Can governments manage the economy? ~.............::..,..;..j..~ Can governments manage the economy? ~.............::..,..;..j..~ Fabian Tract 524 Can governments manage the economy? Preface: Bryan Gould 1 Introduction 2 1. How has the economy changed? 3 2. Is economic management still possible? 5 3. Britain in the 1970s 8 4. France in the early 1980s 10 5. Sweden in the 1980s 12 6. Conclusions 14 Bryan Gould is MP for Dagenham, the Labour Party spokesperson on Trade and Industry and Vice-Chair of the Fabian Society. Jim Tomlinson is lecturer in economics at Brunei University. He is the author of Monetarism : is there an alternative?, published in 1986. This pamphlet like all publications of the Fabian Society represents not the collective view of the Society but only the views of the individual who prepared it. The responsibility of the Society is limited to approving the publications it issues as worthy for consideration within the labour movement. Cover design: Brian Nugent January 1988 ISBN 0 7163 0524 0 ' ISSN 0307 7523 \ Printed by The College Hill Press Limited (TU), London & Worthing Published by the Fabian Society, 11 Dartmouth Street, London SW 1 H 9BN Preface Bryan Gould Jim Tomlinson provides us in this short study with a valuable antidote against the pessimism which sometimes grips the labour movement. All too often, we are told that a Labour government in Britain would be powerless to run the economy in the interests of working people because the globalisation of capital markets and the operations of multinationals render 'socialism in one country' impossible. This is a counsel of despair. Ifwe are to postpone socialist reforms until we have left governments throughout Europe and can co-ordinate reflation with them, we shall wait forever. The truth is that, while international co-operationwith like-minded governments would be very helpful, there is much that can be done by a socialist government in this country to improve our economic performance and bring about socialist reforms. Jim Thmlinson shows that the supposed obstacles to national economic policy making are much less serious than is commonly supposed. International capital movements on a substantial scale are by no means new; and while multinationals have great power, they are not irrational and will in the end respond to market conditions (which are very much within the control of national governments) just like any other economic actor. These points are corroborated by the comparative study which Jim Thmlinson makes of the experience of the Wilson government in this country, the Socialist government in France and the present government of Sweden. The crucial point of difference which he establishes between the failures of the first two and the success of the last is that Wilson and Mitterand allowed their real economy objectives to be subordinated to the monetary measures invented by the financial establishment (so that they spent a great deal of time and effort in propping up the exchange rate), whereas the Swedes were prepared to frame their interest rate and exchange rate policies in the interests of working people rather than of the bankers. The lessons for the labour movement are clear. A Labour government which is hard headed enough to ignore the pressures and blandishments in favour of financial orthodoxy can achieve a great deal in promoting full employment and raising the living standards-in terms of both personal consumption and public services-of working people. This Fabian pamphlet will help to give us the courage to do precisely that. ------------------------Fabian Tract 524 • 1 Introduction Perhaps the most striking feature of the development of the advanced capitalist economies in the middle third of the twentieth century was the rise of national economic management. Though there was no single form to the development, nor one accompanying politics, in almost all these countries the national economy was regulated in order to obtain some mixture of employment, growth, inflation and balance of payments goals. Since the collapse of the post-war boom in the early 1970s there has been a growing chorus saying that the days of national economic management are over. One version of this thesis sees it in terms of the displacement of one economic ideology by another-Keynesianism by monetarism. More compelling is the version that focusses on changing structures of the world economy, which are said to undermine the conditions of existence of national economic management-for example, the internationalisation of capital. National economic management is of key political importance. On the right the demise of such management can be welcomed as a liberating return to " realism"; this attitude has been taken by the current Conservative government, especially, of course, in its attitude to employment policy. For the left the alleged demise is much more problematic. There are those who have always been suspicious of any 'national' policy on the grounds of a vague internationalism. They welcome this alleged demise of the conditions for national economic management as laying the basis. for an international economic policy approach, especially focussing on a co-ordinated reflation of the West European economy. Allowing for the moment that indeed it is true that the days of national economic management