Williamsburg: what was left out

The recent Williamsburg summit conference attracted a great deal of worldwide attention. Any meeting involving the leadership of industrialized nations will cause us to pay attention, to speculate about what really was discussed, and to wonder how its results will affect the future course of events.

Now that it is over there will undoubtedly be a period of several weeks, if not months, in which every thoughtful journalist will tell us what the results of the conference mean. These commentaries will certainly make entertaining - if not enlightening - reading.

Yet we must look beyond Williamsburg, which tended to be long on rhetoric and short on substance. When we look more deeply we see that one of the most important economic issues for the balance of this decade did not appear to be discussed in Virginia. Specifically, the world economy stands on the threshold of industrial overproduction - a situation where the capacity to produce will grow in an uncontrolled fashion among many nations while consumption of a wide range of products remains concentrated in only a handful of highly developed countries.

How did we get ourselves into this situation?

One must be careful to avoid oversim-plification, but two economic forces have played a dominant role:

* The downsizing of manufacturing plants which facilitated easy access to productive capacity for the industrializing third-world countries.

* The emergence of a new version of economic nationalism based on this newly created industrial capacity. South Korea is an excellent example although there are others, most notably Brazil and Taiwan.

These two factors require brief comment, but, to repeat, the result is the potential for global overproduction.

Technological change. Over the past two decades there have been fundamental engineering breakthroughs in the redesign, simplification, and downsizing of the manufacturing production process. It started with continuous processing at steel plants in the 1960s and now we are in the midst of a computerized (CAD-CAM) manufacturing revolution. As a result, most newly industrializing countries are able to enter into sophisticated manufacturing activities that heretofore were limited to the most developed countries. The proliferation of this industrial capacity among countries with substantially lower wage structures goes a long way toward explaining the competition that America's much older industrial capital stock is now facing.

Economic nationalism. The emergence of economic nationalism is the inevitable outgrowth of this technological development. Twenty years ago when I was an economist working in Latin America to achieve the goals of the Alliance for Progress, it was widely believed that the desirable end in the long chain of economic development was for third-world countries to participate fully in the dynamic affairs of the industrialized world. Now this goal is being achieved in a number of countries. But it appears that this very success has produced a serious problem - an excess of manufacturing capacity.

In a sense we should have foreseen these results. It is far easier to create industrial capacity than to create a middle class by raising income in developing countries. Thus, not unexpectedly, the dominant viable consumer market for this new output has become the United States, Japan, and Europe. With a greater propensity for protectionism in Japan and Europe, the burden to consume has fallen disproportionately on the US. At the same time it is abundantly clear that we alone cannot always be the consumer of last resort.

Taken together, technological change and economic nationalism result in a significant mismatch between production capacity in a growing number of countries and the current worldwide demand for consumer goods.

Policy options. What are the policy options - the real Williamsburg issues?

Certainly we must begin to acknowledge that the rapid creation of manufacturing capacity among developing countries is a fast-emerging problem that could generate considerable international economic confrontation. We must also recognize that:

* The consumer and producer markets in the US, Japan, and Europe do not have an infinite capacity to absorb unilateral increases in output without serious economic disruptions to their own indigenous in-dustries.

* In the face of increased third-world manufacturing production, the US must avoid protectionism. Policymakers in Washington would do well to concentrate on encouraging new institutional arrangements in these emerging manufacturing countries that would facilitate the development of their own middle classes, thus enhancing their ability to consume an increasing share of the world's output.

* Leadership in these newly industrializing countries should broaden their concept of economic nationalism. Such a concept should include deliberate efforts to expand domestic purchasing power.

Over the years capitalism has been confronted with many new and varied tests. Certainly the effort to facilitate third-world economic development has been most noteworthy. But lest Marx's prophecy - that ''capitalism's success will sow the seeds of its own destruction'' - be fulfilled, policymakers need to creatively address the challenge to consume that is posed by the new reality of world industrial capacity.

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