All the Tsar’s Men
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Does a global economy still exist? If one were to base one's judgment solely on the recent meetings of the world's most powerful decision-makers-whether at Geneva, Versailles or Cancún-the answer might well be "no." Conflicting perceptions, diverging priorities, and lack of any sense of direction suggest, indeed, that the concept of world interdependence has been lost in a policy and intellectual vacuum. Seldom have so many common interests run into so many common problems to produce so little common action.
Let us hope that the period extending from the July 1981 Ottawa summit to the Versailles summit of June 1982 and to the Geneva GATT ministerial meeting in November 1982 will be seen in retrospect as the nadir of international economic cooperation. The story of the 1960s had been that of a prosperous blossoming of the trees planted at Bretton Woods. With a few noticeable exceptions, the story of the 1970s and early 1980s was one of missed opportunities and growing intellectual disarray. We failed to plant the seeds of organization and reform that the emergence of a truly global economic system was beginning to call for.
It simply has not sunk in how rapidly the world has changed, not only during the fast-growth period of the 1960s but also during the lower-growth decade of the 1970s. We confuse stagnant growth with "no change" scenarios, when in fact the level of interdependence between countries may never have increased faster and the underlying structure of power changed more deeply than in the latter period.
Thus, we are still striving to overcome an international economic crisis through national economic policies. Models of closed national economies still govern much of our thinking, and we wonder with incredulity at their failure-be it on the Keynesian or on the monetarist side. Modest coordination proposals aimed at promoting a much needed world recovery still arouse controversy and skepticism-when in fact national policymakers have obviously lost control over their much cherished spheres of economic autonomy.
The time has come to realize that the international economy can no longer be defined as, and limited to, the intersection of national economies. Rather, it is now the national economies which must be looked upon as the extension of a global and integrated system with a logic of its own. To make the point clear, let me call the global system the "worldeconomy."
Once we accept this notion of a worldeconomy which is qualitatively different from simple national interactions, much of what is said and done today appears remarkably narrow and limited in scope. National decision-makers are revealed as sailors on an open sea, taking the utmost care to adhere to the course of their choosing when in fact the currents, winds and swirls are often carrying them in the opposite direction.
Acknowledging the existence and influence of a worldeconomy implies much more than castigating economic nationalism. Indeed, a major part of today's problem is to understand how the "free trade" and "free market forces" we think of as the opposite of economic nationalism are actually operating. As I try to make clear in the following pages, the "free trade" approach still widely identified with international-mindedness is also an inheritance from days of lesser complexity and interdependence. A good rule for trade relations considered in isolation, it still has to take into account the complex relationships which now make for unexpected feedbacks between trade, money, finance and the changing industrial standing of countries.
The experience of a global economic system in which the free market approach prevails, albeit imperfectly, not only for trade but also for the monetary system and financial flows, is much more recent than we often realize. We have in fact been living in such a system for only half a dozen years. And yet, it is striking to see how often we have already had to revise our assumptions of what free trade cum floating exchange rates cum free capital flows would look like.
The 1976 Jamaica agreements on exchange rates, for example, did little but formally bury the Bretton Woods monetary system. The absence of a new set of rules to replace the old ones was assumed to clear the way for a self-stabilizing monetary and financial system. These hopes have now been proven wrong, beyond any reasonable doubt, by repeated and prolonged incoherent exchange rate situations (as well as by the poisoned fruits of the flowers of recycling). That not all free floaters are ready, as yet, to open their eyes only illustrates again the well-known power of cognitive inertia.
The trade machine took longer to grind to a standstill. Buoyant markets and the early launching of the Tokyo Round negotiations preserved the momentum well into the late 1970s. But theory and new realities were moving further and further apart, and by the GATT meeting in Geneva, calls for more liberalization as a buffer to exploding restrictions-or "freeze" and "standstill" proposals in the face of a tide of protection-suddenly appeared as a well-meaning, well-tried but narrow and obsolete strategy. Strategic mistakes were compounded by clumsy tactics, as the American delegation called for initiatives-in services and technology-without specific proposals. The only tour de force achieved was that American attacks did succeed in getting even the British to speak in defense of the European Economic Community (EEC) common agricultural policy. In all other respects, Geneva was the Waterloo of the GATT-unlike 1815, for some peculiar reason, the French thought this was good news.
Lack of collective control over events, now threatening in finance, money and trade, has been with us in energy for ten years. After two oil shocks and two episodes of taking comfort in OPEC's change of fortune, we are still projecting the future in the light of the last three months in the market. The present extension of the pure market approach to oil must be questioned when one remembers that trade in oil (to the tune of $450 billion) is 20 times larger than in any other commodity and has profound impact on trade and financial flow patterns. It is hardly surprising, therefore, that the present drops in price are being greeted with some of the same apprehension as upward oil shocks. The markets are not and cannot be perfect.
Strong fluctuations of a key parameter-whether upward or downward-are a threat to the survival of the system. They exact tremendous adjustment costs. In particular, much of the recent steady decline of capacity utilization has reflected accelerated obsolescence of industrial equipment resulting from the major relative price changes of the 1970s, above all in energy and energy-dominated factors of production. In the mid-1980s, we may see the reverse-premature obsolescence of the major investments that were supposed to "adjust" to this situation. Either way, we experience an unprecedented wastage of scarce resources.
Failure to acknowledge the existence of this type of threat illustrates a gap in our intellectual apparatus, already visible, in a more complex setting, with respect to the wild swings of the major currencies. Confusing perfect or quasi-perfect market models with the reality of world economic competition, the present American economic decision-makers look at a 30-percent change in the external value of the world's central currency in the same casual manner they would treat a weather report. Warner stock can plummet when videogames fare badly, cocoa can lose half its value when demand for chocolate softens, so why could not the price of the dollar, the price of oil, the price of money or the cost of servicing international debt undergo 20- to 50-percent changes if "market forces" warrant? Such was the sophisticated view of the world on which the most powerful nation tried to build its non-policy.
As for those who oppose this less and less benign neglect, they have still to come up with something better than the proposal to put the worldeconomy in H.G. Wells' time machine-to bring it back to the good old Bretton Woods days, if not to the gold-exchange standard.
The absence of an international analytical framework for today that could capture the difference between the role of exchange rates and that of Chicago pork bellies futures has left the door wide open for each country to follow the downhill road of economic nationalism.
Politicians were on the front line, but economists also deserve their fair share of blame for the present state of policy disarray. Rather than intermediary investigation tools, economic models have become ends in themselves. Nobel prize winners spend their lectures teaching second-class mathematics. A modicum of calculus gives the right to look elsewhere when the world gets untidy. Like would-be bodhisattvas, our great thinkers have devised various methods of cutting the link between the nirvana of pure thought and the world of pains, emotions and problems. It takes the eyes and health of a Wassily Leontief to shout-but who listens?-that the king is naked, and the model dumb.
