political revue


Year XXVII, 1985, Number 3, Page 183



In the decade following the oil crisis, the international debt of the non-oil producing Third World countries increased at an average annual rate of 19%. Though various factors contributed to this increase, the three major causes were increased oil prices, the increase in real interest rates and worsening terms of trade.
Being higher than the world average, the rate of economic development achieved by many Third World countries has itself contributed to their worsening balance of payment figures since it has caused imports to rise faster than exports. Cumulative destabilizing effects arose when this coincided with the increase in real interest rates and the slump in the world economy.
These international problems were certainly not the only cause of the Third World’s financial difficulties. Instead of being restricted to investment, foreign loans have frequently been used to support consumer spending and this has led to illusions about the strict need to keep one’s balance of payment figures in the black.
The Third World’s economic position has been aggravated by an interplay between world recession and these countries’ own internal problems. Return on investments financed by foreign loans has decreased in the wake of the world recession and this, in turn, has made it much harder to produce the income needed to pay back loans – which, of course, is precisely the reason for the current widespread debate on the need to restructure world finance because of the risk that the international financial system will crack up. The size of the debt is not the most serious aspect of the situation. Far more significant is what lies behind it – the unsolved problems of the world’s financial and monetary system, the continuing international circumstances threatening the Third World. Indeed, by any standard one may choose to adopt, the size of the Third World’s overall debt is by no means large. If we restrict our field to international banking activities, OECD statistics show that after a considerable increase due to the oil crisis, the Third World’s share of foreign loans stabilized at around 30%.
A glance at the current situation in the light of the position in the early part of the century shows how remarkably smaller lending is today. At the beginning of the century, foreign loans were roughly three times the size of world trade, whereas today they are not much more than a tenth. How much more meaningful these figures are when we consider recent trends. The rocketing US trade gap makes the Third World’s financial problems pale by comparison, a conclusion which is, moreover, upheld by the IMF’s latest forecasts. The current international financial system just cannot cope with the problem of international debt.
A Historical Precedent.
At the beginning of the century the international financial system successfully coped with major capital transfers, owing to the sterling exchange standard’s stability and the City of London’s central role in a system whose heyday was the late nineteenth and early twentieth centuries when the UK was able to balance its major capital exports with an identical trading surplus.
During this period the UK was a constant net exporter of capital for long-term overseas investment. Through the City’s efficient, sophisticated mediation, developing countries’ structural deficit was properly financed. No risk to the system’s stability or to sterling’s position as the main reserve currency and principal means of international payments arose from this outflow of capital which was offset by the UK’s trading surplus. In other words, the loans and investments arranged by the City returned to the UK as demand for goods and services. The system’s stability was further strengthened thanks to the City’s position as the world’s major financial centre since this meant that the UK was able to stave off any pressure on her gold reserves by raising the Bank of England’s discount rate so that gold was drawn in mainly from European countries.
This in general terms was the financial and monetary system that had grown up towards the end of the Nineteenth century. The system began to collapse when the UK’s economic advantages were lost with the industrial revolution’s spread to other countries. The arrival of two new economic and political giants, Germany and the US, made inroads on the UK’s privileged position in open markets. Hence the UK found it increasingly difficult to export capital without running up a trade gap.
The situation was further aggravated by the lack of a central US bank since the Federal Reserve System was only founded on December 23rd 1913. The Bank of England itself had for many decades been acting almost like a central bank in its ties with the US domestic market. Obviously this was a destabilising factor. The US authorities had not only failed to accept their responsibility as regards effectively contributing to a balanced international monetary system, by giving the dollar functions similar to sterling, they were even calling on sterling to finance their domestic economic development.
T here is little point in going further into this matter which illustrates the existence of a historical precedent demonstrating that financing Third World countries’ long-term structural deficits is perfectly feasible. It shows that foreign development loans can be handled by one financial centre (in one country) only in specific circumstances giving rise to economic and financial supremacy, which are in due course bound to be eroded.
The Current Situation.
This historical precedent helps to clarify how far the US can finance international economic development in today’s world and whether, in different political and economic conditions, it can, in fact, hope to emulate the UK.
