.. A New lnterrtlltiortlll Economic Order

A NEW INTERNATIONAL ECONOMIC ORDER: BASIC PROBLEMS AND THE 1943

KEYNES PLAN!>

A.P. ThirlwaW"

INTRODUCTION

We live in a very divided and chaotic international economic environment that favours the strong at the expense of the weak. Accord­ing to the 1987 World Development Report, the average level of per capita income in the developed industrialised countries is nearly$12,OOO per annum compared to $270 in 30 very low income countries, and $1,300 in 60 middle income countries. There are also large discrepancies in other indices of welfare such as literacy, life expectancy, housing provision, and other basic needs. There are nearly three billion people living in primary poverty, and nearly one billion suffer various states of malnutrition. Moreover, the situation is deteriorating. Because popula­tion is growing, the absolute numbers in primary poverty are increas­ing, and the world distribution of income shows no sign of equalising. The Gini ratio for the world distribution of income was 0.62 in 1950 and is still over 0.6 today. Looking to the future, the catching 'up process is colossal. For the average developing country growing at 3 percent per annum, it would take 80 years to catch up with current living standards in the 'north', let alone to narrow the absolute gap. The current .debt burden of the developing countries, created by a combination of over­lending, high interest rates, world recession and low commodity prices, now blights the lives of millions of poor people in Africa and Latin America .

It is no wonder that there have been frequent periodic calls from international development agencies, international statesmen, profes­sional economists and the developing countries themselves for a New International Economic Order (N.I.E.O.), and it is this issue that I want to address. I will divide my remarks into three parts. First, I will give · some official statements relating to the call for a N.I.E.O. Secondly, I will

.. This paper is based on lectures given to t~ Fiji Economic Association on 3rd August 1988 and at the School of Social and Economic Develop­ment of the University of the South Pacific on 4th August 1988 .

.... Professor of Applied Economics, University of Kent, England.

JOURNAL OF PACIFIC STUDIES, Volume 15, 1990

discuss some of the biases and cumulative forces that work to perpetu­ate divisions in the world economy - forces which a N.I.E.O. is designed to counteract. Thirdly, I will suggest some solu tions and reforms to the organisation of the world economy to rectify some of these biases and cumulative forces, particularly referring to the Keynes Plan of 1943 which was rejected at Bretton Woods in 1944, but which would, I believe, have provided the basis for a fairer and more stable interna­tional economic order.

CALLS FOR A NEW INTERNATIONAL ECONOMIC ORDER

The official call for a N .I.E.O. came from the Sixth SpeciaJ Session of the U.N. General Assembly in 1974. The U.N. pledged itself 'to work urgently for the establishment of a N.I.E.O. based on equity, sovereign equality, common interest and cooperation among all States, irrespective of their economic and social systems, which shall correct inequalities and redress existing injustices, make it possible to elimina te the widening gap between the developed and the developing countries and ensure steadily atcelerating economic and social development and peace and justice for present and future generations.' The U.N. pt:o­gramme of action called for such things as: improved terms of trade for the exports of poor countries; greater accessto the markets of developed countr~s for manufactured goods; greater financial assistance and the alleviation of debt; reform of the International Monetary Fund (lMF); an international food programme, and greater technical cooperation. The call for a N.I.E.O. has been reiterated several times by various U.N. agencies. In 1975, the United Nations Industrial Development Organ­isation (UNIOO) produced the Lima Declaration which set a target for the LDCs to secure a 25 percent share of world manufacturing produc­tion by the year 2000, compared to the prescnt share of 15 percent. On the monetary front, in 1980 there was the Arusha Declaration which demanded a U.N. Conference on International Money and Finance to create a new international monetary order 'capable of achieving mone­tary stability, restoring acceptable levels of employment and sustain­able growth' and 'supportive of a process of global development'. At the· 7th Session of UNCT AD in Geneva in 1987, policy approaches were called for in four major areas: debt and development resources; com­modities; international trade; and the problems of the least developed countries (LDCs).

EXISTING BIASES AND PROBLEMS

There are many depressive and cumulative forces operating to keep people in primary poverty and which perpetua te the development

2

A New Inter7Ultio7Ul1 Economic Order

) gap between rich and poor countries; some internal to poor countries, others which relate to the functioning of the world economy. I will concentrate on the latter category of"forces, ignoring, therefore, such issues as population growth, choice of techniques, domestic economic policy and so on .

