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Financial Post, Weekly edition, June 4, 1983


What's needed to sustain a recovery

Something more than just a faint glimpse of hope for the business outlook is emerging as the economic upswing gains a firmer foothold in the U.S. and among some of our other major trading partners.

Perhaps the international co-operation needed to sustain a stable recovery worldwide has even been hastened along a little by the outcome of this week's Williamsburg summit. Despite substantially differing objectives, the summiteers managed to emphasize the need to lower interest rates, and implicitly committed the U.S. to help the process through lowered budget deficits. The hopeful nature of the Williamsburg communiqué aside, however, one point remains obvious: the world trading system faces its most crucial challenge since the Great Depression. World trade is shrinking for the first time since the 1950s. High unemployment has triggered increasing protectionism - and the summit communiqué did, at least, recognize the danger of that. Exchange rates have been far too volatile for a fragile international financial system's comfort.

With an upswing underway, what we do have is valuable breathing space, a chance to get on with the fundamental public policy adjustments that favor the private sector. That will be absolutely essential for the resumption of growth in world trade, something in which Canada as an exporting nation has such a tremendous stake.

What's needed, post-Williamsburg, are these international policy directions:

1. The temptation to prime the credit pumps again and make money too easy must be resisted. Throwing credit at our problems will only throw away the gains so excruciatingly won in getting down inflation. Thankfully, inflationary expectations have been lowered, and some gradual relaxation in monetary policy is appropriate. But a credit spree is the last thing we need.

Prudent support

2. There should be prudent support for the co-operative efforts of the International Monetary Fund and the commercial banking sector in trying to bring financial stability to the less developed countries. The LDCs owe commercial banks and government agencies more than $500 billion but are unlikely to be able to pay it back unless maturities are stretched and terms eased and in some cases additional financing made available. This doesn't, of course, mean pampering profligacy. But it does mean helping those countries that show a determination to help themselves. An abrupt drying up of funds to the LDCs might run the risk of major collapses. That would not be in our trading interests, let alone theirs.

3. By all means, see, as the summit suggested, if the international monetary system can be improved. But calls for more government intervention in currency markets, for another Bretton Woods-style international conference and a return to fixed exchange rates, should continue to be diplomatically deflected. Some degree of limited currency market intervention is necessary, to smooth out exchange-rate swings. But this should be on a minor scale only. Lowering inflation through a prudent mix of monetary and fiscal policy is a more appropriate focus for governments and their central banks. Furthermore, we certainly don't want another layer of suprainternational financial institutions on top of the IMF and the World Bank.

Grand quick fixes are just not in sight. Nonetheless, much can be achieved by working away at reducing economic conflicts between nations, by committing ourselves firmly to more trade liberalization rather than less of it (even on issues as contentious as auto imports), by getting greater monetary co-ordination internationally, and by giving free markets the scope to work more effectively. These are post-summit goals that must be pursued with determination.

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Revised: June 3, 1995

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