https://cpes.org.uk/om/files/original/6baae75a2b19163232dcb10d3836d634.pdf 91e09b1965cb22395a001f477702cb99 Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Title A name given to the resource Cambridge Economic Policy Review Volume 6 No 3 Text A resource consisting primarily of words for reading. Examples include books, letters, dissertations, poems, newspapers, articles, archives of mailing lists. Note that facsimiles or images of texts are still of the genre Text. Text Any textual data included in the document Chapter 3 The effects of restructuring Chapters 1 and 2 have examined tendencies to imbalance in world trade and shown how those tendencies combine with financial constraints to depress growth in the world economy. We tum finally to consider structural adjustments that might improve prospects for the world as a whole or for particular blocs. The main area in which restructuring policies would assist world expansion is energy. Given present energy trends and the low response of spending in oil-surplus countries to increases in their revenue, there is a likelihood that widening imbalances in energy trade and continuing increases in oil prices will cause prolonged recession in the rest of the world. But expansion of spending and income in oil-importing countries could be accelerated by energy saving and by development of additional energy supplies outside the oil-surplus bloc.The possible effects ofsuch energy restructuring are discussed in the first section below. The second section considers the implications of industrial restructuring, including strategies of trade liberalisation and preferences in favour of exports from developing countries. The binding nature ofthe constraint now imposed by energy imbalance implies that industrial restructuring can have little effect on growth in the world as a whole. But it can certainly alter the distribution of growth between countries and blocs. The final part ofthe chapter assesses 'go-it-alone' strategies for accelerated growth ofindividual countries or blocs through protection, examining in particular the circumstances under which such strategies will or will not harm other countries.lt will be shown that protection need not have 'beggar-myneighbour' consequences provided that it is used to secure faster expansion within the protected region and that consequent energy problems are solved internally or covered by external borrowing. 3.1 Energy restructuring The technical dependence of modem economies on energy input, particularly oil, and the great disparities between energy supply in different countries and blocs, are the principal reasons why trade imbalances tend to widen when growth of spending accelerates. 36 Since 1973 the high price of oil has helped to induce energy saving and to renew efforts to increase supplies in most parts of the world. These efforts have been promoted not only by higher internal energy prices in each country but also by government policies. Here we examine the consequences ofintensified efforts to restructure energy demand and supply. Such restructuring will affect rates of economic expansion and may alter conditions in the world oil market, including the price of oil. Our estimates are designed to show the distribution of benefits from energy restructuring taking these indirect effects into account. Chapter 1 examined what might happen in the early 1980s ifall blocs in the world economy achieved accelerated growth of spending. Our estimate was that trends of energy supply would be inadequate to stabilise world prices under conditions of faster world economic growth. By 1985 a 60-70% rise in the world price ofoil from its present level(relative to prices ofmanufactures) would be needed to eliminate excess demand for oil. This very high price (nearly 200% above the price in 1975) would induce further energy saving and additional supply, but would imply deficits in the energy trade of the USA, Japan and Western Europe reaching over 300 billion 1975 dollars (about $450 billion in today's money). The Middle East's surplus on oil trade would, correspondingly, reach$250 billion(in 1975 values) and it seems impossible that imbalances of this magnitude could be compensated through non-oil trade. In these circumstances financial constraints, considered in Chapter 2, would depress growth in spending in the world as a whole; this would diminish pressure on the oil market and slow the rise in oil prices. With lower world prices, the incentive to save energy would be lessened and expansion of nonOPEC supplies might be less rapid. The recession and the smaller price rise would however bring the oil deficits ofdeveloped blocs down to more manageable levels. The correction of imbalances in energy trade through reduced economic growth is, for most parts of the world, damaging if not disastrous. Suppose that the main oil importers- the USA, Japan and Western Europe - were to make strenuous efforts at energy saving without having to be forced to do so by a very high world price. 