§ In 1979 it was clear that the long-term decline of Britain's relative position in the world economy called for a fresh start, for a radical new beginning. And it soon became apparent, as the effects of the second oil price shock hit home, that that fresh start would have to be made in an international setting that was increasingly difficult.
§ Last year world output and trade were lower than generally expected. In the major industrial economies output fell; and more than 30 million of their people were unemployed.
§ Developing countries have faced similar difficulties. Weak markets for their products, high oil import costs and 135 high interest rates have led to a sharp rise in their short-term debt. They have had to cut their imports; and that has added to the fall in world trade.
§ It is worth recalling that in 1979–80 the world price of oil rose by about 2½ times, and that it was this sharp rise, coming in the aftermath of the 1973 surge, that triggered off the deepest economic recession the world has experienced since the war.
§ Now, however, there are signs that the worst of the problems of the world economy are beginning to abate.
§ Oil prices have now weakened. For the world as a whole this means lower inflation, and hence an encouragement to increased activity.
§ More important still, there are clear signs that the world is breaking the inflationary habits of the 1970s. In many countries the rate of increase in prices has fallen more steeply than expected.
§ At the same time, interest rates have declined substantially almost everywhere, including, of course, here. In the United States, though real interest rates remain high, three-month rates have almost halved from last summer's peaks.
§ Looking ahead, 1983 should see recovery in the major economies gathering pace as the year goes on. This should be accompanied by a recovery of world trade.
§ Even so, we cannot expect a year of trouble-free progress. Transition from a period of high inflation is bound to be uncomfortable, internationally as well as nationally. The process of adjustment by major debtor countries has to be encouraged, and world recovery nurtured and sustained.
§ There is a major task here for the international financial institutions, which deserve—indeed require—our full support. The need is not for blue-prints for new institutions but for increased commitment—political and financial—to the existing ones. That is why, as chairman of the Interim Committee of the International Monetary Fund, I worked this winter for an early increase in the resources available to the fund for lending to countries in difficulty, and why I pressed for a major increase. The decisions reached in the Interim Committee in February require ratification by national Parliaments, including this House. But their effect should be substantially to increase the usable resources at the fund's disposal—and I hope that the House will share my view that this is a wholly welcome development.
§ The agenda for international discussion remains a full one. Differences in performance by individual industrial countries remain wide and create tensions which are reflected in the foreign exchange markets. The threat of protectionism, which in the, long run benefits nobody, continues to grow. The efforts of the United States Administration to cut back their daunting structural deficit are crucial to the prospects for interest rates and future inflation, and hence recovery prospects, for us all.
§ It is sometimes suggested that countries which have made most progress against inflation should speed the recovery process by a resort to reflation. But nothing could be more dangerous for recovery.
§ Lower inflation and lower interest rates are themselves the right foundations for economic recovery, a recovery which can be sustained. The days when Governments by spending more could guarantee to boost activity are far 136 behind us—as the right hon. Member for Cardiff, South-East (Mr. Callaghan) pointed out almost seven years ago. But lower interest rates, and lower inflation, reduce costs and provide the opportunity for greater real growth of activity.
§ The prospect now is for just such a recovery. It will be gradual, but it should be steady, provided anti-inflationary gains are not thrown away; and the international consensus is that they must not be thrown away.
§ This is the heart of the strategy agreed at last year's Versailles summit and recently reaffirmed by the Interim Committee. Carrying it through will need persistence and political will, but it is backed by a broad measure of international commitment, on which we hope to build in the series of international meetings leading up to the Williamsburg summit.