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Dealing with world economic slump

By Harry B. EllisSenior economics correspondent of The Christian Science Monitor / December 6, 1982



Washington

At the heart of the world's economic dilemma lies a recession so deep that it threatens to turn nations inward to their own peril.

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Such inward turning, summarized by the word protectionism, only worsens the economic stagnation from which most countries - rich and poor - are struggling to free themselves.

Thirty million people are out of work in the leading industrial nations of the non-communist world, and the total is rising.

Unemployment stands a 13.2 percent in Britain, 10.8 percent in the United States, and 8.4 percent in West Germany. In many third world nations, half or more of the labor force is jobless or works part time.

The reaction of governments, prodded by the anguished pleas of jobless workers for protection against imports, is to raise barriers against goods from other lands.

Already, the US, which prides itself on having the most open market in the world, restricts imports of steel from Europe, cars from Japan, and textiles from a host of places. Congress is under pressure to lengthen the list.

Other nations also wield protectionist tools - tariffs, quotas, stiff customs rules, and the more subtle ploy of providing export subsidies to troubled industries.

Yet protectionism, experts agree, is exactly the wrong route to go in trying to break national economies out of stagnation and back onto a path of growth.

For most nations, including the US, a free flow of goods and services across national frontiers is vital because exports increasingly create domestic jobs.

The contribution of foreign trade to the economies of Western Europe ranges from 18 percent in France to 52 percent in Ireland, with the average just below 25 percent.

For the US, with its vast continental resources, the role of foreign trade is smaller, but growing. Over the past 12 years, the export share of the US economy has nearly doubled from 4.4 percent to 8.5 percent.

For developing nations of the third world, the price of global stagnation is cruelly high. Unable to sell their own goods abroad, they plunge deeper into debt to pay for essential imports.

Seen in this light, governments have a common interest in adopting measures to stimulate the world's economy, not to contract it further.

Over the past decade, governments have proven their ability to cooperate in greater or less degree to combat other economic problems that were global in nature.

First came the 10-fold escalation of oil prices from $3 a barrel in the beginning of 1973 to roughly $34 a barrel today. Dramatic energy conservation in many countries, coupled with fresh oil discoveries outside the 13-nation OPEC cartel, helped the world to adjust to the higher cost of fuel.

Then came inflation, fed partly by the boom in food and fuel prices, but more basically by a sharp run-up of labor costs in advanced industrial nations, including the United States.

Inflation, with some notable exceptions, is coming under control. A key to success in that struggle was international agreement that governments must curb excessive economic growth through relatively austere tax, spending, and monetary policies.

These policies, while beneficial on the inflation front, carried within them the seeds of recession and rising unemployment as economies slowed down.

Nations with lower labor costs - Japan, Taiwan, South Korea, Brazil, and others - worsened the problem for the ''old'' industrial powers by churning out high-quality goods with competitive price tags, snapped up by consumers in the West.

The international banking system, meanwhile, came under growing stress as developing countries piled up debts that they could not service through exports.

Hundreds of Western banks now are captive to their major debtors, obliged to grant fresh loans to prevent massive defaults that could destroy confidence in the world banking system.

A spotlight falls on the US to lead the way out of stagnation. With the largest market for imports in the world, a brisk American economy would help to spark recovery in the export industries of other lands.

But US exports also must be given a chance to grow, lest the American trade deficit - already at record levels and swiftly climbing - strengthen protectionist demands.

''Few firms within America's heavy industry can effectively compete internationally (today),'' says a new report from E.F. Hutton. ''As to industrial sectors where the US does retain comparative advantage, protectionist policies in other nations impeded their ability to sell.''

The names of Britain, France, Belgium, Holland, even West Germany and Sweden, could be substituted for that of the United States in the above statements and they still would hold true.

In varying degree, all of the old line industrial powers need to modernize basic industries and bring labor costs into line with productivity. If they do not, they will continue to lose ground to Japan and the most advanced developing countries.

This is easy enough to diagnose, but hard to implement. Restructuring basic industries in the US and Europe will require, among other things, more robots and fewer humans on assembly lines.

As for the workers that remain in heavy industry, their pay and benefit scales may have to be pared back. US auto and steel workers, for example, enjoy wages half again as high as the average industrial wage in the United States - a prime cause of the decline of these once-great industries and their clamor for import protection.

Because of recession, labor costs in the United States and in some other industrial countries are stablizing. That is progress, which somehow must be perpetuated in a fresh equation, linking the growth of incomes to productivity.