The Global Zeitenwende
How to Avoid a New Cold War in a Multipolar Era
EXPERIENCE has twice shown us that the thinking and planning about economic policies done immediately after the close of a world war soon have to be revised. A nation is fortunate indeed if the revision is not radical and drastic. Though at such a time we intend to look forward, all but the most imaginative economic policy-making is likely to look backward. Thinking is conditioned by the past--a tendency strengthened by the fact that despite well-meaning efforts to make the objectives of a war seem positive, the war aims of peace-loving countries are essentially negative. A war is undertaken to prevent certain disastrous things from happening. It destroys--though it destroys in order that other people and other policies, good or bad, may live. Postwar planning in a democratic country also is biased by the determination to prevent certain things which happened in the past from happening in the future. A great deal of thinking and planning in the forties was unavoidably concerned wtih the problems and difficulties of the thirties; we were intent on full employment when in fact the real enemy turned out to be inflation. The experts and governments were at fault in this but, if they had not been, electorates would have selected other governments and other experts.
It is only after a lapse of time, when the real shape of postwar problems begins to be clear, that we readjust our thinking and come to grips with the real problems, not the imaginary or traditional ones, and to wrestle with the tough issues of the world-as-it-is. Thus, one of the moves toward reality in our postwar world has been the formation of the North Atlantic community. The impetus for this, of course, was supplied by the policies of the Soviet Union, but its usefulness is not limited by that. One of the merits of this North Atlantic policy is that in breaking down an unmanageable global problem, it brings into closer relationship a group of countries which, with one or two exceptions, had been forced to come together in two successive wars when circumstances underlined the strategic importance of the narrowness of the North Atlantic. Between the wars these countries drifted apart; and it is probably true that only the threat of the Soviet Union brought them all into a single organization. Yet this integration has a solid base in geography and a genuine foundation in common interest; it may be that this community is an organism and not a mere aggregate.
But cutting across NATO is a threatening fissure. The North Atlantic community is not simply an organization of countries with common interests. It is a community which embraces parts of both the dollar and sterling areas, and also the countries of Western Europe with their limited and fragile unity. The economic position of the sterling area and the scarcity of dollars with which it is plagued separate it seriously and dangerously in trade and policy from the dollar areas. Here, evidently, is one of the real and deep-rooted problems with which we must cope if the North Atlantic community is to have strength, unity and growth. It is a problem which must be grasped firmly now if the alliance is to develop into an enduring institution.
It is well for us on this side of the Atlantic, in the midst of our prosperity and preconceptions, and our own political excitements, to remind ourselves that the sterling area is vitally important both to the dollar area and to the North Atlantic community. In this year of a record wheat crop it is obvious to any Canadian that the United Kingdom (with Western Europe) is important as a cereal market, though the demands of the Far East have reduced that importance. It has always been of substantial importance to Canada as a source of imports, and in lesser measure similarly important to the United States. Beyond these obvious facts, however, the sterling area plays a primary rôle in the establishment of any kind of stable balance, economic or strategic, in Western Europe. In the constricted non-Communist world, it is a great trading community. It is equally important because of its outposts in Asia and Africa, both great present and future battlegrounds of the struggle to keep the world free. We on this side of the Atlantic need not only the presence of members of the Commonwealth and the sterling area in those regions in which North America is unrepresented. We need the help of British experience and institutions, without which we are likely to be less effective in our Asiatic and African policies than we might otherwise be. Our interests can be greatly injured if economic limitations prevent the United Kingdom from pursuing a vigorous policy in areas where she has interests and responsibilities.
Before this article appears in print, the Commonwealth Prime Ministers will have convened in London to examine the problem presented by this economic fissure in the Atlantic community. The question, of course, is much larger than the Commonwealth, and the discussions in London can no more than make a beginning toward a solution. But a preliminary survey here of some aspects of the problem may perhaps help put the findings of this conference--whatever they may be--in perspective.
In brief, what the Prime Ministers are considering is the second postwar crisis of the sterling area. The crisis of 1949, which resulted in the devaluation of sterling, was quickly dissipated and seemed for a time to be replaced by a growing abundance of dollars which appeared as if by magic. There were optimistic statements to the effect that the dollar scarcity was ended. But this period of ease and hope did not last long, and the crisis quickly recurred. In the past months it has again abated, but only with the help of a drastic curtailment of imports which holds no assurance of future health. We have been granted a respite and an improved atmosphere, not a solution.
