From the point of view of human development, the principle of one state one vote in the UN General Assembly (though its resolutions have only recommendatory power) cannot be justified. Respect for persons applies to equality of status enjoyed by individuals within a nation, but not to corporate entities such as states. In the United Nations context, however, it could be said that the voting rights in the Assembly compensate for the gross economic inequality manifested in international trade and the military inequality recognised in the great powers' permanent membership and veto power on the Security Council, which can reach decisions with binding force. It should also be remembered that the large and growing majority of the world's people live in the developing countries. A further justification for voting by states lies in the overriding importance of avoiding war. And the state is the institution with a monopoly of force. Yet, considerations of law and order in international relations have to be tempered by those of social justice. In civilised relations, including international relations, bargaining and negotiations do not occur in a space of pure power politics, but always appeal, openly or tacitly, to mutually accepted or acceptable values and norms.

The United Nations and its many organisations have not yet adjusted to the post-cold war era. They have been subjected to many criticisms, and numerous proposals have been made for their reform. Many have put the blame on institutional inadequacies. It is true that badly designed institutions can be formidable obstacles to reform. But even the best institutions cannot work if they are not supported by political power. In the final analysis the past defects of the United Nations agencies were not the result of institutional inadequacies, overlaps here and gaps there, of low-level representation at important meetings, of lack of co-ordination, or managerial flaws, but of lack of commitment by member governments. There were successes: the crisis in Africa called forth the best in the UN. In the prevention of natural disasters, in the eradication of contagious diseases and in limiting damage to the environment, the UN agencies have been quite successful. Some argue that the United Nations have been more successful in the social and economic fields than in peace-keeping, others see it the other way round. What would an agenda for reform in the 90s look like?

State sovereignty, which still dominates the world order, has become inadequate and indeed dangerous. In the area of peace-keeping, the unrealistic distinction between external aggression and internal oppression must be abandoned. The predominant threat to stability is conflict within countries and not between them. There is an urgent need to strengthen international human rights law. Many of the most destabilising troubles come from within states -- either because of ethnic strife or repressive measures by governments. Conditions that lead to tyranny at home sooner or later are likely to spill over into search for enemies abroad. Consider the Soviet's invasion of Hungary and Czechoslovakia, the South Africans in Angola and Mozambique, and Iraq in Kuwait. An ounce of prevention is better than a ton of punishment. And prevention of aggression is an important task for the UN. The creation of a UN rapid-deployment force would be a contribution to peace.

Urgent new claims in international co-ordination have been added to old ones, in the context of shrinking public expenditures. The East European countries' claims are less than those of, say, India, on grounds of poverty, and less than those of, say, Thailand, on grounds of good performance. But if the ground is the promise to move to a more peaceful world order, their claims are strong. Ideally, resources from the industrial countries to Eastern Europe and the Soviet Union should be additional to those going to the Third World. If there is going to be a peace dividend, this could be the source of additionality, but its existence, or its use for this purpose, is controversial. Competing claims for the countries of sub-Saharan Africa and for the industrial countries themselves are being made.
 

5. The Need For Institutional Innovation

There are some international institutions that work well. They never hit the headlines. They carry out their allotted tasks in a quietly effective manner. The Universal Postal Union, founded in 1875, whose task it is to perfect postal services and to promote international collaboration, the International Telecommunication Union, the World Meteorological Association, the International Civil Aviation Organisation and the World Intellectual Property Organisation, have clearly and narrowly defined technical mandates, and are non-politicised, and implement their tasks competently. Their success is due largely to their covering technical issues.

International co-ordination has also worked well in areas where the advantages are great and visible: the wide, though not universal, adoption of the metric system, the adoption of Greenwich Mean Time in 1884, on which the world's time system is based, and the establishment of an international regime for containing contagious diseases.

Other international institutions have worked less well, among them the united Nations Conference on Trade and Development (UNCTAD) and the United Nations Educational, Scientific and Cultural Organisation (UNESCO). Their mandates were broad, overlapping with those of other organisations, perceptions about the future, about objectives, and about which policies had which results differed, and the debates in their counsels brought in extraneous political controversies. It is from these negative experiences that some have drawn the conclusion that international co-operation is unnecessary and undesirable.

