What in the World Is Wrong?

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Slow growth and swift inflation stymie rich and poor nations alike

Recession. The word no longer seems adequate to describe the relentless turmoil that is shaking the world economy. More and more politicians, businessmen and economists are beginning to have a few haunting fears that this economic decline could spiral out of control, leading to a breakdown in the economic system. Said Canadian Prime Minister Pierre Trudeau at the recent Versailles economic summit: "We are moving from crisis to catastrophe." Warns Paul McCracken, former chairman of the Council of Economic Advisers under President Nixon: "The world economy is balanced on a knife-edge and could easily plunge into another era of international economic disintegration."

While nations have struggled with the twin scourges of swift inflation and slow economic growth, millions of people have lost their jobs. Steep interest rates have destroyed thousands of businesses. Countless companies have been unable to modernize obsolete factories. The promise of economic expansion, always the driving force of capitalism, suddenly seems in jeopardy.

Despite a wrenching retrenchment, the international economy appears to be no closer to a robust recovery than when the agony began. Indeed, for many countries the problems are intensifying, and governments that have tried to expand their economies while others were battling inflation are rethinking their policies. Rocked by a falling currency, France slapped a four-month wage and price freeze on its economy and devalued the franc by 10%. Beset by near record interest rates and high unemployment, Canada unveiled an austere budget that would limit salary increases for its federal workers to 6%, or about half the rate of inflation. Faced with an alarming government deficit, Belgium took the unprecedented step of prohibiting cost of living increases to pensioners and wage earners now receiving more than $530 per month.

As virtually every country has curbed its money supply in the fight against inflation, high interest rates have created a worldwide financial crunch. Scores of nations deeply in debt are finding it difficult to meet their payments. Private banks have cut off credit to whole areas of Eastern Europe, Latin America and Africa. Some bankers and economists fear a prolonged contraction of credit that could disrupt world trade. Says Fritz Leutwiler, chairman of the Bank for International Settlements: "When all the banks get worried at once, there may be a squeeze. The [international financial] markets are extremely vulnerable."

Not since the Great Depression of the 1930s has an economic downturn had such global reach. The crisis has become epidemic, almost inescapable. It infects both strong and weak economies, rich and poor nations, capitalist democracies and Communist dictatorships.

In the U.S. and Western Europe, the slump has swelled the ranks of the unemployed to a post-World War II record of 22 million, or almost one out of every ten workers. Even in West Germany, one of the foremost economic powerhouses of the postwar era, joblessness has nearly doubled since 1979, to 6.8%, and the pace of business bankruptcies has increased more than 100%. Says Karl Otto Pöhl, president of the West German Bundesbank: "Resignation and pessimism are more widespread than at any time since the war."