Courtesy Reuters

Restructuring the World Economy

The world economy is currently in a state of disequilibrium of a magnitude not seen since the aftermath of World War II. The symptoms of underlying stress have been manifested over the past two years in the form of raw-material shortages, a food and fertilizer crisis, a dramatic rise in petroleum prices, and finally, worldwide inflation and threats of impending financial disaster.

The immediate cause of most of these problems was the rapid growth of almost all parts of the world economy in the previous decade, culminating in a strong cyclical upswing in the industrial countries. In 1972-73 the economies of the advanced countries as a group were growing at an unsustainable rate of over six percent, pushing against existing productive capacity and outstripping the potential rate of expansion of world supplies of many raw materials. This spurt in demand provided the opportunity for primary producers in both developed and developing countries to raise their prices, with or without collusive action among producers.

Some of the symptoms of commodity shortages and high prices are purely cyclical and are already disappearing as a result of the current stagnation in world incomes. Others, however, reflect long-term shifts in demand and supply that were merely accelerated by the recent period of rapid growth. This is notably true of the supply of energy and foodstuffs, where the evidence of shifts in the balance of supply and demand was apparent before these markets were disrupted by booming demand, crop failures, and the behavior of the Organization of the Petroleum Exporting Countries (OPEC). Before the world economy can return to a condition of orderly development, substantial redirection of investment and production in these and related sectors is imperative.

While the present dimensions of the oil, food, raw materials and balance-of-payments problems are by now well-known,1 international attention has centered on their immediate impacts on different groups of countries and on the interim measures needed to offset them. There has been little analysis of the adjustment mechanisms that

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