The Economics of World Tension

...it is the socio logical effects and moral implications of this attitude which may become damaging to the cause of the 'West.' These problems are not necessarily inherent in the private enterprise system as such...

...It is the long-run menace to the existence of the latter which is, perhaps, the most dangerous threat to the present efforts at relaxing world tension...

...At the same time it encourages consumption in the affluent countries instead of undertaking measures to moderate international inequality and use the quickening increment of national income in the rich areas for the benefit of the poorer ones...

...This is impossible so long as the non-Soviet orbit relies for stability solely on monetary policy, i.e., on the deliberate creation of uncertainty and fear...

...Foreign aid can and should play an important role...

...It also over-stimulates expenditure on conspicuous consumption in contrast to collective well-being and an increase in investment (which is sorely needed in Britain and in the poorer areas...

...Instead of regarding this as a healthy readjustment (and merely calling on other countries to refrain from turning their dollar assets into gold) the danger is great that the U.S...

...total bilateral and multilateral aid and technical assistance programs represented $11,251 millions, between 1954 and 1957...

...Consequently, a sys tem in which the highly developed areas periodically restrain demand by monetary policy, and the impact of this policy in primary-producing markets, necessarily causes a sharp deterioration in the terms of trade...

...In the postwar years, government aid, in the form of low interest bearing loans or outright grants channelled either directly or through international agencies, has represented a very considerable contribution...

...There has been insistent propaganda in favor of restoring the sway of the uncontrolled working of the price mechanism in "free" markets acting through the profit motive and of forswearing Keynesian methods of stabilization...

...It is also partly due in certain cases to the financial myopia which dominates the International Monetary Fund, and which has caused untold harm to the democratic cause in poor areas...

...have aggravated the prob...

...This is the basic cause of our failure...

...Foreign aid must be used to stimulate national effort and reform, and to reduce the need for compulsion in mobilizing the rural manpower of the poor areas for accelerated growth...

...these have reduced mortality rates without much hope of an early fall in births...

...I feel that indirect taxes, if applied on a sufficiently large scale, can, in a democracy, be made as obnoxious by skilled propaganda as direct ones...

...the main effort must come from the recipient country itself...

...Much was accomplished...

...There is no doubt, moreover, that technical progress in the highly developed areas has been so strong as to make investment relatively very attractive...

...To the worsening of the terms of trade of the poor countries a fall in direct aid would then be added...

...Here we are confronted with a problem which causes a grave split in the opinion of the Free World, since an important fraction regards it as a religious issue on which compromise is not possible...

...Moreover, Russian interest in harming western Europe is increased by their failure in agriculture...

...The efforts of the US to curtail home, production, while famine conditions obtain in important strategic areas illustrates the failure to understand the problem...

...They must find a balanced way of deciding between increases in leisure and incomes...

...So long, moreover, as productivity in Russia is increasing at a rate far faster than in America or western Europe, the potential threat will constantly increase...

...The present system leads to instability, unemployment and a decline in the relative growth of the non-Communist world...

...All non-Communist areas need a vast increase in investment in human beings, both in health and education, and in housing and urban planning to buttress their spiritual well-being...

...Against this success, the fear of compulsion will weigh less and less in favor of the West if it is not able to tackle the problem of poverty successfully...

...Only a thorough overhaul and liberalization of the constitution and functioning of the International Monetary Fund and the Bank which provided for a mechanism to offset such gold losses could prevent a positive aggravation of the already unfortunate position of the primary-reducing countries...

...The pressure of salesmanship of the rich countries, the prestige conferred by the possession of articles of conspicuous luxury (Cadillacs, television, etc...

...To call for an increase of social expenditure on education, say, or health or the underdeveloped areas seems to be considered politically dangerous...

...This has also been attacked successfully by the propaganda of those who fear to lose their privileges...

...The growing hostility in Latin America to the activities of the International Monetary Fund is an eloquent proof of the grave dangers of this policy to the cohesion of the non-Soviet world...

...So-called libertarian "cajollery" bids fair to doom the West to inmobility and failure...

...It is an open question whether the rich in this way have exploited the poor...

...The diagnosis of the long-term economic outlook for the West suggests a number of ways in which improvement might be striven for...

...2) It would seem essential in view of the relentless increase in Soviet economic efficiency to accelerate growth even in the most developed countries of western Europe...

...The reason for this is partly the immense difficulties in finding suitable administrators and entrepreneurial ability in underdeveloped areas...

...At the same time they are under a deadly threat of a rapid increase in their populations which itself is the result of the medico-technical revolution which has been going on in the rich countries...

