Courtesy Reuters

Gunboat Economics

Over the last four years America’s foreign economic policy jumped its traditional track. The first few postwar administrations practiced a single-handed kind of world leadership, because there was no one else to help. As Europe and Japan gained more economic strength, recent presidents focused on ways to share the management of the world economy. But President Reagan and his team seemed far less interested in international economic policy. Above all, they were preoccupied with events at home.

Their ideas went like this. Crank up the engines of domestic growth by freeing up private enterprise. As the "magic of the market" worked in the United States, so it could be made to work by other nations. The government-to-government agenda in international economic relations could thus be kept narrow. An aphorism from Goethe captured all: "Let everyone sweep up under his own door and the whole world would be clean."

During the first term, there were some notable achievements. These included the vibrant U.S. recovery which boosted world growth; the containment of a Latin American debt crisis that threatened, time and again, to become a global banking calamity; and the promotion around the world of new respect for market-oriented policies. Nevertheless, there were also major policy failures. To sweep up around one’s door was not in itself enough, since living in such close quarters meant that it mattered how the broom was wielded and where the dirt settled. In fact, America’s foreign economic policy showed little regard for the impact of U.S. fiscal and monetary policies on the rest of the world. Moreover, it was a policy which ignored the erosion of America’s international competitive position.

The Administration’s approach might have been more viable in earlier periods in American history, when trade counted for a very minor portion of U.S. gross national product and the American dollar was not the currency for 80 percent of non-communist trade or 75 percent of reserves held by central banks. But

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