability, and a serious impediment to world growth. Much of Africa suffered from tragic food and nutritional problems and experienced continued economic deterioration.