• (i) The Nature of-Goods Produced by LDCs

First, we must understand the fundamental theoretical differ­ences between land-based activities on the one hand and industrial activities on the other. Land based activities, in which developing c:ountries tend to specialise, are subject to dimin.ishing returns and produce goods with a low income elasticity of demand, while industrial activities, in which developed countries tend to specialise, are subject to increasing returns and produce goods with a higher income elasticity of demand. The implications of these differences are profound and go a long way t~ account for the differences in living standards that have arisen between '-north' and 'south'. Diminishing returns depress the level and growth of productivity, and mean there is a limit to the profitable employment of labour in these activities, while increasing returns raise the level and growth of productivity, and by increasing per capita income, enlarge the demand for other commodities in a cumula­tive expansionary process if the demand is price elastic. I

In a trading envir-onment, a low income elasticity of demand for land-based products compared to industrial products means thaHhe balan~e of trade for the countries that produce land-based goods is always likely to deteriorate relative to the countries trading industrial pr<;xlucts. This implies slower growth in the poor countries relative to the rich unless relative price changes can act as an efficient adjustment mechanism. There is not muCh evidence that they do; growth is con­strained by the balance of payments (rather than supply constrained) and by the ability to attract capital inflows.2 In the centre-periphery models of Prebisch3, Myrdal4, Seerss, Kaldor" and others, differences in the equilibrium growth rates between the centre and the periphery have as their basis differences in income elasticities of demand for exports and imports.7 In a simple two-rountry model with relative prices fixed, balance of payments equilibrium requires that:

gpx em=_ gc x ex

where gp is income growth in the 'periphery', gc is income growth in the 'cenfre', em is the income elasticity of demand for imports in the

3

JOURNAL OF PACIFIC STUDIES , Volume 15, 1990

periphery, and ex is the income elasticity of demand for the periphery's exports. Therefore:

An income elasticity of demand for imports in the periphery (say 1.5) twice that for its exports (say 0.75) would constrain the periphery's growth rate to one-half that of the centre on the assumptions of the model and no capital inflows.

Diminishing returns, and the lfnemployment consequences of a balance of payments constraint if the natural growth rate exceeds the balance of payments constrained growth rate, have implications for real trade theory, and for the classical argument that free trade is mutually profitable. Unemployment which reduces the social cost of labour below the private cost of labour establishes a case for protections, although not necessarily for tariffs.9

The differences in economic structure between the developed and less developed countries, and the consequences to which they give rise, also have implications for resource allocation and industrial policy in LDCs, and for the attitude of developed countries towards the imports of manufacturers from LDCs. For example, there is little or no chance of the Lima Declaration target being met by the year 2000 without structural change in favour of manufacturing industry and a willingness by developed countries to reduce tariffs and other protec­tive barriers against the export of manufactures by LDCs . .

(ii) The Terms of Trade

A further depressive tendency which afflicts poor countries is the long run trend of deterioration in the terms of trade of primary commodities, which make up 70 percent of LDC's exports, and which reduces real income directly. There can be no doubt about this deterio­ration, despite assertions to the contrary. This terms of trade deteriora­tion is sometimes called the Prebisch-Singer thesis after Raul Prebisch and Hans Singer both pointed to the same phenomenoo at the same time (1950).10 Prebisch originally put the_trend deterioration at 0.9 percent per annum. Spraos has confirmed this downward trend up to 1939, but calculates the annual trenq deterioration to be slightly less at 0.5 percent.)) The post-war evidence suggests that a decline set in in 1954 which, apart from the commodity price boom years 1971-74 (and to a lesser extent 1979-80), has continued on a long run downward trendY

