*Twenty-six Economists, Promoting World Recovery: A Statement on Global Economic Strategy, Institute for International Economics, Washington, D.C., December, 1982.

“Promoting World Recovery” is an article written by twenty- six economists from fourteen countries. The economists came together to form a consensus on how the world should handle the serious economic crisis they were in. As of 1982, the year the article was written, no consensus had been formed on what to do about the new economic problems the world was facing.

The Crisis:

The crisis the economists were trying to fix was recession form the second oil shock. It was the longest and deepest recession since the great depression. Unemployment was at a postwar record of 32 million. Commodity prices were at the lowest real levels in 30 years. Corporate bankruptcies were common. In general, the world economy seemed on the verge of collapse.

The origins of the crisis lie in the restrictive monetary and fiscal policies that most countries used after the second oil shock. These policies were aimed at stopping the inflation of the 60’s and 70’s. The inflation started because of excess demand “…resulting from attempts to avoid hard choices between priorities, the emergence of inconsistent real income aspirations, and irresponsibly expansionary monetary policies.” The restrictive policies that were being used at the time had begun to curb inflation, but in the process it created a deep recession and people’s expectations of the future were weakened. The authors expressed concern that governments would change from anti-inflationary policies to anti- stagflationary policies which would not help the situation.

The Solution:

Instead, the authors of this article wanted the world to begin to use expansionary policies in most of the industrialized countries. While most of the policy recommendations were directed towards individual countries, they repeatedly stressed the need for international coordination of these policies. The expansionary policies would reduce unemployment, restore growth, and help to reduce the severity of the crisis in the financial system. These policies are aimed at increasing world aggregate demand. There are two exceptions to the expansionary recommendations. Countries with particularly weak balance of payments or high inflation are instructed to not use the expansive policies. The authors hoped that the stimulation to the rest of the world economy would allow them to not need the use of anti- inflationary measures such as the contraction of the money supply. The other exception to the expansionary measures is countries with extremely large government debts (the United States was an example of this). In this case the governments were instructed to tighten fiscal policies to help avoid crowding out of investment. The authors didn’t think that the crisis could be fixed with demand side policies alone however. They also proposed supply side policies to help fix the real wage. They saw as a major cause for the wide spread unemployment. One suggestion was to let the future productivity gains be passed on the workers through increased leisure, or environmental restoration instead of continually rising real wages.

The authors also called for the IMF to lend heavily to underdeveloped nations that show they can obtain a reasonable balance of payments deficit. They also asked the IMF not to force borrowing countries to cut back output until the world economy is able to recover.

Summary by Aaron Zaidel