'Voluntary' Table 3.1 Alternative energy projections for the USA, Western Europe and Japan Growth of real spending per capita, 1979-85 Balance on energy trade 1985 USA Ex ante With financial constraints With energy saving With higher internal energy supply Western Europe Ex ante With financial constraints With energy saving With higher internal energy supply Japan Ex ante With financial constraints With energy saving With higher internal energy supply (%per year) 2.5 0.6 2.1 1.0 3.0 1.1 2.5 1.4 4.0 3.8 6.5 4.0 ($1975 billion) 81 53 33 46 -148 -105 - 79 -100 84 69 56 68 Ratio of physical energy consumption to real spending, 1985 (1973 = 100) 78 83 72 83 82 87 75 88 68 72 63 73 Ex ante With fmancial constraints With energy saving With higher internal supply World oil price (1975 = 100) 294 226 192 218 Projection assumptions Unconstrained expansion in all blocs (Chapter 1) Growth inhibited by financial constraints: base projection (see Chapter 2) Additional savings at 3% per year (for given real spending and world oil price) in all developed blocs. Faster growth of domestic energy supply (for given world oil price) by 1% per year in all developed blocs. energy saving could be achieved by government regulations or subsidies designed to encourage the efficient use ofenergy. Governments could also raise internal energy prices relative to world prices to stimulate internal supply and reduce demand. The general effect would be to reduce the energy deficits of energy-saving blocs, accelerate their economic growth and their non-oil imports, raise the non-oil exports of other blocs and weaken world oil prices. Our illustrative projection (see Table 3.1) shows growth of spending increased by 1~% per year in the USA and Western Europe and by over 2~% per year in Japan, with a consequent reduction of $60 billion in their combined 1985 deficit on energy trade and a 15% reduction in the 1985 real price of oil. But to secure this, they would need to accelerate their energy saving from the 1~-2~% a year achieved between 1973 and 1978 to 4-5% a year from now on - and that without much further increase in the world price. By 1985 they would need to have cut their energy consumption relative to real income by about 30% compared with 1973. This is a much more ambitious target than is now officially envisaged*. Only Denmark has so far planned rigorous energy conservation on such a scale. If such accelerated energy saving is implausible, what about intensified efforts to increase supply? Domestic energy sources in the United States alone easily exceed total Middle East production; deve- *See lEA, 1980, Energy Policies and Programmes of lEA countries. 37 Table 3.2 Energy restructuring in developed blocs: the implications for others USA Western Europe Japan Other developed Latin America Africa Asia Middle East Centrally plannedb Trade balance, 1985 Base Energy projection savinga Higher energy supply a ($1975 billion) -12 2 - 9 -15 5 -13 + 2 +11 + 3 7 -3 -6 -16 -17 -16 - 6 - 8 -6 -22 -21 -22 +84 +51 +76 676 Growth of real spending per capita 1979-1985 Base projection Energy savinga Higher energy supplya (%per year) 0.6 2.1 1.0 1.1 2.5 1.4 3.8 5.4 4.0 1.3 2.5 1.7 3.6 3.3 3.5 7.3 5.8 6.9 3.3 3.8 3.4 4.5 4.5 4.5 3.4 2.9 3.2 World totalb 000 1.3 2.1 1.4 a In developed blocs only (not including centrally planned). See Table 3.1 for assumptions. b See Table 2.8, footnote d. loped countries together produce about 40% ofworld energy output. The problem is that exhaustion of traditional oilfields and the longstanding rundown of deep-mined coal have caused a depressed trend in their total energy supply which is only gradually and with difficulty being turned round. The long gestation periods for development ofmost new energy sources in the developed blocs mean that little more could be done to raise their supply by 1985. However even a 1% per year addition to supply would offer some appreciable benefits. Our calculation is that this would raise economic growth in developed blocs by ~-~%per year while cutting the combined energy deficit of the USA, Western Europe and Japan by $15 billion in 1985. The consequences for developing countries of energy restructuring in developed countries depend on the former's own energy positions. Their non-oil exports may rise with the improvement in developed countries' markets but countries with substantial oil production will lose from the lower world oil price. At the level of continental blocs our estimate is that only Asia would achieve a net gain and this because ofits position as a significant exporter ofmanufactures. Africa and even Latin America would lose income overall although individual non-oil countries within those blocs would benefit. (See Table 3.2.) These results serve to emphasise that the world cannot simply be divided into two groups of oilexporting and oil-importing countries. Only a few oil-producing countries are wealthy enough to be free from external financial constraints. Among countries which now import oil, some are better able to adjust to high prices than others, while those with chronic oil deficits vary in their ability to profit (or 38 lose) from changes in non-oil trade induced by the world energy situation. Energy restructuring is especially beneficial for Japan and Western Europe since their dependence on oil imports is so great and their shares ofworld markets for manufactures are so high. It is of little benefit to countries with a low dependence on oil imports and negligible manufactured exports. 