Paul Streeten
This essay looks at the world as a whole and examines what innovations are needed in order to enable all members of humankind to play their full role in society and to develop and exercise their talents. Our global society presents great opportunities, but also many obstacles, to the improvement of the human condition. International interdependence, about which so much is written and talked these days, can amount to the opening up of new worlds, but it can also mean the infliction of suffering by one nation on others. The state has become too big for the small things, and too small for the big things. The small things call for delegation downwards, to the local level, to participatory organisations, to decentralised decision-making, and to the market. The big things call for delegation upwards, for co-ordination between national policies or for transnational institutions. In examining the need for institutional reforms, the concern will always be their impact on the lives of individual human beings, their families, their neighbourhoods and their communities.
This century's greatest and most influential economist, John Maynard Keynes, had anticipated many of our global problems and had proposed solutions during and after World War II. Although he had shown little interest in what today would be called development studies and developing countries (with the exception of Indian currency reform), his imaginative treatment of international issues has still important implications for the poor people living in the developing countries. He was prescient about the need to stabilise the prices of primary products; the need to put pressure on surplus countries as well as deficit countries; the need to move towards a world currency; and the need for surveillance and co-ordination of international economic policies.
He had witnessed the great depression of the 1930s, with mass unemployment, disastrous deflation, and international beggar-my-neighbour policies. He was determined that the generation that had fought the war should never have to return to poverty and unemployment. Full employment and the welfare state were written on the banner of the Keynesian consensus that led in 1944 to the negotiations at BrettonWoods.
Keynes foresaw clearly the deflationary pressures on the world economy generated by countries amassing large current account surpluses in their balances of payments. The deficit countries have to restrict demand, production and employment, and there is no corresponding pressure on the surplus countries to expand activity or to lend or invest abroad. In conditions of underemployment or full employment, the surplus countries are the enemies of the global economy, because they export unemployment to the rest of the world. The deficit countries are benefactors, because they export employment. Half a century ago the threat of exporting unemployment arose from the USA although it was masked by US generosity in the Marshall Plan. In the 70s the threat came from the capital-exporting OPEC countries, and in the 80s from Japan and, until the unification, from Germany. The economic dynamism of some of these countries, reflected in their export surpluses, can spell suffering for others, unless these surpluses are converted into long-term loans or investments on acceptable terms, or into grants.
Keynes also foresaw the need for an international authority to supervise trade, to prevent single governments trying to snatch advantages by protecting their jobs at the expense of others, and in the longer run at their own expense. He predicted the need to prevent the violent fluctuations in the prices of exported primary commodities, that wreak havoc with the incomes and livelihoods of small farmers in developing countries and cause inflation and unemployment in the importing industrial countries. The International Trade Organisation was intended to be the third arm -- in addition to the World Bank and the International Monetary Fund -- to bring order into the world economy. The principles of this world order were, in accordance with the prevailing American economic philosophy, and not entirely to Keynes's liking, on-discrimination in trade with few barriers, currency convertibility with fixed exchange rates, and commodity price stabilisation. Energy, and specifically petroleum, multinational corporations, direct private foreign investment, trade between public enterprises, and trade in services were issues that arose later, but did not yet play an important part in the design of the post-war order.
The Havana Charter attempted to set up an International Trade Organisation (ITO). Agreement was reached in March 1948. In Keynes's view it was the "indispensable third pillar," in addition to the Bank and Fund. But the US Senate rejected it. It contained some of the provisions for which the developing countries asked in the 1970s, thirty years later. Among these were commodity price stabilisation, new preferences, the permission to impose quantitative restrictions in some conditions, and provision for trading with public enterprises. There was a chapter on employment, development and restrictive business practices. All this was too much for American business interests. Limited trade objectives (confined to trade in manufactured products) were implemented through the General Agreement on Tariffs and Trade (GATT), which had been set up in 1947 as a provisional agreement, until the anticipated, but never realised, ratification of the ITO.
If the international community had succeeded in establishing and maintaining the ITO as envisaged by Keynes, commodity prices would have been stabilised. The price of oil would not have at first fallen, and then, in 1973, and again in 1979, been precipitously raised. The terms of trade of the debtor countries would not have sharply deteriorated in the 80s, and the debt crisis would have been avoided.
