Get Out the World-Trade Map
Parodoxical financial atmosphere stemming from currently weak dollar may colud crucial long-term issues
THE leaders of the seven principal industrial powers (the G-7) are meeting in Naples, Italy this weekend in an atmosphere of perversity and paradox. The economic news is generally good, but financial markets are behaving as though it were bad.
The seven are the United States, Japan, Germany, France, Great Britain, Italy, and Canada. Together they account for 65 percent to 70 percent of the world's gross national product, but they have only 11 percent of the world's population. All except Japan are experiencing generally satisfactory growth with low inflation. Even Japan shows signs of revival, especially if it can achieve some political stability.
You wouldn't know this from looking at the frenzy in international currency trading and the distress in securities markets. This turmoil is an overreaction to a decline in the dollar below 100 yen, a level which has acquired an unwarranted symbolism.
The dollar is the world's leading currency, and its movements either up or down have some disruptive effects. For example, oil is traded in dollars; so for the rest of the world, the price of oil is affected by the dollar exchange rate as well as by underlying market forces.
Except for such side effects, there is nothing necessarily wrong with a cheaper dollar. This is how the market deals with international-trade imbalances.
The principal such imbalance today is the Japanese surplus of $130 billion, more of it with the US than with any other country. When the dollar goes down and the yen goes up, the market is encouraging Japanese to buy more from the US, and Americans to buy less from Japan.
When the yen was 200 to the dollar, a television set that cost 100,000 yen in Japan could be exported for $500. But when the yen is 100 to the dollar, as has been the case recently, that same television set costs $1,000 to export. Conversely, a computer that cost $2,000 in California would have cost 400,000 yen to export when the yen was 200 to the dollar, but only 200,000 yen at 100 to the dollar.
Over time, a cheaper dollar and a more expensive yen will bring trade back into balance. This is how natural economic forces, operating through a free market, correct trade imbalances when governments don't get in the way. Governments have a habit of getting in the way. When they try to interfere, they usually only postpone the readjustment, making it more painful when it finally comes. Don't be surprised if this happens in Naples.
What would be more surprising in Naples would be to see the G-7 leaders take effective action with respect to some fundamental problems that are looming more ominously than the momentary turmoil in currency markets. The G-7 cannot dictate to the rest of the world, but not much is going to happen in the world economy without G-7 leadership. Where does the G-7 want the world to go, and how does it propose to get there?
Leadership is needed with respect to three areas: Russia, the emerging middle powers, and the new trading system.
In its last two or three meetings, the G-7 has recognized the importance of helping Russia and the other countries of the former Soviet Union change from socialism to democratic capitalism.
The rhetoric has outrun the performance. The structural rigidities of the former Soviet countries were underestimated and have made the transition more difficult than anyone anticipated. Lack of resources among the G-7 is a real problem, but lack of imagination may be a greater constraint.
Russian President Boris Yeltsin will be in Naples. Has anyone thought about the optimum outcome of the group's meeting with him?
Mr. Yeltsin has made it clear in the past that he would like to be a member of the economic elite and turn the G-7 into the G-8. Cold economic data do not support him in this, but it might be useful to think of creating a kind of associate membership not only for Russia but also for three or four of the larger middle-sized economies - China, India, and Brazil or Mexico, for example. That would perhaps help create a bridge between the G-7 and the rest of the world.
Within the last year, we have seen the conclusion of the Uruguay Round of trade talks. Along with the North American Free Trade Agreement, this has laid the basis for the emergence of a new and greatly expanded world trading system, which will be to everyone's advantage. But somebody has to take the lead in meshing worldwide multilateral trade with regional blocs.
It would be a pity if the G-7 dithered over the transitory problem of the dollar and neglected more important long-range policies. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.