are over, the road to a co-ordinated European economic policy looks very hard. On the one hand it would require as a political condition that pro-reflation governments were simultaneously in place in the major Western European countries. This seems a long shot under current political conditions. In addition, from the purely British point of view, a coordinated reflation would be likely to pose severe problems for the British balance of payments: putting some or all of the over three million unemployed back to work would substantially increase the demand for imports. This is not to be interpreted as "anti-Europeanism", rather as realism about what can be delivered by European (EC) wide strategies. An alternative view from the left would be that the demise of national economic management would be a serious blow to the electoral prospects of the left, because successful economic management is a key aspect of successful government and hence electoral support. This is perhaps especially so for left governments, because their alwaysdifficult relations to capitalism make them particularly prone to accusations of economic mismanagement. If it is true that national economic management is a thing of the past the political consequences are enormous. It would mean that much of the traditional approach of left governments to the economy would have w be abandoned. It is far from clear that there is a non-utopian alternative which could offer reasonable prospects of managing the economy at a multinational level. Given this background, the purpose of 2 • Fabian Tract 524 ------------------------- this pamphlet is to examine how far the conditions for successful national economic management have indeed been eroded. It first of all examines those changes in economic structure ~hich are said to have undermined such management. Then it looks at three countries as case studies. First at Britain and France, where the experiences of the mid-1970s and early 1980s respectively have been used to argue that national economic management is no longer viable. The third country, Sweden, is used to examine how far these structural changes in the world economy can be offset by appropriate policy measures. 1. How has the economy changed? The belief that the scope for national economic management has declined is usually based on some combination of one or more of three features of the modern advanced capitalist economies: the growing dependence of those economies on international trade; the internationalisation of financial markets with massive flows of capital in and out of countries; the growth of multinationals. Before discussing the impact of each of these, it is useful to put recent changes in some historical perspective. Views of changes in the possibilities of economic management often depend on trends since 1945. A different picture emerges if a longer time span is considered. Broadly speaking, in the decades befo.re 1914 international economic integration was growing apace. This was then reversed by the First World War and the succeeding depression of the inter-war period, capped by the impact of the Second World War. Since 1945 integration has again grown apace, but from much lower levels than existed in 1914. This pattern is most readily demonstratable in quantitative terms for trade openness. Thble 1 shows how the ratio of trade to national income has fluctuated for three countries through the twentieth century. It reveals that for Table 1 Ratio of Trade to GDP (%) Britain France Sweden 1905-14 48.6 40.3 1965-75 35.2 28.6 42.1 1982-85 46.5 39.0 55.1 1905-14 and 1965-75 for Britain and Sweden, S Grassman, Long-Term Trends in Openness of National Economies, Oxford Economic Papers (1980). 1982-5 for all countries, and all French calculations-own calculations, on same basis as Grassman. ------------------------Fabian Tract 52~ 3 Britain at least, the economy is no more dependent on foreign trade in 1982-85 than in 1905-14. One reason why these figures do not show a strong trend (if any) towards more openness is that each country has over the twentieth century seen a large rise in the share of output taken both by government and by services. As both of these are much less internationally traded than manufactures, their growth in share of output has reduced the vulnerability of total output to external forces. Another way of saying this is that international trade in manufactures has grown very rapidly, and increasingly dominates overall trade, but manufacture's share in domestic output has fallen in almost all advanced countries. Whilst trade/income ratios give a reasonably straightforward measure of trade openness, vulnerability to flows of capital is much more problematic to measure. Grassman uses the net capital flows (measured as the residual of the current account balance) relative to national income. Over a short period this is clearly a dubious procedure- financial openness is seen to fluctuate with the trade balance. But for long periods this measure may be reasonable, and it shows ajall in the importance of capital flows in all major capitalist countries (see Table 2: the higher the ratio, the greater the openness to capital flows). This long-run pattern is less surprising if one thinks of the scale of capitalflows before the First World War- especially for Britain with its