Keynes also saw the need for a world currency -- he called it Bancor. It was to be initially fixed in terms of thirty primary commodities (of which gold was one), which would stabilise the average prices of commodities, and with them the international medium of exchange and the store of value. He proposed an International Clearing Union with powers that represented a step towards a global Central Bank. Excessive accumulation of both deficits (use of quotas) and surpluses was to be penalised by an interest charge. If Keynes's plan had been implemented, debtor countries would have been treated similarly to IMF practice, except that greater emphasis would have been put on trade restrictions, and less on fiscal and monetary deflation (expenditure reduction). The big difference would have been that pressures would also have been put on countries with surpluses to reduce them. They would have been taxed at the rate of one per cent per month on their surpluses and required to adopt measures to expand their economies.
Keynes opposed free private international capital movements, and there was a provision that countries with excessive deficits should be forced to restrict the outflow of capital. Although this would have deprived the developing countries of some funds, especially from the Eurocurrency market, it would also have avoided the debt crisis. Most of Keynes's innovative proposals sank without a trace.
At the same time Keynes did not favour central planning or detailed government regulation. He believed that once government responsibility for full employment was accepted, and certain rules were laid down for international relations, markets are best suited to allocate resources efficiently. Once the nature of the environment is set right, the free play of economic forces is needed for the realisation of the full potentialities of production.
Keynes, like many of his more orthodox teachers and contemporaries, did not think that free markets distributed incomes and wealth fairly. He favoured the provision of social services for the poor and unemployed. He predicted with approval the "euthanasia of the rentier," which would follow from the ever lower returns on the ever larger invested savings of the propertied classes.
Of course, Keynes did not foresee all our present problems. We have moved from a time when the USA dominated world production and trade to a multi-polar world. The share of US GNP in that of the world fell from about half in the 1940s, to less than a quarter in the 60s, and to 16 per cent in 1988. The emergence and decline of OPEC, with its legacy of the debt crisis, and the rise of Germany and Japan as economic giants, the move towards European integration, the entry of China and the socialist countries into the world economy, the proliferation of sovereign states, the concern for the Third World, the formation of the Group of 77, and the rise of the newly industrialising countries, all these are new events which have changed the world scene. The scourge of global stagflation is still intractable, and regarded as not amenable to Keynesian remedies. International migration, concerns for the environment, energy, the status of women, AIDS, drugs, terrorism, all these are new problems which neither Keynes nor anyone else could have foreseen. At the same time, it is remarkable how prescient Keynes was half a century ago, and how correctly he perceived the problems of the post-war world, yet how he had to compromise in the crucial negotiations leading to Bretton Woods, and how little heed was ultimately paid to his proposals.
The negotiations in 1943, 1944 and at Bretton Woods were dominated by the disastrous experience of the 1930s. Countries then had moved deeper and deeper into unemployment as a result of beggar-my-neighbour policies of competitive devaluations and rising protection. The economic, social and political consequences were terrible. Between 1929 and 1933 world trade declined in value by 65 per cent, and in volume by 25 per cent. Commodity prices had fallen disastrously and the need to stabilise them had become obvious. The way in which the government's mobilisation for a war economy in Britain had rapidly led to full employment and improved health, and allied economic co-operation had overcome the depression, pointed to the need for active government intervention in the economy, international institutions and rules of conduct for the post-war world.
Keynes's views were strongly influenced by the experience of Great Britain, and his proposals were framed in that light. The country was to emerge from the War as a large debtor nation, with industrial plants that had been outdated even in 1939, and had not been replaced since. The USA had become the giant creditor who had expended production and productivity during the war. Keynes's task was to enable a large debtor, who suffered from a war-destroyed, run-down economy, to re-enter international trade, while reconstructing its economy.
The Bretton Woods negotiations in 1944 were largely based on Anglo-American
relations. Canada played a useful mediating role. Germany, Japan and Italy
were still enemy countries, France still occupied, and the Soviet Union
joined at a late stage. Although 27 developing countries participated,
their impact was small. Only India and Brazil took an active part. The
USA dominated the proceedings, with its view that economic freedom would
be the basis for peace, and that discrimination, trade restrictions and
exchange controls were the causes of war. Britain, which was receiving
$30 billion Lend-Lease aid from America, was not in a strong bargaining
position.1
2. The Global Order And National Governments
The roles of individuals, their rights and obligations, are partly defined by their communities. The family is the closest community; then comes the neighbourhood, the village or the town in which we live, and after that the province and the nation with its central government. Beyond the state is the world community. There are numerous ligaments that join people within and across these political institutions, such as religion, professional organisations, voluntary associations, interest groups, all the many institutions that form the civil society.