To no small extent, the difficulties we are presently going through and the vulnerabilities we have developed reflect a crisis of ignorance. We called for a worldeconomy. Now we have it. The time has come to learn how to make productive use of it, lest we become the victims of our own creation. Our first duty is to acknowledge how little we know. Our second is to close the widening gap between growing interdependence and declining collective capacity to deal with the perils it brings with it.
Whereas only three years ago energy seemed to have become, far into the future, the weak point of the world economic system, financial vulnerability now appears as its Achilles' heel.
Yet, it is worth taking note of the many threads that run from the energy crisis of the 1970s to the financial crisis of the 1980s. It is also useful to recall that financial issues as such had already arisen intermittently: at the outset of the two bursts of petro-recycling (in 1973-74 and 1979-80) and in the Brazilian debt problem of 1980. One may also wonder at the striking inclination displayed over the last few years by the financial community for moving in a few months from doomsday scenarios to self-congratulation.
There is no need here to recall in detail the recent convulsions of the world financial system. Poland is in undeclared default. Romania and Argentina did not even gather their bankers before telexing a rescheduling. Mexico is on the brink of disaster, and may be further hurt by plummeting oil prices. Countries of lesser weight have been queueing at the door of the "Club of Paris" in the dozens instead of in the handfuls.1 Overall, it can now be estimated that almost half of all Third World and East European debt is located in countries which have had, in one way or another, to renege on their official obligations.
There is a way to look at these figures and find some source of comfort: after all, half of what could go wrong has done so and we are still here. Furthermore, the minefield has now been largely walked through-witness the noise and smoke. Falling oil prices may add Nigeria, Venezuela and Algeria to the Who's Who of international default, but they would also mitigate the plight of a large number of oil-importing countries, both in the South and North. Thus, to the superficial observer, the worst is over.
True, one can agree with the optimists' school that our short-term capacity to weather well-identified crises has been quite remarkable indeed. But our capacity to move from crisis management to problem solving is far less impressive. In several cases, our short-term successes can even be shown to have been at the expense of increased long-term tensions and vulnerabilities.
On the first point, our crisis management capacity has been clearly illustrated by the rapid Western reaction to the Mexican debt crisis. One could learn, almost in the same newspaper article, that Mexican debt (widely assumed to be on the order of $40-$50 billion) had come to rest on a mountain of short-term credits and was closer to $80 billion-and that central bankers, meeting at the Bank for International Settlements, had put together an impressive rescue package. This package included several billion dollars of immediate bilateral support, the setting up of a jumbo International Monetary Fund loan, and a three-month moratorium on short-term debt involving no less than 1,400 different banks. Not only did every element of the package quickly materialize, but the Managing Director of the IMF, Jacques de Larosière, was even able to arm-twist all banks involved into further increasing their exposure by seven percent. The "crash of 1982" will never make it into history textbooks, and the key actors in that story deserve our admiration.
The most reassuring thing we learned was that the half-dozen or so top officials who should consult regularly, actually do so whatever their ideological pronouncements. Averting the crisis implied, for example, that Paul Volcker print some money, and he rightly did so. The worldeconomy was not sacrificed-at least not in a single stroke-to some ill-defined monetary aggregate.
In the medium and long term, however, reasons for self-congratulation are less obvious. True, some strengthening of the safety nets is taking place. The accelerated 47.5-percent increase in IMF quotas and the extension of the General Agreements to Borrow must be applauded and are probably sufficient. But present policies are not conducive, to say the least, to the elimination of the "country risks" hanging over international finance. Most problems are simply postponed. Worse, as real interest rates remain at usurious levels, the "adjustment policies" that are the counterpart of the financial first-aid package are becoming a powerful deflationary force: between the two of them, Mexico and Brazil are committed to reducing their annual imports by a dozen billion dollars. As for the wider "system risks" that stem from the operation of the system itself-such as the danger of fragmentation of the interbank market-they are hardly, if at all, on the agenda.2
In the next few years, one can think in terms of two broad scenarios, depending on what relationship will prevail between the "real" economic sphere and the financial one. In the first, the optimistic one, the real economy will be able to grow faster than the size of the financial "deadweight" with which it is now burdened. If that were to happen, specific country or corporate situations could still be sources of difficulty but, on the whole, the debt overhang would gradually dissolve itself. Nothing more drastic than heavy rescheduling might be needed.
The second broad scenario, however, looks more likely, at least in the absence of concerted recovery policies of the type described below-that policies of financial "adjustment" would converge toward deflation on a global scale and would increase rather than reduce the fundamental economic, social and political vulnerabilities. At some point, the weight of accumulated debt would be such that repudiation could not be avoided, and might even be the only way out of an implosion trap. In the best cases, it would be organized, for example, through the purchase by some international institution, one hopes at a discount, of doubtful debt. It would be the bankers' pot of the century, to be divided out on principles yet unborn. In the worst cases, of course, ayatollahs of one type or another would deprive the banking community of the bitter pleasure of masterminding the dividing up of such a pot.
The first scenario is not totally beyond reach. Whereas the successful liquidation of debts is usually associated with high inflation, this need not necessarily be the case. Success depends on our capacity to promote, simultaneously, higher economic growth rates and lower real interest rates so that the real economy again starts moving faster than the debt burden. The present situation-no growth and excessively high real interest rates-is such that substantial room for maneuver does exist on both sides of the equation.
The role of interest rates in shaping our medium-term economic environment is crucial: their decline would both slow down the growth of existing debt and facilitate a stronger economic recovery. And because of their leading role in the international interest rate structure, American interest rates are really what matter. Hence, like it or not, U.S. monetary-and to some extent budgetary-policies do not belong simply to America. If we are to preserve an integrated worldeconomy, their critical impact on the system has to be both recognized and acted on. Within a framework still to be spelled out, they have to become a matter for international discussion-negotiations would be too strong a word; "consensus building" would probably better describe the type of process to foster.
One can of course reject this view, provided that one is also ready to do away with the central role assigned to the dollar in the international monetary system. Indeed, the time for greater consistency has come. Either the United States wants to preserve the role of the dollar and the special role and privileges associated with it-and must then manage its currency as the international currency, which means in close cooperation with others, notably Japanese and Europeans. Or the United States gives priority to preserving the autonomy of its domestic economic policy-notably monetary-and must then work with others to greatly reduce the impact of that policy on the rest of the world.
A "leader" who is neither all-powerful nor international-minded cannot hope to retain the type of legitimacy which the pax americana had entailed. Without political legitimacy, the worldeconomy cannot operate. Policies built on the assumption that the dollar is both the central world currency and a commodity of the most trivial kind are leading us to a world of irresponsibility, conflict and, eventually, fragmentation.
The risks associated with the present state of the financial and monetary system have their equivalent in the situation of the trade system. There, too, major reassessments are in order.
