Can Putin Survive?
The Lessons of the Soviet Collapse
"The Bretton Woods system is dead." How often has that remark been made in the last year? Like most clichés, it blends truth and error and the problem is to know in what proportion. The ending of the dollar's convertibility into gold and its devaluation can certainly be taken to mark the end of the monetary system with which we have lived for most of the postwar period. But only some parts of that system worked as envisaged at Bretton Woods, New Hampshire, in 1944. Other key attributes developed quite differently. Whatever monetary system comes next-perhaps it will bear the name of Nairobi where the International Monetary Fund meets in the fall of 1973- will certainly alter some of the Bretton Woods rules and practices but may also have some features closer to the original design than to the dollar standard of the past decades.
Money was only one of the things that concerned the designers of the Bretton Woods world (as it may be called since it has no other name). Trade, agriculture, capital movements and many other matters came into their plans and not least the problem of relating the domestic economic policies of a country to its international economic position. The basic principle of the Bretton Woods approach was that as many problems as possible should be dealt with by continuing multilateral coöperation, much of it carried on through a series of international organizations each of which was the center of a cluster of rules governing the behavior of member countries. The formula sounds banal. We take these principles for granted even when we do not always observe them. Yet the general acceptance of this idea and the creation of at least some of the institutions that embodied it made the Bretton Woods world different from anything that had preceded it. The salient question today is not whether the Bretton Woods world is dead, but whether what comes next in international economic affairs builds on it or reverts to that form of chaos called economic nationalism.
Even before the Depression made intense economic nationalism almost universal, coöperation in international economic affairs between the wars was rather modest and there were few major international economic organizations. The openness of the world economy before 1914 was more the result of ideas about the proper role of government than of international coöperation. The designers of the Bretton Woods world were trying both to avoid the troubles of the interwar period and to provide greater welfare for more people than the nineteenth-century system did. While ascribing high value to free markets, they recognized that in the mid-twentieth century governments had to take far greater responsibilities for economic life than had been thought necessary (or even possible) for some time past No system could survive that did not somehow reconcile the demands of domestic policy and the requirements-formal or not-of the international economy. The tension between the two sets of government obligations was bound to give rise to many difficulties, but there was also the great promise-in which most of the architects of the Bretton Woods system fervently and idealistically believed-that full participation in a well- ordered international economy could significantly increase the ability of countries to meet the desires of their citizens.
The Bretton Woods response to these problems was in many ways inadequate but it is hard to envisage a satisfactory international economic system that would not try to deal with them in one way or another. In doing so, it will have to build on at least some of what has been accomplished in the last 25 years. In that sense, the Bretton Woods system is not dead. It is, however, threatened, not only in its monetary features but in fundamentals. That is the fact which makes the economic troubles of recent years-and those yet to come-more important than many people realize. We are dealing with more than an unlucky convergence of separate developments in Europe, Japan and the United States, a clumsy handling of new difficulties, and the friction inevitable in shifts in power. All these elements are real enough, but underlying them is a threat to the whole system of international economic coöperation resulting from a combination of neglect, deterioration, failure to adapt to changed circumstances, and, above all, unwise responses by the major economic powers to their own problems and those of the system. Not the least of the delinquents is the United States.
Out of the stress, strain and challenge may come one of three results: some adaptation of the existing system; substantially new arrangements; or further breakdown and more economic nationalism whether rooted in individual countries or in blocs. How matters fall within this range of possibilities depends on many things, but especially on what the United States does.
The United States was vital to the creation of the Bretton Woods world and will play the key part, though in a different way, in its adaptation, alteration or demise. Such statements are not popular these days when the fashionable emphasis is on the decline of American power, the need for others to take a larger share of responsibility, the deterioration of the United States' competitive position in the world and the weakness of the dollar. These factors are real and important, and a central fact in the present situation is the gain in wealth and economic strength of other countries, notably Japan and Western Europe. Nevertheless, it is still the United States which has the greatest wealth and economic power to be found under a single sovereignty. Failure to understand the extent of American economic strength is dangerous. It encourages the belief that others will do what they cannot and obscures the extent of the damage which action by the United States may inflict on not only the welfare of others but the fundamental structure of international coöperation.