The weakness of sterling, or the security of dollars, is chronic only in the sense that it has recurred repeatedly over a long period. There is nothing inherent or inevitable in it, though it is imbedded in stubborn facts of economic and political history. It calls for remedies in the United Kingdom, the sterling area and elsewhere which may be difficult and unpalatable and from which there is an inclination to turn aside in the hope that by some miracle of nature the patient may recover anyway.
Since the closing years of the nineteenth century the United Kingdom has been slowly adjusting itself to changed conditions of technology and world markets. But two wars diverted it from this gradual economic adjustment and left it each time with an accumulation of many years' changes to make up if it was to maintain a competitive position. And it was weakened also by wartime economic damage and losses of markets in the Far East, Eastern Europe and elsewhere.
In sharp contrast, the two world wars thrust the United States and Canada rapidly forward along the lines of their development and accelerated rather than retarded the attainment of their appropriate economic positions. Quite apart from any shortcoming of British policy, the United Kingdom was inevitably faced in two postwar periods with the specially keen competition of the United States, Japan, Germany and other countries. In each case, it was left with a heritage of structural unbalance, particularly in coal and textiles, and faced a dilemma of policy. Now the situation has become particularly acute because Germany and Japan, deprived of their former sources of food, are going to have to buy it by competing exports in the markets of the West. And the problem has been made still more serious by the revolution in Asia and Africa.
After the First World War, the United Kingdom's long-term problem of adjustment was in some measure concealed by the existence of large external assets and substantial overseas income, but in World War II the external assets were substantially liquidated and the stark problem of adjustment was laid bare. There is also a political heritage which handicaps present action. The close contest between the Labor Party and the Conservative Party goes back to the years before 1931 when Labor, carrying on a minority government, was replaced by a National Government on the ground that only thus could the necessary but unpalatable cuts in expenditure be made and the pound sterling saved from disaster. Yet the National Government soon, perforce, agreed to abandon gold and the fixed parity of exchanges which it had been formed to defend. The action was followed by the explanation that the supposed disaster was in reality a blessing which had delivered Britain from the worst pressures of the depression. It is small wonder that the present Government in Britain, holding power by a slender margin, finds it difficult to gain substantial support from the Labor Party for measures to maintain the international balance; Labor naturally fears that this is again a device for confirming its opponents (or those of little faith within its own party) in positions of authority.
It can be said of the United Kingdom, as of many Western countries, that in the past few years, voluntarily or involuntarily, it has been attempting too much and overloading its economy. Britain has inherited overseas commitments appropriate to a much larger economy; and she has assumed defense obligations relatively beyond those of other countries. British investments both at home and elsewhere in the sterling area have been very high. Consumption has been forced upward by social security legislation and by food subsidies. There is no doubt that the total burden must be reduced by cuts somewhere, as virtually everyone has admitted. Messrs. Bevan and Wilson would cut defense expenditures; others feel that housing must be cut back; and still others would be prepared to take the props out from under consumption. It is worth pointing out that while the aggregate expenditures of the United Kingdom are obviously too great, no country has striven more heroically to carry the burden with safety. Further, the aggregate expenditures would not be too great were circumstances such as to promote some flow of capital into the various parts of the sterling area. But instead of this, there has been a continuing and debilitating leakage of capital out of the area.
It is commonplace to say that recent experience has shown the inadequacy of direct controls in dealing with the disparities between economies. The disparities are in fact just differences in level, and the direct controls can do no more than minimize the leaks from one level to another. They do nothing to change the levels or to create any balancing counterflow. They have in the past proved necessary in dealing with sudden and catastrophic disparities, but they have proved very unsatisfactory long-range instruments.