...This article, by the distinguished English economist, is a condensed version of a longer study which first appeared in the English magazine, New Statesman and Nation...

...In principle there is nothing which the Soviet system can accomplish which cannot be done with equal or greater ease (because the West still contains by far the richest areas of the world) by western Europe and North America...

...This impact is the more likely, as the long-run world market outlook for some primary products is not at all encouraging...

...EVEN SO CURSORY an enumeration of some of the ways in which relief might be sought from the present trend towards increasing internal and international tension is sufficient to show the immensity of the psychological problems involved...

...The success achieved by China in mobilizing the underemployed rural masses for productive investment is ominous for the non-Soviet world, as it contrasts with an almost complete failure in this respect in the underdeveloped part of the nonSoviet world, including in particular India...

...In one sense they have, and continue to do so...

...This exacerbates the poverty, which is basically due to shortage of equipment and to the relentless acceleration of population increase caused by improved public health policies...

...The satisfaction felt in some circles in the West at this failure is therefore misguided...

...will cut its aid faster than western Europe expands its program...

...But foreign aid can be only marginal...

...There has been an irresistible tendency toward independence in the colonial areas of Asia and Africa...

...Buna rubber, glass-wool (replacing cork), artificial fibers, and highly refined and cheap groundnut oil show the immense threat involved to specialized primary producers...

...A new menace has arisen in this respect in the gold losses recently suffered by the U.S...

...The prestige of having broken through poverty and stagnation virtually by their own efforts has had and will have immense propaganda value for the Russians in these areas...

...Nevertheless, there can be little doubt that private investment is not a sufficiently broad basis on which to start a self-generating process of expansion...

...Foreign help needs, therefore, to be carefully planned to promote reform, and to enable a general economic mobilization...

...The decline in the rate of mortality in the last century was followed by a decline in the rate of births in most advancing countries, as a natural outcome of an organic improvement in general well-being...

...In the rich countries there has been a return toward the policies of the prewar period, in which rising prices lead to insistent calls for restrictive monetary action—no other weapon being available to governments which are pledged to economic "freedom" and the abolition of discriminatory controls...

...Thus, it is only in certain specific instances, and mostly to exploit raw material resources either by way of plantations or by way of mines or wells, that foreign capital has flowed from the rich to the poor in any considerable quantity...

...It might well increase the attraction of the Communist solution—especially if that is seen to be "working...

...It is not the techniques that are lacking but the social and economic insight, which must be ready for a pragmatic approach to any question...

...The fact that the cost of a change in automobile models is equivalent to the whole of the productive investment program of India for several years should at least make people wonder whether the present system of allocating resources of the western alliance is sufficient as things stand to cope with their international politico-economic problem...

...Once the arms race were over, the Russians could concentrate on drawing their rural manpower into industry more quickly (57 per cent of their population—a higher figure than Italy— was still rural in 1956) by being able to provide more production...

...The threat of Soviet competition in primary-producing areas is steadily growing and could only be met, without detrimental consequences for the increase in the standard of living, by accelerating investment and growth...

...On the other hand, without foreign capital investment, the poor countries would be even poorer...

...At the same time, Russia, far from suffering a disadvantage from such exchanges, would also benefit as she would obtain food and raw materials on far more favorable terms, by concentrating her own efforts on industrial expansion, than she is capable of doing at present...

...It is this contrast which makes the prospect of the population movement in underdeveloped areas so ominous...

...A lessening of tension is therefore to our advantage in the medium run, by speeding up agricultural and spreading industrial advance...

...Yet their increase cannot be accomplished by the traditional means of market economics...

...Exasperation with the status of political and racial inferiority, which the economic trends consolidate, may clearly make Communism attractive to people who have never had opportunities to enjoy democracy...

...IF RUSSIA WERE TO MAKE USE of her superior industrial productive capacity to obtain raw materials and food by exchanging them for industrial products, the terms of trade of the primary countries would violently shift in their favor, and these countries would have considerable benefit by trading with Russia...

...They are, in most cases, unable to hold their produce even tem porarily off the market in the hope of obtaining better conditions, be cause they lack both the financial institution to help them to carry stocks and the means to store and manage them...

...It is desirable to find a voluntary solution...

...Investment power has been further reduced—and thus the means by which the inequality within these poor areas, and between them and the rich countries, could be mitigated...

...Under the attractive guise of defending basic liberties it wishes to preserve the status quo, and to induce further decreases in the allocation for collective needs...

...the failure may have been caused by the failure of investment, of mobilizing the rural population...

...It is not that the investment programs of the underdeveloped non-Soviet area were too ambitious: they were not ambitious enough...

