Edging back from the economic cliff

Press, 9 October 1987, Page 12

Edging back from the economic cliff

From the ’‘Economist,”

THE WORLD economy has come through five years that could have been cafav/" clysmic but weren’t Therein Ute ' a moral for the Finance Ministers and central bankers who are in Washington for the annual.: , meetings of the International Monetary Fund and the World Bank. If they can lift their eyes above the I.M.F.’s latest forecast which shows growth more sluggish than was once expected, they may yet make the next five years the proper reward for the pain of the past five. At the 1982 meetings of the Fund and the Bank, Latin America’s debt drama had just begun. The O.E.C.D. economies , were in recession, their G.N.P.S shrinking by per cent and unemployment rising by five million a year. Their average inflation rate had reached 13 per cent In 1980, and was still running at 8 per cent in 1982. Oil prices were above $3O a barrel and, by some, expected to reach $5O as soon as the Gulf

war turned-I nasty. They were days when that hackneyed word < used- With ■/ reason, and/ewii the calmest/; spines were chilled. > , Today, O.E,C;p. inflation is just tent Abarrel of on costs barely f slB, in real terms less than half its 1982 level. Throughout the rich world and in much of the poor, Industry is leaner and keener, and productivity is 1 • rising fast Government spending < is being contained, at least as a i percentage of national indome, | leaving room for lower taxes and i lower public borrowing, > In many countries unemploy- ] meat is falling. In a few — i including erstwhile laggards like i Britain, Turkey and Portugal — G.N.P. growth is above its post- < war, average. The Third World’s debt has not gone away, but it no ! longer has the power to |>ust 40 < banks overnight ' I •/■//. r;. Slowly the costs of.ihat borrowing binge are being shared < among the debtors, the banks' shareholders and O.E.C.D. tax- i payers. The solution is neither i

: tldy >nor fair, but it is Under way; / The list .of what has gone right < has kept growing. The dollaf, absurdly, overvalued in< early ’ 1985, has dropped by 38 pet centsince then. Suchafall/would: once have been dubbed a hard landing; in fact America’s G.N.P. has carried on rislng and lts interest rates-are still tower :thaii * they were two years ago. Although opinions differ on how much more the dollar will or should fall, nobody doubts that the bulk of the drop has happened. The results are coming through in trade volumes: America’s exports boomed by 15 per cent in the 12 months to the second quarter, four times faster than world trade, and Japanese imports are growing while its exports decline., ; Impossible, the pessimists once, said: the United States is chronl- < cally uncompetitive, Japan is hooked On export-led growth.: Wrong, on both counts. | And remember how market confidence throughout the-world was supposed to depend entirely on Paul Volcker’s presence at the Fed? He retired last month,

to deserved bouquets. The markets did not flicker. By the standards of five years ago, the future now looks gentler. Nobody can doubt that troubles lie ahead — when didn’t they? — but the same combination of economic sense, steady nerves and luck that worked in 1982-87 will do so again If it is given a chance. The danger is manmade, that economic policies will go primitive. The two countries where primitivism looks strongest are America and West Germany. The American economy is running flat out, its jobless rate down to its lowest for eight years and inflation starting to pick up. At such a time, every first-year economics, student knows that, the , alm of, policy should be<tq . boost supply and restrain’W mand. Instead, the strongest urge ot,American politicians is to cut the supply .of.goods) and geryicte;. by banning some foreign ’’lto-. / many’s economic policy have the opposite fixation. Nominal de-

mand grew by only 5W per qeat in West Germany last year, and has decelerated to barely 3, per cent now. ■, This drives the economy to virtual stagnation, which cramps the Governments revenute and requires it to spend more on unemployment pay aod w®*" sidles. : . The Budget deficit therefore rises, so German primitives Insist that more restraint is needed. The United •; States /may, through protection, drive itself into Inflationary recession; Germany, through fiscal overkill, may go Into a deflationary recession. Both, aS their school reports might have put. It, could do better. The I.M.F. , annual meeting is a good place to Start ( trying. It But Governments can at least understand the wider consequence?® of their follies, and avbid theto' by ’actidn aWbotoe.. r After five yeras struggling a#ay < from the cliff, the world {deserves better than a blithe walk back to the edge. Copyright—The Economist.. 4