3.2 Industrial restructuring Among policy-makers in Western Europe and the USA the belief in free trade, especially as applied to manufacturing industry, has often seemed virtually unshakeable. There is therefore a widespread view that the present recession in these blocs could be mitigated by persevering with trade liberalisation and internal restructuring of their industries to accommodate a 'new international division oflabour'. As the Brandt report puts it: 'as developing countries accelerate the pace of their industrialisation, the old industrial countries will have to deploy their capital and labour increasingly into the production of skill intensive and technically advanced goods'. North-South: A programme for Survival, 1980 The implication is that the old industrial countries should cede less advanced industries to developing countries. The general argument in favour ofwide-sweeping international specialisation in a free trade framework is that it will maximise efficiency and thereby improve ∑ Table 3.3 Effects of trade liberalisation and preferences in favour of developing blocs (comparisons with base projection) Changes in balance of trade in manufactures 1985 ($1975 billion) liberalisation All blocsa USA, Europe & Japan onlyb Preferences to imports from developing blocsc Change in growth of real spending per capita 1979-85 (%per year) liberalisation All blocsa USA, Europe & Japan onlyb Preferences to imports from developing blocsc USA Western Europe Japan Other developed Latin America Africa Asia Middle East Centrally plannedd World totald +20 +39 +11 -11 -26 -19 +1 -12 0 -14 -12 -13 +12 +3 0 +17 +1 +8 0 -3 -8 -4 -2 +6 +2 +6 +3 -1 0 +0.6 +1.3 +1.2 -1.2 -2.3 -4.5 0.0 0.0 -0.3 +0.1 -0.5 -0.4 -1.0 +1.2 +0.2 +0.1 +1.6 0.0 +0.2 -0.1 -0.1 -0.2 -0.3 -0.2 +0.5 +0.4 +0.5 0.0 -0.1 -0.1 a Assumed ratios of imports of manufactures (including intra-bloc trade) to domestic spending: Actual 1978 (per cent) Base projection 1985 Liberalisation 1985 USA Western Europe Japan Other developed Latin America Africa Asia Middle East Centrally planned 4.5 12.3 2.5 13.3 9.5 21.1 16.9 27.1 7.3 5.6 19.4 3.2 12.9 9.5 21.1 20.3 32.9 6.9 7.9 28.7 7.9 22.9 16.9 35.2 30.1 32.9 12.2 b Import ratios for other blocs same as in base projection. c Manufactured export shares of developing blocs increased by 8% per year relative to 1979 levels at the expense of shares of all other blocs: import ratios for all blocs same as in base projection. d See Table 2.8. world welfare. It is also often implied that free trade will raise employment, at least in the long run, in both developed and developing countries together. Industrial efficiency is undoubtedly, of itself, a benefit and trade liberalisation has no doubt contributed to improvements in efficiency in the past two decades. But the distributional consequences cannot be ignored since there is no guarantee that industrial restructuring induced by free trade will uniformly benefit all countries. On the contrary there is a strong presumption that in the present energy-constrained situation changes in the pattern of industrial trade will have little or no effect on total world income but may cause substantial redistribution of income between countries outside the oil-surplus group. To explore shifts in income which might conceivably take place we have calculated several projections embodying different assumptions about import ratios and shares of export markets for manufactures (see Table 3.3). Consider, first, the effects of trade 39 liberalisation everywhere except in the already 'saturated' Middle East. In the interests of balance we assume fu,at Japan would encourage imports on such a scale as to catch up with the level of import penetration in the USA. World trade would certainly grow rapidly relative to income and spending. In the absence ofchanges in the pattern ofmarket shares it is evident that the bulk ofexport gains would accrue to already-established exporters- Western Europe, the USA and Japan. Blocs in deficit on trade in manufactures, notably developing countries, would find those deficits worsening (unless, as we assume for the Middle East, their markets were already so flooded with imports that they had nothing more to lose). The scale of existing deficits reflects the great difficulty developing countries have had in establishing industries and implies that few can yet hope to gain from participating in a universalliberalisation. On the other hand suppose that it is really only the main exporting industrial blocs - the USA, Japan and Western Europe- which liberalise fully. In this case the distribution of gains would be reversed. However the main beneficiaries would not be the large majority of developing countries which have little hold on developed country markets, but rather the small group of newly industrialising countries, mainly in Asia, which have an established position in those markets. These are in reality the countries to which developed blocs are least likely to offer improved terms of access precisely because they present the greatest threat. Another widely advocated policy is the award of preferences to developing countries in the form of tariff reductions or exemptions. This was decided in principle by the United Nations and legalised by modification ofGATT rules in the 1960s. Developed blocs have felt sufficient need ofthird world goodwill to take at least some steps to implementthe principle. For example the EEC introduced a Generalised System of Preferences (GSP) and has given special concessions to the African, Caribbean and Pacific countries with which it negotiated the Lome Convention. Motives on the EEC's side include not only the political aim ofsecuring alliances, particularly in Africa, but also commercial objectives