THE PRESS WEDNESDAY, SEPTEMBER 8, 1982. The battle in Toronto

Press, 8 September 1982, Page 24

THE PRESS WEDNESDAY, SEPTEMBER 8, 1982. The battle in Toronto

Polonius’s advice to his son. Laertes, in ‘Hamlet” was that he should "Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.” This would not be a matter fit for discussion in Toronto where the annual meeting of the International Monetary Fund and the World Bank is being held. Among many voices, the New Zealand Prime Minister, Mr Muldoon, has been offering other advice about the international monetary system, which would mean that the International Monetary Fund would become a bigger lender than it is already. Mr Muldoon’s call may not be heeded; even if it were, the world’s economic ills would not necessarily be cured. The meeting is, however, the appropriate forum in which to consider the argument that Mr Muldoon is advancing. The call that Mr Muldoon is making comes at a time of widespread economic gloom in the world. Probably the biggest single cause of the gloom is the uncertainty about how long it will take for the American economy to improve. Although some of the economic indicators are more encouraging than they have been for some time in the United States, no-one can be sure that the recovery will last. In addition to the gloom about the American economy, a number of countries have found themselves under such a burden of debt over the last few years that repayment of their debts has had to be delayed. The first was Peru; Turkey followed in 1980; and in 1981 and 1982, Poland and Mexico found that they could not pay interest or repay capital on time. The cumulative effect of the difficulties of these countries, and others, has added to the international despondency that, for the moment, is concentrated in Toronto.

Mr Muldoon is arguing, as he argued at a meeting of Commonwealth Finance Ministers in London, that a world conference should review the international financing system. Part of his argument is that the International’ Monetary Fund should lend more to countries which have great needs. Another part of his argument is that there' should be something like a new Bretton Woods agreement.

In Bretton Woods, New Hampshire, in 1944, 44 countries agreed upon the establishment of the I.M.F. and the World Bank. The 10 strongest industrial countries among them resolved, in 1962, to lend their currencies to the I.M.F. when they deemed it necessary to prevent or repair “an impairment in the international monetary system.” In essence, the goals at the ,

Bretton Woods meeting were to improve international trade, to avoid monetary crises, and to maintain stability in exchange rates. ■ Mr Muldoon links his proposals with a re-examination of the General Agreement on Tariffs and Trade. The connection seems to be essential: money and banking measures alone are not sufficient to solve the problems of trade and of the means of countries to earn their way in the world, to repay debts, or to avoid international debts.

Mr Muldoon sees the need for increased lending by the I.M.F. to arise from the dire need of a number of countries in the developing world which have severe problems of overseas debts. Although New Zealand’s position is

obviously relevant, this country is in a better position than many others because it is considered to be a sound risk. It retains the well publicised triple-A rating as a borrower in international markets.

Many countries have borrowed less wisely and are now in dire straits. In some countries the loans have come from private banks. A few countries have invested the money that they have borrowed unwisely and. near the end of the day, they cannot see sufficient return on the money to service the debt and repay the capital. This is as embarrassing for the banks as it is for the country. Mr Muldoon’s proposal for increased loans from the I.M.F. would help these countries to service their loans from the private banks.

The proposal has its catches. One is that public money — money deposited in I.M.F. reserves by various countries — would be being used to bail out private banks, which should have been more prudent in the first place. It may also be argued . that in the instance of the American banks which lent so generously and, with hindsight, so unwisely, to unwise borrowers, the United States Government would rescue one or more of them if a collapse seemed imminent. A second catch is that when the I.M.F. lends money in large quantities it demands an austere economic programme in the borrowing country. Many countries seek to avoid the imposition of such conditions. To avoid these conditions, they turned to the private banks.

Mr Muldoon dealt with this point when he called for “a more flexible and sympathetic approach" to the I.M.F.'s conditions. Yet it must be wondered whether'confidence in the world economic system is going to be increased by allowing the I.M.F. to lend more money against the reserves it holds unless it can be reasonably sure that the lending will produce the results to repay the loans. Equally, more deserving countries that are seeking help will not be pleased to see money going down the drain elsewhere in the hands of those who have been reckless borrowers.

The call for a conference along the lines of Bretton Woods is really a plea to return to an era of more stable exchange rates. The question must be asked, however, about whether it would ever be possible to return to such an era. Neither exchange rate stability nor increasing the amount of money that can be borrowed from the I.M.F, for instance, would solve New Zealand’s particular problems. International exchange rate stability would be of some assistance, even in the battle against inflation. Much more important, a freeing in world trade in agricultural products would undoubtedly help this country a great deal. - , The G.A.T.T. negotiations have not yet dealt adequately with the agricultural products that New Zealand has to sell. A revision of the world monetary system might be of assistance to a number of countries in the short term; the freeing of world trade in agricultural products would undoubtedly be of short-term and longterm advantage to New Zealand and to a number of other countries. It is difficult to conceive of New Zealand managing to heed Polonius’s advice on borrowing; but it would need to borrow less, and would be better able to repay.