World without a policeman

Tim Congdon

The last three decades have seen the most rapid growth of world output and trade ever. It has perhaps been difficult amid all the gloom-mongering to maintain a sense of perspective about the extraordinary pro- gress which has been achieved. In the peak phase, from 1963 to 1973, the volume of trade among industrial countries increased by nine per cent a year. A little dexterity with a pocket calculator shows that, if sus- tained for a century, this would cause trade to rise by over 5,000 times. Admittedly, in the six years to 1979 the growth rate decelerated to five per cent. If this more modest figure continued for a century, world trade would go up by just 130 times. The increase is still remarkable.

But there is a widespread feeling that the period of rapid economic expansion, the era of Bretton Woods and the Keynesian Revolution, is over. It was perhaps this worry, more than anything else, which con- cerned the heads of government at the Ver- sailles economic summit. Another nagging theme throughout seems to have been the difficulty of clarifying the position of the United States in relation to other leading in- dustrial nations. For several years that posi- tion has been shifting, but there has been a reluctance to recognise in what ways and with what consequences. In fact, the two issues may be connected. Stated simply and frankly, the change in the US's position is a decline in its relative power. It is possible that this has undermined some essential foundations of the post-war boom.

Prolonged periods of peace and prosperi- ty are historical rarities. It is very difficult to find anything in the past similar to recent experience. But, without being unduly im- aginative, two precursors could be sug- gested — the Antonine Age in the second century and continuous economic advance in the second half of the 19th century. It is clear what all three periods had in common, the domination by one country of the rest of the world. The US enjoyed the same pre- eminence between 1945 and 1975 as Rome in the second century and Britain in the 19th. Why is a world with one dominant power more likely to enjoy economic success than a world with several roughly equal powers? The point is probably that the dominant power can behave as a policeman. By acting as a universal law-enforcement agency, it ensures that its values and attitudes set the tone for all international relationships. The values and attitudes of the US are well- known. Like Britain in the last century, it favours free-market capitalism and economic liberalism.

The implications have been profound. Perhaps the most salient feature of the post-war boom has been internationalisa- tion, the extent to which countries have become more economically dependent on each other. Awareness of American power has reduced fears that trade flows might be interrupted by warfare or other political ac- cidents. In consequence, countries have specialised in making certain products for export and stopped making others which may instead be imported. There have been few doubts about the reliability of supply from foreign sources. Relatively poor na- tions have also been able to acquire improv- ed technology by attracting investment from multinational companies or by impor- ting capital equipment at prices determined 'If we play Argentina, will it be under FA rules or the Geneva Convention?' by supply and demand rather than political whim. The ratio of world trade to world output is higher today than ever before, while capital movements from country to country are on an unprecedented scale. All this may sound naively meliorist and Panglos§ian. Policemen may be necessary, but they tend to be unpopular. The US has over the years received numerous brickbats, most of them verbal but some more serious, from the riff-raff of the Third World. Even its European allies and Japan have at titres been insubordinate. Surely, the post-war boom has a more general explanation than the existence of a dominant world power. If there has been an undeclared American em- pire, it has been the imperialism of Coca- Cola, ITT and Citibank. It could be argued that its emotional appeal has been u°' dignified, its practical importance slight. , But American power — or the threat 01 American power — has been used on mail occasions to defend the open international economic order. If a country nationalises foreign assets without compensatiori' American aid and credit are cut off; If it tries to rig the price of an international commodity export, the US releases a certain amount of the.commodity from a strategic, stockpile in order to frustrate the attempt' if it introduces a tariff in conflict with inter- national treaties, the US can arrange that . loses the 'most favoured nation' status .3c,"s corded by the General Agreement on Tarn and Trade; and so on. Also basic to and kind of international exchange is ,t`',,t assumption that countries will not fig each other. The US can discourage rogue nations from embarking on military advent tures by supplying sophisticated equiPMe" to its enemies.

Now compare a world with one authentic police force to another world with tWoo three or more pretend police forces. A sr?, delinquent country in a peripheral regt°"5 may start causing irritation to it neighbours. If these neighbours apPeal to police force at the centre, the delincllie,°,, country appeals to a rival police force. 14"" central powers become involved in erld.le„sst squabbles on behalf of aggrieved clic" states. They stop trusting each other. Ter': sions and conflicts multiply because a

que, well-defined locus of authority 0" longer exists.

In the deteriorating international en vironment businessmen face increasirw's serious political risks whenever they cr°.5 their national frontiers. as hesitate to invest in a peripheral countni:m they have no protection against gangsrellser by local political leaders; bankers discovi that Third World governments, suppose n, safe borrowers because they are `sovereig_t over a particular slice of territory, carun keep up hire-purchase payments on the military hardware and steel plants sold t,u them, often with generous credit subsidiesci by export salesmen from the West; and even the export salesmen, in the vangualic of industrial nations' competing econ°51„r chauvinisms, doubt whether it is altoget"'

sensible to conduct marketing campaigns in exotic locations where they are liable to be kidnapped, imprisoned as spies or simply cheated.

Evidence for the breakdown of the open international economic order has ac- cumulated in the last few years. While Political risks in international trade and finance are intensifying, the world economy is slowing down. In many countries growth has halted completely. How is the second Antonine Age to be retrieved? President Reagan does not seem to be a complicated man; he has certainly not found a complicated solution. He has had two correct perceptions, that American Power is waning and that American defence expenditure has been declining; and he has concluded, more debatably, that they are connected. So defence expenditure is being increased with the explicit aim of restoring American power. This response has already run into dif- ficulties. The irony of the Fifties and Sixties Was that the open international economic Order was so successful that other countries grew faster than its main sponsor, the US. America is so much weaker economically in relation to the other Western nations that it no longer has the resources to run an effi- cient international police force. The finan- cial constraint obliged Reagan to raise defence spending without simultaneously Putting up taxes with the inevitable result that a large budget deficit emerged. Very Tgh interest rates have been needed to sell the accompanying issues of government debt.

The budget deficit numbers are so burdensome and dollar interest rates so

Versailles that the six other countries at v ersailles have expressed no gratitude for

America's attempt to resume its protective functions. They have also shown little will- 1,,Itgoess to accept an increased share of the the defence costs. Is the only answer for

`ie American people to pay more taxes to

finance Reagan's military programme? It would be rather unfair. American taxpayers would, in effect, be providing the money for warships and missiles which make the ,l'io„rid safe for Japanese businessmen and lett-wing French politicians. It is symbolic of fading American in- fluence that the Versailles summit should have coincided with the Falklands war and the Israeli invasion of the Lebanon. Thirty

these ago the US could have prevented 'nese conflicts merely by stating its disap-

proval to any of the parties; even 20 years ago discreet arm-twisting, involving dollar plornacy and hints about the Marines, uould have been sufficient; but today the S is virtually a spectator. Both quarrels have economic repercussions. The ,Falklands crisis has led to a trade and finan- cial embargo on Argentina, while the strugg- i„ in the Middle East could affect the supp- S of oil to the West. The link between the

breakdown of American power and the tureakdown of international economic rela-

i?ns could hardly have been demonstrated with more alarming clarity.