HL Deb 23 March 1983 vol 440 cc1111-5

3.29 p.m.

Lord Soames rose to call attention to the need for a more active and vigorous world economy and for greater international currency stability as a contribution thereto; and to move for Papers.

The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper. There are happily some solid signs of incipient recovery in the world economy. Housing starts are well up on last year's figures for January and February in the United States, motor-car manufacturers are seeing an upturn in orders, and in a number of industrial sectors the inventory pipeline is beginning at last to fill. If this trend continues it should not be long before the first ripples of recovery are seen on this side of the Atlantic, with the hope that that holds out for the future, particularly for countries like ours who are well placed to benefit from increased demand and increased industrial activity. But we must not forget that a year ago people were saying much the same thing, and in the event the recovery did not materialise in 1982. And though this year the indices point more firmly than they did last towards increased activity in the world economy, and we have the notable added advantage, for some time at least, of lower oil prices, there are still important inhibiting factors of which it would be wise to take notice.

The world economy is still in a precarious state. It is as yet convalescent and no better than that. So in the years to come it is possible that we could be looking back on 1983 as the year which saw the start of sustained recovery in the world economy. On the other hand, if this incipient recovery were to be aborted—if it proves to be nothing more than a will-o'-the wisp—then by 1985 things would look very bleak indeed for the Western world as a whole. So what I had in mind in initiating this debate was a discussion in advance of the Economic Summit at Wiliamsburg on what can be done by Governments who will be there represented to encourage and sustain the momentum of this evident, but as yet incipient, recovery.

In general terms, I suppose that the biggest contribution that Governments can make is to pay attention in their deeds, as well as in their words, to the crucial necessity and the crucial fact of our interdependence, one with another, not only in matters of trade but also in monetary and fiscal affairs. We should all have learnt by now, for instance, that no one country can successfully go its own way without regard to others; no one country in Europe can bring about its own recovery on its own. If we needed any reminding of that, surely we have the example of recent experience in France. No one country can spend its way out of recession; we can only grow out of it together. There can be no such thing as an island of recovery in a sea of recession.

One would have hoped that even the Labour Party would have learnt that by now. But, I must say, judging from the highly inflationary and somewhat ludicrous mock budget they produced the other day, it would appear not. However, I am delighted to see the noble Lord, Lord Lever, on the Front Bench of the Opposition and speaking on their behalf in winding up this debate. Is this a sign, perhaps, that the official Opposition are coming round to his common-sense way of thinking? I should like to think that it was so, but I fear not. I fear that one swallow does not make a summer—even one as bright and as chirpy as the noble Lord.

My Lords, another pre-requisite for sustained world growth must be a high level of private investment, for without that the recovery is doomed to fizzle out. For that, industrialists need confidence that real interest rates will be brought down further and will stay down; in other words, that they will be brought down without raising inflationary expectations. The main contribution which Governments can make to this end is to show enough discipline not to pre-empt for their own expenditure too high a proportion of available money in circulation. For instance, there is, rightly or wrongly, serious doubt (perhaps fear would be a better word) in the minds of a number of American industrialists as whether the size of the current and forecast United States budget deficit leaves enough room for investment, without interest rates having to be raised again to resist inflationary pressures. And rising interest rates constitute a grave inhibition to investment.

There can be only one effective long-term solution to this problem and that is a sustained rise in world economic activity, enough to create both greater demand for raw materials by the industrialised world and also a greater demand in our markets for the developing world's manufactured goods. But at best that is some way off. Meanwhile, a good measure of success has been achieved in recent months by Governments, central banks and official institutions in a series of major international financial rescue operations for countries in the third world. What once looked like an imminent danger of a seize-up in the world banking system has been averted, at least for the present, helped along by the prospect of lower oil prices and interest charges. But there remains a most serious situation, with precious little margin for error.

There has been, for instance, markedly little enthusiasm—and understandably so—for the extra bank lending in support of IMF adjustment programmes and drawings. If the domestic programmes in the borrowing countries fail to be implemented, do not produce the expected results or, possibly most important, if the world economy proves less buoyant than has been assumed, it will be extremely difficult in the medium term to manage continuing rescue operations. And let us be in no doubt that if the faltering recovery puts these rescues in jeopardy, the financial consequences will in turn rebound sharply on that faltering recovery itself.

