A Common Cause for Pacific Basin : Nations Should Finally Organize to Tackle Trade, Debt Issues

<i> W. W. Rostow is a professor of political economy at the University of Texas at Austin. This is adapted from a speech delivered March 2 at the Pacific Basin Symposium in Honolulu. </i>

It is now more than 20 years since a distinguished Japanese citizen, Prof. Kiyoshi Kojima, proposed that a Pacific Basin organization be set up. For a generation, a great deal of thought, technical skill and good will have been invested in elaborating the concept. It is proper that we have allowed time to turn the problem around in our hands, identify the interests that such an organization must satisfy if it is to be successful and identify the problems it must overcome. This interval also provided the time to develop an underlying sense of community. But there comes a time when symposiums and learned essays should give way to action.

Clearly, what the Pacific Basin requires now is an economic, not a political or military, organization. Existing security treaties and understandings appear adequate, at least for the present. On the other hand, there is much for a sound economic organization to do. But what kind of organization?

Evidently, one cannot envisage right now a Common Market or free-trade area for a region with economies at such different stages of growth. In fact, a basic requirement for success is that countries at early stages of growth feel not merely unthreatened in such an organization but also look upon it as a source of support.


What should such an organization do? And, especially, how should it begin?

Clear thinking about the Pacific Basin has, by and large, been obstructed by analogies with the European movement toward economic unity. But the European experience does hold one good lesson for the Pacific Basin nations: The European movement acquired credibility when it proved capable of solving what was then the most important political-economic problem in Western Europe. The problem in 1948-1949 was how to ensure equitable access to the dominating coal and steel resources of West Germany. The solution--fair to Germans and to all others--was the Coal and Steel Community. The success of that enterprise was the political and psychological basis for the Common Market.

In light of that lesson, the first thing a Pacific Basin organization should do is come to grips with the two biggest problems now obstructing political harmony and sustained economic prosperity in the region: the related problems of trade and the debts of many developing countries.

So far as advanced industrial countries are concerned, I define the trade problem as the development of large, chronic surpluses and deficits, inducing in the deficit countries--notably, the United States--mounting pressures for extreme protectionist solutions.

Before I make a concrete proposal on trade policy in the Pacific Basin, let me say something about Third World debts, for they are a substantial part of the trade problem of the developed nations as well as the critical barrier to economic growth in important parts of the developing world. (Incidentally, I assume a future Pacific Basin organization will include some of the major Latin American countries.)

Just as we can’t solve the surplus-deficit trade problem by exchange-rate manipulation without relinking domestic and foreign economic policy over a wide front, we can’t solve the debt problem wholly by conventional financial measures. It is an integral part of problems of trade and growth in the world economy.

For six years, we have dealt with Third World debts as primarily a financial matter: Creditor banks in advanced industrial countries lent the debtors enough each year to pay interest and pushed the principal down the road.


The results have been appalling. In the heavily indebted countries, gross national product per capita declined between 1980 and 1986 at an average annual rate of 1.8%; gross capital formation as a percent of GNP fell by one-third; imports fell by 20%; the ratio of interest payments to exports doubled.

The impact of this tragic episode of regression on the advanced industrial countries has been, of course, a significant loss of export markets. U.S. exports, for example, are estimated to be between 20% and 40% below the level they would have been if the heavily indebted countries had enjoyed normal growth rates.

Proposals to resolve the Third World debt problem are of four broad types: Procedural reform (such as multi-year debt rescheduling and extension of maturities); changing the nature of claims (debt-equity conversions and interest capitalization); new institutions (an inter-governmental institution that would take over the direct claims of banks on borrowing countries and provide relief to debtors), and direct debt relief (a reduction in debt servicing charges).

The time has come for bold, decisive action to end the Third World debt crisis, with Western Europe taking the lead in dealing with the African debts and the advanced industrial countries of the Pacific Basin taking the lead with the Latin American and Asian debts, notably those of the Philippines and Indonesia.

In a matter of this kind, bold, decisive action pays off, as the Marshall Plan proved. That plan was completed in a shorter time and at less cost than originally envisaged. In part, this happened because its scale and decisiveness raised morale in Europe and encouraged vigorous action by Europeans. In this case, an additional factor argues in the same direction: A bold, decisive plan to end the Third World debt crisis could induce a return of a large part of the flight capital that has complicated the task of the debtor countries. I suggest the answer lies in a new institution within which the World Bank and International Monetary Fund would play an important but not exclusive role, plus a substantial measure of debt relief.

As a first step, therefore, I propose that a meeting of governments interested in exploring the possibility of setting up a Pacific Basin organization take place soon at the ministerial level. Its five-point agenda might look something like this:

--Measures to end within three years or less chronic trade surpluses and deficits in ways consistent with high-growth rates, minimum protectionism and avoidance of major crisis in the international financial system.

--Long-run rules for trade that would avert in the future the buildup of large, chronic trade surpluses and deficits and unmanageable debt levels, including rules relating the domestic economic policies of nations to their external trade and financial positions, taking into account variations appropriate to their stages of growth.

--Measures to deal decisively and promptly with debt problems of developing nations in Latin America and the Pacific.

--Other possible Pacific tasks.

--Organizational issues.

For each item, relatively small, expert groups--well-balanced between advanced industrial and developing countries--might be appointed to develop proposals for consideration.

It is often forgotten that the pre-1914 world economy--on which we sometimes look back with nostalgia--was not held together by free trade. The United States, the European continent and Japan all mounted and sustained substantial tariff and other barriers to trade. What held the pre-1914 system together was the political acceptance of the rhythm of the business cycle as a kind of act of God.

But severe, protracted depressions are no longer politically acceptable. Therefore, we shall have to manage our way out of the unsupportable current trade surpluses and deficits; and the rules of the game for the long run must accept a higher degree of management than our rhetoric--especially the rhetoric of politicians and after-dinner speeches--allows.

It is time to invoke the great rule of Jean Monnet, one of the founders of the Common Market: Do not come together to argue and negotiate; come together to solve a common problem. And the problem is much deeper than free trade or protectionism.