Debt, deficits and dollars: The world economy in 3-D

Abstract

The world economy in the 1980s was dominated by problems of international debt, balance-of-payments and fiscal deficits, and exchange rate instability. Analyzing these three problems, this paper attempts to demonstrate how changes in both the international financial regime and the conduct of macroeconomic policy at the global level are required if they are to be avoided in the 1990s. Recognizing the bureaucratic and political constraints on far-reaching reform, the paper spells out a number of less ambitious options which could, nonetheless, have a beneficial effect on the world economy. An implication of all the reforms discussed, touching on both financing and adjustment, is an increase in the relative importance of the official sector, in the form of the International Monetary Fund (IMF) and the World Bank, as compared with the private sector, in the form of the international commercial banks. In this regard, as well as in terms of some of their specifics, the proposals find a strong antecedent in the Keynes Plan that was presented to the Bretton Woods Conference in 1944. As then, the argument here is that international financial reform based on a coherent perspective of the world economy can make an important contribution toward bringing about balanced and sustainable world economic expansion.