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Creating a Harmonious Global Economic Order

February 17, 2015 in Economics

By James A. Dorn

James A. Dorn

International economic order depends on credible rules that discipline and limit government power while allowing the freedom to engage in mutually beneficial trades. In creating a harmonious global order, therefore, governments must first get their own houses in order.

In doing so, the first principle should be “Do no harm.” This means policymakers should take account of the long-run consequences of their actions, rather than wedding themselves to the short run. They should also recognize that there is no perfect system. Every policy choice has costs and benefits; trade-offs are a fact of life. A principled approach to policy, however, will have positive spillovers as other countries follow suit.

When thinking about international balances and monetary stability, it is essential to recognize the fundamental problem of determining the proper balance between state and market — that is, between the use of force and freedom. If the force of law/ government is limited to the protection of persons and property, markets, i.e., voluntary exchange, can operate to create social and economic harmony.

The challenge facing policymakers is to adopt a rules-based approach, which means supporting property rights, free markets and long-term monetary rules.”

The free trade movement of the 19th century and the classical gold standard are two notable examples of harmonious international order, but so are the rise of globalization since the 1970s and the emergence of China as the world’s largest trading nation. By liberalizing the foreign trade sector and moving to market pricing and away from central planning, China has greatly increased its standard of living while benefiting its trading partners. However, progress has been uneven, and China still has a long way to go before it is ranked as highly as Hong Kong in terms of economic and personal freedom.

Commitment to rules is not easy. In practice, governments prefer discretion over rules and don’t like to make hard choices, so they tend to favor managed exchange rates, activist central banks and capital controls.

In this mixed system, there is uncertainty about future policy and a lack of the discipline that would exist with known rules and a long-run commitment to a principled approach. Today’s system of managed (pegged) exchange rates should not be confused with a true rules-based system under which monetary policy would be passive.

Temporarily pegging one’s currency at an artificially low rate to stimulate exports is also not to be recommended. As other …read more

Source: OP-EDS

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