BUSINESS

A GOLDEN CHANCE

WESTERN NATIONS HAVE THEIR BEST OPPORTUNITY FOR ECONOMIC CO-OPERATION IN NEARLY 50 YEARS

JOHN DALY April 29 1991
BUSINESS

A GOLDEN CHANCE

WESTERN NATIONS HAVE THEIR BEST OPPORTUNITY FOR ECONOMIC CO-OPERATION IN NEARLY 50 YEARS

JOHN DALY April 29 1991

A GOLDEN CHANCE

BUSINESS

WESTERN NATIONS HAVE THEIR BEST OPPORTUNITY FOR ECONOMIC CO-OPERATION IN NEARLY 50 YEARS

It was a display of unity rarely seen among the world’s leading economic powers. In a modern office block overlooking the River Thames in London last week, British Prime Minister John Major hosted leaders and officials from 39 countries, including Canada, the United States, Germany and the Soviet Union, at the formal inauguration of the European Bank for Reconstruction and Development. The new institution’s role is to provide loans to help Eastern Europe and the Soviet Union in their transition from communism to capitalism. The 12 countries of the European Community contributed about half of the bank’s $14 billion in start-up capital, while the United States provided $1.4 billion. The amount is tiny compared to the $1 trillion that many economists say will be required to rebuild the former Soviet Bloc nations. Even so, speakers at last week’s ceremony praised the co-operative effort. French President François Mitterrand, for one, hailed the bank as “the first institution of the new Europe.”

According to some economists, that co-operative spirit—rooted in the end of the Cold War and fostered by the Gulf War—presents the world’s industrial nations with their best opportunity to promote economic growth since 1944, when economists and government officials from the wartime Allied nations gathered in a small resort in New Hampshire to establish the transition to a peacetime economy. The socalled Bretton Woods conference resulted in a remarkable era of international economic cooperation that lasted for nearly three decades until it collapsed under the weight of national rivalries and inflationary pressures.

Now, President George Bush is urging his fellow leaders to help create “a New World Order.” But most analysts say that they doubt the world’s leading powers will agree to set aside their long-standing economic differences.

In Washington this weekend, finance ministers and central bankers from the Group of Seven countries—the United States, Japan, Germany, Britain, France, Italy and Canada—meet for the first time since U.S.-led forces defeated Iraq in February. Their immediate challenges include the need to assist reconstruction in the Middle East while averting economic catastro-

phe in the Soviet Union. But the G7 ministers are also likely to debate other issues, including the burden of Third World debt and the risk of a trade war between North America, Japan and Western Europe.

According to some analysts, the need for closer co-operation among the world’s leading economic powers has increased since the collapse of the Bretton Woods system in 1971. Essentially, Bretton Woods required the major industrial countries to maintain stable curren-

cies in order to promote trade and orderly economic growth. The United States—the world’s major economic power—agreed to peg its dollar to the price of gold, at a rate of $35 (U.S.) per ounce. In turn, the other industrial nations agreed to tie their currencies to the greenback. To ensure an environment in which trade could flourish and to prevent the dramat-

ic upheavals of the 1930s, countries were expected to control their currencies so as not to gain an unfair advantage over their trading partners. At the same time, the International Monetary Fund provided short-term relief to countries with balance-of-payments deficits, and the World Bank extended low-interest loans to undeveloped countries to help them grow and join the trading system.

For the most part, the Bretton Woods era was one of prosperity. While it lasted, the

world’s industrialized nations enjoyed relatively strong economic growth as well as singledigit inflation and unemployment rates. But the era of co-ordinated exchange rates broke down on Aug. 15, 1971, when then-President Richard Nixon announced that the United States— partly to protect its gold reserves—would no longer automatically exchange dollars for the precious metal. Instead, Nixon declared that the greenback would float on international markets and that its value would be determined by supply and demand. Since then, U.S. leaders have argued that the best way to ensure prosperity is to reduce government intervention and encourage free markets.

But some analysts, including Robert Kuttner, a U.S. economics writer and author of the controversial new book The End of Laissezfaire, claim that the trend towards unrestrained free-market policies in the United States and elsewhere has increased worldwide

economic instability. In an interview, Kuttner said that the wild swings in the dollar’s value since 1971 have had a “devastating” impact on other countries, particularly in the Third World, because prices for most commodities on world markets are in U.S. dollars. Kuttner blames the Reagan administration’s laissezfaire policies for economic problems around the globe. He says that Reagan’s deep tax cuts and domestic deregulation during the 1980s led to record federal budget deficits and huge annual trade deficits. The massive borrowing required to cover those deficits put upward pressure on

interest rates around the world, contributing to the current global recession. Declared Kuttner: “When you leave everything up to markets, all kinds of hell can break loose.” But pro-free-market economists, who continue to dominate policymaking in many Western governments, vigorously dispute that view. Despite the often sharp swings in inflation rates, currency values and trade imbalances that have occurred over the past two decades, they argue that floating exchange rates and more vigorous international competition have yielded greater benefits than the Bretton Woods system. Allan Meitzer, an economist at Carnegie Mellon University in Pittsburgh, for one, says that the trend towards less government intervention helped to bring about “one of the longest economic expansions in history during the 1980s.”

Kuttner, however, says that the United States should abandon its commitment to free markets and join with Germany andJapan to manage trade and finance. As well, he says that the world’s economic powers should “rebuild a global monetary system” similar to the Bretton Woods arrangement. That system would be based in part on a series of public development banks, such as the European Bank for Reconstruction and Development, “with a bias towards growth rather than austerity.”

But free-market economists say that the world’s financial system is now too complex for the United States, Japan and Germany to manage, even if all three nations worked together. Carnegie Mellon’s Meitzer says that guiding exchange rates, for one thing, is nearly impossible because trillions of dollars are traded on world markets every week—more than the combined reserves of the three countries’ central banks. Added Meitzer: “It really is hubris to believe that 11 a few central bankers with a |g few billion dollars can influgjPMis ence international currency ° fluctuations for more than a few hours or a few minutes.”

Despite Bush’s repeated promises of a New World Order, Kuttner concedes that it is highly unlikely that the United States will press for stronger institutions to guide the global economy. “To establish a system like Bretton Woods would require more intervention than is ideologically fashionable,” he said. As a result, last week’s launch of the European Bank for Development may turn out to have been an isolated instance of economic co-operation.

JOHN DALY