4

A New International Economic Order

My own work suggests an annual trend deterioration between 1954 and 1972 of 1.2 percent per annum, and between 1973 and 1982 (excluding oil) of 2.5 percent per annum.13 According to the U.N. index for 30 primary commodities exported by LOCs (excluding gold and oil), their buying power as a whole over manufactured goods was 34 percent lower in 1985 than in 1957. For individual commodity groups, the buying power of food was 26 percent less; of beverages, 23 percent less; of agricultural raw materials, 41 percent less, and of metals, 34 percent less. The collapse of commodity prices in the 1980s has been a major cause of the international debt crisis. I shall say more about this later. The theory of unequal exchange which forms a part of the Marxist explanation for the perpetuation of underdevelopment is essentially a .terms of trade argument. a

(iii) Fluctuations in Primary Commodity Prices

Thirdly, the world economy in general, and developing coun­tries in particular, suffer several problems from the uncontrolled move­ments of primaty commodity prices. Primary product prices are much more cyclically volatile than industrial goods' prices. My own research ShOWS15 that over the period 1960 to 1982, the elasticity of prices of primary products exported by LDCs with respect to the prices of industrial goods was 2.4. Disaggregation by commodity .group shows an elasticity of 1.25 for food; 1.3 for agricultural non-food products, and 2.9 for minerals including oil. This volatility has a number of potentially detrimental consequences. First, it can lead to a great deal of instabili ty in the foreign exchange earnings and balance of payments position of LOCs, which makes investment planning and economic management much more difficult than otherwise would be the case. Secondly, ~ause of asymmetries in pricing behaviour, volatility imparts infla­tionary bias combined with tendencies to depression in the world economy at large. When primary product prices fall, the terms of trade of primary products tends to fall because the price of manufactured goods does not fall pari passu. But the demand for manufactured goods falls. Contra wise, when primary product prices rise, the terms of trade of primary products only improves temporarily Pecause the prices of manufacturers are quick to follow suit. Governments depress demand to control inflation, and the result is stagflation.

It can be shown that these price and terms of trade changes magnify normal multiplier effects on output, which is exactly what Keynes had in mind in 1942 when he proposed the establishmen~ of buffer stocks (Commod Controls) to stabilise the prices of key com­modities: 'At present, a falling off in effective demand in the industrial

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JOURNAL OF PACIFIC STUDIES, Volume 15, 1990

consuming centres causes a price collapse which means a correspond­ing break in the level of incomes and of effective demand in the raw material prOducing centres, with a further adverse reaction, by reper­cussion, on effective demand in the industrial centres; and so, in the familiar way, the slump proceeds from bad to worse. And when the recovery comes, the rebound to excessive demands through the stimu­lus of inflated price promotes, in the same evil manner, the excesses of the boom.'16 Kanbur and Vines have shown large 'macro' gains to be derived from commodity price stabilisation.17 On the assumptions that the 'north' spends 30 percent of its income on primary products from the south; that primary product production fluctuates by 20 percent, and that 'northern' governments cut expenditure when prices rise, they show that the variance of income is five times greater than in the standard case where price symmetry is assumed.

A third consequence of volatility is that the movements in the terms of trade may not reflect movements in the equilibrium terms of trade between primary products and manufactured goods in the sense that supply ana demand are equated in both markets. In these circum­stances, it can be shown that world economic growth becomes either supply or demand constrained. Consider Figure 1 below which shows the relation between the industrial terms of trade and the growth of primary product output on the one hand (ga)' and the growth of industrial output on the other (gI).

Industrial Terms of Trade (p)

6

growth

Figure 1

A New International Economic Order

The lower the ind ustrial terms of trade, the faster the growth of primary roduct output since the primary sector can 'purchase more industrial

inputs per unit of primary products exchanged. The growth of primary roduct output represents the growth of demand for ind~trial goods ~suming a constant propensi ty to save. The higher the industrial terms of trade, the faster the ind ustrial growth since the less investment goods need to be exchanged for primary product inputs (including wage goods) the more outpu t can be reinvested within the sector. The growth of industrial output represents the growth of demand for primary products. In this model of reciprocal demand, the equilibrium terms of trade will be where the two curves cross, and at this terms of trade the growth rate of the system is maximised. If the term~ of trade was out of equilibrium above p. - say at PI - the industrial sector would have the capacity to grow at g3' bu t would be demand constrained to the rate g1' If the terms of trade was below equilibrium - at say P2 - the demand for industrial output would grow ·at. g2' b~t growth would be supply constrained to gr I have formahsea thIS model elsewhere. ls