Of all the direct controls those governing imports are the most effective, because they can be linked to long-established and experienced customs administration. Controls for the efficient allocation of investment and industrial enterprise have proved much less effective, and this difference has produced an important result. In times of difficulties with currency, import controls have generally been shaped to prohibit importation of nonessential goods and to permit but limited importation of goods which are only moderately necessary. If such controls are to be effective the machinery for allocating investment and industrial enterprise must be precise and efficient; otherwise the high protection afforded to nonessential products by import controls will draw labor and capital into producing them at home. It is quite obvious to anyone who has made even a casual survey in countries such as the United Kingdom or Australia that the combination of relatively efficient import controls of this kind, and relatively inefficient machinery for the allocation of investment, have resulted in the promotion of nonessential industry. This, together with extended provisions for social security, has intensified the trend toward urbanization and has dangerously limited food production.
The resumption of the use of monetary policy in the United Kingdom after a long moratorium has been a great forward step which has already produced very useful results. It is clear to many, however, that there is need also for the influence of a price system which moves freely in a reasonably wide latitude. In a directed economy, controls and incentives work in opposite directions. Incentives in the sterling area should work to move exports, directly or indirectly, to the dollar areas, and should encourage the importation of capital. Yet the experience of the last six years has shown how difficult it is, either by controls or persuasion, to impel firms to invade and exploit the more difficult hard-currency markets when price and profit incentives lure them to markets close at hand.
It is easy for the outsider to say that this or that is wrong with the efforts of the United Kingdom, but in fairness we should remember how great its problem has been. No country achieved a more complete war mobilization. Its export industries felt the withdrawal of manpower with particular severity; and its overseas markets were closed for years. External assets of 4.5 billion dollars were sacrificed, and by the beginning of the reconstruction period sterling balances abroad amounted to more than 11 billion dollars. The United States and Canadian loans added another 5 billion dollars of liability; and the merchant fleet, one of the chief earners of dollars, was reduced by one-third. Costly commitments both within and without the Commonwealth constituted a heavy drain on reduced resources and in addition weakened the bargaining power of the United Kingdom in reaching settlements. Expenditures for Burma, the Malay States, Iran, Egypt, Korea, West Europe--these and others made up a formidable overseas burden; and the costs and readjustments resulting from the revolution in Asia and Africa have fallen disproportionately on the United Kingdom.
It is not too much to say that the future of the North Atlantic community depends on the action taken by the United Kingdom and the associated countries of the sterling area to meet this problem. Canada and the United States, no less than the United Kingdom and its partners in the sterling area, will gain if these countries put their houses in order and reintegrate their price systems with those of the Western World. Only such an integration can provide an economic solution to the problem of the relation of population to resources in the United Kingdom, and only a decision to accomplish this integration will induce North American capital to flow into the sterling area. Long and persistent effort will be required to carry out such a policy, but when the decision has been firmly made its effect will at once be felt, and currents favorable to the economy of the United Kingdom will be set in motion.
But if the central and critical decision must be taken by the United Kingdom and her associates, other nations must also face important choices. The problem of economic unbalance is a world responsibility: the view sometimes put forward that the recurring weakness of sterling is merely the result of mistaken policies of the sterling area countries is much like the idea that the depression of the 1930's was wholly made in the United States. All countries have made singularly effective contributions to the creation of these problems, and their solution will require equally effective contributions from all countries with which the sterling area has relations.
The United States can help in more ways than one. Since the end of the war the United States tariff, through the medium of the General Agreement, has been subject to substantial and far-reaching reductions. These reductions have, however, been biased by the growing United States interest in imports of raw and semi-processed materials and in the growing intake of United States industry. The reductions have been much less generous on highly-processed goods. This reflects in part the reluctance of the United States to reduce tariffs, but also the unwillingness of the United Kingdom to reduce the British preferences irrevocably on U.S. products and the reluctance of Western Europe to abandon its protection of favored sectional interests. The result is a tariff structure which implies that the economic world order in which the United States is the dominant country requires other countries to produce raw materials to feed the ravening industrial machine of the United States, and that the responsibility of the United States as the great creditor nation of the world is met by this pattern of trade. It does not seem to have been noticed how close this is to the pattern of trade laid down by British colonial policy against which the United States rebelled in 1776. In fact, British industry soon broke up this pattern. The system is no more tenable for a great industrial nation such as the United States in the twentieth century than it was for Britain in the eighteenth.
