There are happily some solid signs of incipient recovery in the U.S. economy. Housing starts are well up on last year's figures for January and February; motor car manufacturers are seeing an upturn in orders; in a number of industrial sectors, the inventory pipeline is beginning to fill at last. If this trend continues, it should not be long before the first ripples of recovery are seen on this side of the Atlantic.
But we must not forget that a year ago people were saying much the same thing--and in the event the recovery did not materialize in 1982. And though this year the indices point more firmly toward increased activity in the world economy, and we have the notable added advantage--for some time at least--of lower oil prices, there are still important inhibiting factors of which it would be wise to take notice.
So it is possible that in 1985 we could be looking back on 1983 as the year that saw the start of the sustained recovery. On the other hand, if this incipient recovery were to be aborted--if it proved to be a mere will-o'-the-wisp--then by 1985 things could look very bleak indeed for the Western world as a whole.
In this context it is worth considering in advance of the economic summit at Williamsburg what can be done by the governments that will be represented there to encourage and sustain the momentum of this evident but as yet incipient recovery.
In general terms, I suppose the biggest contribution that governments can make is to pay attention in their deeds as well as words to the crucial fact of our interdependence with each other, not only in matters of trade but in monetary and fiscal affairs generally. We should all have learned by now, for instance, that no one country can successfully go its own way without regard to others. No one country in Europe can bring about its own recovery on its own; if we needed any reminding of that, surely we have the example of recent experience in France. No one country can spend its own way out of recession; we can only grow out of it together.
The next prerequisite for sustained world growth must be investment, for without investment, the recovery is doomed to fizzle out. So it is vital that real interest rates be brought down, and in such a way that industrialists have confidence in their staying down--in other words, without raising inflationary expectations. The main contribution that governments can make to this end is to show enough discipline not to preempt for their own expenditure too high a proportion of available money in circulation. There must be for instance, rightly or wrongly, a serious doubt--perhaps fear is a better word--in the minds of American industrialists whether the size of the current and forecast budget deficit leaves enough room for investment without interest rates having to be raised. And nothing inhibits investment more than the expectation of rising interest rates.
The next question has to be the grave problems that beset the borrowers in the developing world and the lenders in Western countries. There can be only one effective long-term solution to this problem--namely, a sustained rise in world economic activity enough to create both greater demand for raw materials by the industrialized world and also a greater demand in our markets for the developing world's manufactured and semi- manufactured goods. But at best that is some way off, and meanwhile, the situation remains extremely serious. 4 A good measure of success has been achieved in recent months by governments, central banks and official institutions in a series of major international financial rescue operations. What once looked like an imminent danger of a seize-up in the world banking system has been averted, at least for the present. But there remains a most serious situation with precious little margin for error.
There has been markedly little enthusiasm, and understandably so, for the extra bank lending in support of IMF adjustment programs and drawings. If the domestic programs in the borrowing countries fail to be implemented, or do not produce the expected results; or--most important--if the world economy proves less buoyant than has been assumed, it will be extremely difficult in the medium term to manage continuing rescue operations. And let us be in no doubt that if the faltering recovery puts these rescues in jeopardy, the financial consequences will in turn rebound sharply on that faltering recovery itself.
So pending a sustained world recovery--and we have to look at best some years ahead for this to have a major impact on many of the seriously indebted countries-- what can be done about this vital problem, which could cause international mayhem if it is not well handled?
Many banks have seriously overlent, some to an irresponsible degree, in their determination to maintain their market share at all costs. For that their shareholders will anyhow have to suffer. In these circumstances, it would be asking a lot to expect these commercial banks to lend yet more money with scant hope of repayment. Yet the flow of funds to the Third World cannot suddenly be turned off without dire consequences, and I suspect some arrangement will need to be arrived at between at least some of these banks and their national authorities.
I come back to the first essential in sustaining economic recovery--namely, a significant improvement in coordination and cooperation between industrialized nations. We all have to take a more global view of our national economic and fiscal policies. Since the Versailles Summit, this has been understood to mean that governments would follow the same broad objectives of combating inflation through sound fiscal and monetary policies with the intention of achieving sustainable growth without inflation. But in the event monetary and fiscal policies of different countries have tended to remain essentially inward-looking. Also, different degrees of success or failure of national policies and unforeseen developments of all kinds have meant that the interest rates and exchange rates--which are in a sense symptoms or byproducts of any one country's individual policies-- have had major influences on other countries' policies.
What is needed at Williamsburg is a decision to take international cooperation onto an altogether higher plane. The essence of successful coordination has to be for each country to be ready to take into account the effect of its policy on others, and vice versa, and to make its economic contribution for the common good.
Take, for example, the question of exchange rates. There can be no doubt that the degree of volatility in exchange rates in recent years has been a malign factor in the lack of growth of international trade. Violent changes in parities have been far greater, far more frequent, and far more uncoupled and disconnected from real economic factors than was ever anticipated a decade ago when the disciplines of the Bretton Woods Monetary System were jettisoned in favor of floating rates.
Surely, whatever may have been the case in the past, it would now be in the interest of the United States, as it certainly would for the rest of the world, for the U.S. government to be prepared to take some joint responsibility, along with others, for the level and structure of exchange rates.
I am not suggesting that there should be a question of defending any particular rates; or of commitment to substantial intervention. But simply the decision that the pattern of world exchange rates was to become a matter of shared concern and the implied acceptance by the major countries jointly that they no longer regarded it as desirable or inevitable that their authorities should be passive in the face of any exchange rate movement, could not fail to make an important contribution to stability.
Another valuable area of international coordination would be to try to agree jointly on the continuation or modification of policies that, carried out country by country, would produce an improved result for the world as a whole.
To that end, a position sugges tion: that each of the seven gov ernments attending the Williams burg summit should circulate
papers in advance on what they
wish to see the others do specifi cally as a contribution to sustain ing growth in the world economy.
This might give rise to a more
fruitful discussion than would the
reiteration of purely national aspi rations and requirements. And
even if the degree of positive coor dination of national policies leaves
as much to be desired as at Ver sailles, we might at least expect a measure of international commitment on what to avoid doing--like agreement to eschew protectionism at all costs.
The seriousness of the world outlook in default of sustained recovery, and the extreme dangers inherent in it of a political and social as well as an economic character, demand a global element in national economic planning.
The fact that all the countries concerned need an annual growth rate of around 5 percent before any real impact is made on our high levels of unemployment--and we know that none of us can achieve that on our own--that fact alone must stimulate the policy-makers at the economic summit to think afresh in truly international terms.
In terms of unemployment we are faced with a pretty uninviting prospect for our peoples in years immediately ahead even if things turn out as well as can presently be hoped, let alone if things go more awry, as they easily could. It is no exaggeration to say that the outcome of the Williamsburg meeting will have an important effect either for good or for ill on the future of the free world.
What is concluded there--the extent to which these seven countries succeed or fail to agree to coordinate their policies for the common good--and how the participants thereafter match their deeds to their words, on that will largely depend whether or not the promise of world economic recovery is fulfilled. Hopefully this will concentrate the minds of our leaders something wonderful.