Empire, formal and informal. These reached the unparalleled level of 10 per cent of national income in peak years, 6-7 per cent over the years 1900-13. If ever a world capital market existed, then it was in this period. Pointing out these long-run trends is important to correct the view that large-scale capital flows are a recent phenomena. But it cannot tell us about the forces that motivate such movement. In a neo-classical world a perfect international capital market would be characterised by a single interest rate (allowing for risk): a small national government could borrow as much as it liked at the going rate of interest, or at worst pay a slightly higher figure to compensate for perceived increased risk. But like most neo-classical stories this one seems implausible; experience shows that capital flows are dictated bysubjective judgements, and that countries can rapidly lose the confidence of international investors (as will be discussed below). In addition to the scale of foreign investment, there is the question of the volatility of such flows. Obviously if funds move with great rapidity and in an unpredictable manner, this poses serious difficulties for national economic management. It is impossible to measure, but it is almost certainly the case that such flows are today more volatile than in the past. However, this is not necessarily caused by the same developments as the long-term trend in international capital markets. Some part of this increased volatility is probablydue to features of the international economic environment such as floating exchange rates which may be temporary developments. This point is returned to in the conclusions. Until recently the growth of multinational enterprise was seen very much as a feature of the post-war world. The Table 2 Openness to Capital Flows Britain France Sweden 1905-14 6 .61 2.01 1965-75 1.17 1.59 1.02 1982-86 1.10 0 .99 1.48 Sources as Table 1. 4 • Fabian Tract 524 ------------------------- capital flows of the pre-1939, and especially pre-1914 world, were seen as overwhelmingly portfolio investments, held by individuals or institutions at arms length from the entity invested in. But recent work has emphasised that such a view is erroneous, and has arisen partly from the greater measurement of typical portfolio investments in government debt. Dunning has recently summarised current knowledge on the pre-1914 period in this area thus: "There is also little doubt that, from the viewpoint of some home and host countries, foreign direct investment, both as a channel for the transfer of resources between countries, and as a means of controlling the use of these and complementary local inputs, played a no less important role than it has done since the mid-1950s, and a far greater one than it did in the inter-war period'' (in M Casson ( ed) The Growth ofInternational Business, Alien and Unwin, 1985). The overall picture of the world economy conjured up by these trends is not one ·of unprecedented economic integration arising anew in the 1970s and 1980s. Whilst strongly integrative forces are no doubt at work, there are both offsetting trends (growth of the public sector) and substantial ambiguities about the appropriate measurement of these trends. Of course, before 1914 national economic management was hardly on the political agenda, so any clash between such management and the integration of the world economy was muted (though a country like Argentina's frequent departures frol:n the gold standard suggests such clashes were far from unheard of). It is only with the mass unemployment of the 1920s and 1930s that economic managementbecomes a central political issue. Nevertheless, it is a misleading perspective on the prospects for national economic management to see these developments as wholly new, creating newly unfavourable circumstances. 2. Is economic management still possible? Whilst changes in the structure ofthe world economy are less fundamental than many have suggested, do they nevertheless make national economic management less credible? This chapter examines the three developments sketched out above to see if they present insuperable obstacles to managing national economies-growing openness to trade; greater internationalisation of financial markets; and the growth of multi national companies. That national economic management is rendered more problematic the greaterthe openness of the economy to international trade has been recognised from the beginnings of such management. In broad terms this openness would appear to inhibit such management in two ways. Firstly, it exposes the economy to external shocks-summed up in the old saw that ''when America sneezes, Britain catches cold", and recentlyamply demonstrated by the impact of the two oil price shocks. Secondly, greater openness reduces the impact of ---------Fabian Tract 524 • 5 domestic policy instruments on the national economy; for example, if the government stimulates the economy, this may raise imports rather than domestic output and incomes. Both these aspects are old commonplaces of basic macroeconomics. But what needs to be stressed is that such openness to trade, whilst a constraint on national economic management, is not of the same character, and not so serious, as the internationalisation of capital markets and the growth of multinationals discussed