There are ominous signs that this pattern of United States tariff policy is being strengthened rather than relaxed. Two results flow from it. The first is conditioned by the elementary fact that the only plentiful resource left to the United Kingdom and Western Europe is labor. On the other side, the whole of United States economic development has been directed by the scarcity of labor. Comparative advantage east of the Atlantic is in goods with high labor content. In the United States, the scarcity of labor is met by mass production, by large units of capital equipment per worker, and high quotas of power per worker. It is precisely in highly-processed goods or in capital goods which involve also extensive services that the exports of Europe and the United Kingdom should be greatest; but on these classes of goods United States tariffs are not only high but prohibitive. Like the rich young man in the parable, the United States has done well many things that are important for the reëstablishment of world trade, but there still remains the one thing needful.
The second result of this policy is that, denied access in highly-processed goods, the efforts of the sterling area are necessarily concentrated on indirect access to the United States market through the absorption of the highly-processed goods of the United Kingdom within the sterling area, and the export of materials such as rubber and tin to the United States. To a degree this is an economical enough detour, and indeed one which must be used, but in an extreme form it makes the dollar supply of the sterling area fluctuate with the wide swings of raw material markets. It has been a significant factor in the costly shifts in the terms of trade and in the recurring sterling crises. This bias in the United States tariff is reinforced by unsatisfactory United States customs law and its equally unsatisfactory administration. The deficiencies here particularly affect goods with high labor content, and the remedy has been long delayed.
There is no need to do more than mention the lapses of the United States from its obligations under the General Agreement, and the conflict between its international obligations and the political improvizations of its agricultural policies. It is quite true, of course, that no country is without sin in this regard, but it is of some importance that we in North America who are sometimes inclined to lecture the United Kingdom and others on the lofty virtues of a freely working price system should bear in mind that prohibitive and flexible tariffs also inhibit the working of the price system and make more difficult the problem of attaining equilibrium.
Even under the most favorable tariff terms there is no reason to expect any large expansion of direct exports of manufactured goods to the United States either from the sterling area or Western Europe. Were there no tariff at all these countries would have difficulty enough in reaching a competitive position. Their greatest chance for enlarged exports is likely to be in third countries and their efforts should be largely directed to making themselves fully competitive in those countries. Their need for increased exports is very great, however, particularly in the light of the present terms of trade or, in layman's language, the disproportionately high prices which they are paying for their imports. Even a moderate increase in their exports to North America would make more feasible the targets which they must reach elsewhere.
There is another field where North America can help and, for its own salvation, must help. The United States is, and must be, the great capital exporter of the world. The evidence that Canada has been able to maintain a very high rate of investment with comparatively small capital imports or, when capital imports were large, an appreciating exchange rate, is an indication that there will be a time in the future when Canada also has capital to export. In the new circumstances, capital or economic aid (as contrasted with military aid) should not be channeled to Western Europe, but rather to the underdeveloped countries of the world where the great revolution that is sweeping Asia and Africa like a cyclone has increased the demand for and enhanced the importance of capital for development. Quite apart from the interest of North America in a more stable world, the United States in particular has a direct interest in investments which will enlarge the world output of raw materials to feed the enormous industrial machine which is developing. No one need underestimate the difficulties of investing prudently, rapidly and productively in countries where the effective use of capital is limited by low standards of living, lack of technical and administrative knowledge and of appropriate institutions. But even though the progress be slow and some of the early results disappointing, it is quite clear that this is the road which North America has to travel.
Despite expected and unexpected difficulties we have moved forward in the postwar world, chapter by chapter. The patterns of our policies have been provisionally affected by the attitudes of the Soviet Union but we have not been prevented from making progress. The International Monetary Fund lacks resources and organization for dealing with many of the problems which have actually arisen, though it has had equipment for dealing with problems which in fact did not arise. The International Bank has made a significant contribution to progress and has gained invaluable experience and competence for the future. The Marshall Plan has carried the Western World through a crucial period and has contributed a noble chapter to the history of the relations of free nations. The degree to which, through all the strains and disappointments, it has been possible for the United States to proceed in assuming larger world responsibilities, and for other countries to coöperate even if not without complaints and strife, represents solid achievement.
