Managing the Global Economy

Citation

Khilji, F. (1998), "Managing the Global Economy", Journal of Economic Studies, Vol. 25 No. 3, pp. 248-248. https://doi.org/10.1108/jes.1998.25.3.248.1

The postwar period divides fairly evenly between years of full employment and economic growth, followed by as many years of global economic instability. Characteristic of this global economic instability are the persistently high levels of unemployment in a number of OECD economies and the frequently capricious behaviour of international financial markets, the latter leading to exchange rate gyrations and crises. The high unemployment levels in turn cast their shadow over the ongoing negotiations on trade liberalisation. Formulating policy in the current economic scenario amounts to a difficult choice between domestic economic stability and exchange rate stability. This range of issues and some related topics are the subject matter of the three books reviewed.

Jonathan Michie’s introduction to the Michie and Grieve Smith volume, the most recent of the three books, claims that the book aims “to make sense of current economic developments and to give an account of the key trends in the world economy, both to indicate what sort of new institutional arrangements might be appropriate and to allow judgments to be made as to their feasibility”. One initial message of the book is that the world has indeed learned some lessons from history. In this second episode of high and sustained levels of unemployment this century, the pre‐war great depression being the first, beggar thy neighbour policies of protectionism and competitive devaluations have generally been avoided.

A paper by Ajit Singh and Ann Zammit addresses the persistent and high unemployment levels in most industrialised economies; and conclude, inter alia, in their contribution that unemployment in the industrialised economies is owed chiefly to demand deficiency; a compact between labour, business and government is essential to restoring demand and employment without risking inflation. John Eatwell’s paper attributes unemployment more directly to government failure in macroeconomic management and argues that it is a problem which would not be resolved with microeconomic tinkering. A two‐stage approach to global labour standards is advocated by Wemer Sengenberger and Frank Wilkinson in their paper; such a process would accommodate national productivity differences with each country having national standards and graduating eventually to the generally more stringent global ones as productivity catches up. Richard Kozul‐Wright’s paper notes that international production by TNCs has evolved into international integrated production and regulating such activity is conceivable at a regional level.

Yilmaz Akyuz emphasizes that the frequently disruptive aspect of speculative capital flows, speculation that is encouraged by financial liberalisation, is basic to the crises in the financial markets, and, in another paper with Andrew Cornford, elaborates on some regulatory measures to moderate adverse speculative impulses. The authors recognise though that regulation of capital movements is no substitute for realistic policy adjustment and exchange rate alignment but would surely complement appropriate policies. Ruth Kelly in her paper sees derivatives as contributing to the 1992‐1993 ERM crisis and to the 1994 bond market crash; measures that reduce the threat to market stability from such instruments are discussed. The Laurence Harris paper on international financial markets argues that although global financial liberalization does constrain national policy choices, the nation state does retain sufficient ability to influence the outcome for the domestic economy through appropriate policies. Gerald Holtham’s paper explains the advantage of exchange rate stability but it is pointed out that such a system would not obtain in absence of international policy co‐ordination. Mike Artis makes the point that the experience with exchange rate targeting shows that concerted intervention can work in the right conditions. Nonetheless the cumulative experience provides little support for targeting in the absence of a strong political commitment.

John Grieve Smith puts forth a range of reform proposals: review of international institutions, a global economic strategy to redress imbalances, a new and more predictable exchange rate arrangement, regulation of capital flows, co‐ordination of central banks’ actions, and a policy on commodities are advocated. In his concluding remarks Will Hutton draws attention to a lack of consensus for reform as well as the lack of intellectually coherent reform proposals. The book’s emphasis on demand management and regulation of capital flows, in its diagnosis and in its suggested answers, and in its plea for a systemic response to the “crisis”, gives it a distinctly Keynesian and optimistic flavour.

Peter Kenen’s book presents the results of a conference to assess the first half century of the Bretton Woods regime on its 50th anniversary, and the need to modernise the system now. The result is a comprehensive review of international economic co‐operation focussed on Bretton Woods institutions, their working, merits, and shortcomings.

In their overview of managing the world economy under the Bretton Woods system, Barry Eichengreen and Peter Kenen argue that the very success of the system, i.e. 25 years of economic growth, was its undoing: US paramountcy and its ability to make side payments to sustain the system were undermined as other economies grew. The authors observe that in certain respects the Bretton Woods system was always lacking; trade and development policies are an example. Problems of an international investment regime, environment, and migration were not quite foreseen at Bretton Woods either, as is pointed out in another paper; the discussion on ITO was stymied subsequently.

In a different interpretation, argued in a paper by John Williamson and C. Randall Hanning, the success of Bretton Woods system was owed to exogenous factors such as the opportunities for catch up growth in Europe and Japan. The two authors propose a system of target zones for lessening instability in exchange rate movements. Nicolas Ardito‐Barletta in his paper on managing development and transition finds that the Bretton Woods institutions present a successful case of adapting to changing circumstances and of thus dealing effectively with the development issues; in comments which follow Moises Naim points to the overburdened agenda and a lack of clear priorities in relation to the work of IBRD and IMF.

John Jackson considers the outcome of the Uruguay Round and post‐Uruguay Round agenda and notes that the creation of WTO is a significant step towards multilateralism. De Anne Julius notes the evident consensus on international direct investment being on balance a beneficial thing, and suggests that access needs to be cased and liberal rules need to be framed; in her view WTO provides the institutional framework to integrate investment issues in a multilateral framework. Daniel C. Esty’s paper makes out a case for a global environment organisation. Advances in transport and communications are making borders increasingly porous to cross‐border human movement says Glenn Winters and notes the need for institutional arrangements to administer migration and related issues.