Great power has to be used circumspectly. Unfortunately, the climate in the United States for the responsible use of economic power is not good. Unemployment, inflation and worry about the balance of payments stimulate policies that pay no regard to the interests of foreigners. Between the close of the Kennedy Round in 1967 and the ending of dollar convertibility in 1971, American presidents did not treat foreign economic policy as a matter of first political importance except in crises, which is no way to build for the future or even to maintain past gains. The neglect gave way to an approach in which an appreciation of political significance is accompanied by high risks related in part to a dangerous mood that has developed in the country.
No one, so far as I know, has borrowed Joe Jacobs' inelegant words, "We was robbed," but many share his sentiments when they think of past American policy. According to this view, the United States has been too generous to the rest of the world. It carried on in the spirit of the Marshall Plan when the need was over, reduced its tariffs faster and further than foreigners reduced theirs, accepted other governments' excuses of domestic political necessities as justifying failures to live up to commitments and expectations and, in the interests of "foreign policy," too often ignored American economic interests. Negotiators who were regarded by foreigners as hard men to deal with, especially as they had all the weight of American power and wealth behind them (as well as the threat of congressional displeasure), are now spoken of by some Americans as if they had been running around the world giving things away.
Part of this revival of Will Rogers' view that "the United States never lost a war or won a conference" is the repeated statement that Europe and Japan are not carrying their fair share of the burden of defense. A more limited, but important, element is the conviction of many businessmen that the United States is more sinned against than sinning in the use of restrictions on trade and payments, discriminatory practices, nontariff barriers and the like. The United States is seen as having a very open economy in which a low tariff is a low tariff and competitive conditions prevail. In this view, foreigners are on an equal footing with domestic producers in the American market while in foreign markets Americans are at a disadvantage because nominally low tariffs are nullified by border taxes, administrative regulations, government discrimination in purchasing and restrictive business practices imposed by local interests.
People who believe they face this kind of world naturally feel that the time is long past for the United States to assert its national interests and to give less weight than in the past to the special pleas of others. Long-run objectives that somehow seem to recede into the future and political goals that grow dull with repetition should be subordinated to the "realities" of the here and now, such as the need for exports, employment and the improvement of the balance of payments. The United States should use its economic strength to ensure that foreigners treat us at least as well as we treat them (and occasionally, it sometimes seems, a little better, perhaps in recognition of our past generosity).
We should, in short, be "like every other country" in the pursuit of our national interests in a highly competitive world. If our efforts to right the balance of the past and strengthen our position in the world arouse foreign resentment and retaliation or generate even more economic nationalism abroad, we should not be unduly alarmed. Most other countries- Japan, Canada and Western Europe are the ones principally in mind-are far more dependent on international trade than the United States. They will feel more impact from restrictions than we will and have more to lose in the long run. Consequently, the chances are good that they will sooner or later come to terms on arrangements that take better account of American interests than those of the past. To support this view, the successful tactics of Secretary Connally between August and December 1971 may be cited.
Can this prescription be right? There is some truth in the charges. For most of the postwar period, American foreign economic policy has been concerned with the creation and maintenance of a world economic system based on coöperation and the removal of barriers to trade and payments. This has sometimes required the sacrifice of narrowly conceived short-run aims and would certainly have been incompatible with the unrestrained use of American political and economic power for purely national advantages as conventionally conceived. In pursuit of political and security aims, the United States has sometimes accepted economic burdens or disadvantages. Other countries have benefited from American policies and have not fully adapted their own behavior to the improvement of their positions. None spends as much of its income on defense as the United States. Japan restricts imports and investment more than other industrialized countries (but the others, including the United States, require of Japan export restraint that they do not accept themselves). The European Community's Common Agricultural Policy is highly restrictive while the farm policy of the United States (formerly the great sinner) has improved. In many foreign countries government-business relations, administrative practices and restrictive arrangements among businessmen put Americans at a disadvantage. And so on-the list of legitimate complaints is long.
