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22 October 2001

World economy

A plan for the world - World economy

By Peter Jay

What we want

  • Free migration
  • Controls on capital movements, policed by the IMF
  • Freely floating exchange rates
  • Cancellation of debt
  • Marshall Aid programme for Africa
  • Sixty years ago, in August 1941, postwar planning began with Churchill and Roosevelt’s battleship meeting off Newfoundland to hammer out not only war aims, but also the peace aims of a war the US had not yet joined. The result was the Atlantic Charter and – less directly – the world we have lived in ever since: liberal, multilateral, Anglo-Saxon, Keynesian, aimed at stability, employment and growth. Its aims reflected the failures of the previous two decades: protectionist, autarchic, deflationary, yielding chaotic swings from hyperinflation to depression.

    Our “war” is not that war, nor, pray God, anything like it. But it may afford an opportunity to convert the long-drawn-out and learned debates of recent years into a crisper vision of a sounder, fairer world.

    In a truly liberal world economy, the freedoms to move enjoyed by goods, services, financial payments and short- and long-term capital would also be enjoyed by labour. Under conditions of free migration, labour, capital and locations would be combined to the most efficient satisfaction of the sovereign preferences of consumers.

    Living standards worldwide would on average be higher and less unequal, at least for each category of labour defined by its marketable skills. The progressive dismantling of barriers to migration should be as prominent a feature of the globe’s economic architecture after this war as the dismantling of trade and payments barriers have been since 1945.

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    Irrational fears of migration make this unlikely to happen, except for a small elite of skilled labour, who need it least. So it becomes doubly important that capital can at least combine with labour in the locations where the latter is imprisoned by perverse migration barriers.

    Globalisation, at least of capital movements, was supposed to have achieved this. But, as the Asian crisis in the late 1990s showed, and as the tribulations of sundry south and central American economies since then – to say nothing of Turkey now – have shown, there is a flaw in this design. Freedom of capital movements is a two-way street; and, when sentiment sours, an otherwise healthy economy can be hit by such a haemorrhage of funds as to bring down its banks, if not also its economy and its government structures.

    Growing numbers of expert observers, many with the most impeccably liberal credentials, now believe that we may therefore have to reintroduce some controls on capital movements, despite the evident discouragement (if you cannot get out, you had better not get in) of original investment. But such controls need policing at the global level to prevent them degenerating into a soft option for weak or corrupt governments wishing to dodge the consequences of their own policies.

    The world also needs a workable system of money – currencies and exchange rates – without which the whole network of exchange on which modern economic life depends is impossible. A theoretical case can be made for a single global currency, properly managed by a global monetary authority or central bank. But this is not practical without a global centralisation of political authority that, even if it were desirable, is not attainable – even by conquest. Without real freedom of migration, those regions which proved uncompetitive would face utter destitution. The alternative would be huge fiscal transfers to the afflicted areas. And that presupposes a central political taxing and spending power that will not exist.

    All experience demonstrates that intermediate regimes of fixed but adjustable exchange rates between sovereign currencies cannot for long succeed in the face of free global currency markets. For major economies, therefore, there is no workable alternative to freely floating exchange rates, though smaller individual economies may at times be able to make a success of absolutely fixed exchange rates or even of adopting some outside currency such as the dollar. In such a world, the International Monetary Fund should police this exchange-rate regime, and police the capital controls that may be necessary and permissible to protect small, developing or weak economies from extreme surges of short-term capital. It should also lend foreign exchange to governments that handle short-term crises appropriately, and gently co-ordinate the efforts of national governments and/or their central banks to steer their economies as smoothly as possible through the inevitable business cycles. It should abstain from trying to thrust conservative economic ideologies which go beyond these practical tasks down the throats of independent nations, especially the democratic ones.

    The World Trade Organisation should continue to work for the general liberalisation of trade, payments and investment known as “globalisation”. It should resist attempts to impose restrictions – for example, on cheap labour – which inhibit the very dynamic that brings a better future, not least for poor people, many of whom get jobs and rising incomes as a result.

    As for the World Bank, its chief clients suspect that it is imposing a doctrinaire conservative agenda on them. Moreover, the accumulated burden of dead-weight debt from the past implies in many cases a net transfer of resources from the poor and less developed countries to those who have least need of official capital inflows.

    The debt should be cancelled, or otherwise relieved, where there is no real prospect of its being serviced without damaging the future economic development of the debtor. The World Bank should leave political choices, including those of economic ideology, to local electorates and governments, focusing instead on facilitating official and private capital flows to support economic development.

    None of this will save Africa. Good government is a precondition. No international economic or financial architecture can supply that, though they can support it when it offers itself or where it is threatened by thugs and thieves. Good government presupposes skilled and educated manpower, secure frontiers and enough official revenue and borrowing to create adequate law and order and infrastructure, which are the preconditions of economic advance. These things must be supported, perhaps through a Marshall Aid programme for Africa. But Africa itself must find the leaders to give it a better future.

    Peter Jay was UK ambassador to the US, 1977-79, and economics and business editor of the BBC, 1990-2001

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