such as longterm access for European industries to third world markets and continuation ofsupplies ofraw materials imported from those countries. The effect of preferences is limited by many factors. One is the low level of industrial tariffs in developed blocs vis-a-vis other developed countries which reduces the value of tariff exemptions in favour of developing countries. Another is that Europe, at least, has little interest in accepting imports from export-orientated industrialising countries in the Far East. A third is that the domestic industries most vulnerable to third world imports are precisely those which have already lost through exclusion from third world markets. For all these reasons the concessions awarded in practice have been strictly limited and almost ineffective. Indeed they have been more than offset by new restrictions under the Multi-Fibre Agreement specifically designed to hold back textile imports from the third world. 40 However, preferences do have the advantage in principle that they are a selective instrument. They could be distributed in proportion to need or in inverse relationship to existing export levels in order to spread benefits more widely among developing countries. They might be more practicable and effective if developed countries attached less importance to free trade among themselves. If developed blocs could readily maintain high employment, the award of preferences in favour of developing countries might not encounter much objection. Indeed if there were no binding energy constraint, the surpluses of the strongest industrial countries rather than those of oil-exporters would become the main problem limiting world expansion. In such circumstances preferences in favour ofdeveloping countries would be virtually costless for the strongest industrial countries as a group. But that is not the present situation. Redistribution of industry now has to be achieved mainly by unilateral efforts in developing countries themselves - and there is clearly a limit to the amount of redistribution which the USA and Western Europe, with their own economies in recession, will tolerate. 3.3 Protection One aspect ofthe efforts ofless industrialised parts of the world to improve their share ofworld income has been the use of tariff or quota systems of protection as well as tax concessions and subsidies in favour of new industries. North America and Western Europe have thus been almost alone in attempting to practise free trade policies. As the balance of competitive advantage has begun to shift first to Japan and then also to some other newly-industrialising countries, enthusiasm for free trade has perceptibly waned in the old industrial countries and increased in those which now challenge them. But although protection is generally regarded in the West as a dangerously negative policy, its role need not necessarily be that of resisting change or preventing redistribution. When global solutions to recession are so difficult protection becomes a significant option for a constrained country or bloc because it may increase the scope for unilateral efforts to maintain or accelerate economic expansion within the protected area. Is it correct to regard protection in these circumstances as a 'beggar-my-neighbour' policy or, worse still, as an inherently destructive act reducing world income as a whole? The logic of our argument that the level of world income is now determined by energy trends and financial constraints implies that industrial protection unaccompanied by other policy changes should have purely redistributive effects. That this is so within our model is demonstrated by a simulation ofa large cut in manufactured imports to the USA, sufficient to restore 2h% a year growth ofper capita spending in the early 1980s (see Table 3.4). The cut would have to be quite drastic because the USA would need a much increased surplus on trade in manufactures to finance its additional imports ofoil and raw materials. ∑ Table 3.4 Effects of US protectiona under alternative assumptions about other policies (comparisons with base projection) Change in balance of trade in manufactures 1985 ($1975 billion) Change in growth of real spending per capita 1979-85 (%per year) No change in other policies Energy savingb Increased financial deficitc No change in other policies Energy savingb Increased financial deficitc USA +68 +12 +9 Western Europe -18 - 5 +3 Japan -20 - 4 +1 Other developed -13 - 2 -3 Latin America 3 0 -2 Africa 2 + 1 -6 Asia -10 3 -3 Middle East 0 00 Centrally plannedd 2 0 0 World totald 0 00 +1.9 -0.6 -1.7 -1.3 -0.1 +0.3 -1.0 0.0 0.0 0.0 +1.9 0.0 -0.2 -0.2 -0.1 -0.4 -0.1 0.0 -0.2 +0.4 +1.9 +0.1 -0.4 +0.3 +0.6 +1.4 +0.4 0.0 +0.5 +0.7 a Reduction in US imports of manufactures so as to achieve 2.5% per year growth in US domestic spending per capita. b Energy saving in USA at the rate necessary to leave the US non-oil trade deficit the same as in the base projection. c Additional US financial deficit sufficient to leave the US non-oil trade deficit the same as in the base projection. d See Table 2.8. Note: US protection with: no change in other policies energy saving increased financial deficit Reduction in 1985 US manufactured import ratio 70% 21% 16% Effect on 1985 world oil price + 3% - 4% +12% Other blocs, particularly exporters ofmanufactures, would suffer losses in industrial trade and would cut back their spending to secure compensating