The state occupies a unique position: its membership is universal and it exercises a monopoly of force. True, citizens might be able to emigrate, and no government can rule simply by force, but broadly universality of membership and force are the two distinguishing characteristics of the state. It continues to be the basis for policy-making.
Many people feel that they owe a special loyalty to their country, although we are witnessing many groups claiming autonomy within their states. Loyalties to the world community are less strong. Humanity is also universal, but obligations to its members are much weaker, partly perhaps because there is no world government with which we have entered into a social contract, according to which it gives us security in return for our support. The result is that international and global relations are mediated by national governments. The fact that the world is divided into sovereign states, and that there is no world government, has important implications for all members of the human race. Some of these are detrimental to human development. They are due partly to natural and historical conditions and endowments, and partly to erected barriers against equalising tendencies.
First, the poor countries start with different initial conditions from those that the rich faced when they embarked on development. Population density in the world is now much higher, and the rates of population growth are greater (as a result of the introduction of modern methods of death control without equally cheap and effective measures of birth control). The high consumption levels in the rich countries, communicated by the media, have demonstration effects, while the technologies, invented in rich countries and appropriate for their conditions, when transferred to low-income countries, contribute to unemployment and inequality.
Second, the international distribution of incomes and wealth is much more unequal than the domestic distribution. The main source of global inequality is the inequality of average incomes between countries. Inequality within countries contributes significantly to global inequality, but much less than inequality between countries. As world incomes rise, intra-country inequality is reduced enough to reduce global inequality noticeably. Yet, between 1950 and the present, overall world income distribution did not change much. This is the result of two opposite movements. The gap between the high income and the middle income countries narrowed, while that between high income and low income countries widened.
Third, advanced countries have put up barriers to the migration of people from low-income countries, who would want to share in the natural and man-made resources which the high-income countries enjoy.
Fourth, this exclusion from the endowments of the earth is aggravated by the encouragement of the movement of professionally trained people from the developing countries: doctors, nurses, scientists, engineers, academics. This brain drain deprives the developing countries not only of people in whose education they have invested, but also of generators of jobs and skills for others.
Fifth, when a developing country attempts to stem this brain drain, it has to offer its professionals salaries comparable to those they would get in the industrial countries. This makes it impossible to pursue an egalitarian incomes policy. It is also socially divisive and can be politically risky. The partial international integration that results from the mobility of professionals, both actual and potential, contributes to national disintegration.
Sixth, in the face of gross inequalities and damages to the poor resulting from the competitive struggle, national governments tax the rich and subsidise the poor through social services. The absence of a world government with powers to tax and provide social services means that the citizens of countries which are victims of the free play of market forces and those incapable of making use of these forces are unable to provide a safety net for their people who suffer the full hardships.
Seventh, the rich countries attract not only trained professionals, but also financial capital from the poor countries. This is contrary to economic doctrine, which predicts higher returns to capital in capital-poor countries, and hence their greater attraction for capital. Capital flight and investment abroad for political reasons deprives the poor countries of the few resources they could mobilise.
Eighth, the global political and military power structure is not responsive to the human needs in the developing countries. The nuclear near-monopoly of the USA, combined with its declining economic strength, and the exercise of power by the Group of 7 has typically little regard for the deprivation of the poor people in the world and their needs. When there were still two superpowers, the non-aligned countries could play off one against the other, and thereby gain attention and support. Such attention was, of course, often military and let to intervention in local and regional conflicts, but it also led to the flow of development resources. With the end of the Cold War, this ability to attract support has disappeared.
Obviously there are also benefits to be derived from the coexistence of rich and poor countries in the absence of a world government. These are benefits compared with a situation in which no advanced, richer countries were to exist. They are not benefits compared with a situation in which a world government would rule the world on principles similar to those of national governments, with progressive taxes, social services, and free movement of labour, as well as of goods, services and capital.
