‘Canada can be a prodder and poker’

July 4 1988

‘Canada can be a prodder and poker’

July 4 1988

‘Canada can be a prodder and poker’

Last week ’s seven-nation economic summit in Toronto gave Canadians televised glimpses of the high and the mighty, a bland communique—and little else. When the meetings adjourned on Tuesday, most of the West ’s major economic problems remained murky and unresolved. To cast some light on the frustrations of economic summitry, Maclean’s Associate Editor Paul Kaihla talked to internationally renowned liberal economist Lester C. Thurow, 50, of Boston ’s Massachusetts Institute of Technology.

Maclean’s: Why do economic summits rarely seem to make any progress?

Thurow: The basic problem is very clear. If you went back to 1945 you would find that the United States economy was about 75 per cent of the world GNP and so the U.S. could play locomotive for the world economy. By the time you get down to the late 1980s, we are down to about 22 per cent of the world GNP. The American economy just can’t play the role of locomotive the way it used to. The obvious answer is that the United States, Germany and Japan together should play locomotive and co-ordinate their policies. But coordinating policies is virtually impossible to do, because what coordination means is that each of the three principal players has to do something which they don’t want to do; something which may be good for the world economy but may not, in the short run, be good for their own national economy. Maclean’s: In what way?

Thurow: Co-ordination would require the United States to cure our budget deficit very rapidly so that we did not have to borrow $200 billion a year from world capital markets. If we did not borrow on this scale, real interest rates could be lower and the world economy could grow faster. What the Japanese have to do, just as rapidly, is reduce their trade surplus by becoming a market for products from other countries. You just can’t run a global trading system with the secondlargest economy in the world not buying anything from anybody. The Japanese are exporting unemployment, and other countries can’t sell their goods. Of all manufactured products from Third World countries, 63 per cent go to the United States, 23 per cent to Europe and seven per cent go to Japan. If Third World countries are going to develop, they have got to be able to sell some

manufactured products in Japan. But the Japanese don’t want to change. Maclean’s: And the Germans?

Thurow: What the Germans need to do is adopt monetary and fiscal policies so that they can grow much more rapidly. They are growing at about one per cent a year, which means that Europe cannot grow much faster than that. The Germans need to stimulate their economy, but they don’t want to do that because they say that would suck in migrant workers and might create some inflationary pressures inside Germany. So

the very things that everyone says these three countries ought to do to co-ordinate things are precisely the things that these three countries do not want to do. You have these summits where they are supposed to work out this co-ordination but they can’t because there is no mechanism to force any of them to do things they don’t want to do. At this summit, each country’s growth rate for the first quarter of 1988 was maybe half a point higher than they had anticipated and that kind of put a rosy glow on everything. The world economy is a little better than expected, so nobody wanted to rock the boat.

Maclean’s: How has all of this affected the summit agendas?

Thurow: When the summits first started, they were supposed to be private—no publicity, just a group of people discussing common problems. What has happened over the years is that they have become more and more formal, where everything is negotiated ahead of time, and they spend less time on economics. They talk about terrorism and at the last one they talked about arms negotiations with the Russians. If you look at the agenda, the proportion of time going to economics has been shrinking. It is easier to agree that you don’t like terrorism than to agree on some common economic policies.

Maclean’s: Do you think that economic summits should be continued?

Thurow: From an economics point of view, I don’t think they make a lot of difference. The question is, do you think it is good to get the leaders together for any excuse once a year just to let them get to know each other better? It is the only regular event where they all have to sit down and, at least for a few hours, be in the same room with each other.

Maclean’s: And this time the focus was mainly on economic issues, such as agricultural subsidies. Thurow: Well, the problem with agricultural subsidies is very easy to state and very hard to solve. The reality is that there are too many farmers in the world. Somebody’s farmers are going to have to go out of business—the question is: whose? Are they going to be Canadian farmers, American farmers or Japanese farmers? I The problem is that nobody wants I their farmers to be the ones to go è out of business. In terms of people who can afford to buy food, the world can produce more food than the world wants to eat. Which means somebody’s farmers have to quit being farmers. That is impossible to negotiate. Who wants to go home and say, T just signed a treaty which puts our farmers out of business ’?

Maclean’s: If the world can produce more food than the world wants to eat, why is there widespread famine in subSaharan Africa?

Thurow: You have to make a distinction between economics and charity. You can give food to sub-Saharan nations, but those are not exports. Those are gifts. The surpluses are bigger than the famine. If we abolished quotas and let every farmer go all out, we could feed the famine nations and in a normal year still produce a

farm surplus. Most of the estimates are that there would be very fat people in Ethiopia if we were to give the surplus food to the sub-Saharan nations. Maclean’s: Some economists say that North American farmers would gain a competitive advantage if all agricultural subsidies were abolished worldwide. Thurow: The answer is more complicated than that. If we really managed to eliminate agricultural subsidies around the world, probably some farmers in every country would go out of business. For example, Dutch and Danish dairy farmers are in general more efficient than American dairy farmers. So if you had no farm subsidies for dairy products, American dairy farmers would go out of business. For the same reason, Kansas wheat

farmers could look to expanded markets but probably North Dakota farmers could not compete with the rest of the world. I suspect the same thing would be true in Canada: some farmers would win and some farmers would lose. If wheat farmers in Argentina had as many tractors, irrigation projects and the transportation network that Canada has, they could really give Canadian wheat farmers a run for their money.

Maclean’s: Then are most Americans for or against subsidies?

Thurow: What tends to happen in the United States is that people say they are for free trade in farming because they think our farmers are better than anyone else’s. Then they look at it closely and

realize that is not true. Therefore, we only favor free trade in farming in areas where our products are very competitive. Yet if Americans say they support free trade in wheat, where they are competitive, then they must, to be consistent, support free trade in lamb. But that presents a problem because the New Zealand sheep farmer would run the American out of business. So this is why talking about agricultural subsidies focuses on a topic for which there is no solution, because the only solution is that somebody’s farmers go out of business.

Maclean’s: What about Third World indebtedness to the banks and governments of the summit nations?

Thurow: There is an obvious answersome of it has to be written off. But

the obvious question is: who pays? Maclean’s: And what about fluctuating exchange rates, which, because of their impact on interest rates, probably affect the day-to-day lives of ordinary people more than any other economic issue? Thurow: Stable exchange rates would certainly be good for industry. But there is a more fundamental problem: the financial markets don’t want stability because they make money on volatility. If I had a magic scheme for stable exchange rates, I guarantee that the world’s financial firms would fight it. Financial firms don’t care whether the market is going up or going down so long as the market moves. If the market does not move, their profits shrink. It would be

hard to get political agreement on a scheme for stability—even if you had a scheme—because there are too many people in the business community who don’t want stability. From an economist’s point of view, stability is a good thing. But if you are running one of the big international banks, it is not a good thing. The general rule in the United States is that the financial community has a lot more political clout than the industrial community.

Maclean’s: You have said that summit results depend on the positions taken by Japan, West Germany and the United States.

Thurow: They are the three biggest economies and they dominate each of their regions.

Maclean’s: Then does Canada have any relevance in these proceedings?

Thurow: Well, Canada is about the size of California and probably has a smaller GNP. Perhaps Canada can be a prodder and poker in trying to get these three powers to do a better job in managing the world economy. But clearly, Canada is not in a position to dominate this show. I’m going to get in trouble for saying this, but the Prime Minister of Canada is roughly the equivalent of the governor of California. There would be a huge fuss if you threw Canada out of the summits. But in terms of population, Canada is a relatively small place by world standards. □