To put it in a nutshell, the age of free trade as an organizing principle may well be over. By "organizing principle," I mean that trade liberalization such as we have experienced in the 1960s and 1970s will not offer a solution to a majority of trade issues likely to be encountered in the 1980s. This does not imply that no free trade will continue or that free trade, from a normative point of view, is not desirable. It is not a matter of prescription but of diagnosis.
It must be remembered first that the movement toward freer and freer trade in the postwar period was brought about in large part through the determined efforts of the United States. This very consistent effort was able to be pursued and to succeed because of two fundamental features of the distribution of economic power in those days. First, the great relative strength of the United States allowed it to make its views prevail on most issues of central concern. Second, the United States had an overwhelming interest in free trade: not only was America the most efficient economy, but, in a dynamic market-power perspective, American firms were also at the top of most of the "product cycles" around which the international division of labor structured itself.
Both features have now been blurred to a considerable extent. In many cases the United States is only able to exercise a veto power. Even more important, a cost-benefit analysis of trade liberalization from the point of view of U.S. manufacturers, although still positive on average, leads to much more nuanced and balanced assessments. One important short-term reason is the overvaluation of the dollar, but a deeper reason is that Japan and Europe have closed the gap with America in a large number of sectors. Japan in particular is now on top of a sizeable number of product cycles, if not yet at the research and development stage, at least at the mass marketing one. What is good for the global worldeconomy is no longer necessarily good for America.
Americans have exhibited a quite remarkable capacity to withstand the first negative impacts of this fundamental realignment in the industrial hierarchies. The U.S. color-TV industry has been allowed almost to disappear, a full quarter of the American car market has been left to the Japanese, U.S. computer makers, concerned with the reliability of their chip supplies, have been the advocates of Japanese advanced-memory imports, and so on.
Yet, in sector after sector, the impact of competition is reaching the threshold above which social and political factors come into play, whatever the beauties of the economic ideal. Although overall support for free trade is likely to remain a dominant feature of the U.S. position, this support will be less and less wholehearted. Policy schizophrenia will remain on the rise. Instruments initially put in place in the name of fair competition, such as the steel "trigger price" mechanism, will lend themselves to an increasingly protectionist use. The cold-blooded negotiation of a market-sharing agreement with European steelmakers is a good example of this trend. American knights will still lead the battle for free and fair trade, but many illusions will be shattered in an increasingly dubious battle.
At the same time, the accession of Japan to the role not only of major exporter but, more important, of industrial pacesetter will accelerate this fundamental change in the nature of trade interaction. Technologies developed in Japan will be, in most cases, more difficult for other Western nations to get access to than technologies developed in the United States. Access to the new testing grounds and pacesetting markets for a broad range of advanced products will also be far more costly and difficult when these markets happen to be in Japan, as will now more often be the case, rather than in the United States or in Germany.
Rather than the fairly manageable pattern of two-way trade within a given sector which has been at the center of transatlantic and, even more, intra-European relations, Japan and the newly industrialized countries will present the challenge of inter-sectoral trade shifts. Following the free trade recipe would not mean therefore trading Renault cars for Mercedes cars: whole lines of products would have to be abandoned. Regional and sectoral impacts will be much more visible. Furthermore, products or sectors selected to be at the center of Japan's industrial strategy are usually those for which the most dynamic world demand is anticipated. More and more often they are also of strategic importance in terms of national security. The policy of blessing the hidden hand for what it is taking away will therefore look less attractive, notably in election years.
Of course, numerous Japanese trade barriers are likely to be lifted; yet, in the light of the new division of labor between Japan and the United States, such incremental progress-if and when it takes place-will be far from compensating for the more fundamental shift in the structure of competition and economic power.
Contrary to a very common accusation, the Japanese strategy is not one of overall protectionism. On the contrary, few countries have been able, like Japan, to accept the need of moving out of sectors where lower-cost competitors were ready to take its place. In this sense-and with exceptions like leather and, of course, agriculture-Japan is quite a liberal country. But at any given time there are a select number of high-priority new industries in which Japan is getting ready to move into the top league. Automobiles, and later semiconductors, have been among the most prominent examples during the 1970s. Industrial robots are a good example today. In those industries, a remarkable mixture of fierce competition at home and uninhibited protection from outside allows the infant industry to grow to the level of competitiveness from which a major export drive can be launched. After a few years, opening up its domestic market becomes perfectly feasible and Japan is also ready to discuss "self-limitation" and investment abroad: new product lines are getting ready, at a higher level of technology sophistication, to replace those in the headlines.
Hence all the talk about bilateral deficits and Japanese protectionism is highly misleading. The problem with Japan is not really of a trade nature. It is only addressed in trade terms because this is the analytical framework Anglo-Saxon economists are accustomed to. But in reality the Japanese challenge is of an "industrial" nature. In fact, it is amusing to see the contrast between the deeply felt Japanese "threat" and the fairly clean bill of health that recent macroeconomic analysis, in standard trade language, gives Japan.3 The real issues are not those which the present set of international organizations and rules of the game-GATT in the first place-have been created to deal with.
Hence a new type of interaction which is developing outside of the existing framework and which can be detected, for example, in the important discussions presently taking place, many of them behind the scenes, on securing American access to Japanese technology. As Americans become increasingly aware of the deeper threat to their industrial leadership, their attempt to maintain an "open world" environment for their firms will not lend itself to the "laissez-faire, laissez-passer" attitude with which free trade has come to be identified. Industrial and technology issues will have to be addressed in an increasingly explicit fashion.
Americans are, of course, perfectly equipped and used to dealing with international industrial issues at the level of transnational corporations. But they are much less at ease in discussing such issues at the higher level of integration that the nature of the Japanese system and emerging degree of Japanese leadership now call for. A difficult choice will have to be made between two types of answers-or at least their relative emphasis.
The traditional type of answer would be an attempt to "open up" Japan and force-feed it the American way of doing business-basically "free enterprise" making the running. Precious time may be wasted in high-level talks, such as those of the fall of 1982 on the number and location of cigarette-vending machines to which American brands have access. More profoundly, America risks embarking on an ill-advised attempt to revive the MacArthur era. Japanese culture, history and institutional organization, and, in particular, the way in which Japanese want their industry to relate to their government, deserve just as much respect as the American economic way of life.
The alternative type of answer, just beginning to emerge, would be that of learning from Japan, as Ezra Vogel and others urge, and of equipping the United States with comparable policy instruments.4 Of course, there are limits to this approach too. Strong government is not among America's natural gifts, and if an American Ministry of International Trade and Industry were ever created, it would probably come under the same strains as the ill-fated Department of Energy, the Great Society programs and other recent American attempts at better economic government.
