International trade and the need for balanced regional development is the focus of this critique of the current economic system.
by Dhanjoo Ghista and Michael Towsey
" It is patent that in our days not alone is wealth accumulated, but immense power and despotic economic domination is concentrated in the hands of a few .... This power becomes particularly irresistible when exercised by those who, because they hold and control money, are able also to govern credit and determine its allotment, for that reason supplying so to speak, the lifeblood to the entire economic body, and grasping, as it were, in their hands the very soul of production, so that no one dare breathe against their will."
Pope Pius XI Encyclical "Quadragesimo Anno."
The powerful language used by Pope Pius XI conveys something of the magnitude of the crime that is modern international finance. A lot of confusion surrounds money and its management primarily because such confusion suits the international banking and business community. Greed always thrives best in an atmosphere of confusion.
For much of its history, banking practice has confused even the economists and bankers! It was not until the mid 19th century that economists became aware that bank lending resulted in the creation of money1 and most bankers did not admit the fact until well into the 20th century. Giving evidence to the New Zealand Royal Commission on Finance in 1955, the Chairman of the Associated Banks of New Zealand said: "They [the banks] have been doing it for a long time [i.e. creating money], but they didn't quite realise it and they did not admit it. Very few did. . . . The system has not changed very much; it is the system that stands today, not very much different from what it was 40, 50 years ago, but there has been a development of thought." [2]
The gradual public realisation that the privately owned banking system creates a community's money supply at little cost to itself and reaps handsome rewards in the process, resulted in the birth of numerous monetary reform movements. Given the vigour with which the banking system has defended its privileged position, it has not been easy to distinguish the sensible reform proposals from the crackpot. Similarly, the present international trading system is inherently inequitable and requires thorough reform if underdeveloped countries are to escape their plight. We will consider a variety of proposals to reform trade management, which are compatible with self-reliant regional development.
Principle of Intra and Inter Community Trade: Multilateral trading within communities, bilateral trading between communities
There are two kinds of economic exchange between individuals, corporate bodies, or nations -- barter, and the money transaction. In barter, there is direct exchange of physical goods or services. There is no need for money since both parties agree that the goods being exchanged are of the same value. It does not matter if the goods are not exchanged at the same time. The essence of the barter agreement is that goods received will at some agreed time be exchanged for other goods of the same value. By comparison, in the money transaction, goods received are exchanged for money. The cash recipient is then free to do whatever. The two traders may never see each other again. There is no agreement to have a later reciprocal transaction.
Both forms of trading have advantages and disadvantages. Barter can go ahead without money and there is no chance of being caught with money one can't use. One the other hand, barter is cumbersome in a fast-moving and complex economy. Money transactions are convenient and flexible, but in large, complex economies, it is quite possible for one community to end up with an excess of physical wealth and another to end up with an excess of money. These imbalances can destabilise and stagnate the communities concerned.
The barter system at the international level is referred to as bilateral trading, whereas money transactions give scope for what is called multilateral trading. Multilateral trading means trading between three or more countries using money as the medium of exchange. The difference between the two systems has proved to be most important. The weaknesses of multilateral trading were (and still are) exploited by the First World to bleed wealth from the Third World.
Just after World War II, the capitalist bloc countries signed two trading pacts, the Bretton Woods Agreement and the General Agreement on Tariffs and Trade (GATT). According to the Bretton Woods Agreement, the U.S. dollar would be used as the standard currency for all trading between capitalist countries. And according to the GATT agreement, multilateral trading was to be the dominant system of trade.
The combined effect of these two agreements was to force poorer and weaker counties to accumulate U.S. dollars so they could have a reserve of money to enable them to engage in international trade. The only way to do this was to export more goods to the U.S. than were imported. By this arrangement, the U.S. was able to accumulate much physical wealth for as long as the exporting countries were prepared to hold onto U.S. dollars. This would not have occurred with bilateral trading.