International co-ordination or co-operation can take different forms. 2 There can be full harmonisation of policies, such as the adoption of common standards, for example the metric system. Or it can mean joint expenditures for a common purpose, such as on international air traffic control. Or it may involve submitting to agreed rules. Or it can amount to the continual exchange of information, such as that on illegal capital flight or on matters of public health. Or, as in the case of macro-economic co-ordination, it can involve joint decision-making on monetary, fiscal, trade and exchange rate policy.

When institutional innovation is proposed here, it is not intended to add legions of international bureaucrats to the existing army, or gleaming, glass-plated headquarter buildings and pools of high-paid consultants with more secretaries. The concern is for procedures, rules, norms, many of which can be adopted by existing organisations. Nor is necessarily more co-ordination of functions involved. Some of these innovations can take a regional form, others should be global.

A different criticism is that, though desirable, these proposed institutions are not feasible; they are utterly unrealistic and utopian. There are five replies to such a criticism, in defence of utopian proposals. First, utopian thinking can be useful as a framework for thinking, in the same way that physicists assume for some purposes a vacuum. The assumption plainly would not be useful for the design of parachutes, but can serve well other purposes. Similarly, when thinking of tomorrow's problems, utopianism is not helpful. But for strategic purposes it is essential. Second, the utopian vision gives a sense of direction, which can get lost in approaches that are preoccupied with the feasible. In a world that is regarded as the best of all feasible worlds, everything becomes a necessary constraint and all vision is lost. Third, excessive concern with the feasible tends to reinforce the status quo. In negotiations, it strengthens the hand of those opposed to reform. Fourth, it is sometimes the case that the conjuncture of circumstances changes quite suddenly and dramatically, and that the constellation of forces, unexpectedly, turns out to be favourable to even radical innovation. Unless we are prepared with a carefully worked out, detailed plan, that yesterday may have appeared utterly utopian, reforms will lose out by default. Nobody would have expected only a few years ago the dramatic changes in Central and East Europe, the Soviet Union, China and South Africa. Although the subsequent fate of the Special Drawing Rights was disappointing, when they were established the creation and acceptability of an international liquid asset came as a surprise to many. Fifth, the utopian reformers themselves can constitute a pressure group, countervailing the self-interested pressures of the obstructionist groups. Ideas thought to be utopian have become realistic at moments in history when large numbers of people support them, and those in power have to yield to their demands. The demand for ending slavery is a historical example. It is for these five reasons that utopians should not be discouraged from formulating their proposals, unencumbered by the inhibitions and obstacles of political constraints, in the same detail that the defenders of the status quo devote to its elaboration, from thinking the unthinkable.
 

6. An International Investment Trust

Imagine that Marshall Plan aid to Europe had been given as commercial loans instead of grants, and that repayments by European surplus countries like Germany had to take the form of recycling the debt service to developing countries. Everybody would be better off. Germany would not be exhorted to expand its economy, the USA would run a much smaller current account deficit, and the developing countries would have access to more capital. Or imagine that the OPEC surpluses of the 70s and early 80s had been recycled through an international trust. Interest rates would have been lower, selection of counties and projects more careful, inflation and counter-inflationary monetary restrictions would have been reduced, there would have been no debt crisis, and world growth would have been higher.

First then, there is a need for a new institution that would recycle the current account surpluses of Japan and Germany (or any other persistent surplus country) to developing countries in need of capital. 3

The Japanese are now inclined to invest the bulk of their excess savings in the most capital-rich country of the world, the USA, thereby sustaining its twin deficits in the budget and the current account. It is generally agreed that the USA will have to reduce its large budget deficit and its current account deficit. What, then, would be the fate of the Japanese surplus? If the United States were to reduce its twin deficits without a corresponding expansion anywhere else, Japan's exports and growth would decline. This would give a powerful deflationary impact to the world economy, which is already suffering from high unemployment.

The current conventional wisdom is to exhort the Japanese to consume and invest more at home. But this seems quite wrong-headed. In a world starved of capital one should be immensely grateful to any country that is prepared to generate excess savings for the rest of the world. To request a country, ready to produce and save more than it absorbs at home, to step up its consumption borders on the immoral.