Yet there is certainly a middle way between trying to transform Japan into a little America or America into a big Japan. This way is in fact being explored already. It may well be that the American system will always prevent a full fledged "industrial policy" from taking shape at the federal level. But, without the word ever having to be pronounced, one is probably witnessing the emergence of an American foreign industrial policy. It would be a great mistake to look, for example, at the recent wave of so-called "voluntary self-limitation" agreements in the narrow terms of "barriers of trade." They are much more than that (otherwise a genuinely free trade Reagan Administration would probably have been able to keep them in check). What we are now seeing are in fact the first elements of an "industrial modus vivendi" between "countries with different socio-economic systems," to use an East-West phrase.
As a matter of practical urgency, this modus vivendi has initially had to take the form of trade agreements. In the future, the trade component may be reduced, if it is supplemented by something else. The recent GM-Toyota 12-year agreement, the discussions on American access to Japanese technology with security implications, and Japanese investments in the United States (some of which are just as "voluntary" as the export restraints) are examples of the new ways in which global economic relations can be regulated. The trade "regime" will not exist separated from an integrated investment/technology/trade complex. We may even be able to return to unrestricted trade, but that will be against a background of managed industrial relations, and it would be misleading to call it "free trade" in the naïve sense of the word.
To those who would refuse to see these emerging patterns, the study of European-Japanese relations may provide additional clues. In February 1983, an agreement between the European Economic Community and Japan was announced-and hailed, with excessive European self-congratulation, as a major turning point. This agreement included limitations on sales of video tape recorders, continued self-limitation of automobile exports, restrictions on sales of larger television tubes and "moderation" of exports of hi-fi equipment, light commercial vehicles, fork-lift trucks, motorcycles and quartz watches.
The video tape recorder component of the deal is particularly interesting, as its trade justifications are far more limited than the importance attached to it would suggest. Indeed, not only do most European companies not produce VTRs that would need to be protected, but some of the most powerful electronic companies had positioned themselves to benefit from Japanese-produced imports, sold under their brand names, as a way to rapidly capture a share of this fast-growing market. Also, a country with a good record as a free-trader, namely the Netherlands, has been lobbying for the restriction (as well as for similar ones, although more discreetly, on such items as the audio laser disc).
What was at stake was therefore not trade interests, but the relative position of Japan and Europe in a few critical segments of the pacesetting electronics industry. In fact, the object of the agreement is not international trade, it is industrial policy. More precisely, Europe has tried to set aside a portion of its domestic market to be used as seed ground for an industry that it does not yet have. In the words of Commissioner Etienne Davignon: "If we want to face up to Japanese competition, then we have to be able to confront them with an industry."
More trade/industry regulation of this type can be expected in the future. The projects of Japan's Ministry of International Trade and Industry in such fields as civilian aircraft, industrial robots and biotechnology are well known. If the previous success stories of Japanese automobiles and electronics offer us any lesson, it is that these new projects hold potentially earthshaking consequences, either in existing industries of strategic importance (aerospace) or in industries of the future likely to have considerable spillover and restructuring impact worldwide (robots, biotechnologies). Simply reenacting the 1960s and 1970s in those fields would lead to the same scenarios: silent growth of Japanese industries behind barriers of whatever nature is called for, blossoming of those industries once they have become highly competitive, reactions of other Western countries to protect themselves by "self-limiting" the Japanese. The only difference will be that the level of bitterness and conflict can be expected to increase, both in Europe and America, where the cumulative impact of Japanese successes will build up to politically dangerous levels, and in Japan, where the feeling will intensify that the Western nations stop playing by their own rules when Japan becomes the best player.
If world economic growth remains slow, Japan will also experience growing difficulties in maintaining its strategy of permanent industrial redeployment: the "old" sectors will close up faster than new ones can develop. If this development takes place against the background of growing tensions in the security field, the end result could be, in a matter of 10 to 15 years, a fundamental change in the way Japan relates to the United States and to the OECD countries. Needless to say, such an evolution would be a major blow to the Western Alliance structure.
Nations, since they came into being, have always been concerned with their positions in international hierarchies of all types. But what we have failed to see until now is that the great process of "catching up" that has taken place since the 1950s has brought about a qualitative change in the impact of national strategies. Whereas French or Japanese industrial policies of the 1960s had only a quantitative impact (in terms of narrowing the gap with the dominant American economy), the same type of policies, coming from near equals, threatens to change the structure of industrial hierarchies in numerous sectors. More than market shares are now at stake: witness the growing concerns in the United States over "Japan as number one" or the "East Asia edge," or, for that matter, over the successful challenge of the European Airbus to Boeing.
By the same token, American policies that would have been seen, ten years ago, simply as one feature of the domestic technology-development process will increasingly come to be seen-both by foreigners and by Americans themselves-as deliberate strategies to preserve "U.S. leadership." American economic decision-makers will be held accountable for those policies both at home and abroad. Whether new technologies are developed by private corporations or within the Defense establishment will gradually appear as only a difference of method and internal organization, and not one of nature when compared to European or Japanese government-centered policies. The new patterns of cooperation between consortia of high-tech firms and universities, as well as the increasingly articulate calls that can be heard in America for an industrial policy, illustrate the rethinking taking place. Whether the policies advocated get translated into explicit policies or not, the perception of the "global stakes" associated with technology issues is likely to become every day more acute.5
Redistribution of economic power and the new strategic implications of industrial competition will therefore be a major obstacle to the extension of free trade regimes in many of the new industries. On the whole, our trade environment will be less transparent and more conflictual. Trade interests will be more complex and will not lend themselves to the traditional forms of regulation developed in the golden age of trade liberalization. The capacity of the hidden hand to bring about not only efficiency at the world level but also harmony and shared interests among nations will continue its decline.
National security and political considerations are also playing an increasing role in shaping the trade scene.
In the recent past, one country has gone out of its way to make more explicit the political and national security constraints that can limit free trade in both agriculture and high technology. The paradox is that this country is the one that also happens to be the strongest advocate of free trade in those fields, namely the United States. While the right hand was busy pamphleteering against politicization of trade, the left hand was toying, with increasing pleasure and incompetence, with "economic weapons."
In the field of East-West trade, the problem was less the principle of trade restraint in itself than the rather remarkable degree of incoherence, inconsistence and indifference to European views that presided over its actual implementation. It is often forgotten, for example, that the Carter Administration, until the invasion of Afghanistan, had been castigating countries like France for their obsolete "cold war" perception, notably on African matters. In those days, not so long ago, the message from Washington was that Cuba had a stabilizing role to play in Angola-overnight, however, the same Administration "learned more about the Soviets" than Europeans could ever have taught them. From then on, a flow of ill-prepared and often less than whole-hearted U.S. initiatives have wreaked havoc on the structure of the Western Alliance, without inflicting nearly as much damage on Soviet interests.