A fourth consequence of volatility is thata collapse of commod­ity prices can cause severe debt service problems for countries that have previously borrowed heavily when prices were higher and export earnings were buoyant. A large part of the.current debt servjce difficul­ties faced by the debtor countries in Africa and Latin America are the result of large falls in commodity prices in the 1980s compared to the 1970s.1 9 Using 1975 = 100 as the base, the UN composite price index of 30 primary products stood at 166in 1980, falling to 123 in 1982 and to 116 in 1985. With such falls, there is no way in which debtor countries can service debts in foreign currency without a vast increase in export volume or a compression of imports. But when commodity prices are falling, world economic activity is invariably depressed; so that there is little or no scope for any increase in export volume. In 1981 and 1982 when commodity prices started to tumble, world economic activity contracted by 10.3 percent over two years. There is then little alternative to import compression, which implies a sacrifice of growth and living standards. Falling commodity prices therefore inflicts d'ouble damage on debtor countries. The terms of trade deteriorates and then, in order for debts to be repaid, medicine must be administered which inflicts further damage on the real economy. .

The cyC\icali ty of primary prod uct prices is, of course, not a new phenomenon. The syndrome of depression, falling commodity prices anddebtdifficulties for primary producing countries was exactly what the world economy experienced during the 1930s. Keynes noted in a paper delivered to the British Association for the Adv.ancement of

7

A New International Economic Order

The lower the industrial terms of trade, the faster the growth of primary product output since the primary sector can·purchase more industrial inputs per unit of primary products exchanged. The growth of primary product output represents the growth of demand for ind~trial goods assuming a constant propensity to save. The higher the industrial terms of trade, the faster the industrial growth since the less investment goods need to be exchanged for primary product inputs (including wage goods) the more output can be reinvested within the sector. The growth of industrial output represents the growth of demand for primary products. In this model of reciprocal demand, the equilibrium tenns of trade will be where the two curves cross, and at this terms of trade the growth rate of the system is maximised. If the term~ of trade was out of equilibrium above p" - say at PI - the industrial sector would have the capacity to grow at g3' but woula be demand constrained to the rateg1· If the terms of trade was below equilibrium - at say P2 - the demand for industrial output would grow 'at g2' but growth would be supply constrained to gr I have formalisea this model elsewhere.18

A fourth consequence of vola tili ty is tha t a colla pse of commod­ity prices can cause severe debt service problems for countries that have previously borrowed heavily when prices were higher and export earnings were buoyant. A large part of the.current debt servjce difficul­ties faced by the debtor countries in Africa and Latin America are the result of large falls in commodity prices in the 1980s compared to the 1970s.19 Using 1975 = 100 as the base, the UN composite price index of 30 primary products stood at 166in 1980, falling to 123 in 1982and to 116 in 1985. With such falls, there is no way in which debtor countries can service debts in foreign currency without a vast increase in export volume or a compression of imports. But when commodity prices are falling, world economic activity is invariably depressed; so that there is little or no scope for any increase in export volume. In 1981 and 1982 when commodity prices started to tumble, world economic activity contracted by 10.3 percent over two years. There is then little alternative to import compression, which implies a sacrifice of growth and living standards. Falling commodity prices therefore inflicts d'ouble damage on debtor countries. The terms of trade deteriorates and then, in order for debts to be repaid, medicine must be administered which inflicts further damage on the real economy. .

The cyclical i ty of primary prod uct prices is, of course, not a new phenomenon. The syndrome of depression, falling commodity prices and debt difficulties for primary producing countries was exactly what the world economy experienced during the 1930s. Keynes noted in a paper delivered to the British Association for the Advancement of

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JOURNAL OF PACIFIC STUDIES, Volume 15, 1990

Science in 1938 that for the four commodities of rubber, cotton, wheat and lead, the price had fluctuated by 67 percent in the previous ten years, and was led to remark: 'assuredly nothing can be more inefficient than the present system by which the price is always too high or too low and there are frequent meaningless fluctuations in the plant and labour force employed'.2o Later, in his war-time proposal for 'Com mod Con­trol', Keynes expresses the view that 'one of the greatest evils in international trade before the war was the wide and rapid fluctuations in the world price of primary commodities .... It must be the prime purpose of control to prevent these wide fluctuations'.2l

