The Frontiers of Management. Peter F. Drucker

go up—spectacularly so. But far from stimulating the domestic economy, this depressed it and resulted in simultaneous record unemployment and accelerated inflation, the worst of all possible outcomes.

      Mr. Reagan then, a few years later, pushed up interest rates to stop inflation and also pushed up the dollar. This did indeed stop inflation. It also triggered massive inflows of capital. But it so overvalued the dollar as to create a surge of foreign imports. As a result, the Reagan policy exposed the most vulnerable of the old smokestack industries, such as steel and automotive, to competition they could not possibly meet with a dollar exchange rate of 250 yen to the dollar (or a D Mark rate of three to the dollar). And it deprived them of the earnings they needed to modernize themselves. Also, the policy seriously damaged, perhaps irreversibly, the competitive position of American farm products in the world markets, and at the worst possible time. Worse still, his “cleverness” defeated Mr. Reagan's major purpose: the reduction of the U.S. government deficit. Because of the losses to foreign competition, domestic industry did not grow enough to produce higher tax revenues. Yet the easy and almost unlimited availability of foreign money enabled the Congress (and the administration) to postpone again and again action to cut the deficit.

      The Japanese, too, may have been too clever in their attempt to exploit the disjunction between the international symbol economy and the international real economy. Exploiting an undervalued yen, the Japanese have been pushing exports, a policy quite reminiscent of America under the Carter administration. But, as earlier in America, the Japanese policy failed to stimulate the domestic economy; it has been barely growing these last few years, despite the export boom. As a result, the Japanese, as mentioned earlier, have become dangerously over-dependent on one customer, the United States. And this has forced them to invest huge sums in American dollars, even though every thoughtful Japanese (including, of course, the Japanese government and the Japanese Central Bank) knew all along that these claims would end up being severely devalued.

      Surely these three lessons should have taught us that government policies in the world economy will succeed to the extent to which they try to harmonize the needs of the two economies, rather than to the extent to which they try to exploit the disharmony between them. Or to repeat very old wisdom: “In finance don't be clever; be simple and conscientious.” But, I am afraid, this is advice that governments are not likely to heed soon.

      Conclusion

      It is much too early even to guess what the world economy of tomorrow will look like. Will major countries, for instance, succumb to the traditional fear reaction—that is, retreat into protectionism—or will they see a changed world economy as an opportunity?

      Some of the main agenda are however pretty clear by now.

      High among them will be the formulation of new development concepts and new development policies, especially on the part of the rapidly industrializing countries such as Mexico or Brazil. They can no longer hope to finance their development by raw-materials exports, for example, Mexican petroleum. But it is also becoming unrealistic for them to believe that their low labor costs will enable them to export large quantities of finished goods to the developed countries—which is what the Brazilians, for instance, still expect. They would do much better to go into production sharing, that is, to use their labor advantage to become subcontractors to developed-country manufacturers for highly labor-intensive work that cannot be automated—some assembly operation, for instance, or parts and components needed in relatively small quantities only. Developed countries simply do not have the labor anymore to do such work. Yet even with the most thorough automation it will still account for 15 or 20 percent of manufacturing work.

      Such production sharing is, of course, how the noncommunist Chinese of Southeast Asia—Singapore, Hong Kong, Taiwan—bootstrapped their development. Yet in Latin America production sharing is still politically quite unacceptable and, indeed, anathema. Mexico, for instance, has been deeply committed—since its beginnings as a modern nation in the early years of this century—to making her economy less dependent on, and less integrated with, that of its big neighbor to the north. That this policy has been a total failure for eighty years has only strengthened its emotional and political appeal.

      But even if production sharing is used to the fullest, it would not by itself provide enough income to fuel development, especially of countries so much larger than Chinese city-states. We thus need a new model and new policies. Can we, for instance, learn something from India? Everyone knows, of course, of India's problems—and they are legion. Few people seem to know, however, that India, since independence, has done a better development job than almost any other Third World country: the fastest increase in farm production and farm yields; a growth rate in manufacturing production equal to that of Brazil, and perhaps even of South Korea (India now has a bigger industrial economy than any but a handful of developed countries!); the emergence of a large and highly entrepreneurial middle class; and, arguably the greatest achievement, progress in providing both schooling and health care in the villages. Yet the Indians followed none of the established models. They did not, like Stalin, Mao, and so many of the Africans, despoil the peasants to produce capital for industrial development. They did not export raw materials. And they did not export the products of cheap labor. But ever since Nehru's death in 1964 India has encouraged and rewarded farm productivity and sponsored consumer-goods production and local entrepreneurs. India and her achievement are bound to get far more attention from now on than they have received.

      The developed countries, too, need to think through their policies in respect to the Third World—and especially in respect to the hopes of the Third World, the rapidly industrializing countries. There are some beginnings: the new U.S. proposals for the debts of the primary-products countries that U.S. Treasury Secretary Baker recently put forth, or the new lending criteria which the World Bank recently announced and under which loans to Third World countries from now on will be made conditional on a country's overall development policies rather than based mainly on the soundness of individual projects. But these proposals are so far aimed more at correcting past mistakes than at developing new policies.

      The other major agenda item is, inevitably, going to be the international monetary system. Since the Bretton Woods Conference at the end of World War II, it has been based on the U.S. dollar as the “reserve currency.” This clearly does not work anymore. The reserve currency's country must be willing to subordinate its domestic policies to the needs of the international economy, for instance, risk domestic unemployment to keep currency rates stable. And when it came to the crunch, the United States refused to do so, as Keynes, by the way, predicted forty years ago.

      The stability the reserve currency was supposed to supply could be established today only if the major trading countries—at a minimum the United States, West Germany, and Japan—agreed to coordinate their economic, fiscal, and monetary policies, if not to subordinate them to joint, and that would mean supernational, decision making. Is such a development even conceivable, except perhaps in the event of worldwide financial collapse? The European experience with the far more modest European Currency Unit (ECU) is not encouraging; so far, no European government has been willing to yield an inch for the sake of the ECU. But what else could be done? Or have we come to the end of the 300-year-old attempt to regulate and stabilize money on which, in the last analysis, both the modern national state and the international system are largely based?

      Finally, there is one conclusion: Economic dynamics have decisively shifted to the world economy.

      Prevailing economic theory—whether Keynesian, monetarist, or supply-side—considers the national economy, especially that of the large developed countries, to be autonomous and the unit of both economic analysis and economic policy. The international economy may be a restraint and a limitation, but it is not central, let alone determining. This “macroeconomic axiom” of the modern economist has become increasingly shaky. The two major developed countries that fully subscribe to it in their economic policies, Great Britain and the United States, have done least well economically in the last thirty years and have also had the most economic instability. West Germany and Japan never accepted the macroeconomic axiom. Their universities teach it, of course. But their policymakers, both in government and in business, reject it. Instead, both have all along