Previous research on global macroeconomic interactions is flawed, according to international economist David Vines: it has ignored the effects of the South on the OECD economies. Vines spoke at a lunchtime meeting held on 19 September to launch Macroeconomic Interactions Between North and South, edited by David Currie and David Vines and published by Cambridge University Press for CEPR. This volume is based on a conference organized by the International Economics Study Group and the Centre.
David Currie is Professor and Director of the Centre for Economic Forecasting at the London Business School and David Vines is Adam Smith Professor of Political Economy at the University of Glasgow. They are both Research Fellows in CEPR's International Macroeconomics programme. Their remarks at the lunchtime meeting were based in part on research carried out under a programme of work on `North-South Interaction: Models for Policy Analysis', with financial support from ESCOR at the Overseas Development Administration.
Renewed interest in the macroeconomic linkages between the OECD and the LDCs, stimulated by the LDC debt crisis and the effects on the South of prolonged recession in the North, made the new volume particularly timely, Vines noted. The linkages from North to South are well known: LDCs depend on OECD markets for exports, on OECD capital markets for finance, and on the import of OECD technology. The linkages from South to North are much less evident, and are frequently regarded as having only a negligible impact on Northern economies. Macroeconomic Interactions Between North and South demonstrates that this assumption may be seriously incorrect. In his talk, Vines focused on two channels of integration, through international commodity and capital markets.
The debt crisis, depressed commodity prices and the dearth of new finance for the South have made it very difficult for debtor countries to avoid sharp declines in investment. The chapter in the volume by Fritsch on Brazil illustrates this process and shows how reduced investment leads to lower productive capacity and therefore to lower Southern supply in the longer term, altering the balance between supply and demand in world commodity markets. Other studies have found that sustainable output growth in the North depends on this commodity market balance: low investment in the South, arising from the debt crisis, may therefore impair medium-term growth prospects in the North. Shortages of raw materials provided by the South may also raise world commodity prices and add to inflationary pressures. This might prevent the OECD economies from maintaining their present growth rate, even if other global problems, such as the US current account deficit, can be resolved. The recent proposal by former Treasury Secretary James Baker, for the use of a commodity price index as an indicator of inflationary potential, points to an awareness of this possible difficulty.

The operation of international capital markets provides a second reason why the behaviour of the South matters to the North. The existence of a substantial sovereign risk premium on Southern debt introduces an important imperfection in world capital markets, in that profitable investment opportunities in highly indebted countries are not exploited because of the threat of default. Thus for a country whose debt trades at a discount of 50%, the cost of new capital is twice the world rate of interest. Eliminating this distortion would revive investment flows to the South, enabling the LDCs to supply more exports to the OECD countries and improving resource allocation. Arrangements such as debt/equity swaps have been proposed to alleviate the problem of default risk, and the chapter by Powell and Gilbert analyses other innovative ideas, derived from financial markets, aimed at smoothing out developing countries' income paths over time. Such techniques were also applicable to commodity markets, where the experience of agreements to stabilize commodity prices had proved to be messy.
Vines outlined three areas in which policy cooperation between North and South was desirable to respond to these interdependencies. First, it was the North's responsibility to maintain a satisfactory global economic environment. Rising OECD inflation and persistent US deficits threatened drastic policy changes which could destroy the possibility of cooperative solutions to global problems. Second, it was important that LDCs pursue appropriate economic policies, including adjustment programmes. The political vulnerability of LDC governments created considerable risks of inappropriate policies, such as large-scale debt default, which would also threaten cooperative policies. The third requirement, according to Vines, was an early resumption of lending to LDCs, especially debtors, reversing the trend revealed in the 1988 World Development Report of a $40 bn net transfer of resources out of the LDCs. The temptation to delay new lending until LDCs `put their houses in order' must be resisted, since capital inflows were required to establish and consolidate the appropriate domestic policies.
Cooperation between North and South must therefore be viewed as an integrated package, Vines argued; if the risks involved in all three areas were not overcome, both North and South would suffer.
Currie and Vines analyse cooperative strategies for dealing with such problems in their own contribution to the volume. They note, however, that previous research has fallen short of the complete econometric modelling required to provide a firmer empirical understanding of global interdependence. Future work on such detailed empirical modelling will be a major feature of CEPR's collaboration with the Brookings Institution in a planned `Network of Empirical Researchers in Macroeconomics', in which CEPR is expected to play the lead role in modelling North-South interactions. The Rockefeller Foundation has also awarded a grant to Currie and Vines that will enable CEPR to organize a series of international workshops on North-South interactions in 1989/90, culminating in a further conference and book. Over the next two years our knowledge of North-South interactions will grow appreciably, Vines concluded.

In the discussion after the talk, the volume's editors were asked to quantify the importance to the North of the LDC economies. The trade effects were well known, according to Currie; what remained to quantify were the effects of commodity price movements on the North and the interaction between Northern interest rates and commodity prices. Vines cited as an example the finding that $50 bn of lost US exports in the 1980s were to Latin America, where the debt crisis had significantly reduced imports