.. (iv) Deflationary Bias in the World Economy

A fourth category of depressive forces relates to deflationary bias in the world economy which tends to affect poor, balance of payments constrained countries differentially, and which has causes additional to the effects of adverse trends and cycles in the terms of trade of primary commodities. These other causes include: protection­ism and beggar-thy-neighbour policies because of inadequate finance to sustain balance of payments deficits; continual pressure on deficit countries to adjust without symmetrical pressure on surplus countries to expand or revalue their currencies; structural deficits and surpluses arising from the dissimilar economic structures of rich and poor coun­tries; inadequate financial institutions to channel funds from surplus countries to deficit countries most in need, and the lack of a truly international money to bring together countries which desperately need resources with those which have underutilised resources and are will­ing to export more.

In my view, the organisation and activities of the IMF do not help. In most countries the IMF exerts a depressive effect on economic activity, because it misconceives the nature of balance of payments difficulties. Structural adjustment. and conditionality have become euphemisms for deflation which focus on instruments for the achieve­ment of balance of payments equilibrium, rather than on the target of balance of payments equilibrium itself and leaving to countries them­selves the decisions on how to achieve equilibrium. ~ayments deficits always seem to be associated in the IMF's mind with distorted relative prices and excessive aggregate demand, which leads to the standard adjustment package of devaluation and deflation. More recent struc­tural adjustment policies have operated no differently from convention­al standby programmes. The IMF rarely recognises the structural char­acteristics of LOCs that make deficits inetitable in their attempt to

8

A N~ InterTUltioTUlI Economic Order

accelera te development, or that because of supply rigidities and de­mand inelasticities, devaluation may be a singularly inappropriate adjustment weapon. Moreover, the IMF will not concede that free trade in goods and financial transactions may not be optimal for LDCs, and yet trade and financialliberalisation are invariably conditions for loan support. At the same time, pressure has rarely been put on countries with counterpart surpluses to expand their economies or revalue their currencies which would hel p the defici t countries wi thou t the necessi ty to defla te.

When Keynes addressed thes~ various issues at Bretton Woods, he had a different vision to what has transpired . In 'thinking abouta New International Economic Order, it is salutary to go back and look at some of his ideas and policies formulated during the war, and his proposals fOf an International Clearing Union. He had proposals for the stabilisa­tion of primary commodity prices; for the penalisation of surplus countries, and for the control of capital movements.

SUG GESTIONS FOR REFORMS: THE 1943 KEYNES PLAN

As far as primary product price stabilisation is concerned, Keynes's paper to the British Association has already been mentioned ,22

In 1942 he produced a more detailed plan for what he called 'Commod Control' - an international body representing leading producers and consumers that would stand ready to buy ~commods' (Keynes's name for typical commodities), and store them at a price (say) 10 percent below the agreed basic price and sell them at 10 percent above.23 The basic price would be adjusted according to whether there was a gradual run-down or build up of stocks, indicating that the pric~ is either ' too low' or ' too high'. The finance for the storage and holding of 'Commods' would have been provided through his proposal for an International ~Iearing Union (lCU), acting like a world central bank, with which Commod Controls' would keep accounts , Keynes was convinced that suc~ a 'Commod Control' scheme would make a major contribution to cunng the international trade cycle, The injection and withdrawal of pur,chasmg power by buying up 'Commods' when prices are falling and selhng them when prices are rising would, he believed, operate much ~ore effectively and immediately than public works. Keynes submitted hl~ 'plan to the Bri ti sh War Cabinet, but it was not adopted as official po ICY ?eca use of opposi tion from the Bank of England and the Ministry ? f ~gnculture for d ifferent reasons. The Bank thought the scheme too l a l sse~-faire' because it aIJowed for private trading, while the Ministry

of AgrIculture believed that only output restrictions could solve the

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JOURNAL OF PACIFIC STUDIES, Volume 15, 1990

problem of surpluses and that minimum prices would encourage production. The mor.e modest proposal at Bretton Woods for an Inter­national Trade Organisation never got off the ground. At the present time, finance for the holding and storage of buffer stocks could be provided through the use of Special Drawing Rights (SDRs). The world has created this new international money, but fails to use it for useful international collectively agreed purposes. If ever there was an instru­ment in search of a policy, it is SDRs!