The same story may be told in other terms. The United States has not really been Santa Claus. The altruistic elements in its policy have been based for the most part on a fairly clear conception of the kind of world economy that would best serve the long-run interests of the United States as well as of other countries. One need only try to imagine where we would be if there had been no Marshall Plan, GATT or Bretton Woods. While other countries have benefited, so has the United States. Not all the failures, errors and disappointments in foreign economic policy can be traced to generosity, misguided idealism or the sharp practices of others. Foreigners would laugh at the idea that the United States has always ignored domestic pressures or short-run interests. "Congress will not accept an alternative" has forced more than one foreign government to swallow unpleasant medicine. It is hard to see how a more narrowly nationalistic (or selfish) economic policy by the United States would have achieved as much politically or economically as the one actually followed, in whatever terms it is characterized.
However one appraises the record of the last 25 years, it is not realistic to expect to be compensated now or in the future for past errors or generosity. The United States is entitled to call on others to live up to their obligations and get rid of restrictions that are left over from times when they were weak and the dollar was strong. But beyond that, progress is not likely to be made except through bargains that are mutually advantageous. In a world where trade, investment and capital movements are all mixed up and the relation between national and private interests is blurred, generalizations about other countries being more restrictive than the United States are hard to test. Only through negotiations can complaints be translated into policy. Demands for more burden-sharing in military affairs have to be related to basic judgments about the needs of American security as well as the sharing of decisions about common security and the relative freedom (or lack of it) of each partner in foreign policy matters. In development aid, the picture of a giant flow from an American cornucopia and a dribble of pittances from others is out of date (though the figures that show many other countries giving a larger share of their gross national product in aid than the United States do not tell the whole story either).
In short, the world remains a place of complex issues that can only be resolved in a constructive fashion by patience, determination and give and take. But people who feel unfairly treated by an ungrateful world need little persuasion to support strong measures to set things right. The nationalist and populist rhetoric that accompanied the unilateral economic steps the United States took in the summer of 1971 may have been adopted for bargaining purposes, but it also must be seen as both a warning of the temptations that international issues may offer politicians and an echo of a simplistic economic nationalism that the world has scarcely heard since 1939.
The economic conditions of the late sixties and early seventies have aggravated American discontent with the world. When concern for the balance of payments is added to unemployment and inflation, it becomes hard to resist any promise of short-run advantage, no matter what imposition of new controls it requires. In the past, the ability to hold the line against protectionist pressures has often depended on the government's invoking international commitments and the need to adhere to the basic principles of liberal policy lest other countries retaliate. But what principles apply if policy is animated only by nationalism?
Perhaps because it is so difficult to answer that question-or because the logical answers are so distressing-some of the supporters of the "strong line" taken by the Nixon administration in August 1971 have said that its basic rationale was to put the United States in a position to resume its "established policy"-i.e. further liberalization and continued international coöperation. There is certainly a case for this view. Tactically, there are advantages in using discontent to fuel a strong policy. Politically, it can be helpful to make foreign governments understand that the United States is serious about the issues. Economically, an improvement in the U.S. export position will strengthen the case for the view that the United States can gain from further liberalization. But there are risks in such a course and the arguments for taking them would be stronger if there were a clear idea about where a resumption of the "established policy" would lead. Simply to continue "the Bretton Woods approach" is inadequate to contemporary conditions and few alternatives have been proposed.
The chief contender appears to be the idea of a five-power world. In the hands of skillful analysts who keep themselves and their readers aware of its assumptions and limitations, this concept may be useful in elucidating certain problems of a world that is yet to come. But as a guide to foreign economic policy it is at best grossly inadequate and at worst pernicious.