My proposal is to establish an International Investment Trust that would issue bonds (and perhaps other assets) to central banks and perhaps other financial institutions. These would be multilaterally guaranteed against devaluation and perhaps indexed against inflation. Unless the reduction in the US current account deficit is accompanied by increased loan demand elsewhere (or by domestic expansion in Japan and Germany), the world economy is threatened with growing deflation and unprecedented unemployment. Recycling to credit-worthy developing countries through the proposed International Investment Trust is a sensible alternative. The rate of return on assets acquired from the Trust by lenders would be lower than that on U.S. Treasury bonds, but it would be safer (threatened neither by inflation nor devaluation), and this should make it attractive to the lenders. The loans would be on commercial terms, to the newly industrialising countries. It would be desirable, though not an essential feature of the scheme, to graft an interest rate subsidy onto it, so that loans could also be made to the poorer countries. More of this below.

Can existing institutions, such as the World Bank or the regional development banks not undertake this task? In principle they could, and this would be better than global deflation. But some competition in lending procedures, an invitation to experiment with alternative lending styles, and some limits to the size and monopoly power of lending institutions is clearly desirable.

It is not proposed that the whole of the Japanese current account surplus should be recycled in this way. Japan has a deficiency in housing. It has been said that the Japanese live in rabbit hutches. The share of residential building in total reproducible fixed assets is only 25 percent in Japan, compared with 35 per cent in the United States. Many Japanese spend four hours a day commuting. Infrastructure and especially the modernisation of coastal ports for domestic freight transport are other candidates for investment funds. More land for urban parks may be desirable. But the whole Japanese surplus could be used domestically only at the cost of diminishing returns on investment or increases in consumption of already affluent people, and a lowering of the Japanese growth rate. With it would go a lowering of the growth rates in other parts of the world. We should be grateful for a nation that combines the work ethic with the saving ethic, and makes capital available to the rest of the world.

The table shows rough orders of magnitude in the world's current account balances for the 12 months to March 1992.

It may be asked whether these surpluses will last. Some have argued that they are the temporary result of over-adjustment to the oil price rises in the 1970s and that, with falling oil prices, they will automatically disappear. Others claim that they arise from adversarial trade policies. Others again see the reason for the high savings rate and the low consumption rate in Japanese culture. The Japanese savings rate has been running at 27 per cent of GNP, and some economists have maintained that this high propensity to save is "structural," that it is deeply embedded in Japanese tradition and culture. When interest rates were lowered in 1986 savings did indeed fall. But in 1989, when interest rates were raised against inflation, domestic spending and imports dropped again.

Others have argued that the high savings rate is the result of the Japanese age distribution. In the long term, the ageing Japanese population will probably reduce the savings ratio. On a life-cycle theory of savings, the young save in order to live on their savings in their old age. Japan has had a higher proportion of young workers to both old people and dependent children than other OECD countries. If this interpretation is right, the savings rate will decline over the next 15 years. But when precisely this will be is uncertain, and meanwhile the surplus is likely to remain, although the countries with which it is incurred will be changing.

Even if the Japanese surpluses were not to continue, while some countries have deficits, others must have surpluses, and it is on those that the International Investment Trust would draw. With reduced defence expenditure in the OECD countries, an excess of savings over domestic absorption (consumption plus investment) is likely to arise, and the International Investment Trust can officer its bonds to individuals, firms and institutions whose savings will thereby become available. They would take the place of the Japan, if the Japanese surpluses were to disappear.

If the Japanese were to divert the whole surplus to domestic use by raising either their consumption, or their domestic investment, they would have to accept diminishing returns and higher unemployment in the previous export industries. The global economy would also suffer from higher deflation. If, on the other hand, the surplus were likely to continue, a place for foreign investment other than the United States would have to be found. This would provide a major opportunity for a reform that would be in everybody's interest: the OECD countries (including the United States and Japan), the developing countries, and the global economy would all benefit.

A recycling of these surpluses to the developing countries, on commercial terms, by a multilaterally guaranteed International Investment Trust, would have the following advantages: No new debt problem would arise because the terms of lending would be easier, and the selection of projects, programmes and countries more careful. Surplus countries would find safer returns for their foreign investment, not subject to devaluation and inflation; the OECD countries would find a larger market for their exports of capital goods and other products to the Third World; the developing countries would find a new source of capital on acceptable terms for their development needs; and the global economy would resume higher employment and growth.

The purpose of the proposal is to bring together, to mutual benefit, three now grossly under-utilised pools of resources: the current account surpluses of Japan (and Germany), in search of safe returns; the under-utilised industrial capacity and skilled unemployed of the OECD countries, on whose exports some of the recycled loans will be spent; and the vast idle or underemployed unskilled and semi-skilled manpower of the South, hungry for capital. And all this in the service of a growing world economy.

