A Transatlantic Survey
Troubled waters ahead?

In economic policy the high point of the 'special relationship' between the United States and the United Kingdom came in 1944, when together they built the foundations for the monetary and commercial policy institutions that have guided the international economy since the war. By the 1970s, however, the economic dominance of the US was declining; and the 1980s saw it retreat from multilateralism, though recently there have been signs of an end to this retreat. The United Kingdom, for its part, has been increasingly drawn into the affairs of the European Community. Although both countries participate in the Group of Five and the economic summits, perhaps the two most influential groups on the international economic scene, their bilateral relationship has ceased to be pivotal.

In Discussion Paper No. 100, CEPR Director Richard Portes considers current policy issues concerning finance, trade and development from the perspective of the Anglo-American relationship. The policies of the major industrial countries in these areas have shown a marked convergence in the first half of the 1980s. This has not been the result of deliberate cooperation or coordination; nor are policies similar through a process of imitation or because they are imposed by a dominant power or an international institution. Instead, governments have more or less independently adopted similar approaches to their common problems.

The existence of common problems has been a necessary condition for these recent similarities among economic policies, but Portes contends that this is not a full explanation. Governments could have chosen alternative means to similar ends had their political perspectives differed more. It is therefore possible that this policy convergence has been encouraged by the alliance between the United States and the United Kingdom, through UK influence in the EEC, as well as by the force of the American example.

The current British and American administrations clearly possess common attitudes towards economic policies, Portes notes. They oppose discretionary macroeconomic management ('fine tuning') and favour microeconomic, structural, 'supply-side' policies instead. Overall they believe that if each country can put its own economic house in order, there should be little need for coordination or the explicit management of the world economy. Yet actual policies have not been entirely consistent with these stated preferences. The US budget deficit is a glaring example of disorder in one's own economic house, and even the Reagan administration has found it necessary to enlist international cooperation in dealing with the debt problem and more recently with the exchange rate of the dollar. Despite these inconsistencies it is nevertheless doubtful whether Mrs Thatcher or Mr Reagan would have signed the Bretton Woods agreement. Portes discusses the effect that the attitudes of the British and American administrations have had on the fundamental policy choice between 'management' and 'laissez-faire' in the international economic system.

There is a clear linkage between problems of international finance, trade and development, and the UK and US administrations have now begun to accept the importance of these linkages, Portes notes. There is widespread agreement that the present system of floating exchange rates tends to produce exchange rate misalignments, leading in turn to large trade imbalances and the growth of protectionism. Some observers go so far as to claim that 'managed' international money is necessary to preserve 'unmanaged' international trade: the international economic agenda may therefore be first, money and second, trade. Although he notes that some trade policy initiatives might be of mutual economic benefit regardless of the macroeconomic environment, Portes agrees that progress on macroeconomic and exchange rate policies is a political prerequisite for progress on commercial issues. Yet trade may have to be dealt with first: open and growing markets for LDC exports in the developed countries may be essential to achieve reasonable growth in the developing countries and to avoid recurrent debt crises, which would in turn put intolerable strains on the management of international money.

Finally, Portes notes the inconsistency of conventional wisdom concerning problems of international trade, finance and development. In trade and development, despite the serious problems confronting individual countries and the system itself, there are few prophecies of catastrophe or even of crisis. In money and finance, however, it is often suggested that crisis is inevitable and perhaps represents the only means of achieving necessary but painful reforms. These views are inconsistent with a belief that the systems of international trade and finance are interdependent. Portes argues that progress on correcting current macroeconomic policy imbalances and structural reform of the international financial system is needed in order to promote trade and hence development. Without such progress, he warns, the debt problem could itself become the crisis we fear for the international monetary system and for domestic financial systems.


Finance, Trade and Development: Issues in Transatlantic Cooperation
R Portes

Discussion Paper No. 100, April 1986 (IM)