So, pending a sustained world recovery—and we have to look at best some years ahead for this to have a major impact on many of the seriously indebted countries—what can be done about this vital problem which could cause, if it were not properly handled, severe damage to our whole banking system? Many banks have seriously over-lent, some to an irresponsible degree, in their determination to maintain their market share of loans at all costs. For that their shareholders will anyhow have to suffer, and the tendency will be for some banks to shy away from yet more lending to the worst-indebted countries. Yet the flow of funds to the third world cannot suddenly be turned off without dire consequences to economic, political and social stability in those countries; and if this threatens, some arrangement will have to be arrived at between these banks and their national authorities.

I come back to what must surely be the first essential in sustaining substantial economic recovery, namely, a significant improvement in co-ordination and co-operation over national economic policies. Since the Versailles summit this has been understood to mean that Governments would follow the same broad objective of containing inflation through sound fiscal and monetary policies with the intention of achieving sustainable growth without inflation. But in the event monetary and fiscal policies of different countries have tended to remain essentially inward looking. Also, different degrees of success or failure of national policies and unforeseen developments of all kinds have meant that the interest rates and exchange rates, which are in a sense symptoms or by-products of any one country's individual policies, have had major influences on other countries' policies.

What is needed at Williamsburg, surely, is a decision to take international co-operation on to an altogether higher plane. The essence of successful co-ordination has to be for each country to be ready to take into account in its planning the effects of its policies on others and vice versa, and to make its economic contribution for the common good. Take, for example, the question of exchange rates. There can be no doubt that the volatility in exchange rates in recent years has been a malign factor militating against international trade. Violent changes in parities have been far greater, far more frequent, and far more uncoupled and disconnected from real economic factors than was ever anticipated a decade ago, when the disciplines of the Bretton Woods monetary system were jettisoned in favour of a floating rates system.

Surely, whatever may have been the case in the past, it would now be in the interest of the United States, as it certainly would be for the rest of the world, for the United States Government to be prepared to take some measure of joint responsibility, along with others, for the level and structure of exchange rates. I am not suggesting that there should be any question of defending any particular rates; or of commitment to any substantial intervention. But simply the decision that the pattern of world exchange rates was to become a matter of shared concern and the implied acceptance by the major countries jointly that they no longer regarded it as desirable or inevitable that their authorities should be passive in the face of any exchange rate movements—that alone could not fail to make an important contribution to stability.

Another valuable area of international co-ordination would be to try to agree jointly on the continuation or modification of policies which, carried out individually, country by country, would produce an improved result for the world as a whole. To that end, I would make a positive suggestion: that each of the seven Governments attending the Williamsburg summit should circulate papers in advance of that meeting on what they individually wished to see the others do specifically as a contribution to sustaining growth in the world economy. This could give rise, hopefully, to a more fruitful and effective discussion, on facts rather than on communiquśs, than would the reiteration of purely national aspirations and requirements. Even if the extent of agreement on the co-ordination of national policies were to leave much to be desired, as it has done in past summits, we might at least expect a measure of international commitment on what to avoid doing—like agreement to eschew further protectionism, and also to monitor the implementation of any agreements reached country by country.

The seriousness of the world outlook in default of sustained recovery, and the extreme dangers inherent in it of a political and social character as well as an economic character, demand a global element in national economic planning. The fact that all countries represented around that table at Williamsburg need a consistent annual growth of around 5 per cent. before any real impact is made on our high levels of unemployment—and we know that none of us can achieve that on our own—and that fact alone, must stimulate the policymakers at the summit to think boldly, yet responsibly, in truly international terms.

In terms of unemployment, all the countries at Williamsburg are faced with a pretty uninviting prospect for our peoples in the years immediately ahead even if things turn out as well as can presently be hoped, let alone if things go more awry, as they plainly could. It is no exaggeration to say that the outcome of the Williamsburg meeting will have an important effect either for good or for ill on the future of the free world, both in the North and in the South. On what is concluded there—the extent to which the seven countries succeed or fail to agree to co-ordinate their policies for the common good and thereafter match their words with their deeds—will largely depend whether or not the promise of world economic recovery is fulfilled. Hopefully, this fact will concentrate the minds of our leaders something wonderful, and will lead them, for the first time, to make an economic summit both effective and valuable in world terms. My Lords, I beg to move for Papers.