A singular economic remedy

Dian Cohen December 2 1985

A singular economic remedy

Dian Cohen December 2 1985

A singular economic remedy


Dian Cohen

The past quarter century has witnessed the world’s golden age of trade. And as trade has expanded, the global economy has become more closely integrated. Watching that trend, an increasing number of economists and politicians around the world pronounced it good. And they have subscribed to the view that if each of us were to concentrate on producing things in which we have a comparative advantage and then trade with others for the things they produce more efficiently, we would all be better off.

That is not an idle belief. The world’s exports, expressed as a percentage of total output, have doubled. Meanwhile, the standard of living in a majority of the world’s countries has, until recently, been rising. That is why, for most of the postwar period, reducing global trade barriers has been an international preoccupation.

Such is no longer the case. Although politicians still pay lip service to multilateral negotiations under the General Agreement on Tariffs and Trade, few of them are holding their breath until the next round of talks. And here at home Canadians, still unsure that they even want free trade, refuse to recognize the dangers of the 300 protectionist bills currently waiting to be passed by the U.S. Congress.

Lester Thurow, the prolific economist from the Massachusetts Institute of Technology and author of such books as The Zero-Sum Society and Dangerous Currents, has just published a stunning article in the Nov. 15, 1985, issue of The Economist which is relevant to the Canadian debate about free trade with the United States. If the United States ignores Thurow’s prescription, its standard of living will surely drop; in Canada, where our economy is weaker and more dependent on international trade, that medicine is a matter of survival.

Thurow argues that the postwar period of expanding world trade is probably drawing to a close and that “the next 10 years are likely to witness a lessening of economic integration.” In Canada the standard of living is already declining, and if Thurow is right his scenario could be devastating.

Thurow says that such a downturn need not necessarily happen. But he adds that it is likely because the three major industrial actors—the United

States, Europe and Japan—will find the easiest solutions to their domestic problems in withdrawing from world trade rather than in co-operative management of economic integration.

The domestic problems vary from country to country. Thurow identifies the biggest domestic problem faced by the Americans as declining productivity. A measurement of output per hour of work, productivity is the best of many imperfect indicators of a country’s ability to generate a high and rising standard of living for its citizens. Recently, the Massachusetts-based research group Data Resources surveyed the seven leading industrial countries and found that France and Germany have already surpassed the United States in output per hour worked.

Worse, it found that productivity in Japan and such former economic basket cases as Italy and the United Kingdom is growing at such a fast rate that

The prescription for all of us is the same: economic integration rather than withdrawal into protectionism

they will soon overtake the United States. That will make it even more difficult for U.S. producers to compete internationally and the U.S. trade deficit will continue to grow.

The American productivity problem requires politically difficult initiatives both domestically and abroad. Domestically, it requires an effort to reverse the trends causing the United States to fall behind. Thurow calls for a commitment in education, where for the past 15 years the test scores of college students have been declining sharply. Also, he calls for a doubling of capital investment and increased spending on research and development.

If those suggestions are tough medicine, his international prescriptions for the U.S. economy are equally problematic. Essentially, he argues for internationally co-ordinated monetary and fiscal policies. To help Washington reduce the U.S. deficit, the Gang of Five—West Germany, Britain, Japan, France and Italy—have already agreed to let their currencies rise while the U.S. dollar falls. In the past eight weeks it has dropped about 10 per

cent. But Thurow claims that the dollar must fall 40 per cent. And that cannot happen unless the other nations co-ordinate tax policies with Washington so that while the United States raises taxes to decrease its deficit, they lower their own to stimulate domestic demand. That has yet to happen, and that kind of domestic and international effort is unlikely.

The Europeans, too, will find the quickest solution to their problem—a shortage of jobs—in withdrawal from world trade. There have been no new jobs generated in Europe since 1970, and in some countries unemployment exceeds Depression levels. The best solution lies in the same co-ordination that would help the Americans: European nations must lower taxes to stimulate demand. As well, they must accept domestic budgetary deficits. And they must get rid of rigid labor laws that make it more sensible for business firms to substitute equipment for labor.

But those are difficult political decisions. It is easier to close one’s economy and create jobs by reflation.

For the Japanese, the problem is different again: Japan relies on exports to run its domestic economy. If it cannot make the structural changes necessary to cause imports to grow as fast as exports, Thurow warns that the rest of the world will gradually exclude Japan and force it to reduce its dependency.

Canada is afflicted with all of the above ailments. Like the United States, it has a productivity problem. Data Resources figures reveal that Canada’s output per hour worked has already been surpassed by all but one other of the seven industrialized countries; only Britain’s output lags behind ours—but its productivity growth rate is three times ours. Like Europe, we too have a lack-of-jobs problem. As well, we depend on trade every bit as much as do the Japanese.

The prescription for all of us is the same: economic integration rather

than withdrawal into protectionism. And if the industrialized nations cannot manage that, Canadians must at least work to keep trade flowing with their largest partner.

Instead, Canadians are still debating the fate of the trees of their national economy. And we do not see the global economy’s forest going up in smoke.

Dian Cohen is a Montreal based economics writer.