below. Unlike these other elements, there is an essentially passive, non-reactive character to the trade constraint. External shocks (such as the two oil shocks at the beginning and end of the 1970s) are not aimed at inhibiting the functioning of national economic management. Whilst they may cut across such management, theydo not interact with such management in the sense of involving a strategic game between the 'shockers' and the managers of the affected national economies. Equally, in the case of imports substituting for domestic outputthis is an 'unintended consequence' of the relative competitiveness of domestic and foreign output, not usually part of a deliberate attempt to reduce or offset the aims of national economic management. In addition, trade openness is not simply a structural feature of the world economy, a feature whose effects are beyond the reach of policy-governments can act to manage their effects. The oil shocks, for example, may pose difficult problems for all those countries with substantial oil imports. But they do not necessarily imply a rise in inflation or unemployment ie a failure of policy measured by the two most important indices. (Other things being equal, it does involve a fall in real incomes in the importing country, because of the change in the terms of trade.) As will be discussed below, some national economies were able to escape the worst consequences of these shocks by effective management. As regards the sucking-in of imports, this of course does reduce the impact of domestic stimulation. But this is a serious problem only where domestic capacity is either so fully utilised or inefficient that any domestic stimulus leads directly to serious payments difficulties (assuming offsetting exchange depreciation is not a viable option). In other words, openness to imports will only put a complete bar on domestic management if either the economy is already fully employed, or is suffering from chronic uncompetitiveness. In the first case domestic stimulation is not necessary; in the second there is clearly a policy problem, but not one arisingfrom openness per se. Ifthe economy is generally competitive, national economic management isstill feasible in an open trading economy. Capital flows The second change in the world economy of great importance to national economic management has been the growth of capital flows over the post-1945 period. As already suggested above, what may be important to these flows is not their scale so much as their motives for movement. Thus Michael Stewart argues that capital flows may tend to be deflationary in effect. If a country is deflating its economy, capital will flow in, thus reinforcing the policy by driving up the exchange rate, with its deflationary effects on the trade balance. Conversely, an expansionary policy is likely to lead to capital fleeing the country, reducing the exchange rate and leading to a rise in inflation which will soon force the reversal of expansion (Controlling the Economic Future, Wheat- sheaf 1983). That processes of this kind have taken place in recent years seems indisputable. However, there is a danger of overgeneralising from the two cases which seem to show such features-Britain and France. There seems to be a larger menu of policy choice than is suggested by too mechanistic an application of this 6 • Fabian Tract 524 ------------------------- asymmetric approach. The British and French cases will be looked at in more detail later (along with the Swedish), but here two general points can be made. First as Stewart rightly makes clear, international flows of capital do not move automatically in relation to a simple index, as neo-classical accounts tend to suggest. Rather their movement depends on specific forms of calculation regarding the perceived effects of anational government's policy. This involves relatively straightforward elements like interest rates and expected changes in currency value, but also complex assessments of both the economic and political implications of a policy. Secondly, these calculations are made by a diversity of economic agents, with no single 'master' calculation involved. The "world financial community" as described by Stewart may for some purposes be treated as a single economic agent, but just like the traditional categories of agent called 'capital' and 'labour', treatment in this way can be highly misleading. This is both because under some conditions the "world financial community" may be less important than the domestic financial community, and because the calculations of the "world financial community" are not necessarily unified. The point of importance in relation to the constraints on national economic management is that international capital flows should be seen not as automatic but as a consequence of the characteristics of the relevant agents and their calculations, both of which may be seen as the object of policymeasures. Of course, the scale of capital flows does provide a structure for leverage over national economic policy which would not exist if all national economies were wholly insulated. But it does not thereby involve any necessary consequences. Multinationals Iffinancial flows have dominated dis cussion of the possibilities of national economic management in the 1980s, multinationals played a similar role in the 