The grain embargo of January 1980-which left wide open the possibility for U.S. firms to export non-American grain-was lifted by the Reagan Administration in April 1981 before its impact could really begin to be felt on the Soviet Union. The lesson was not forgotten by European politicians who might have supported the American trade restraint philosophy, the more so as the United States then concentrated on controlling those elements of East-West trade in which European rather than American economic interests were at stake.6
It was easier to be tough at the expense of Germany than of Kansas. Even in that field, "staying the course" was a less than straightforward policy, as the Reagan Administration closed its eyes to some gas-pipeline-related contracts, only to oppose them retroactively and with little concern over European reactions.
Indeed, 1982 would deserve to be called "the year of Europe" from the Soviet point of view, as the Reagan Administration devoted so much of its resources to putting American and European interests and perceptions on a collision course.
As a result of the great Reagan pipeline paranoia of 1982, major European firms such as Creusot-Loire, which had purchased American technology and products for a century as a matter of routine suddenly lost access to American supplies of all types. Strange exercises, such as making an inventory of American components and licenses used in the making of the French TGV fast train, had to be undertaken on a crash basis. A national label had to be put on pieces of equipment that until then were known only by their technical characteristics. An assessment of the dependence on American technology had to be made. It was found to be great. Too great.
Other European firms were "punished" with a set of measures more narrowly focused on oil and gas. Yet the French experience with the American "switch on-switch off" concept of free trade is not isolated. The Japanese, for instance, cannot have failed to reflect, albeit in their prudent and non-vocal manner, on the political and economic price of reliance on U.S. technology in their all-important Sakhalin gas exploration undertaking. It is on such occasions that politicians build a lasting personal opinion on the virtues and drawbacks of interdependence.
The grain and pipeline dust had no sooner settled than economic weaponry was again given a field day. Of course, it was in the name of a crusade for freer trade. By subsidizing a sale of one million tons of wheat to Egypt and threatening similar moves on dairy products, the United States was, of course, teaching the Europeans the limits of EEC export-subsidy policies. Short-term victories in such battles can only accrue to dominant American agrobusiness.
Yet the story may not end up with the EEC stray sheep rushing back to the free trade fold. The foreign policy component of trade relations is again brought a little more into the light. The reliability of U.S. commitments-remember George Shultz's agricultural trade "truce" of December 10, 1982-is a little more questioned. Myopic displays of force are not the essence of leadership. The market-sharing that will take place in agricultural exports could have come at a lesser political cost to the Atlantic Alliance.
As the increased interaction between trade and technology suggests, the major challenges that the worldeconomy confronts us with are not only the sectoral ones-trade, finance, money-we are used to, but challenges of a more encompassing and systemic nature. The problems of managing complex interactions find us poorly prepared. The high level of specialization that now prevails in academia as well as bureaucracies too often prevents the global issues from being raised and the complex trade-offs from taking shape. The main problems for the 1980s will stem from the rapidity of interaction between finance, monetary relations and trade-notably in manufactures and oil. Coping with them will require some fundamental rethinking.
Let me start with an analogy: in a remarkable book called Liberal America and the Third World, Robert Packenham once remarked that liberal thinkers had developed policies on the assumption that "all good things go together."7 They saw economic growth, international security, and democracy as equally desirable, and they worked therefore to achieve all these objectives at the same time. Alas, as Packenham sadly remarked, it can be the case that some good things can only be pursued at the expense of other good things. Unpleasant trade-offs have to be struck. But such trade-offs cannot be explicitly and fully addressed by policymakers honestly committed to a philosophy that holds all these objectives as morally imperative. Contradictions are therefore allowed to develop. They often go unnoticed, as they would call for painful rethinking. Policymakers want clear-cut principles that they can apply across the board; those who try to strike too subtle trade-offs are called "inconsistent," and lose their jobs to supply-siders.
I am convinced that a perverse effect of this kind is at work before our eyes at the level of the worldeconomy as a whole. The problem could be described as one of inappropriate interactions between the regimes now prevailing, even if imperfectly, in trade, finance, money and energy.8 The inappropriate nature of the interaction, however, is proving difficult to acknowledge and to address because all of these regimes are built around the same set of fundamental principles (or, if you will, "regulation mode"), namely, free market principles. They are assumed to be mutually coherent. But they are not. The various "invisible hands" now at work in the worldeconomy can often be seen working against one another. Waiting for them to make the world safe for interdependence is like waiting for Penelope to finish her weaving.
After all, as we have noted, the coexistence of free market regimes in all of the three major dimensions of trade, finance and money is a very recent phenomenon. Until the mid-1970s, the development of free trade took place against the background of fixed exchange rates and relatively small and regulated international financial flows. The move toward the free market approach to monetary relations began in 1971 and, after the Smithsonian compromise, found its official expression in the 1976 Jamaica agreement. The move toward a massive, highly integrated and remarkably unregulated international financial system gathered steam even later: originally an unexpected byproduct of the cold war, the Euromarkets really took off as a result of the two oil shocks and of the need to recycle-as no government-regulated system would have been able to do-astronomical surpluses toward abysmal deficits. As for oil, the monopoly power of the companies was replaced at first by the monopoly power of OPEC, which has only very recently begun to give way, still incompletely, to a free-market type of regulation.
Considered in isolation, and with more reservations in the case of the monetary system, each of these developments was a "good thing." But I want to submit the working assumption that we are now stuck with three "good things" that do not go together.
This does not mean that the global free-market approach does not have, in theory, the highest conceivable efficiency potential. Yet, in the present state of the world and of our understanding of economics, this potential cannot be translated into reality. In fact, the full free-market worldeconomy that we have allowed to develop, in part inadvertently, during the 1970s could be seen as a cybernetic system-namely, one in which all variables are allowed to move and interact freely. It may be that 10 or 20 years from now, our understanding of such a cybernetic system will be such as to allow a fuller use of its efficiency potential.
But what we have seen repeatedly over the last few years is an amazing discrepancy between the sophistication of the worldeconomy and the shortsightedness and narrowness of the policies pursued within it. It is time, for instance, to draw the lessons from the whole gamut of perverse effects which the Reagan monetary policy has had on the system (from deepening recession in Europe to exacerbating the Third World debt crisis). One must also note the negative impact that repeated situations of excessive overvaluation or underevaluation of key currencies have had on balance of payments, economic activity and protectionism.9
In short, our present policies are, by an order of magnitude, too primitive to allow intelligent use of the complex system we have allowed to develop. Highly sophisticated "third order" interactions between money, trade and finance coexist with a laughable belief in the Laffer curve: in terms of potential for disaster, it is as though one were dealing with a nuclear power plant in Baluchistan. The time has come for our national policies to be accompanied by an "impact statement" of their effect on the worldeconomy!
A bad time for the economy and especially for the financial system, the second half of 1982 and early 1983 has been, however, a good time for international rethinking.
Unemployment levels unprecedented since the 1930s were becoming every day harder to dismiss as short-term adjustment costs. In Germany, the unemployment toll rose by 50 percent to 2.5 million in 1982 alone. Similarly, the Mexican debt crisis sent bankers by the dozen to the U.S. Federal Reserve and Treasury; in retrospect, one of the noteworthy features of the Reagan period will be the gap between the blind faith in market forces exhibited by the theologians within the Administration and the more nuanced and pragmatic view that actual market participants, time and again, have had to convey to them.
