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What's Wrong with the World


Cernobbio, Como, Italy. -- Decisions rarely are made at Group of 7 meetings, and if made they never are carried out. That comment has been made of past economic "summits." It would be regrettable if it proves true of the meeting of chiefs of state that takes place this week in Naples. The international economy now is in a condition that poses social and political risks to the future of the industrial countries.

Thus the interest in a mock G-7 meeting carried out last weekend at this Lake Como resort, at the invitation of the U.S. and Italy. Several veterans of previous G-7 meetings, including three former heads of government, gave their versions of what their successors at this week's Naples meeting ought to discuss. The result might be called the sophisticated consensus of opinion on what's wrong with the world -- if not on what to do about it.

There was agreement that the recovery from recession has begun. Yet the financial markets remain depressed and pessimistic. Why? Because of a lack of confidence in the Clinton administration and the fact that employment in Europe is not recovering, while Japan remains in political disorder.

A second cause of difficulty is the lack of coordination in the industrial nations' economic and monetary policies. These policies are being driven in contradictory directions by domestic political considerations. The margin of order imposed by the European Monetary System has been weakened. The dollar is devalued.

The markets themselves, at the same time, are dominated by the movement, at unprecedented velocities, of huge masses of investment funds, controlled by traders who react to rumors, ill-interpreted news and unsophisticated economic and political analyses -- the effects of their actions automatically multiplied by dumbly reactive computer programming.

Fundamentally, however, there was general agreement that the world's economic difficulties are not transient or cyclical. They are largely, although not exclusively, the result of a fundamental mutation in the contemporary economy that is electronic in origin. Computers and the new forms of global communication and interaction have transformed economic society.

Not only does work now tend to migrate in response to the wage market, low-wage work itself tends to be automated in high-technology countries, destroying jobs. A dramatic polarization in earnings has taken place, not only between lowest-paid and highest-paid job sectors, but even within professions. Stanford University economist Paul Krugman writes that "lawyers make much more in comparison with janitors than they did 15 years ago; but the best-paid lawyers also make much more in comparison with the average lawyer."

Governments and societies are reacting to this in different ways, producing contrasting problems in the United States and Western Europe. In the United States, the largely unregulated employment market has produced a fall in the standard of living for unskilled and semi-skilled workers. Thus, whilethe U.S. now is well into recovery from its recession and is creating new jobs, they tend to be unrewarding "McJobs," socially and psychologically demeaning to those who have had better work in the past.

In Europe, wages have not fallen as they have in the United States, and social protection is maintained at levels unknown in America. But long-term unemployment has risen sharply and seems intractable. The recovery that now has begun is not reducing unemployment at anything approaching a proportionate pace.

The response of market economists has been to criticize Europe's social-security norms for producing an "inflexible" labor market, destructive of employment. This, behind its bureaucratic obfuscations, is more or less the message of the important study on jobs published last month by the Organization for Economic Cooperation and Development.

However, this analysis neglects the social and political implications of what is going on. Long-term unemployment and an impoverished work force are not mere economic phenomena but social and political developments of great importance. The polarization of incomes, as Professor Krugman writes, "demoralizes those on the bottom and coarsens those on the top."

The consensus conclusion seems to be the highly pessimistic one that this upheaval in the world economy may take as long to work through as the half-century of social upheaval -- along with the impoverishment of a displaced agricultural work force -- that accompanied the industrial revolution itself.

History is not a subject to be addressed by the world leaders who meet this week in Naples. It should, however, be understood by them. Their responsibilities are no longer the trivial ones of adjusting the effects of the business cycle. The dimensions of today's situation mean that the political as well as economic history of the next half-century is being shaped. It is not necessarily being shaped to the advantage of our children and grandchildren.

8, William Pfaff is a syndicated columnist.

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