...Moreover, evolution in the Soviet world, and especially in Russia, is likely to favor the Soviet buying of primary products at high prices relative to manufactures...

...Thus, Russian self-interest and the interest of the poor countries would coincide...

...Allocations of for eign aid and technical assistance have been made on a piecemeal, projectwise basis from year to year, thus preventing the full fruition on even those insufficient amounts that have been voted...

...The inequality between rich and poor countries is actually increasing...

...They completely lack the social integration which comes through the Welfare State, and high, progressive taxation...

...It is also due to the multiplicity of the agencies in charge, the lack of co-ordination and the failure to take an overall view and to apply aid and technical assistance at the points most likely to yield best results on the basis of comprehensive surveys...

...On the other hand, it should be said quite categorically that an economic solution to these problems cannot by itself guarantee that adverse shifts in the international balance will not occur...

...c) Industrial progress has also had an unfavorable effect on primary producers...

...There is hardly a poor country where self-sustaining growth can safely be said to have been started...

...Non-Communist countries, moreover, have not mobilized their vast under-employed rural manpower for productive investment...

...In particular, speedy measures must be taken to prevent gold losses by important countries and the shortage of international liquidity which leads to a cut in total aid to the poor areas...

...This cannot be entirely attributed to the decline in international private investment due to the wickedness of the debtor countries, their inflationary policies, and the like...

...A deterioration in the terms of trade by ten per cent, for instance, would wipe out all gains from the present rate of increase in productivity in Britain...

...b) Far less ominous, far more easily remedied, is another problem—agricultural protection in highly developed areas, including the efforts of the US government to get rid of commodity surpluses without being willing to pursue a planned policy of economic expansion in the underdeveloped areas...

...This agricultural revolution has been most conspicuous in America and Germany, but it is now gaining ground in France and Britain...

...This is possible only if a desire for general popular participation can successful be evoked...

...and since progressive taxation has now been introduced in most areas (this contrasts strongly with prewar practice), the poor areas also participate in the profits earned...

...Poor pri mary producers are notoriously in a weak bargaining position when the sellers' market disappears...

...If, then, the socio-economic dogma of uncontrolled markets have imposed a growing unbalance and spiritual dissatisfaction even within rich and highly developed countries, its impact on the poorer areas has been disastrous...

...They obtain labor much more cheaply than they can at home, and they have access to favorable raw material bases...

...In comparison with these factors the problem of armaments expenditure is of minor importance...

...The Russians have it within their power to condemn important western European countries—and especially Britain, which has fallen far behind Germany, France and even Italy in the rate of her economic expansion—to stagnation, unless these countries can decisively increase their rate of investment and progress...

...It must Iead to a polarization of sentiment and to tension within, and between, countries...

...and in South America, too, there has been a decided quickening of popular discontent with traditional regimes which combine economic liberalism with military dictatorship...

...By such "linked public works" financed by the recipient governments with foreign aid, much of the liberty of the individual could be safeguarded...

...Yet it is clear that even such Keynesian methods cannot achieve the acceleration of growth and decrease in international inequality which are needed...

...This is an extremely menacing prospect for the industrial countries of western Europe which depend on the import of primary products and export manufacturers...

...THERE IS A SHARP CONTRAST between mobilization in Communist countries of vast manpower reserves for productive investment, and the feeble efforts which the poorer non-Soviet countries have hitherto made, even with the substantial aid in resources and technical knowledge which has been supplied to them...

...Hitherto it has been used, if anything, to induce the deferment of reforms...

...THUS, PRIMARY-PRODUCING countries, after a short period of relief immediately after the war, are finding it increasingly difficult to start or sustain capital accumulation sufficiently to induce sustaining growth...

...In the first place, the dismantling of direct controls has had more debilitating effects in the poorer than in the rich areas...

...The political risk is obviously much higher in the relations between the poor and rich countries than it is within the rich countries themselves...

...5) Beyond all this is the relentless increase in population which again overshadows the greater part of the world, and threatens to negate all efforts to increase per capita national incomes...

...This raises a question of farreaching importance: does not the approach to economic development adopted in the non-Soviet countries, including the organization of technical assistance, need thorough reappraisal and reform...

...They cannot easily curtail their produc tion...

...1) The allocation and growth of the national income ought to be influenced more consciously than at present...

...There can be no doubt, however, that some solution will have to be found in the less developed areas, for otherwise all their efforts will be doomed to failure...

...The collapse of death rates in underdeveloped areas has been the consequence of advances made not in those countries but elsewhere...

...Decontrol, therefore, has resulted in a dissipation of investment power, in favor of luxury building and luxury imports of western durable consumers' goods, as the rich have used their new freedom to satisfy their desire for these conspicuous signs of eminence...