Some have argued that Japan should give directly more aid to low-income countries. In fact, Japan has increased its contribution to the World Bank and the International Monetary Fund, and has expanded its bilateral aid programme. But although Japan should give more aid, the reason is not its current account surpluses, but rather the high incomes of its citizens. By the same criterion, the USA, the UK, Canada and Australia should also give more aid. Japan's surpluses are a reason for it to undertake more long-term foreign investment and lending on commercial terms. If a current account surplus were a good reason for giving more aid, deficit countries would soon plead that their deficits are a reason for giving less. But that would be comparable to the rich man who found himself with temporary liquidity problems, and then cut first his contribution to Oxfam. The criterion for giving aid is income per head; for lending commercially or for investing abroad, it is the size of the current account surplus.

An important difference between the OPEC surpluses in the 70s and the Japanese and German surpluses in the later 80s is that the former consisted largely of government loans, the latter are from private lenders. Japanese and German private banks can mediate in the bank lending, and in portfolio and equity investment of some of the private savings. Japanese private direct investment can also make a contribution. But, although the Japanese banking system has been quite remarkably adaptive and has developed the capacity to channel international loans, financial innovation may be required, because a multilateral institution is better suited for providing the guarantees and for accomplishing at least part of the task. The World Bank and its affiliates, the International Finance Corporation and the International Development Association, also may not be able to accomplish the whole task, though they could contribute to a solution. It is for consideration how multilateral these new institutions should be, how much of a government guarantee is needed, and whether the loans should be guaranteed against currency depreciation and indexed against inflation.

An imaginative additional step would be to graft an interest-subsidy scheme onto the recycling mechanism, for the benefit of low-income countries. Contributions to this window should not be made according to the size of the surplus on current account, but instead according to income per head, preferably on a progressive basis, so that the contribution as a percentage of total national income would rise with higher incomes per head. The cost-effectiveness of such aid would be quite high, because a small interest subsidy would make it possible for large investment funds to be recycled to poor countries. Moreover, conditions of good macro-economic and human development policies could be attached to the concessional loans, so that their efficient use is further enhanced. Some of these could be on-lent to domestic borrowers by a development finance corporation, if it were thought that this would raise incentives for efficient use. The experience of the World Bank's International Development Association could be used for this facility.

Some observers advocate that the surpluses should be used to refinance and relieve commercial debt, mainly that owed by Latin American countries. But the result of such proposals would be to aid the banks in the industrial countries rather than to foster productive investment in poor countries. It might amount to rewarding greedy lenders and profligate borrowers. However desirable it might be to deal with old debt in such a way as to restore credit worthiness in Latin America and to resume world growth, the fact remains that there are large areas of the world, such as South Asia, which have, until a few years ago, been careful to avoid a debt problem, have carefully husbanded their resources, and could make excellent use of the scarce funds provided by the Investment Trust.

Another objection that has been raised to recycling proposals is that as long as the US budgetary deficits continue, the reduction or elimination of the Japanese surpluses will exert pressure on world capital markets, which might have adverse repercussions on Latin American debtors. The reply to this objection is that the US deficits are, in any case, unsustainable and that recycling surpluses to the developing countries would raise their demand for US exports and contribute to the reduction or elimination of the US current account deficit. This is surely a better way of stimulating the world economy than either the present exhortations to Japan and Germany to buy more from the US or, in the absence of expansion abroad, further contraction in the US. In addition, monetary expansion in Japan and Europe might rekindle inflation, while continuing US deficits would threaten, as they already do, the fairly open world trading system. The recycling of the surpluses to the Third World, whether by the World Bank or by a new International Investment Trust, offers a solution that yields safer returns to the surplus countries, a reduction in the deficit without excessive restriction of the domestic economy to the United States, much-needed resources to the developing countries, and a non-inflationary expansion of the world economy.
 

Footnotes:

2.See Richard N. Cooper, "Panel discussion: the prospects for international policy co-ordination," International Economic Policy Co-ordination, edited by William H. Buiter and Ricahrd C. Marston, Cambridge University Press, Cambridge, England, 1985, pp. 369-370.

3.This recalls Keynes's proposal for a Clearing Union, which had such a role.