The Frontiers of Management. Peter F. Drucker

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      Actually, this is the only scenario that is so far supported by hard facts rather than by theory. Indeed, it is already playing.

      The U.S. government forced down the dollar by a full third (from a rate of 250 to a rate of 180 yen to the dollar) between June 1985 and February 1986—one of the most massive devaluations ever of a major currency, though called a readjustment. America's creditors unanimously supported this devaluation and indeed demanded it. More amazing still, they have since increased their loans to the United States, and substantially so. There is agreement, apparently, among international bankers that as the United States is the more creditworthy the more the lender stands to lose by lending to it!

      And a major reason for this Alice in Wonderland attitude is that our biggest creditors, the Japanese, clearly prefer even very heavy losses on their dollar holdings to domestic unemployment. For without the exports to the United States, Japan might have unemployment close to that of Western Europe, that is, at a rate of 9 to 11 percent, and concentrated in the politically most sensitive smokestack industries in which Japan is becoming increasingly vulnerable to competition by newcomers, such as South Korea.

      Similarly, economic conditions alone will not induce the Hong Kong Chinese to withdraw the money they have transferred to American banks in anticipation of Hong Kong's “return” to Red China in 1997—and these deposits amount to billions. The even larger amounts, at least several hundred billions, of “flight capital” from Latin America that have found refuge in the U.S. dollar, will also not be lured away by purely economic incentives, such as higher interest rates.

      The sum needed from the outside to keep going both a huge U.S. budget deficit and a huge U.S. trade deficit would be far too big to make this scenario more than a possibility. Still, if political factors are in control, then the symbol economy is indeed truly uncoupled from the real economy, at least in the international sphere.

      And whichever scenario proves right, none promises a return to “normality” of any kind.

      One implication of the drifting apart of symbol and real economy is that from now on the exchange rates between major currencies will have to be treated in economic theory and business policy alike as a “comparative-advantage” factor, and as a major one to boot.

      Economic theory teaches that the comparative-advantage factors of the real economy—comparative labor costs and labor productivity, raw-materials costs, energy costs, transportation costs, and the like—determine exchange rates. And practically all businesses base their policies on this theorem. Increasingly, however, exchange rates decide how labor costs in country A compare to labor costs in country B. Increasingly, exchange rates are a major comparative cost and one totally beyond business control. And then, any firm at all exposed to the international economy has to realize that it is in two businesses at the same time. It is both a maker of goods (or a supplier of services) and a financial business. It cannot disregard either.

      Specifically, the business that sells abroad—whether as an exporter or through subsidiaries in foreign countries—will have to protect itself against foreign-exchange exposure in respect to all three: proceeds from sales, working capital devoted to manufacturing for overseas markets, and investments abroad. This will have to be done whether the business expects the value of its own currency to go up or to go down. Businesses that buy abroad will have to do the same. Indeed, even purely domestic businesses that face foreign competition in their home market will have to learn to hedge against the currency in which their main competitors produce. If American businesses had been run that way during the years of the overvalued dollar, that is, from 1982 through 1985, most of the losses in market standing abroad and in foreign earnings might have been prevented. These were management failures rather than acts of God. Surely stockholders, but also the public in general, have every right to expect managements to do better the next time around.

      In respect to government policy there is one conclusion: Don't be clever. It is tempting to exploit the ambiguity, instability, and uncertainty of the world economy to gain short-term advantages and to duck unpopular political decisions. But it does not work. Indeed—and this is the lesson of all three of the attempts made so far—disaster is a more likely outcome than success.

      The Carter administration pushed down the U.S. dollar to artificial lows to stimulate the American economy through the promotion of American exports. American exports did indeed 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 СКАЧАТЬ