Although unanimity was far from complete, one could feel growing consensus around the need for some form of "recovery" program built around the three following principles:
-a strengthening of international safety nets;
-a prudent move toward more expansionary monetary policies in the low-inflation countries;
-a rollback of protectionism.
Of course, each of the numerous "recovery plans" which have flourished in the winter of 1982-1983 has spelled out these principles in a slightly different manner and with a different sense of priorities. And the previous gospel of tight money, small government and benign neglect was still read in a number of the old faithful churches. But the new perception could be seen at work behind the more accommodating stance taken by the Fed since the summer of 1982 and behind the U-turn of the American executive branch on the need to strengthen the IMF. It could also be seen behind the adoption by the new conservative government in Germany of a budget that most Social Democrats would have felt comfortable with, budget cuts being used to finance new investment incentives.
The furthest point in this intellectual tide may have been reached when the Thatcherite Chancellor of the Exchequer, while raising his eyebrows at Treasury Secretary Donald Regan's "new Bretton Woods" surprise mention, joined the recovery crowd. Commenting on the earthshaking nature of Sir Geoffrey Howe's four-point recovery proposal, The Financial Times could remark that "perhaps the most controversial part of Sir Geoffrey's strategy was his suggestion that recovery required a modest reflation by some countries." Indeed, the surprising lesson that mother nature was teaching conservative economists in this cold 1983 winter could be summarized as the discovery that "reflation will not come from deflation alone."
This process of rethinking, however, is still incipient. The widely expected American recovery of 1983 could bring it to a halt. Results would then only have materialized-if Congress approves-with respect to the strengthening of the IMF, a very noteworthy but limited achievement. Trying to protect the still-fragile interest in the management of the worldeconomy against the short-term illusions of cyclical upturns is therefore our immediate responsibility. If the Williamsburg summit this May does not achieve this limited objective, those who believe that economic nationalism is the answer will see their hand further strengthened.
As I have tried to show, the changing nature of international economic relations and of their political implications calls for more than a liquidity shot. The world economic crisis is more deep-rooted and obstinate than most of our sectoral analysis tends to assume. We have built a global economic system, yet we fail to acknowledge the global nature of the challenges now confronting us. Yes, beyond oil shocks, protectionism and defaults, there is such a thing as a crisis of the worldeconomy. Rushing from one short-term symptom to the other and waiting for the next upturn in the business cycle to cure it all-as the incipient American recovery is inviting us to do-should at least be seen for what it is: a recipe for disaster.
In my view, the task ahead of us should be organized around four complementary objectives. The first of these is more or less being taken care of, the second is widely talked about, notably in the Williamsburg perspective, but the last two are only beginning to emerge on the agenda and need to be addressed more fully and comprehensively. Let me call these the "4 Rs" program: resilience, recovery, restabilizing and rethinking.
First, the world economic system must be made more resilient to the variety of shocks and crises that have so much reduced its overall effectiveness since the early 1970s. Very notable progress has been made in the last few months on this "crisis management" aspect. Therefore, it need not be the central element in the measures to promote now. The financial and monetary safety nets are here; they have worked well. One can always ask for much more, for instance, the Brandt Commission calling for a full doubling of IMF quotas. But this would attract scarce political resources to a field of declining marginal economic returns. In a political perspective, even if one agrees with Henry Kissinger that there may be a risk of the debtors trying to "blackmail" the lenders,10 preventing this calls for more than a financial deterrent. It calls for a broader collective effort to recreate what I have called elsewhere "economic security."11
The politics of crisis management could become more complex if strong opposition to the agreed measures develops in the U.S. Congress and American public opinion. One gets a sense indeed that the latent populism of American politics is pushing toward opposing the "bailout" of the banks in a manner not dissimilar to the opposition aroused in the past by oil companies. Bankers, however, do have a point in asking not to be "punished." Their sin of heavy recycling, if a sin, was committed at everyone else's request and applause. Yet it would be in their long-term best interest to avoid making rescheduling the most profitable game in town. Fat spreads and huge front-end fees may have been a legitimate reward for the risk taken at the time they lent to high-risk borrowers. But collecting them a posteriori, and doing so on top of real interest rates of five to eight percentage points, may be looked at later-by borrowers and by public opinion-as increasing their salaries with the size of their mistakes. Also, the process of gradual provisioning for risky debt now in progress should be accelerated, provided it does not come out of would-be "profits" on Mexican rescheduling. Provisioning should then find its way into the valuation of bank stocks, thus inflicting a certain but tolerable amount of "punishment."
But, barring a major controversy on the "bailout" issue, the emphasis in the effort toward greater resilience should now begin to move toward those aspects of economic relations that are presently not at the center of the crisis. Strengthening emergency and other food reserves is one such field. Yet energy is certainly the area where a policy of anticipating rather than reacting to problems is most clearly in order.
If our objective is a sustainable resumption of world growth, then we have no reason for complacency in an oil "glut" of which only one-third can be traced back to "hard" progress (substitution and price-induced conservation), the other two-thirds being traceable to the world recession and, even more worrisome, to huge oil-stockpile drawdowns. We should reaffirm and strengthen the emergency programs of the EEC and International Energy Agency. Stockpiles should be rebuilt to the high level they had reached one year ago.
It is clear to most people involved in the present financial rescue effort that crisis management will soon reach its limits if it is not backed up by a sustained recovery of the world economy. According to Rimmer de Vries, Senior Vice President of Morgan Guaranty Trust, the absence of recovery in the West would produce a financing gap of $180 billion over three years for the 21 most indebted less-developed countries, even assuming a major adjustment on their part and a seven-percent net increase in bank lending.12
There is no room here for giving a detailed description of what macroeconomic measures are involved, the more so as a group of 26 economists from 14 countries has released in December 1982 a highly convincing statement that offers, to my mind, the best possible guidelines at this stage. Referring the reader to this statement issued by the Institute for International Economics in Washington,13 I shall limit myself to endorsing their major proposals:
-a two tier-policy in the United States of reducing, through immediate monetary measures, short-term interest rates by at least two percentage points, while working to reduce budget deficits in the medium term;
-a more expansionary fiscal policy in Japan and Germany, with limited monetary accommodation to foster notably yen appreciation.
-a more expansionary fiscal policy and a more relaxed monetary stance in the United Kingdom;
-no immediate action in France, Italy and Canada, where inflation should remain a major concern.
The role of these seven summit countries in restarting the worldeconomy is essential, as they represent about half of world production and trade. The notion that the South could by itself act as the "engine for growth" is still very premature. Yet this does not mean that a recovery program can neglect the Third World.