Today, the whole system is threatened with collapse because the U.S. flooded the international markets with a huge excess of dollars primarily to finance the Vietnam War, oil imports, and Reagan's Star Wars program. The excess of U.S. dollars means they are no longer so valuable to hold onto. The only thing which keeps the system going is the fear of those holding dollars that they will be worth nothing if the system collapses! So today we find the central banks of western Europe and Japan buying U.S. dollars for no other reason than to keep their price up.
Despite this abuse at the international level, multilateral trading has an essential role to play both within nations and between nations. The problem to be solved is: what mix of bilateral and multilateral trading should be used so that the advantages of each can be maximised and their disadvantages minimised?
Experience suggests the following. Multilateral trading (via money transactions) should be used within a community because of its convenience. Potential instabilities can be corrected due to the cultural and political coherence of the community. (Here the term community means any socio-economic community whether at the level of a locality, district, state, or federal trading bloc.) On the other hand, barter or bilateral trading should be used between communities because this system prevents one community gaining at the expense of another. Multilateral trading requires much cohesiveness between the numerous trading entities if it is to be of mutual benefit to all concerned. As a corollary, the further two communities are apart, whether in distance, culture, or politics, the more bilateral trading is the preferred system. This principle can be used to formulate trade agreements for South-South cooperation and more generally in the reform of international trade.
Bilateral trade is especially beneficial for underdeveloped countries because it helps to isolate them from the economic cycles (of inflation and depression) which originate in exploitatively developed countries (with excessive wealth concentration). Global inflation and depression spread through multilateral trading networks rather like a contagious disease. Bangladesh exports raw jute, animal hides, and some manufactured goods. It imports foodstuffs and almost everything else. In the event of a global depression, multilateral trading grinds to a halt and Bangladesh would suffer greatly. By arranging bilateral trading agreements, Bangladesh could lessen the impact of a global depression. [3]
There should be minimal trade of raw materials and only where absolutely necessary. Local industries should be established to utilise local resources. This benefits local industry, increases economic security, and prevents drainage of capital. Manufactured goods are less subject to price manipulation and command better prices than raw materials. "Local raw material prices in the export market are subject to manipulation and erratic fluctuations as they are currently traded through speculative commodity markets which are controlled by vested interests." [4]
Principle: Free trade offers the best possibility for regional development
Here it must be noted that free trade is defined as the absence of government-imposed import and export duties and the absence of private speculators controlling international markets. It does not mean unregulated trade. The difference is extremely important. Free trade offers many economic advantages for underdeveloped nations principally because it enables them to dispose of local surplus profitably. Import and export duties, tariffs, and trade restrictions reduce the mutual benefits to be gained by trade. Despite their rhetoric, wealthy western nations practice free trade only when it suits their purpose. "Neither the capitalist or the communist countries like the free trade system because it is detrimental to their respective self-interests. But there are free trade zones in the world which are very bright examples of the success of this sort of system." [5]
However, in formulating a trade policy, each economic unit should make a distinction between raw materials and manufactured commodities and between essential commodities and luxuries. The export of unprocessed raw materials is an indicator of economic ill health. Rather, such commodities should be converted into manufactured goods at the place of origin of the raw materials. Manufactured commodities invariably command better prices than raw materials. In the case of perishable agricultural commodities, excess production depresses world prices, which benefits only the First World. But canned and processed foods allow possibility of higher prices. Research into product diversification is another means to dispose of a surplus. [6]
Similarly, the import of essential requirements is a sign of economic ill-health. While the free trade of semi-essential and non-essential commodities is to be encouraged, the trade of essential commodities should be regulated on a global basis to ensure that every citizen in the world has the minimum essentials of life.
References
- J.Pen, Modern Economics, Pelican, UK, 1980.
- The Institute of Economic Deomcracy, "The Money Trick", Kingstown, NSW, Australia
- P.R. Sarkar, Prout in a Nutshell, Vol. XIII, Ananda Marga Publications, Calcutta, 1987, p,.54
- ibid. p.38
- ibid. p.56
- ibid. p.57
Dhanjoo Ghista and Michael Towsey were members of the faculty of United Arab Emirates University, Al. Ain, UAE when this article was first published. This article is an extract from their manuscript Self Reliant Regional Development.