The End of a Liberal Era?

THE END OF A LIBERAL ERA? BeIa Balassa o, "ne increasingly encounters dire prophecies that the liberal era in the world economy is coming to an end. It has been claimed that the liberal international economic order, which is said to have been dominant until the quadrupling of oil prices and the world recession of 1974-75, is now disintegrating. According to a high-level study group, "the international disciplines that are meant to restrain governments, especially the principles and rules of the gatt . . . are increasingly called in question, and governments quietly permit resort to ad hoc and, it almost follows, shortsighted protectionist courses ofactions."1 At the same time, "when [owing to protectionist measures] world trade is growing so slowly, the viability of the international financial system ... is being widely queried."2 These remarks indicate the interdependence of international trade and international finance. Another important component of the international economic system is foreign direct investment, which combines the movement of capital with that of managerial and technological know1 . Kenneth Durham et al., Spectators ofTheir Own Actions, an interim report on protectionism for the GATT ministerial meeting by a study group under the chairmanship of Kenneth Durham (London: Trade Policy Research Center, November 1982), p. 8. 2.Ibid., p. 10. BeIa Balassa is professor of political economy at The Johns Hopkins University and consultant to the World Bank. Comments by J. M. Finger are gratefully acknowledged. However, the opinions expressed in this paper are the author's own and should not be interpreted to reflect the views of the organizations with which he is associated. Professor Balassa is the author of numerous publications in the fields of international trade, economic development, and comparative economic systems. His most recent books include The Newly-Industrializing Countries in the World Economy (New York: Pergamon Press, 1981), and Development Strategies in Semi-Industrial Economies (Baltimore: The Johns Hopkins University Press, 1982). 133 134 SAIS REVIEW how. One may then define the liberal international economic system as one characterized by the absence of barriers to the free flow of goods and capital, including the right of establishment abroad. Such a system never existed in reality. While there was an impressive tariff disarmament in the 1950s and '60s on nonagricultural products in the developed countries, agricultural protection was aggravated by the establishment of the Common Agricultural Policy of the European Communities (ec) and the imposition of U.S. restrictions on meat, dairy products, and sugar. In addition, the major developed countries, other than Japan, subsidized shipbuilding and began to apply restrictions to textile imports in 1962. In turn, the newly established Socialist countries increasingly isolated themselves from the world economy. Furthermore, at least until the mid1960s , the trend in the developing countries was toward greater protection ; few developing countries had access to international finance, and a number of them imposed limitations on foreign direct investment. The international economic system as it existed a decade ago thus had numerous warts and blemishes. Still, the question needs to be answered, what further blows has the system since suffered, and where does its future lie? In the following, measures affecting capital flows and trade will be reviewed, with consideration given to desirable policies for the future. As far as financial capital is concerned, a convenient point of departure is the Great Depression, during which time widespread currency controls were imposed, and then maintained during World War II. The Bretton Woods Agreements did not envisage the freeing of financial flows. As a knowledgeable observer expressed it: "Not only was freedom of international capital movement thought to be unnecessary to achieve the objectives of high income and employment and efficient growth in world trade, but also the experience of the interwar period had indicated that such freedom might actually be harmful and disruptive to the pursuit of those objectives."3 Convertibility was reestablished in the late 1950s, but financial flows continued to be limited (1) for lack of a truly international capital market; (2) continued restrictions on capital movements in European countries; and (3) the imposition of the Interest Equalization Tax in the United States. An international market for capital emerged with the development of the Eurodollar market, which assumed increasing...