As with the UK, for a period of time, circumstances enabled the US to offset its sizeable capital outflow with a trade surplus. In the immediate post-war period, there were no great difficulties, the Marshall plan being a prime example of this capability. But today there are various signs that these favourable market conditions are a thing of the past. In much the same way that the UK’s market domination was undermined by German, French and US growth, so, from the late sixties onwards, Japan’s development and the completion of the European Customs Union have made inroads on the undisputed economic hegemony of the US. And just as the UK lost its privileged position of being the only industrial power with the spread of the industrial revolution, so, too, the US has lost its privileged position of being the only developed market of continental size, so vital for optimising modern production technologies.
In 1944, at the time of Bretton Woods, the US economy had roughly 40% of the world GDP, 90% of world gold reserves were in Fort Knox, the US industrial system was going at full blast, while the rest of the world was reeling under the aftermath of war. Today, the US has roughly 20% of world GDP, gold reserves have been redistributed and the rest of the world has developed faster than the US economy.
These key data bring out the insuperable, historical constraints on the role of the US: while its relative strength in the world economy has decreased, the demand for international finance and currency to stimulate world economic integration and development has risen proportionately. These two trends are contradictory and the absence of a European Central Bank has further compounded their destabilizing effects. In much the same way as the Bank of England was forced to take over the functions of central banking in the US at the turn of the century, similarly, today, the dollar, both inside and outside Europe, fills the gap left by the absence of a European Central Bank.
This brief analysis shows that the US is unable in the current circumstances to guarantee adequate financial support for international economic development on its own.
The Role of Banks as Intermediaries.
The central role the US plays in propping up the international financial system is based on the assumption that the US acts as a banking intermediary between foreign creditors and countries with structural debts, a function which has become increasingly difficult.
A triangular financial system grew up in the wake of the first oil crisis whereby OPEC countries were structural creditors, Third World countries were debtors and industrial countries and American banks in particular recycled surplus funds.
But doubts have now arisen as to the OPEC countries, capacity to produce financial surpluses and in the near future they may well be forced to sell their accumulated assets to offset the current account deficits.
The international banking system will then be ‘burnt’ at both ends: while the Third World countries will maintain or increase their demand for capital funds – their lack of liquidity often compelling them to negotiate new loans to avoid defaulting on interest payments due on previous loans – at the very same time OPEC countries may very well begin to withdraw their deposits.
In other words, the system will have to face up to falling deposits and frozen assets, a difficulty which the key country is compounding by consuming resources and failing to contribute to the rest of the world’s finance. The direct consequence of this will be the need to find a ‘low gear’ state of equilibrium, which is why the international financial system has forced debtor countries to deflate their economies so as to reduce or severely curtail any increase in debt.
The resulting contradictory trend in relationships between industrialised countries should be highlighted. The role as structural creditor that OPEC countries are abandoning must inevitably be taken over by others and in recent years Japan and to a lesser extent Europe have taken up this role. The trend has gone hand in hand with New York’s development as an international financial centre, in keeping with the dollar’s role as the major reserve currency. The responsibility for propping up the international financial system and the ability to provide the necessary financial resources remain separate, with the result that the system is very fragile.
What Deflation Means for the Third World.
Simply by measuring their deflationary impact on Third World countries, we can appreciate the adverse effects of the measures adopted by the current international financial system. Lower growth rates, falling per-capita income, rising unemployment, falling international trade and with it a slowdown in the international division of labour have to varying extents all affected the Third World. The newly industrialised Asian countries have been the most successful in adapting to the changed economic climate, whereas, at the other end of the spectrum, the Black African and some South American countries will shortly be facing very harsh consequences. The outlook for the entire Third World is, indeed, very bleak.
The consequences can in fact be measured by turning the matter round and looking at it from the opposite point of view, i.e. what size of debt would be needed to achieve a planned growth rate and what rise in per-capita income would be sufficient, at least prospectively, for the Third World to break out of its condition of chronic underdevelopment? CEPII, the French government’s authoritative economic forecasting unit, made the following calculations as regards this problem: to guarantee an annual 2% rise in per-capita income, Third World countries would have to increase their debt threefold by the end of the decade over the 1982 figures. This forecast should be considered in the light of the fivefold increase in the Third World’s debt between 1975 and 1982. The forecast further shows that simply keeping pace with current per-capita income would require an annual increase of 40 thousand million dollars in the Third World’s debt.
Only a high increase in the Third World’s debts and an associated high growth rate will lower the risk of a crisis in the international financial system. It is clearly in the interests of the industrialised and Third World countries to look for a solution which ensures balanced growth in the world economy. Therefore, the central problem is to revamp the international financial system.