There is the opportunity to export labour-intensive goods (restricted
though it is) that yield remunerative earnings for poor people, as well
as the existence of markets for more traditional exports. There is the
availability of development aid and technical assistance, small in amount
and poor in quality though it is. The role of multilateral aid should increase
in the post-cold war world. Private capital flows, and the management and
technical know-how that go with direct private investment, are useful in
supplementing domestic efforts. They can provide missing components and
speed up the development process. The developing countries can also draw
on the stock of accumulated scientific and technical knowledge and experience
of the rich countries, and on the evolution of their institutions, from
double-entry book-keeping and the joint stock company to trade unions and
Parliamentary democracy.
3. The dilemmas Of Global Interdependence
In the international arena we are witnessing a lag of institutions behind technology. The revolutions in the technologies of transport, travel, communications and information have unified and shrunk the globe, but our organisation into nation states dates back to the Peace of Westphalia in 1648, to the 19th century unifications of Germany and Italy, and to the new states founded after the first and second World Wars. When the early nation states were founded, the city states and the feudalism that preceded them had become too small for the scale of operations required by the Industrial Revolution. The political institution therefore was adapted to the new industrial technology, to the roads, railways and canals. The nation state was then a progressive institution. Today, some aspects of this institution have become obsolete, and supra-national institutions could usefully take over certain functions. But the adaptation of institutions to technology is not an inevitable process. The Middle Ages had, for example, lost the Roman technology about roads, baths, aqueducts and amphitheatres, and these were allowed to fall into disrepair. Now the nation state, with its insistence on full sovereignty, has become an obstacle to further progress. Each nation acts in its own perceived rational self-interest, and the result is that every country is worse off. It pays each nation to pursue this mutually destructive course.
Common interests and conflicts are running today across national boundaries. The European farmers are in conflict with the European industrialists and the public in the world at large has to pay for the Common Agricultural Policy. The advanced countries' textile manufacturers are aligned in the Multi-fibre Arrangement against Third World textile exporters and the consumers of textiles in the industrial countries. The nation state has revealed itself to be the inappropriate level at which such issues can be resolved.
Public goods, such as peace, an open trading system, including freedom of the seas, the market, standards of weights and measures, international stability, a working monetary system, and conservation of the global environment, are undersupplied, while public bads, such as wars, pollution, and poverty are oversupplied. The situation has been described in parables and similes such as the Tragedy of the Commons, Social Traps, the Isolation Paradox, etc. Everybody free rides, and thereby contributes to the possible disappearance of the horse.
Under the present system there are gains to uncoordinated action. It
pays any one country to put up protectionist barriers, whether others do
so or not; to build up its arms promises security to any one country, whether
others do so or not; any one country can to its advantage pollute the common
air and the oceans, whether others do so or not. It pays any one country
to attract capital from abroad by tax incentives, whether others do so
or not, thereby eroding the tax basis. These ultimately self-damaging and
possibly self-destructive actions can be avoided, in the absence of self-restraint,
only by either a dominant world power imposing the restraints, or by co-operation,
or by delegation of some powers to a transnational authority, with the
power to enforce restraint.
If action for the common good is called for, the ranking of preferences by each country is the following:
Examples of such dilemmas on the global scale are ubiquitous. Above all there is the arms race, which, though we have so far avoided a major nuclear war, has contributed to hundreds of minor wars, mostly in the Third World; then there is competitive protectionism, through which each country casts its employment problem onto others; competitive exchange rates movements, by which unemployment or inflation are exported; research and development wars; investment wars; competitive tax concessions; environmental pollution; the killing of whales, the depletion of ocean reserves, and the debt crisis. These are only some of the areas in which these battles are now being fought.
To avoid these traps, co-ordination, delegation and enforcement of policies
are needed. They are needed not in order to impose an external will on
unwilling subjects, but in order to realise the objectives of the states
themselves, not pursued by counter-productive actions. But co-ordination
means that each country has to do things it does not want to do. The U.S.
has to balance its budget in order to lower world interest rates but does
not wish to raise taxes; Germany has to grow faster, but she does not want
to attract guest workers from Turkey and Yugoslavia; Japan should import
more, but she does not want to hurt her domestic industries. And so on.
According to Jagdish Bhagwati sovereignty is like virginity: once you engage
in intercourse with the outside world you have lost it.
Footnotes:
1.On this whole section, see H.W. Singer, "Lessons of Post-War Development Experience 1945-1988," Institute of Development Studies Discussion Paper 260, April 1989.