At the UNCT AD meeting in Nairobi in 1976, the LOCs called for an Integrated Programme for Commodities to encourage the proc­essing and marketing of primary commodities and for the establish­ment of buffer stocks for eighteen storable commodities financed by a Common Fund. At the time of writing, the Fund has still not been activated owing to a shortage of pledged funds. But in any case the agreed sum of $500 million is trivial compared to the need, and to the original request of $6 billion.

In his proposal for an International Clearing Union, Keynes was seeking to avoid all the sources of deflationary bias that I previously mentioned. He described the aim of his Plan24 as 'the substitution of an expansionist, in place of a contractionist, pressure on world trade' (para 10). Crucial to this aim was that creditor countries should be treated equally, but oppositely, as debtor countries to ensure symmetry of adjustment. He argued 'we need a system possessed of an internal stabilising mechanism, by which pressure is exercised on any country whose balance of payments with the rest of the world is departing from equilibrium in either direction, so as to prevent movements 'which must create for its neighbours an equal but opposite want of balance' (p.3). Keynes's proposal was therefore that each member country should pay to the Reserve Fund of the Clearing Union 1 percent of its debits or credits in excess of 25 percent of its quota, and a further 1 percent if its debits or credits exceeded 50 percent of its quota. Keynes referred to his system as looking on 'excessive credit balances with as critical an eye as excessive debit balances, each being indeed the inevitable concomitant of the other' (p.5) .... 'The objective is that the creditor should not be allowed to remain entirely passive' (p.l1). Indeed, the Governing Board of the Clearing Union should be empowered to diSC\lsS with countries in credit measures to expand demal}d; appreciate the currency; reduce tariffs and to give international development loans, with the Board having the ultimate discretipn. If the Keynes Plan had been adopted at Bretton Woods, all this would have applied to the oil exporting coun­tries in the 1970s, which would have avoided the unloading of such large surpluses on the private capital markets and the subsequent debt

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A New International Economic Order

blems of the recipients, and also it would have applied to countries r:Othe developed world persistently in surplus, notably Japan and

Germany.

The United States at Bretton Woods was happy to support the .d of the 'scarce cUJlfency' clause which would enaple countries to 1 ea . d . h ood od d · . d.scriminate 10 tra e agamst t e g s pr uce 10 a country 10

I sistent balance of payments surplus whose currency was persis­rrtly scarce in the Fund, but the clause was never invoked largely :Cause the predicted scarcity of the dollar never materialised as the

orld moved to a dollar standard. The logic and theory behind the ~arce currency clause still remains valid, however, and could be

plied today against countries such as Japan and Germany with ~rsistent surpluses, which ipso facto constrain activity in other coun-

tries.

To minimise the problems posed by capital outflows from deficit countries, the Governing Board of the leu would have been empowered to recommend the imposition of controls on the outward movement of capital if debit balances rose to over 50 percent of quota. The present philosophy of the IMF is the exact opposite; to liberalise capital markets whatever the underlying state of the balance of pay­ments. Keynes saw the object of capital controls as providing a means of controlling short term speculative movements which serve no useful social function, and as a means of distinguishing long term loans by creditor countries (which help to maintain equilibrium and to develop the worJd' s resources) from movemen ts of funds out of debtor countries which lack the means to finance them, except by raising interest rates to unacceptably high levels. It is the implications for interest rates, and hence domestic investment, that can lead to a large divengence between the pri vate and social benefi t as the resul tof the uncontrolled movement of capita\.

CONCLUSION

The years since 1973 have been a sorry episode in the world's economic history, which should never have occurred, and would never have occurred if the world possessed more sensible institutional struc­tures. The relative stability of the post-Bretton Woods era up to 1973 lulled the world into a false sense of security, and when the shocks came in the early 1970s the system was totally unprepared. I believe the world would have been better prepared if the Keynes Plan had been adopted at Bretton Woods instead of the American (White) Plan. In my view, the

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A New International Economic Order

problems of the recipients, and also it would have applied to countries in the developed world persistently in surplus, notably Japan and Germany.

