At the IMF—reflation or doom
Attendance at a dull international monetary conference, which I have always carefully avoided, can often be enlivened by the sound of hollow laughter coming from those on the back seats listening to the ministerial or official ape on the rostrum. Last week in Washington at the IMF conference the assurances given by some Finance Ministers that the world recession would be beaten by the middle of 1976 because of the firm reflationary action taken by the 'strong' economic powers — America, West Germany, France and Japan — must have aroused some mirth among the economic correspondents who, Perhaps indoctrinated by the current Marxist propaganda, believe this to be the worse crisis for capitalism for over forty years and not yet solved. Even Peter Jay, of the Times, who cannot be accused of being a Marxist, writes: "Any Measurable upturn in Britain before the end of 1976 now looks most unlikely."
The managing director of the IMF, Dr Witteveen, was, in fact, more realistic than the finance ministers. He noted that the recovery in Japan was proceeding slowly and that in Germany and France, in spite of their reflationary measures, economic activity was a great deal weaker than expected a few months ago. The German finance minister did not promise anything in Washington but he is getting increasing criticism from Bonn that his reflationary package is quite inadequate. In France anger at the mounting unemployment is so fierce that the President has had to announce a further reflationary boost to the economy by cutting bank rate and pumping in the equivalent of no less than £3,000 million. Why Mr Healey 'should be so confident that (quote) "the expansionary measures recently introduced or shortly to be announced by some of my European colleagues should be producing significant results by the middle of next year" is not clear. It suggests that he is either out of touch with the latest economic reports or is seeking to justify to the TUC at home his determination not to be pushed "into panic measures of reflation" in the U.K.
Mr Healey is, of course, probably right in refusing to consider reflation before he has brought down the run-away UK inflation rate. It is true that some frightened people — in particular the National Institute of Economic and Social Research in its latest Bulletin — consider that it will be necessary to begin reflation of domestic demand fairly soon in order to influence the level of employment next summer — the National Institute is always frightened by the shadow of its own generally inaccurate forecasts — but Mr Healey is surely wise to do nothing before the next April budget and to prepare the nation for "a hard winter".
One can only hope that not only the TUC will learn by suffering more unemployment not to press their wage demands beyond £6 but that the Chancellor himself will learn not to increase government expenditure by enlarging the public sector in this inflationary period. It is extraordinary that Mr Healey should go on complaining about "the oyer-heating of our economy which a few years ago contributed so greatly to the inflation and the consequent recession" without mentioning the fact that his Labour government, by driving up the borrowing requirement to over E10,000 million, has also contributed to the inflation of the economy., Does it not occur to him that there is an inflationary risk in increasing, the public sector? There is little doubt that it was the failure of the public sector to stand up against excessive wage demands which is mainly responsible for our present inflationary plight.
The reason why recovery from the prevailing deep depression is bound to be slow is because the purchasing power of the non-oil developing world, especially the poorer half, has been knocked flat by the alarming increase in its balance of payments deficits. This year, according to the IMF, these deficits will amount to more than £23,000 million. They have been brought about by the quintupling of the price of oil — the cost of their oil imports this year will be at least 6 per cent up after a 40 per cent increase last year — by the inflationary rise in the cost of their other manufactured imports and by the fall in the volume of their exports to the depressed "rich" world outside. (In some cases there has also been a fall in export prices after the 27 per cent rise last year.) Mr Healey is well aware of the dangers of this situation, for he referred in his IMF speech to "the threat to recovery in the industrial countries if their trade with the developing world collapsed and the parallel inability of the developing countries to avoid catastrophe unless the industrial world achieved recovery". This was the biggest "doom warning" of the IMF Washington conference.
Mr Robert McNamara set the stage for this 'doom' performance of Mr Healey by giving the facts and figures of the 'developing' world tragedy in his earlier speech as President of the World Bank. The per capita ' income of the 1 billion people in the poorest countries was less than $200 per annum and was still going down, which meant a further decline into poverty, hunger and disease. In the "middle-income developing countries" — those with per capita incomes of $200 and above — there was a 3.9 per cent growth last year but this has now been arrested and growth is expected to fall behind population growth, which means a decline in per capita incomes. So the gap between rich and poor in the world economy is continuing to widen. Mr McNamara made a passionate plea to the rich countries to raise the level of their "development aid." To reach the target set by the United Nations this would have to rise to 0.7 per cent of the GNP of the donor countries but at present they are only contributing 0.33 per cent.
As the rich countries feel that they have a cash problem at the moment they have been thinking up some ingenious schemes to help the 'developing' world — an IMF 'trust fund', a World Bank 'third window:, and a US, 'development security,:facility'. But something concrete:did come out of the IMF conference on gold which could be of some assistance to the developing world. The Americans and the French agreed that something should be done about the 150 million ounces of gold held 'frozen' by the IMF. The anti-gold Americans would have liked to sell off the lot and the pro-gold French would have liked to have seen the lot returned to the original subscribers. The compromise finally adopted was to let the IMF retain 100 million ounces for the time being, to return 25 million ounces to the original subscribers and to sell off 25 million ounces on the free market — or to Central Banks at the free market price — and let the profit go to the developing countries. This could give them a
bonus of about $2,500 million which would enable them to buy that amount of goods from the depressed industrial nations who are trying vainly to increase their exports to one another. There is to be a meeting in Jamaica in January to settle the gold details. A tiny contribution to world reflation, it is true, but it could be doubled by writing up another 25 million ounces of gold. As Alan Hart said in his documentary film, time is running out for the poorer half of the world and we may have only three to five years to prevent an ultimate global catastrophe.