1970s. Typical of this argument was Stuart Holland's The Socialist Challenge (Quartet, 1975). Here the growth of multinational " mesoeconomic" firms undermines the effectiveness of all the major instruments of macroeconomic policy, as they plan their strategies on a global scale and directly act against any national policies damaging to such strategies. That multinationals have become more significant over the post-war period hardly seem disputable. What seems much less clear is whether they have led to the scale of loss of national economic sovereignty that Holland and others suggest. Two elements need to be disentangled in assessing this. First, the long-run consequences of multinational forms of organisation for capital mobility. Multinationals may act to transfer capital from areas of lower to areas of higher returns, and over a long period such sustained movements may clearly damage a country's economic base. But this result cannot be reduced to the effect of multinationality. First, capital will always tend to flow out of countries where returns are poor to those offering higher returns-multinationals may simply ease a process which would exist without them. Furthermore, where there are substantial net capitaloutflows from an economy this is usually a consequence of the failure of national policies to raise efficiency in production, rather than a cause of such failure. Second, multinationals will have an impact on macroeconomic policy such as management of the exchange rate and credit control. But the impact of multinationals per se needs to be disentangled from the general impact of the scale of international transactions. For example, multinationals undoubtedly will speed up/slow down currency transactions in order to benefit from any exchange rate changes, and in so doing make exchange rate controls less useful. -------------------------Fabian Tract 524 • 7 But this would be true of any economic agent engaged in international transactions. Similarly, the availability of credit in 'foreign' centres undercuts monetary policy in a domestic economy. But again such funds can be deployed outside the context of multinational firms. Clearly, if all multinationals were organised on a global basis, and orders on their behaviour simply travelled from global headquarters to branch plant, the problems for national economic management would be severe. In practice the picture is far from so simple. Many multinationals do not pursue global strategies. In addition, they are constrained in pursuing such strategies as they do have by both economic factors (eg the fixity of many of their assets which militates against rapid changes of policy), and organisational ones, the impossibility of running a large organisation as a strict hierarchy in which orders move from top to bottom and are simply and unproblematically implemented. It may also be a mistake to suppose that all economic pressures tend towards global strategies. For example, recent emphasis on 'just-in-time' sourcing of components in manufacturing mayimply some trend towards more use of local suppliers. (Under 'just-in-time' sourcing, long-term, constructive relationships are established with local suppliers in order that large manufacturers can order what they want when theywant.) In sum the role of multinationals, separate from the scale of international transactions, seems commonly exaggerated especially in relation to short-run economic management. Over the longer run they may prove central agents in the process of a country's economic decline, but to focus on their role in such a process seems largely to put the cart before the horse. Finally, it is striking that in recent discussions of the problems of national economic management in Britain in the mid-1970s and France in the early 1980s (returned to in the next chapter) so little is heard of the role of multinationals. Even Holland's account, whilst repeating the arguments of 1975 on multinationals, focusses attention on capital flows as the basis for the recent failure of economic management (Out ofCrisis, Spokesman, 1983). 3. Britain in the 1970s The question to be asked in this chapter is how far Britain's experience in the mid-1970s can support the view that single country reflationary economic management is no longer a viable option. Britain is a good example to look at, not only because the events of the 1970s have commonly been used in this way, but also because it clearly is an economy highly integrated into the rest of the world. It has high trade/GNP and capital/GNP ratios, and is also probably the most dominated of all major OECD countries by multinational enterprise. For example, 70 per cent of all those employed in manufacturing are in multinational firms. The context of the Labour government's elements, one international, one attempts to defy the deflationary pres-national. On the international side the sures in 1974 to 1976 has two important context was, of course, the first oil price 8 • Fabian Tract 524 ----------------------- shock, the most serious deflationary pressure on the world economy in the post-war period. In January 1974, Britain joined with other major capitalist countries in agreeing not to deflate domestic demand to offset the balance of payments consequences of the oil price rise. But Britain was almost alone in sticking to this