First, if nothing is done, the indebted countries could very well act as the "engine for worldwide depression." Beyond financial rescue, there is therefore an urgent need to revise the conditionality that presently links financial adjustment to deflationary policies. As the point has been made repeatedly, downward adjustment policies that might work at the level of one country become mutually defeating when implemented on a global scale. To use the vocabulary of nuclear strategy, the present salvo of IMF-type adjustment policies creates "fratricide effects."
Second, no sustainable world recovery can take place against the background of a failure of the development process in the Third World. True, many development plans were overambitious and ill-conceived. But a worldeconomy no longer hospitable to rapid progress in the better endowed part of the South and receptive to the basic human needs of the least developed countries would clearly lack the political and economic legitimacy that its global scope of action calls for.
3. Restabilizing: toward an interim stabilization agreement
After ten years of compromising with inflation, governments have now realized that reflationary policies in a context of relentless inflation were self-defeating. This recognition is major progress, and the lesson must not be forgotten. Yet there are several other major variables that must also be brought under control if macroeconomic policies are to regain the effectiveness they once enjoyed.
Obsessed as we have been with eradicating inflation, we have failed to see that the same distortions in market signals and behavior have been produced, on a massive scale, by exchange rate fluctuations, wild swings in the relative price of energy, or unpredictable levels of real interest rates. The herculean task of freeing the worldeconomy from the multiheaded hydra that holds its growth hostage cannot stop at cutting off, again and again, only the inflation head.
As underlined, for instance, in the last GATT annual report, one can attribute a large part of the reduction in the underlying potential growth rate of most economies to the reduced time horizon and increased riskiness under which economic agents now have to operate. Part of the excessive level of real interest rates can also be traced back to the same factors. Short-term arbitrage (I do not want to use the emotional term "speculation") and greater aversion to industrial risk-taking can be seen everywhere: in the rise of international bank loans as against equity and direct investment, in the explosion of short-term debt, in the rise of the financial conglomerate as opposed to the industrial empire. Protectionism itself is only one form of the general quest for security that increased uncertainty has brought about. Hence, by the way, one more reason for my skepticism about the narrow "return to free trade" approach: how can a nation accept the high cost of adjusting to international price signals when these signals are increasingly volatile and arbitrary?
If a "recovery" is to be sustained, and if it is to open the way to a resumption of investment, trade and growth, then the present level of uncertainty must be reduced. True, nobody can tell what is, for instance, "the right" exchange rate. But this should no longer be an excuse for complete passivity in the face of even the most prolonged and arbitrary misalignments.14 Drawing the lessons of one decade of floating rates, which he helped bring about, Helmut Schmidt wrote recently: "the exchange rates of the major currencies must not be made into a football. . . . Central banks and governments must make it plain where exchange rate policy is heading . . . for left to themselves foreign exchange dealers will behave like a flock of sheep."15
What is needed, I believe is a three-year interim stabilization agreement. Its objective would be to announce and provide a much greater degree of predictability for a few key parameters. The most important ones would be the exchange rates as between the yen, the dollar and the European ECU and the level of real interest rates-but others, as I will suggest below, could also be covered.
The use of a broad range of instruments should enable these key parameters to be kept within a reasonable fluctuation range. For instance, cooperation between the United States, Japan and the EEC, along the lines of that which now prevails in the European Monetary System, should enable these key actors to come back to the greater exchange rate stability that did prevail from October 1979 to January 1981. Attention would also be given to keeping real interest rates within a reasonable zone (something like zero to three percent above the inflation rate). A fixed real interest rate more in line with repayment capacities could be used, notably in the rescheduling or long-term consolidation of Third World debt.
Being limited to three years, such an interim agreement would give enough time to transform the cyclical American recovery into a more broadly based process of Western growth. Yet it would not imply that ten years of benign neglect can be corrected overnight. Also, this program should not be narrowly equated with quantitative targets. The process of cooperation and learning is what would really matter. The role of targets is mostly to foster a permanent process of coordinated analysis and action. They would be adjusted when changing circumstances warrant.
The interim agreement could also concern itself with the availability of long-term capital for the developing countries. The size of gross North-South financial flows-on the order of $100 billion a year-should not blind us to the fact that net flows toward the South are, by an order of magnitude, much smaller and may very well become negative. It will take a concerted effort by banks and governments to make sure that the process of development, which is the only hope of a lasting solution to the debt crisis, can be financed.
Attention should be given to more "automatic" ways of financing development. Without going to the unrealistic extreme of a world development "tax," a strengthening of capital flows through guarantee schemes, co-financing with multilateral institutions, and a more predictable environment for investment are urgently called for. In this respect, many of the proposals of Common Crisis, the just-released second Brandt Commission report, provide an interesting middle ground between market mechanisms and institutional intervention.
In particular, a doubling of the "gearing ratio" of the World Bank (i.e., the ratio between outstanding loans and capital) would make for a substantial increase of high-quality finance. This ratio is presently one-to-one, whereas it is in the range of 20- or 30-to-one for a typical commercial bank. Similarly, it is scarcely rational on the part of market economists to deny the IMF a more automatic access to financial markets. In the present state of the financial system, an extension of the intermediation role of the multilateral institutions is the most market-oriented way to maintain essential financial flows. The interim agreement should therefore grant the IMF, on an experimental three-year basis, the opportunity to freely enter the capital markets. The World Bank would be asked to behave more like a bank, through the provision of more "program loans" and the doubling of its gearing ratio.
As I know how emotionally unreceptive most of the Anglo-Saxon world is to this notion, I will not deal here with the issue of oil-price stabilization. Yet it is clear that we cannot rush, as we have done, back and forth from oil bonanzas to oil shocks. Let us pay greater attention, for instance, to the fact that drawing down oil stocks in early 1983 has artificially added four million barrels a day-as much as present Saudi production-to the supply. As Myer Rashish recently said, "the period of soft oil prices will prove to be one of phony peace in which, unless we take appropriate steps, we have practiced disarmament." In any approach, what is needed is to strike a careful balance between strengthening the consumers' hand (including resolute stockpiling) and finding common long-term interests between key producers and consumers. A more predictable oil price would make for better development and reduced vulnerability in both groups of countries.
The reason I advocate only a three-year "interim" stabilization agreement is that getting a better grasp of our brave new worldeconomy is a long, difficult and challenging task. It makes no sense to call for a new Bretton Woods if the Keynes-White type of conceptual preparation has not taken place. Indeed, the respite made possible by a recovery cum reduced uncertainty should be used to launch such a rethinking process, discreetly and with the brain power that is called for. In the meantime, the process of closer cooperation called for under point 3 would provide the learning-by-doing opportunities that have been so cruelly lacking in the past. The setting-up at Williamsburg of a small "brainstorming group" of political economists of the highest caliber, with a two-year mandate, could initiate this process.
I have indicated in the first part of this article what are, to my mind, the major intellectual challenges. They can be summarized in the need to adapt, collectively and nationally, our policies to the "cybernetic" nature of the worldeconomy.