The inadequacy lies in silence and generalization. Quite apart from saying nothing about economic relations between rich and poor countries (which are likely to grow more important in the future), the concept conceals more than it reveals about economic relations among the five powers themselves. It is hard to judge what kinds of economic relations may eventually develop between the Communist and non-Communist parts of the world, or between Russia and China, but it strains credulity to suppose that in the foreseeable future they will resemble the economic relations of Japan, Western Europe and the United States. But the model makes no distinction and so is no help. No doubt many versions of economic relations among the non-Communist industrial countries are intellectually compatible with the theory of the five-power world, including some that would permit a high degree of international coöperation. But this model is not just an intellectual construct. Perhaps because it is so simple at its core, the five-power idea has found its way through official speeches and papers into general currency in a vulgarized form that seems to be influencing American thinking (or feeling) about foreign affairs. In this version it encourages the view that the five centers are in permanent rivalry with one another and that each must mobilize all its different kinds of power to compete with the others. In these circumstances national interests are almost bound to be interpreted in narrow mercantilistic terms and competition becomes not a beneficial force in the marketplace but an effort to assert power and a reason to refuse coöperation.
This may prove to be a correct view of the world of the seventies and eighties. It is certainly the world that the United States and other countries will create if they act on the assumptions of the vulgarized model. But even if the model is abandoned or left to the theorists, the world will move in the direction of economic nationalism unless the governments of the industrial powers devote themselves to finding an alternative.
What alternatives there are to economic nationalism and how governments may pursue them are matters that go beyond the scope of an article that is analytical rather than prescriptive. But to understand what kind of a task has to be undertaken, five salient facts must be taken into account: (1) The basic decisions have to be taken by the industrialized non-Communist countries. (2) The economic relations of these countries present unprecedented problems which can be dealt with only by new methods and policies. (3) At the same time, the reinvigoration of some old policies is essential to retaining some of the advantages these countries have achieved over the last few decades. (4) To find satisfactory ways of dealing with present problems will be considerably harder than the task faced at Bretton Woods. (5) The distribution of power in the industrial world increases the means available for dealing with these problems but complicates the process of mobilizing resources behind policy.
The first of these statements does not mean that the Communist countries or those in the less developed parts of the world would have no part in shaping the world economy. Their influence may well be greater in the future than it was in the past. Nevertheless, the issues that will do most to determine the character of the world economy for some time to come will arise in the next few years in the economic relations of Europe, North America and Japan. Those relations are different from anything the world has ever seen. Trade barriers are at record lows. Direct foreign investment- a matter of enterprise and organization as much as of money-plays a greater part than ever before in shaping not only international economic relations but many national economies as well. Money is more truly international, in its movement and accessibility, than in the past. The result is frequently labeled "interdependence," a word that sums up the openness of economies to one another, their interpenetration, and a considerable fluidity of goods, money, enterprise and, to a degree, people. A truly international economy has been growing up, much of it in private hands, but public power remains national. The resulting tensions shape the basic problems of international economic life and provide its dynamics.
This new world economy is only in part the result of the Bretton Woods approach but one cannot disentangle the effect of the removal of barriers to trade and payments and the way the forces of technology, science, entrepreneurship and the efforts of governments to satisfy their citizens have responded to the resulting freedom. But for the future it is plainly not enough to continue past policies. The various elements of the Bretton Woods approach make a pattern of success, failure, inaction and irrelevance. Some fresh starts are needed and perhaps some approaches that failed once should be tried again. Most of the new problems, however, result from the successes, the measures which have done most to create openness and interdependence. For example, the removal of tariffs has made other kinds of trade restrictions more important; the freer movement of capital raises questions about the regulation of the multinational enterprise.
While it is impossible just to "go back to Bretton Woods," it is also impossible to make a completely fresh start. Governments have to live with their pasts; part of the best that they have created can be kept only by retaining some of the arrangements they first made years ago. Unless some old rules are kept alive, old problems will reappear. (How many tariffs would have been reimposed in the last five years if there had been no GATT?) The mixture of old and new requirements is a troublesome one, not made for dramatization, popularization or even consistency. The contrast with the forties is great; then there was little to preserve and the need for fresh starts was plain.