pledge. Second, the election of the Labour government was based on the battle of the previous Heath government with the miners. The importance of this was that the victory of Labour compounded the already very powerful pressure towards a public sector wage explosion, by making it politically very difficult for Labour to resist such claims. Both these factors are important in any judgement of the significance of the subsequent events. The unsurprising consequence of Britain's 'go it alone' policy was a sharp deterioration in the balance of payments. The deficit on current account rose from 1.4 per cent in 1973 to 4 per cent of GDP in 1974. This led to a fall in the exchange rate which, coupled with a domestic pay explosion, compounded the rapid rise in inflation. But it is important to note that both these problems were already reducing in scale well before the sharp reversal of policy in 1976 when loans were sought from the IMF. The incomes policy introduced in summer 1975 was followed by a sharpfall in the rate of inflation which peaked in August, and the balance of payments improved, albeit slowly, so that in 1975 the current account deficit was down to 1.5 per cent of GDP. The loss of confidence in sterling in 1976, which precipitated the policy reversal of that year, seems to have been caused by two elements: • a belief that the Bank of England was eager to encourage a further fall in the£ (it was $2 in March 1976, compared with $2.40 a year earlier) -this provided a strong encouragement for anyone to move out of sterling; · • the rise in public expenditure and the parallel rise in public borrowing which, especially because of the explosion of public sector pay, was the particular form that expansionarybudgetary policy took in this period. The issue of importance here is how things might have been different, even given the international exposure of the economy. Any answer to this must be counterfactual, and hence speculative. It must also take into account that, apart ·from the level of international integration, there were other features of the British economy that over the short period of a couple of years have to be treated as given: • Britain's long-standing weak competitive position in international markets; • the financing of government borrowing through sales of gilt-edged stock to private institutions which gavethose institutions very great leverage over government policy; • the fact that domestic capital markets were completely dominated by private bodies, without trade union or other forms of more public regulation, meant that there was little institutional-cum-political inhibition on capital flight (a point particularly important in relation to Sweden, as discussed below). Even given these constraints it is possible to argue that a policy of reflation which was coupled with an effective incomes policy, focussed expenditure on areas other than the public sector wage bill and was less ambitious initially might have prevented the 'boom and bust' sequence that occurred. Such a course would have depended on a series of political conditions that are fairly remote from the actual situation at the time. Nevertheless, the point here being made is not that such an alternative was readily available, but that it was not available for reasons which have much more to do with the nexus of union/labour rela -------------------------Fabian Tract 524 • 9 tions, the ideologies and practices of the left, than with international economic integration per se. But it was the political context of the Labour government's assumption of power in 1974, coupled with the unprecedented nature of the world depression, which made its position so difficult. In combination with those features of the British economy noted above, the task was, as of1974, a fairly hopeless one. Nevertheless, the lessons to be drawn from this period are not all the impossibility of national economic management under current international economic relations. This general point is returned to in the final chapter. 4. France in the early 1980s Like Britain in the mid-1970s, France in the early 1980s had a socialist government which pursued economic policies of a reflationary character, which then had to be reversed. Like the British, the French case has been used to argue against the possibility of a single country reflation (but see Denis Mac- Shane, French Lessons for Labour, Fabian Tract 512, 1986). Like the British, the French case is clearly pertinent to the general issue of international dependence; France has high trade/GNP and capital flow/GNP ratios, and though a newcomer, has quickly become an important country for multinational enterprise activity. Like Britain a few years earlier, the French Socialists came to power in a very adverse international economic context. The French balance of payments had not fully adjusted to the second oil price rise by 1981, and was quickly plunged into the consequences of what we can call the Thatcher- Reagan depression, as these countries responded to the oil price and its consequent rise with their own sharply deflationary policies. The US economy'scondition in the first 18 months of the Socialists' rule is indicated by the fact that American industrial production fell by 10 per cent from mid-1981 to the end of 1982. If the British government of 1974 might be