The United States at Bretton Woods was happy to support the idea of the 'scarce cUf!fency' clause which would enaple countries to discriminate in trade against the goods produced in a country in persistent balance of payments surplus whose currency was persis­tently scarce in the Fund, but the clause was never invoked largely because the predicted scarcity of the dollar never materialised as the world moved to a dollar standard . The logic and theory behind the scarce currency clause still remains valid, however, and could be applied today against countries such as Japan and Germany with persistent surpluses, which ipso facto constrain activity in other coun­tries.

To minimise the problems posed by capital outflows from deficit countries, the Governing Board of the leu would have been empowered to recommend the imposition of controls on the outward movement of capital if debit balances rose to over 50 percent of quota . The present philosophy of the IMF is the exact opposite; to liberalise capital markets whatever the underlying state of the balance of pay­men ts. Keynes sa w the object of ca pi tal con trois as providing a means of controlling short term speculative movements which serve no useful social function, and as a means of distinguishing long term loans by creditor countries (which help to maintain equilibrium and to develop the world's resources) from movements of funds out of debtor countries which lack the means to finance them, except by raising interest rates to unacceptably high levels. It is the implications for interest rates, and hence domestic investment, tha t can lead to a large divertgence between the private and social benefi t as the resul tof the uncontrolled movement of capital.

CONCLUSION

The years since 1973 have been a sorry episode in the world's economic history, which should never have occurred, and would never have occurred if the world possessed more sensible institutional struc­tures. The relative stability of the post-Bretton Woods era up to 1973 lulled the world intoa false sense of security, and when the shocks came in the early 1970s the system was totally unprepared. I believe the world would have been better prepared if the Keynes Plan had been adopted at Bretton Woods instead of the American (White) Plan. In my view, the

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world is still unprepared for future shocks. The imposition of adjustment on countries (which is the only policy the IMF seems able to talk about) is, in a sense, a substitute for the global solutions to many of the difficulties confronting countries that make adjustment necessary e.g. primary product price instability; deflationary bias in the world econ­omy, and a paucity of mechanisms to transfer resources between countries in an efficient and collectively responsible way. There is a case for a New Bretton Woods to lay the basis for a New International Economic Order which would better serve the interests of the world economy in general, and the LDCs in particular. It would pay much more attention to: primary product price instability; the penalisation of countries in balance of payments surplus; the use of international money to effect resource transfers, and the control of capi tal movements (and exchange rates). But in the last resort, structural change is the only way in which the poor countries will become rich.

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A New /nterl1Qtiol1Q/ Economic Order

APPENDlX J: THE DECOMPOSITION OF CHANGES IN THE DEBT SER VICE RA TIO

The de terminants of changes in the debt service ratio are the ra te of grow th of debt; the rate of change of export earnings (made up of cha nges in export volume and price); changes in the rate of interest, and changes in the rate of amortisation. The debt service ratio may be written as

R/E, 0)

where R is total debt service repayments and E is export earnings. This ra tio will ri se if;

. . R>E

where a dot denotes time rate of change. Now, R = (rO + A)

(2)

(3)

where r is the interest rate, 0 is outstanding debt, and A is amortisation payments. Hence,

dR = drD + dOr + dA, (4)

where d is the difference operator. Now, A = 9D,

\.vhere9 is the amortisation rate. Hence dA = d90 + d09

Substituting (6) i to (4) and dividing by R gives

R = (dr + d9)0 + (r +9)dO (r +9)0

(5)

(6)

(7)

Therefore, the change in the debt service ratio (R/E) can be approxmiated by;

(8)

where X is the rate of change of export volume and p is the rate of change of export prices.

JOURNAL OF PACIFIC STUDIES, Volume 15, 1990

ENDNOTES

1. See Allyn Young, 'Increasing Returns and Economic Progress', Eco­nomic Journal, December 1928.

2. See A.P. Thirlwall and M. Nureldin Hussain, 'The Balance of Pay­ments Constraint, Capital Flows and Growth Ra.te Differences Be­tween Developing Countries', Oxford Economic Papers, November 1982.

3. R. Prebisch, 'Commercial Policy in the Underdeveloped Countries', American Economic Review, Papers and Proceedings, May 1959.