This, in turn, means reconsidering the workings of the international monetary system and, in the final instance, the world economy. A set of objectives needs to be drawn up and Europe’s role within such a framework needs to be defined.
A World Solution.
Keynes put forward one possible approach. During the Bretton Woods negotiations, which led to the IMF’s establishment, he argued for a world government based on strengthened international organisations, at that time considered to be the core of a government which would have managed the world economy. In the long term, this is the proper line of thinking and indeed the winning answer, since it fulfils historical requirements; but in the short term, while some progress may be made in this direction, it is highly unlikely for historical and political rather than economic reasons that much progress can be made. Proper understanding of the merits of Keynes’ project is vital. Keynes argued that the true source of development is effective demand. But, while the consumer society has exhausted its potential for development in industrialised countries, economic growth can be sustained as long as the potential demand from the Third World can be turned into effective demand. In an age of world markets, the rational management of Third World demand will be of major significance. Regardless of political and moral considerations, however justified they may be, we must recognise that a new economic growth cycle can be activated if effective Third World demand is properly financed by the international community. But can such a plan really be implemented today?
An European and African Solution.
The affirmation of a new economic order has (from Bretton Woods onwards) been a far-sighted ideal. In the current climate, a new world economic order is fast becoming a realistic and necessary answer to pressing problems. A new system is feasible because it can be supported by joint European and African initiatives – indeed we may safely add this is the only strategy which will ensure that both Europe and Africa, and in the final analysis the entire world, will develop.
The correct solution to the problem is to launch a new European “Marshall plan” for African development, the only strategy really capable of supporting the modernisation of the European economy, which is unthinkable outside a plan for the development of international co-operation. A Europe falling back on itself would be fatally forced to protect its manufacturing capacity which would entail a return to protectionism, the progressive obsolescence of Europe’s industries, economic stagnation and second league status for Europe. The real problem is to reach agreement on how to bring about this solution. Strengthening the process of economic and monetary unification in both Europe and Africa is of decisive significance.
What is at issue is the development of the international economic system and its financing; establishing a new monetary system is essential if international finance is to achieve balanced development and have a progressive role.
Europe’s economic and monetary unification would pave the way for a currency functioning alongside the dollar, which could be used both for payments and as an international reserve currency. This is also an indispensable condition for uniting Europe’s capital markets. Only in this way can Europe hope to play a leading world role on a par with the City of London’s role in the past.
Establishing a European Monetary Union is crucial because to ensure adequate financial support for a Third World solidarity programme Europe must increase its ‘weight’ in the world economy. Likewise, strengthening existing African monetary unions and making a start to the process of monetary and economic unification of Africa are indispensable for Africa’s balanced development. Internationally, African unity would ensure equal partnership in relationships with Europe and the other industrialised areas, whereas a divided Africa would be condemned to submit to the hegemony of more advanced states, in the form of a new colonialism. African unification is also required to ensure optimum allocation of resources in Africa.
We should recall the historical precedent of post-war Europe whose reconstruction was based on a unified project: this ensured the best possible use of US aid under the Marshall Plan and laid the bases for equal partnership between Europe and the US, although it was not possible to achieve this immediately.
Africa should take its cue from the European Monetary System (EMS) and set about establishing and developing an African Monetary System. The EEC’s experience is important. The monetary problem was not considered at the time of its foundation because, in the first stages, the EEC was able to use the dollar in lieu of a European currency. But today the EEC cannot work without a common currency because the dollar crisis is the cause of fluctuating exchange rates: in order to work, a market needs stable prices of raw materials and manufactured goods which is impossible without monetary stability. For Africa, developing a process of monetary unification is even more indispensable. In Europe, the problem was to abolish customs barriers, which were holding up economic development, to allow a better division of labour, whereas in Africa the problem is how to create an agricultural and manufacturing capability which cannot develop spontaneously. This is why it is vital to achieve an optimum allocation of resources throughout the whole of Africa, distributed in keeping with a coherent common loan policy.
Currency is a decisive feature in economic sovereignty. Any proposal for monetary unification raises the issue of European and African autonomy. The greater both continents’ freedom to follow their natural vocation becomes and the sooner they have the means to control their own destiny, the more co-operation between Europe and Africa will be able to develop.
Dario Velo




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