We have not yet, however, surmounted all the difficulties and come out on a smooth and well-defined path. There are still great projects to be carried through before the economic unity of the West can be put squarely behind the organization of the Atlantic community, and before the ties of the West with Africa and Asia can be strengthened and made enduring. We have come to the place where we are no longer forecasting an imagined world but have come to grips with the real problems which beset us. Several of the weapons we devised have proved feeble or useless. Many of our preconceptions were a hindrance. What is most significant is that amid all the unexpected changes and events the economic objectives set up in the conferences under the Lend-Lease Agreements have proved their worth. Economic freedom, multilateral and non-discriminatory trade and currency arrangements, and revived international lending are now looked at with more realism but also more informed respect.
There is need at this juncture for a new approach, broad in scope, uninhibited in methods, and of a magnitude such as to insure success. The precise form and timing of the initiative rest on many considerations not to be assessed in a brief article. The items to be included within it must be analyzed in detail. Some alternatives may be easier to adopt in particular circumstances than others, but in broad terms the objects and the components of the program are reasonably clear.
We ought to aim in the near future at convertibility of the pound sterling, accompanied by such measures as are necessary to maintain that convertibility. It has become clear beyond doubt that the maintenance of the British system of controls is no longer practical nor profitable, and that the further rehabilitation of the price system must be called to aid in the economic direction of resources in the sterling area and Western Europe. This is not now a matter of preaching orthodoxy to the sterling area. It is a matter of its own interest. Beleaguered as the United Kingdom is by the "free traders" of other countries, such a step is all but a matter of necessity. No one should pretend that such a decision would be other than a bold and difficult venture, and if it is undertaken, North America should lend what aid is necessary to insure that the long and arduous effort which it would demand of the British emerges ultimately in a success in which we all have a stake. To guarantee time for the completion of that effort whatever is prudent by way of a stabilization fund may well be contributed by North America.
For years United States aid has been going into Western Europe and the sterling area. It is fairly clear that we have reached the end of the appropriate period of Marshall aid. Its disadvantages are now outstripping its advantages. Here and there there may well be special needs, but in the main aid should now take the form of a greatly enlarged stream of directed capital to the underdeveloped countries, generous regard being had to the effects of this outflow of dollars on the reserves of London and other financial centers of the world which may be expected to benefit and to help. There is need to liberalize and extend the operations of whatever institutions and arrangements can be useful in this movement--the International Bank, the Export-Import Bank, the Colombo Plan and possibly newly devised institutions.
We need not underestimate the great difficulties of increasing the capital investment in these countries which must build themselves up to the points where enlarged capital investment can be economically used. We should, however, bear in mind that such an outflow can perform the double function of alleviating a dollar scarcity and at the same time giving fresh life and hope to those areas of the world which have been swept by an epoch-making revolution. If North America believes in the retreat of imperialism before national autonomy, and believes that other continents can be held in amicable relationship with the North Atlantic, it must be prepared to help in building up workable and profitable relationships based on mutual respect and sound economy. The interest of the United States in particular in enlarging the output of raw materials, and of the foodstuffs on which the production of raw materials depends, is in itself a strong justification for a fresh initiative in directing and enlarging the outflow of capital. This would not be for relief or for reconstruction but for productive investment capable of yielding dividends both in money and human welfare over many decades.
Beyond the narrow confines of GATT and the restricted machinery of the Trade Agreements Act there is need for a new United States approach in the field of trade and tariffs. It is probably true that United States tariffs are much less important both to the protected interests in the United States and to the traders of other countries than they are ordinarily considered to be. It is not clear that the complete removal of the tariffs would greatly increase imports to the United States, but substantial and essentially unilateral action by a Great Power which had achieved economic leadership in the world would be a potent assurance that the United States itself believed in the integration of the world economy and was ready to accept for its own use prescriptions which it has given abroad. Few things can be more important than steps which would encourage other countries to embark boldly on the paths of multilateral trade and non-discrimination which the United States has itself prescribed.
The difficulties in the way, both political and economic, are still great and numerous. Seven years have passed with their setbacks and defeats. But there have been great achievements. The targets set up have proved to be the right ones. The world is moving to a conjuncture in which a bold initiative can achieve the goals which the United States and its associates have never wholly given up, even though it and they have fallen woefully short at times in the particular measures undertaken to achieve them. Together we can give the Atlantic community a fresh vitality and meaning which will determine the history of the next half century.
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