Trade Policy and Current Economic Problems

Two issues have dominated economic policy discussions in recent months. The first is that of cyclical recovery in the main industrial countries, which many observers expected to be weak and/or threatened by a possible resurgence of inflation. Several indicators suggest that a spontaneous upturn may be expected now that inflation has declined much more rapidly than originally expected, with interest rates declining in parallel fashion from February into December 1982. Inventory levels are low, financial balances of households have improved, construction is experiencing a gradual revival of orders. There is little doubt that many firms and households can no longer postpone the replacement and improvement of durable equipment. Another encouraging development, especially for employment, is the improved relationship between real wages and real interest rates; for much of the 1970's, low or negative real interest rates and high real wages combined to give business investment a strong labour-saving bias. The potential created by these favourable conditions will, however, be realized only in an appropriate policy environment. What constitutes "the right policy environment" is thus the key question. That also applies to the second issue, which concerns the short-run situation facing the most indebted developing countries and their creditor banks. An almost exclusive pre-occupation of all the actors involved with the short-term aspects of the problem, mainly with mobilization of emergency credits, is the most worrisome aspect. Debtors see their indebtedness growing (through the capitalization of interest due) but little in the way of new resources flowing in, while creditors are asked to provide additional funds to countries which are behind in servicing existing debts. Although neither party is likely to find this situation tolerable for long, the question of a long-term solution has hardly been raised