savings on imports of oil and primary commodities. The world price of oil, the Middle East's trade surplus and overall trade deficits of other blocs would show little change ex post but there would have been a large shift of economic activity to the USA from all other developed blocs and from developing Asia. This result does not entirely dispose of the issue since the loss to other blocs caused by US protection would arise from what may reasonably be regarded as a side-effect- namely, the rise in US oil imports. The point can be illustrated by supposing, somewhat hypothetically, that the USA took precautions in the form of extra energy saving to prevent a rise in its oil deficit, thereby eliminating the need for an improve- ment in its non-oil trade surplus. In this case US imports ofmanufactures need only be cut, expost, to the degree necessary to finance higher raw material imports. The only loss of income to the rest of the world would arise from the weakening ofpressure on US institutions to incur financial deficits now that their income had improved. More plausibly, suppose that instead ofprocuring greater energy saving, the US government were to borrow money specifically to finance higher oil imports made necessary by faster internal expansion, while still preventing deterioration of its non-oil trade balance through restriction of imports of rnnufactures. The world oil price would rise and there would be complex distributional effects in the rest ofthe world induced by this as well as by the shift in composition of US non-oil imports from manu- 41 Table 3.5 Effects of protection and increased fmancial deficits in USA and Western Europel' Changes in 1985 trade balance Food and raw materials Energy Manufactures ($1975 billion) (comparisons with base projection) Total Change in growth of real spending per capita 1979-85 (%per year) USA Western Europe Japan Other developed Latin America Africa Asia Middle East Centrally plannedb -2 -14 +2 +3 +4 1 +7 +1 0 -32 + 2 --40 +14 8 +5 +1 2 + 6 -4 +16 -10 -1 -3 +53 0 +3 -32 -39 2 +3 +6 +6 +3 +54 +2 +1.9 +1.9 -0.5 +0.9 +1.2 +2.6 +1.2 0.0 +0.9 World total b 0 0 0 0 +1.3 a Reductions in growth of imports of manufactures in USA and Western Europe so as to achieve growth rates in per capita domestic spending equal to 2.5 and 3.0% per year respectively: additional financial deficits of USA and Western Europe sufficient to leave the non-oil trade balances of both blocs unchanged. b see Table 2.8, noted Note: reductions in 1985 manufactured import ratios - USA 9%, Europe 11 %; effect on 1985 world oil price + ii%. factures to raw materials. Overall, the level of real spending in the rest of the world would rise with a larger US deficit and a higher price of oil (despite restriction ofUS imports ofmanufactures). The only bloc to lose out would be Japan which is the most vulnerable to higher oil prices and the most dependent on exports of manufactures to the US market. This combination of protection and external borrowing could hardly be termed a 'beggar-myneighbour' strategy since growth rates in most other blocs would actually be increased (see Table 3.4). There is in fact a very important point implicit in the result. With inflexible free trade policies, the industrial economies of North America and Western Europe notonly externalise damage causedbyinappropriate policies but also externalise gains from good policies. Thus with free trade any stimulus to expansion in the USA tends to 'leak out' to other countries as US imports rise. This, however beneficial to others, increases the cost and difficulty of deficit financing for any US administration which attempts to provide such a stimulus. The generality and magnitude of the gain which could be achieved by borrowing to cover increased oil deficits combined with protection to prevent a spill-over into non-oil trade balances is illustrated by a final simulation of the effects of such policies, introduced independently but simultaneously, in the USA and Western Europe (Table 3.5). All blocs except Japan would gain substantially and the USA and Western Europe could achieve assumed growth targets in full. In such an environment, with adequate internal growth and general import-control mechanisms operating, it becomes more realistic to suppose that the USA and Western Europe might be willing to assist non-oil developing countries through preferences and grant aid. Blanket prohibition of protection in developed blocs is now both unrealistic and unhelpful. The more constructive approach is to see what rules are necessary to ensure that developed countries use protection to overcome their internal recession without causing damage to others. The main rule suggested by our analysis is that they should finance any rise in their oil deficits by external borrowing. The criterion, which would need to be monitored, is that they should not increase their surpluses on nonoil trade. 42 Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Title A name given to the resource Chapter 3 The effects of restructuring Creator An entity primarily responsible for making the resource Paul Atkinson Iain Begg Francis Cripps Michael Anyadike-Danes Graham Gudgin Source A related resource from which the described resource is derived Cambridge Economic Policy Review Volume 6 No 3, pages 36 - 42 Date A point or period of time associated with an event in the lifecycle of the resource December 1980