Tommaso Padoa‐Schioppa and Fabrizio Saccomanni argue, in the context of private capital flows, that the international institutional arrangements are in a process of evolution from predominantly inter‐governmental to a more market‐led version.

In the final section Fred Bergsten and Peter Kenen consider the future. Bergsten sees a deepening of inter‐dependence and increasing globalisation leading to a tension between the economic imperatives and political demands; the answer in his view does not lie in a Bretton Woods II but in a continuing adaptation of the existing intellectual and institutional framework. Somewhat different from this is Peter Kenen’s concluding assessment: nothing can quite prepare one for the future and the reforms proposed in the book may look modest when the future happens.

As one would expect of conference proceedings there is a lively diversity of views, particularly as each of the papers is supplemented with comments by more than one person. The 20 commentators include Richard Cooper, Paul Volcker, Joseph Nye, Mahbub Ul Haq and Lawrence Summers. The latter two contribute by way of an annex.

Cline’s book has its origins in a lecture course for graduate students pursuing economics and business courses. The purpose is to impart an analytical approach for understanding international economic policy issues; empirical evidence being the acid test of the conceptual framework. In this the book succeeds admirably.

There are eight chapters covering the threat of a global recession, adjustment of the USA‐Japan imbalance, trade and protectionist tendencies, trade policies of Japan and Mexico, the international debt problem, economic reform in Russia and Eastern Europe, the economic future of Europe, and environment and the global economy. Cline has written a topical book that is wide ranging in its coverage and, by way of an epilogue, makes an effort to be as current in its coverage as the medium of a book, with its lags between writing and publishing, might permit.

The outlook as Cline perceives it is one of sluggish growth in the 1990s, not recession. The likelihood of a recession is lessened as inflation has moderated to a low, and the major economies are taking measures to correct fiscal positions; of course whenever the rate of growth picks up the risk of higher inflation would reappear.

Cline argues that the exchange rate is basic to external balance. But exchange rates are influenced by policies and appropriate policies are therefore a must; neither can the exchange rates be left to markets entirely, nor is a return to the adjustable‐peg Bretton Woods regime feasible. A new regime needs to be worked out.

Cline notes the fair trade argument and its variant of strategic trade policy that is a part of the trade debate in the USA, but notes that the quest for trade is also a quest for reciprocity. The Uruguay Round developments at the time of writing, including the agreement, are noted, as is the suggestion that multilateral and bilateral approaches may be complementary. There is an undercurrent of managed trade in relations between USA and Japan. The answer to Japanese industrial and commercial practices that are restrictive of trade is a competition policy in Japan and not managed trade. The generalization of NAFTA into a Western Hemisphere Free Trade Area must await absorption of the implications and results of NAFTA in the USA; this could take some time, Cline concludes.

The end seems to be in sight for the debt problem, notes Cline. Successful international co‐ordination seems to have staved off a systemic threat. Unlike the 1930s there has been an early return of most debtor countries to capital markets as borrowers, and the Bretton Woods system has clearly facilitated this. The question remains though whether this could have been achieved sooner and at a lower cost in human suffering.

It is a moot point in Cline’s view whether shock therapy has best served the reorientation of the Russian and East European economies; and skeptics note that there has been more shock and little therapy. The future outcome would be influenced by a better understanding of the policies required as well as the availability of finances.

There is guarded optimism in relation to the future of Europe. It is conceivable, in Cline’s view, that a united Europe could play the kind of positive role in the world economy that was characteristic of USA behavior for the better part of the twentieth century. But the terms for forging a monetary union, as summed up in the Maastricht criteria, make high growth in the EU extremely unlikely in the foreseeable future as countries desirous of joining the single currency necessarily need to pursue contractionary fiscal and monetary policies, and centrifugal tendencies demonstrated in events in Yugoslavia too caution against undue enthusiasm.

It would be appropriate to include economic measures, including trade measures, in support of enforcing environment protection provided there is agreement on environment protocols. Unilateral action is undesirable, Cline feels, especially given that science does not yet offer a generally accepted view on causes and effects.

Cline’s approach to his task does weave into what is a readable narrative, a method of analysis which should equip the interested reader of a business newspaper to better understand and analyse ensuing developments.

To sum up this review of the three books, a commonplace observation is that the world today faces issues of mass unemployment and instability in international financial markets on a global scale for a second time this century; the major variations are that on the previous occasion there was a deep and prolonged recession as well, and a present‐day novelty is the transition economies and their problems.

A sense of urgency however characterised the period at the end of the Second World War, and this was behind the tremendous efforts then undertaken at global institution building to resolve what were seen as global and systemic problems. The combination of a consensus about the problem, a vision of how to resolve it, and an urgency to get on with the systemic resolution of issues were important to the success of the Bretton Woods conference and the resultant Bretton Woods system.

An effort of that order and the accompanying sense of urgency are evidently lacking today. Indeed, today there is an evident lack of consensus on the causes of the problems that the world economy faces; a vision of how to best address these predicaments also continues to elude us. The three books are topical and present a spectrum of views. Even though topicality is a double‐edged sword, informing the reader of recent developments by way of information that is “transitory” by definition, investing time and money in one or more of these books would be worthwhile as one can well foresee the issues discussed as matters that would be actively debated well into the future.