Aiding Eastern Europe in a a Capital-Short World

AIDING EASTERN EUROPE IN A. A CAPITAL-SHORT WORLD Leonard Silk T,he countries of Eastern Europe and the former Soviet Union desperately need money from the outside world as they struggle to go capitalist. But can they get it in a world that seems to be suffering from a shortage of capital? After World War II, the United States could finance the reconstruction of Europe through the Marshall Plan without running a budget deficit or a current-account deficit in its balance ofpayments. Today the United States has a budget deficit approaching $400 billion and currentaccount deficit ofapproximately $100 billion. There are even doubts that the Group of Seven largest industrial countries could collectively provide enough capital for the ex-Communist countries. A Global Credit Crunch However, on technical grounds, some economists insist that there can be no such thing as a capital shortage, because the demand and supply Leonard Silk is economics columnist ofThe New York Times, Distinguished Professor ofEconomics at Pace University, and Adjunct Professor ofEconomics at the Graduate Center of the City University of New York. He has been a senior fellow at the Brookings Institution and Ford Research Professor at the Graduate School of Industrial Administration of Carnegie-Mellon University, and served in the United States Mission to the North Atlantic Treaty Organization. The author wishes to thank Ivo John Lederer for his generous advice and contributions to this article. 2 SAIS REVIEW of capital must match at the market rate of interest; the market clears when everyone who wants capital can get it at the going rate. Nevertheless, whatever the problems of definition, there is what can be called a global "credit crunch," with insufficient capital flowing to Eastern Europe and the independent states of the former Soviet Union, as well as to the Third World. What is causing the crunch—an insufficient supply of capital, soaring demands, or both? Alexandre Lamfalussy, of the Bank for International Settlements, concludes that "the bulk of the evidence shows that two distinct problems —a banking crisis and a savings crisis—are creating a global credit crunch."1 The short-term slump in the world economy, he maintains, has only exacerbated the long-term structural problems of the banking industry; excess capacity in banking on a global scale has increased competition, cut profit margins, and forced the banking industry to cut back on loans. At the same time, as B.I.S. data show, savings rates have been falling in the countries that have been the major suppliers of international capital. From the 1960s to the 1980s, net national savings ofthe members ofthe Group of Seven fell dramatically: in the United States, from 10.8% ofnational income in the 1960s to 4% in the 1980s; in Japan, from 25.2% to 20.9%; in Germany, from 19.9% to 11.6%; in France, from 19.2% to 8.9%; in Britain, from 10.9% to 5.5%; in Italy, from 19.8% to 11%; and in Canada, from 11.3% to 9.9%.2 And evidence of a credit squeeze is found in the worldwide rise in real interest rates. Governments cannot do much about private savings rates, though they keep trying to affect them by fiddling with taxes, in efforts to discourage consumption or encourage saving. The only direct means governments have ofincreasing national savings is to cut a budget deficit or to increase a budget surplus by raising taxes, cutting spending, or both. But if governments fail to cut their budget deficits, Mr. Lamfalussy warns, "The global credit crunch alert of 1990 will become a long-lasting capital shortage that will slow worldwide economic growth for the rest of the decade."3 The slowdown in world growth did continue in 1991, when global output fell three-tenths of 1 percent and per capita output dropped 2 percent.4 David Suratgar, group director of Morgan Grenfell & Co., 1.Alexandre Lamfalussy, "The Credit Crunch Is Real!" World Link: The Magazine ofthe World Economic Forum, No. 3, 1991. 2.Bank for International Settlements, based on OECD national accounts. 3.Ibid., p. 11. 4.World Economic Survey, United Nations, December 16, 1991, p. 1. ACAPITAL-SHORTWORLD 3 believes that the capital...