That was not the only advantage the architects of Bretton Woods had. At the heart of their effort was the wish to remove barriers to trade and payments, an objective with years of teaching, preaching and theory behind it. The difficulty was to get governments to act. This kind of liberalization remains important, but to cope with the new problems arising from the high degree of interdependence that has been achieved is much more complicated. On many of the issues there is no clear agreement about who would benefit from what course of action. And if that is clear, there may still be no consensus about desirable objectives. And even if governments agree about broad objectives, they will disagree about how to reach them. Many so-called nontariff barriers, for example, are closely linked with the pursuit of domestic objectives that governments will not (and should not) give up simply to expand trade, such as the improvement of conditions in depressed areas and the reduction of pollution. The "coördination of national policies" is a favorite prescription for dealing with balance-of- payments problems, but to live up to the idea could raise delicate domestic questions. All this is the natural result of interdependence, which requires coöperation in "positive" action, not just "negative" agreements to remove barriers. Put another way, the need is for an increasing degree of international management of economic affairs. To reconcile the conflicting demands of a single electorate is hard enough, especially at a time when traditional economic values like growth and efficiency are being challenged-and for good reasons. It is much more difficult to find ways of getting enough international agreement to make common action possible.
To be sure, the industrial countries face these unprecedented problems with greater resources than ever before. But wealth and welfare can blur the awareness of problems and affluence can make it seem cheaper to subsidize inefficiency than to face the social and political costs of adjustment The openness of the industrial economies plus the speed of technological change will probably sharpen the pressures for adaptation, thus adding to the burdens of governments. Europe and Japan are strong, not weak as they were at the end of the War, but the dispersal of power over more centers can be an obstacle to action. It is empty to argue about who has the power to veto what, but it is obvious that no system of international coöperation can be viable without the active participation of Japan and Europe.
It was unrealistic and somewhat self-indulgent for Americans to say for some years that it was time for others to take the lead in international economic affairs. There are good historical reasons, and understandable political and psychological ones, why Europe and Japan should be preoccupied with such matters as integration in the one case and the rapid entry into the upper reaches of the world economy in the other. These concerns will not disappear overnight. Still, it would be unrealistic and self-indulgent of the Europeans and Japanese to suppose that if they do not accord a higher priority than in the past to the requirements of the international economic system, the United States will not only do the job for them but take adequate account of their interests in what it does.
They should have learned from the monetary crisis of 1971 that if others confine themselves to insisting that the United States "do something," they may not like the results. If there are to be better alternatives, Europeans and Japanese must follow policies which, like American policy during most of the postwar period, have two tiers, one the pursuit of conventional national interests, and the other concern for the operation of the international economic system. Otherwise, it is unlikely that the nationalistic tendency in the United States can be kept in check.
If, in spite of the magnitude of the task, the people of the industrial world decide to try to save themselves from economic nationalism, what must they do? The agenda is quite clear.[i] Few doubt the need to reform the international monetary system. There is even a rather wide consensus about several essentials of a new régime, such as an internationally managed substitute for the dollar as the principal form of reserves and a better adjustment mechanism. There are also areas of intellectual and political disagreement-the dollar "overhang," flexible rates, the handling of short- term capital movements-which are important but surely negotiable as long as the need to act is accepted.
With regard to trade there is less consensus and a feeling in some quarters that it would be sensible to postpone serious efforts. This would be a major mistake. It is true that no great progress can be expected quickly, but if no serious effort is made to deal with a number of difficult problems, the deterioration of the last few years will continue and the negative mood of the United States that so strengthens economic nationalism will grow. There are many immediate targets: the trade impact of the enlargement of the European Community, some of the nontariff barriers of which American businessmen complain so bitterly, foreign complaints about American tax concessions on exports and the increased use by the United States of anti-dumping and countervailing duties. A broader effort to deal with fundamentals is also needed, but here the proper timing is difficult to judge. There is a good case for bold proposals-the elimination of tariffs on manufactured goods is a favorite candidate-but their positive psychological impact requires their having more credibility than any major government could give to them for the time being. One way of preparing the ground for larger initiatives is to repair, strengthen and perhaps in some respects amend the GATT while reaffirming its members' commitments to its basic principles.