...The dogmatic fervor which has overtaken western governments seems to doom us to frustration and might condemn us to defeat...

...Inasmuch as foreign investors have exerted pressure against state enterprise, they may in the long term have harmed rather than helped the poor countries...

...On the one hand, it has reduced waste, and therefore reduced the need for any given output of corresponding raw materials...

...4) It has been suggested that the cost of such a restoration of internal and international social balance might be more easily borne if financed by increasing indirect, rather than direct, taxation...

...The fact that foreign—especially American—help was in many cases dependent on decontrol (recent flagrant cases in point include Turkey and Spain) meant that these countries were, so to say, bribed by tem porary relief (without due overall analysis of their problems) to accept policies which are in the long run bound to weaken their capacity to increase their standards beyond the temporary increase that foreign aid spurred...

...Such enthusiasm is unattainable without far-reaching social and economic reform, including mass education...

...lem...

...This in its turn was due to a failure to push through reforms in land-tenure, in taxation, and effective direct controls...

...According to the UN World Economic Survey for 1958, the poor primary-producing areas lost more as a result of the deterioration of their terms of trade than the whole of their foreign aid...

...By putting additional resources at the disposal of the poor, the need for compulsion can be reduced...

...d) Last, but not least, tastes have changed—and the change has been accentuated— by incessant advertising—towards highly manufactured durable consumer goods and against goods with a high content of imported agricultural products such as food or clothing...

...On the other (and even more important) it results in the discovery of new and superior materials which displace the natural products by virtue of their cheapness, evenness of quality and other advantages...

...A further alternative could be the extension of public ownership...

...I doubt this...

...The malaise in the underdeveloped area has further been ag gravated by the worsening, since 1951, of the terms at which they can sell their produce in exchange for manufactures...

...Thus the rich, in a sense, exploit only the opportunities they themselves created...

...voluntary co-operation can be induced by enabling the peasant and the laborer to earn some immediate income if he participates in communal investment...

...The condensation has been checked by the author.—EDITotts...

...WHAT IS THERE TO BE DONE...

...Their national income is far less evenly distributed than in richer areas...

...Indeed the opposite may be true...

...The main stream of public opinion in the West, far from promoting the creation of the preconditions needed for an outcome favorable to democracy, is marshalled in a diametrically opposite direction by advertising campaigns...

...This means wagespolicy, tax-reform and control over investment...

...In the years since the war, America alone has provided $62,133 millions in this way...

...A transformation of the IMF into an International Central Bank with powers to create reserves and a reform of its present policies and attitudes is essential to this end...

...The rising standard of comfort and ease in rich capitalist countries and the lessening of class bitterness mask a drift toward productive inferiority in relation to the Communist bloc...

...3) The needs of international, as contrasted with national, development have also been largely misunderstood...

...Successful co-existence of capitalist countries with the Soviet bloc depends on the realization in the former that the non-totalitarian ecnonomic system has been put on the defensive...

...yet if the vast amounts are taken into account, the achievements are disappointing...

...But, at any rate in the United States, this kind of expenditure is being widely encouraged as the only safe way of increasing government outlay and so sustaining expansion...

...But it would certainly be foolish to hope that slight increases in the standard of life, without increased self-confidence and hope, would be enough to reduce discontent...

...There is: (a) a technical agrarian revolution going on in highly developed areas by which their productivity in regard to temperate-zone food and raw materials is increasing at a rate faster even than industrial progress...

...However, armaments themselves do not make war...

...Even if the whole of the international social unbalance, the growing discrepancy between the fate of the rich and the poor countries, were the fault of the latter (e.g., the inability to curb the rise of populations and mismanagement of investment), the increasing unbalance could not be regarded with indifference by the former...

...profound institutional changes have become inevitable...

...Here then is a threat of extreme gravity both to our influence in the poorer areas of the world and also to the standard of living of the highly developed countries of Europe...

...They could be solved without doing irremediable harm to basic individual rights or changing the character of the system...

...Internationally, this anti-inflationary polciy in highly developed areas has had the effect of undermining the earning capacity of the less developed areas by reducing the demand for their products...

...In the teeth of all evidence, strenuous efforts are being made by economists in the rich countries to show that in the long run the primary producers have nothing to gain and much to lose by diversifying their economies, by accelerated planned investment in industrialization...

...Moreover, the contradictions in the non-Soviet world between the problems of the highly developed and those of the poor areas is likely to frustrate efforts to achieve stability in the former and make it difficult to bring effective aid to non-Communist governments in the latter...

...Unfortunately, there seems to be no immediate prospect of the pragmatic approach that would be needed to tackle them...