4. G. Myrdal, Economic Theory and Underdeveloped Regions, Duckworth, 1957.

5. D. Seers, 'A Model of Comparative Rates of Growth of the World Economy', Economic Journal, March 1962.

6. N. Kaldor, 'The Case for Regional Policies', Scottish Journal of Political Economy, November 1970.

7. A.P. Thirlwall, 'Foreign Trade Elasticities in Centre-Periphery Mod­els of Gro~th and Development', Banca Nazionale del Lavoro Quar­terly Review, September 1983.

8. S.B. Linder, Tradeand Trade Policy for Development,New York: Praeger, 1967.

9. H.G. Johnson, 'Tariffs and Economic Development: Some Theoretical Issues', Journal of Development Studies, October 1964.

10. R. Prebisch, The Economic Developme!'t of Latin America and its Principal Problems, (New York: ECLA, UN. Dept. of Economic Affairs 1950), and H. Singer, 'The Distribution of Gains Between Investing and Borrowing Countries', American Econo1Jlic Review, Papers and Proceedings, May 1950.

11. J. Spraos, 'The Statistical Debate on the Net Barter Terms of Trade Between Primary Commodities and Manufactures', Economic Jour­mU, March 1980.

12 .. See, for example, D. Sapsford, 'The Statistical Debate on the Net Barter Terms ofTrade Between Primary Commodities and Manufac­tures', Economic Journal, September 1985, and P. Sarkar, 'The Singer­Prebisch Hypothesis: A Statistical Evaluation', Cambridge Journal of Economics, December 1986.

13. A.P. Thirlwall and J. Bergevin, 'Trends, Cycles and Asymmetries in the Terms of Trade of Primary Commodities from Developed and Less Developed Countries', World Development, July 1985 ..

14. Arghiri Emmanuel, Unequal Exchange: A Study of the Imperialism of Trade, New York: Monthly Review Press, 1972.

15. A.P. Thirlwall and J. Bergevin, op.cit., 1972.

14

A New International Economic Order

16. D. Moggridge (ed.), The Collected Writings of J.M. Keynes, Vol. XXVJI: Activities 1940-1946 Shaping the Post- War World: Employment and Commodities, London: Macmillan, 1980.

17. R. Kanbur and D. Vines, 'North-South Interaction aN:i Com mod Control', Journill of Development Economics, 1982.

18. A.P. Thirlwall, 'A General Model of Growth and Development on Kaldorian Lines', Oxford Economic Papers, July 1986.

19. The decomposition of changes in the debt service ratio into its component parts is shown in Appendix I.

20. J.M. Keynes, 'The Policy of Governmenl Stora:g~ of Foodstuffs and Raw Materials', Economic Journill, September 1938.

21. See D. Moggridge (ed.), op.cit., 1980. 22. Op.cit., Economic Journal, September 1938. 23. See D: Moggridge (ed.), op.cit., 1980. 24 .. Proposals for an International Clearing Union, Cmnd. 6437 (London

HMSO April 1943). Reprinted in A.P. Thirlwall (ed.), Keynes and Economic Development, London: Macmillan, 1987.

A New International Economic Order

16. D. Moggridge (ed .), The Collected Writings of J.M. Keynes, Vol. XXVJI: Activities 1940-1946 Shaping the Post-War World: Employment and Commodities, London: Macmillan, 1980.

17. R. Kanbur and D. Vines, 'North-South Interaction aM Commod Control', Journal of Development Economics, 1982.

18. A.P. Thirlwall, 'A General Model of Growth and Development on Kaldorian Lines', Oxford Economic Papers, July 1986.

19. The decomposition of changes in the debt service ratio into its component parts is shown in Appendix I.

20. J.M. Keynes, 'The Policy of Governmenl Storag~ of Foodstuffs and Raw Materials', Economic Journal, September 1938.

21. See D. Moggridge (ed.), op.cit., 1980. 22. Op.cit., Economic Journal, September 1938. 23. See 0 : Moggridge (ed.), op.cit., 1980. 24 .. Proposals for an International Clearing Union, Cmnd. 6437 (London

HMSO April 1943). Reprinted in A.P. Thirlwall (ed.), Keynes and Economic Development, London: Macmillan, 1987.

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