As a practical matter, one serious effort in trade will lead to another. Governments have different priorities and to strike balanced bargains it will often be necessary to act on more than one subject at a time. Many so- called nontariff barriers cannot be dealt with by once-and-for-all agreements; codes, complaints procedures and statements of principles will become vehicles for continuing negotiation. The more open to one another economies become, the longer the list grows of the "conditions of competition" that are of international concern: prices, taxes, labor laws, credit arrangements, business practices. The more governments try to adapt their economies to changing needs, the more deeply they will become involved in "industrial policy," the comprehensive or piecemeal shaping of parts of the national economy in ways that raise problems for other countries. Industrial policy affects investment as well as trade but investment issues will be on the agenda for other reasons too: increased worry at home and abroad about American investment, the links between investment and trade, the suspicion that multinational enterprises will elude the control of national governments. Still, investment questions do not seem as urgent as those concerning trade and money and may be treated case by case for some time to come.
Agriculture, in contrast, will have a high place on the agenda of international discussions in spite of a long history of disappointment. The record of trade liberalization in agriculture has been dismal compared with what has been achieved in the treatment of other products. Among experts there is a good bit of agreement that if there is to be any real progress international negotiations will have to be directed to the policies that give rise to the trade barriers in the first place, such as subsidies and price supports. The political difficulties of such a course are obvious but the importance attached to agriculture in Washington plus the discontent in Europe with the cost of the Common Agricultural Policy make it reasonable to try again.
One would have to be a fanatic, a con man or a negotiator to insist that there is only one satisfactory solution to each of the problems of money, trade, investment and agriculture. There is in fact a range of acceptable possibilities, a margin of tolerance for failure, several possible mixes of speedy achievement, slow progress, no progress and even, in a few matters, indefinite postponement. But in every specific instance there are certain needs that must be met and overall some minimum level of accomplishment that must be reached if there is to be anything like as much international economic coöperation in the next quarter-century as in the one just past. In monetary affairs, awareness of the dangers has grown in the wake of the crisis of 1971, and 1972 has brought some promise of constructive action. But even if successful monetary reforms are worked out in 1973, the dangers of a great rise in economic nationalism will not be averted. To make progress in trade, agriculture, investment and other matters will take longer and will not be possible unless there is a continuing awareness of the fact that behind every difficult problem, however isolated it may seem, there is a potential threat to the world economic system as a whole.
International economic coöperation does not come about spontaneously. It requires conscious and sustained efforts by a number of governments. In the past the United States was the principal tender of the system. Those who would have it abandon that task contribute to the present danger. There is no one to take the United States' place. But it is also true that the United States will not be willing-and may not be able-to perform adequately in the new state of the world unless Europe and Japan also accept the need to make the maintenance of the system of international economic coöperation one of the objectives of their policies.
The builders of Bretton Woods had three important advantages: the need to do something was obvious; there was a surprisingly broad consensus about what ought to be done; the United States-while not in a position to dictate, as is often said-had enough power to overcome inaction most of the time. None of these conditions exists today and we shall not see their like again. In new circumstances, facing both old and new problems, the governments of the industrial countries again have choices to make. There are in the international economy of the industrial world two elements, both of its essence: interdependence and national power. Easily in contradiction, occasionally mutually reinforcing, and more often in a dynamic interaction, they can produce a wide range of results. Few people declare themselves against coöperation, but the combination of political power organized along national lines, the priority that politicians inevitably give to short-run considerations, and the cushion that affluence permits for uneconomic policies is a potentially lethal one. Awareness of these facts made possible the Bretton Woods approach, a combination of fear and hope. Now there is some fear-perhaps not enough. Hope seems stilled, or is taken for granted. Even the awareness of what the real questions are seems often to be lacking, or obscured.
When Foreign Affairs was started in 1922, efforts at economic coöperation were being made-as at Genoa. They were ultimately futile, but when Foreign Affairs was 25 years old in 1947 new and different efforts were at their height. These were successful, in their way and for a time, in holding economic nationalism in check. Now, as Foreign Affairs turns 50, the old questions have reappeared in both old and new forms. The shape of the world economy for quite a long time to come will depend on what answers are found this time.
[i] These issues are discussed more fully in William Diebold, Jr., "The United States and the Industrial World: American Foreign Economic Policy in the 1970s." New York: Praeger, for the Council on Foreign Relations, 1972.