It is simply not true that a "cybernetic" system, in which all variables are allowed to move and interact freely, is necessarily self-regulating. Let us not confuse free market forces with artificial intelligence: our economic workmanship has not reached that stage yet. True, the advocates of the total free market approach are right to reject certain forms of inefficient government intervention. But it is not true that any form of government intervention is by nature counterproductive. Actions are needed to prevent perverse interactions from developing-such as the ones floating rates have produced in the exchange markets or the deflationary spirals that financial "adjustment" policies in the debtor countries may generate.
The strikingly emotional nature of this debate can be traced back to profound divergences as to what should be the role of governments in the worldeconomy. Those divergences could make for increasingly divisive disputes, not only in finance and monetary relations but also in trade, where the issues of subsidies and industrial policies will probably dominate the 1980s. It is high time to move away from the present sterile doctrinal conflict, as it undermines the very fabric of relations between the great industrial democracies of Japan, the United States and Europe.
Events have clearly shown that governments are not all-powerful. In spite of national control over nearly all the banking system sector and almost half of industry, socialist-run France has discovered how dependent on the worldeconomy she remains. But government cannot be wished away either: the Reagan Administration's attempt to reduce the weight of government on the real economy has backfired in a tremendous increase of the weight of government on the financial markets: according to Morgan Guaranty Trust, overall public sector needs may rocket from 30 percent of national savings in 1982 to more than 60 percent in 1984. Even more ironic, the Reagan Administration, in order to reduce its self-inflicted budgetary deficit problem, is gradually obliged to bring the percentage of federal taxes to gross national product back to the level that it had undertaken to reduce in 1981.
Similarly, beyond the technical measurement difficulties, the narrow-minded among the monetarists are discovering that limiting the role of government to the pursuit of monetary targets is in no way the neutral policy it was supposed to be. As the present debate on the "velocity" of money should make clear, the impact of these targets on the economy can amount to a very arbitrary intervention by the monetary authorities in the real economy.
Let us be more candid therefore: governments have a role to play. And they have to discharge it differently in the light of different cultures and traditions. Rather than "more" or "less" government as an end in itself, the issue is better government of the worldeconomy. A new relationship among all major actors-be they governments, banks, corporations or international organizations-has to be fostered if the system is to operate at a satisfactory level of efficiency and vulnerability.
Similarly, the new balance of economic power and the uncertainty that comes with rapid changes in industrial hierarchies have to be taken into account in the political process of managing economic interdependence. Whereas this used to imply coping with reduced American relative power, the new trends Have now more to do with the rise of Japan and the increased vulnerability of Europe. In particular, without a renewed and imaginative effort at European cooperation-in industry, finance and defense notably-there will be little hope of reaching a satisfactory and stable relationship among the industrial democracies.
Sound management of the worldeconomy is presently jeopardized by much more than the often-mentioned "national interests." Our present crisis is one of values, world views and economic philosophy-before being one of policies and indicators. Getting back on the prosperity track requires not only a "conceptual breakthrough" at the policy level but also a capacity we seem to have lost for rediscovering the fundamental values we have in common, behind the diverging stereotyped expression each country has given them.
The creation of the "brainstorming group" I have mentioned could act as a catalyst to this essential rethinking process. Working in the same spirit as the Brandt Commission but with the global worldeconomy as its agenda, this group should bypass the stage of moral pronouncements that took up too much of the early Brandt Commission work and jump right into the analysis of priorities and opportunities for cooperation.
As we prepare for the Williamsburg summit this May, many economic commentators and journalists will once again make the fundamental mistake of looking at summitry in the indulgent and amused vocabulary of comedy. What is not being done at the summits is not being done elsewhere either. Their failure is the most condensed illustration of our collective failure to live up to the challenge of a world of our making. They are the telling reflection of the depth of our present disarray and divisions.
The worldeconomy offers great opportunities for common prosperity-but, left to itself, it can also be the breeding ground for uncontrollable contradictions and nationalism. Let us work together so that the story of the failure of international economic cooperation is not rewritten some day in the language of tragedy.
1 The Club of Paris brings together the treasury officials of the lending countries, together with those of any debtor country needing to adjust its official obligations.
2 For a detailed analysis of "system risks" and the broader issues of financial and economic security, see the annual report, of IFRI (Institut Français des Relations Internationales), RAMSES 1982: The State of the World Economy, Cambridge: Ballinger, 1982; and London: Macmillan, 1982 (hereafter cited as The State of the World Economy, 1982).
3 See, for example, C. Fred Bergsten and William Cline, eds., Trade Policy in the 1980s, Washington: Institute for International Economics, 1982.
4 Ezra Vogel, Japan as Number One, Cambridge: Harvard University Press, 1979.
5 See, for example, James Bobkin, Dan Dimancescu and Ray Shasta, Global Stakes: The Future of High Technology in America, Cambridge: Ballinger, 1982. For an American view of the Japanese and European challenge, see John Zysman and Stephen S. Cohen, The Mercantilist Challenge to the Liberal International Trade Order, a report prepared for the use of the Joint Economic Committee, 97th Cong., 2nd sess., Dec. 29, 1982, Washington: GPO, 1982.
7 Robert Packenham, Liberal America and the Third World, Princeton, N.J.: Princeton University Press, 1973.
8 The concept of international "regimes" developed by Joseph Nye and Robert Keohane has proved to be a very useful tool for the analysis of specific aspects of international relations, as it brings together "the rules of the game," institutional arrangements and other elements around which international relations in that field are organized. But, in my view, when it comes to analyzing interdependence in a global perspective, it has to be supplemented with a more general concept of "regulation modes." The same "regulation mode," such as reliance on free market forces, or reliance on intergovernmental mechanisms, can be at work in a large number of international regimes. The point made here is that the "free market approach" can be highly efficient within the specific regimes (trade and finance), but inefficient as a global "regulation mode" in the present state of interdependence.
9 See, for instance, C. Fred Bergsten, "What To Do About the U.S.-Japan Economic Conflict," Foreign Affairs, Summer 1982.
10 Henry Kissinger, "Save the World Economy," Newsweek, Jan. 24, 1983.
11 The State of the World Economy, 1982, op. cit., passim.
12 "Global Debt: Assessment and Prescriptions." Statement by Rimmer de Vries before the Subcommittee on International Economic Policy of the Senate Foreign Relations Committee. Reproduced in World Financial Markets, Morgan Guaranty Trust, February 1983.
13 Promoting World Recovery: A Statement on Global Economic Strategy, Washington: Institute for International Economics, 1982.
14 For a provocative statement on the need for a broader strategy to maintain an open world economic system, see the 1982 annual report of the "Group of Thirty" (a distinguished group of representatives of the financial community), available from the Rockefeller Foundation.
15 "Helmut Schmidt's Prescription," The Economist, 26 February-4 March 1983, p. 24.