Another Dubious Triumph of Conventional Wisdom


July 12, 1993|By WILLIAM PFAFF

Paris. -- The G-7 meeting in Tokyo has echoed the conventional analysis of what is wrong with the world economy and repeated the old, tried and as yet unsuccessful recommendations about what to do. What if both analysis and remedies are wrong?

It is nearly everywhere assumed, in the industrial countries, that increased trade by way of lowered tariffs is the answer to the present recession, the worst and longest the industrial world has experienced since the Great Depression. Thus the Tokyo meeting gave us a new agreement on tariff reductions. The GATT negotiations, in theory to be completed this year, are supposed to produce a recession-ending and growth-inspiring expansion of trade.

However, the European Community has just completed a five-year program of tariff removals and dismantling non-tariff barriers so as to create the Single European Market. The Single Market has been a success. But where are the jobs and the growth? Europe's recession goes on, and unemployment now is at levels unseen since the 1930s. If trade is the answer, what went wrong? The conventional wisdom went wrong: That would seem to be the answer.

The larger argument about the benefits of trade cites the experience of the three decades following trade liberalization at the end of World War II. There was a multiplication of trade and soaring growth in the United States, Western Europe and Japan.

However, the West Europeans and Japan had been major industrial nations before the war. In the late 1940s and the 1950s they rebuilt, with American capital aid, industries that had been destroyed between 1940 and 1945. They knew exactly how to go about it; they had the trained labor anxious to work; they had domestic markets ravenous for peacetime goods as well as for access to a huge, rich, American market open to imports.

The two countries that benefited most were Germany and Japan: the two that had lost the most during the war, but also the two that before the war had already been the most dynamic and ambitious. Germany's postwar trade has been overwhelmingly with its neighbors, within the free-trade European Community. Japan's markets, on the other hand, have never been fully opened to Western exports, and that has been crucial to its success.

Thus it is not entirely true -- or at least it is not self-evidently true -- that free trade gave the G-7 world its 30 years of prosperity. It undoubtedly contributed to its prosperity. Without liberal trade there would be no Japanese superpower today, nor the export-rich ''tigers'' of South Korea, Taiwan, Hong Kong and Singapore. But the lessons of this experience do not provide an unanswerable case for liberalized trade. The example of Asia's success is to restrict imports while exporting -- which is not the lesson GATT wants taught.

Make a different assumption. Suppose that the crucial reason for persisting recession is that consumers in the Western countries have been frightened out of their wits by their loss of economic security during the last decade. In the United States, most working people have lost economic ground since the early 1980s and have lost confidence in their own future well-being and that of their children. Americans elected Bill Clinton president because he recognized this and promised to do something about it.

In continental Europe, people have been obsessed with ''the crisis'' almost continuously since the first oil shock in 1973. That really was the end to optimism in Europe, and since then each economic revival has ended in some new disappointment. The Thatcher years have left Britain in a mood of unprecedented pessimism, with less confidence in this prime minister and his government than the polls have ever recorded. Now even Japan's boom has crashed in scandals, with a break-up of the established political order.

The economic consequences of this popular pessimism may seriously be underestimated. People are not buying goods because the measures thus far taken (out of conventional wisdom) to deal with the recession have produced deflation and austerity, with intense downward pressure on salaries, pensions, employee benefits and now on state insurance and welfare systems. The result is a huge and mounting level of seemingly ineradicable unemployment. Governments today are subsidizing that unemployment. Benefits are an immense item in most state budgets, while social discontent approaches very dangerous levels.

What about subsidizing employment and demand, for a change? Experience suggests that if one country does this, the result spurs imports and inflation. But if all did it, this pernicious result need not follow. There has to be coordinated growth. That is a subject for the G-7 leaders to talk about.

Moreover, what about the huge undeveloped markets of Eastern Europe and the former Soviet Union? Hundreds of millions there long for the goods the West produces, and for goods they could themselves produce with Western investment. Yet the West actually has put up tariff and non-tariff barriers to the few products the ex-Communist countries currently are able competitively to produce. This seems madness even in terms of the Western countries' own future prosperity.

For a decade the same old things have been said, and tried, to get the industrial world out of this slump. They have not worked. The same things were all said again in Tokyo. What about a critical analysis of past experience? What about an attempt to learn from what has failed?

William Pfaff is a syndicated columnist.

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