said to have had a naive faith in the sanctity of international agreements in expecting non-deflationarypolicies in other countries, the French government seem to have had a similarly naive faith in the reliability of economic forecasts. At the time of the Socialists' accession to power, all the major international and French forecasts suggested an upturn in the world economy in 1982. This failed to materialise, and the policy quickly became one of reflation in a deflationary world. Secondly, the political context of the Socialists' accession to power was dominated not by the role of unions as in Britain, but by expectations of immediate and substantial increases in social welfare. Whilst fully explicable given the long dominance of the right in France and the manifest inequalities of income, a commitment to greater spending on welfare makes a successful reflation very difficult. The French policy of reflating in a 10 • Fabian Tract 524 ----------------------- deflationary world led inevitably to balance of payments problems, downward pressure on the exchange rate and rising inflation. Even allowingfor the inaccurate forecasts of world growth in 1982, the government would have been forced to devalue the franc as part of a reflationary policy. Unfortunately, like the British Labour government of the late 1960s, it resisted devaluation until forced into it, and thus undermined financial confidence. The focus on social welfare improvements had two implications. It led to a sharp rise in deficits in the social welfare funds and the national budgets. And, via increases in the SMIC (minimum wage), it drove up labour costs, the latter also being hit by a statutory reduction in the working week. As in Britain, both the rapidity and the purposes of the rise in public spending and the budget deficit led to a loss of financial confidence. The rise in labour costs meant a reflation that was not 'supplyside friendly' and therefore did not have the effect on employment that might have come from an alternative package. Like Britain, France pursued policies which were not congenial to financial opinion, domestically or internationally, and this led to a flight from the currency (though not immediately). However, this did not force the same kind of crisis in France; there was no recourse to the IMF and no specific package of deflation suggested in order to secure funds from an external body. Rather the key element seems to have been the Socialist government's own political calculation that the accumulation of a growingexternal debt, the counterpart to the balance of payments deficit, could not be allowed to continue. (This partly reflected changes in the political balance within the Socialist coalition.) This point needs to be stressed, _because the French government does not seem to have had any problems in financing either its internal or external debt as Britain did in the mid-1970s. The other important difference to Britain was the role of the trade unions. Where in Britain the unions' role was central to the government's position, in France unions never had more than a passing role in government decision making. Whilst consultation was radically extended in the first period of Socialist government, there was none over the wage and price freeze which was introduced in June 1982 as part of the first reversal of policy. This reflected the deep-seated weakness of French trade unionism, its low membership (20-25 per cent of the workforce), and its highly schismatic structure and politics. In Britain part of the problem was the politics (in the broadest sense) of a unified and large trade union movement; in France the unions were never very significant actors in the policymaking process. Defeat The period of French Socialist government was by no means an unmitigated disaster-unemployment, for example, rose much less rapidly in France than in Britain over the same period. Ultimately, however, the Socialists suffered a severe electoral defeat (in 1986), and this obviously prevented them carrying through much of the radical reform package of 1981. Was this the inevitable consequence of ignoring the constraints imposed by the international economic structure? Setting aside the over-optimistic forecasts of prospective world growth in 1981, it still seems to be true that the consequences of French politics for the exchange rate were not properly appreciated. Again, somewhat parallel to the British Labour government of the mid-1960s, there was a hope that industrial policy could so revive industry as to avoid any devaluation resulting from the reflationary policy. In the longer term such a focus on industrial policy appears much less pie-in-the-sky in France than in Britain; but in the short run, industrial policy cannot be an alternative to macroeconomic measures. Secondly, and however difficult politically, the French government needed to -------------------------Fabian Tract 524 • 11 go mu<'h mon' slowly on the improve nwnl of publi('(y rinan<·c'd welfare berw fits if IIH'S<' were' not l.o undcrmirH' its r<'I'IHI ionary stanc·<'. llw sanw ('an l><' SN'n a problem fort lw Fn'tH'h governm<'nl. In this ('On t<'XI orw musl. qu<'stion tiH polili('al ('CIIc·ulV<'rn nwn l rc'mained cn'dit worthy 011 i11l< rnal io11al finat1<'ial mar I < ts through IH82, whi<"h was not tnH' of tlw British govNrHll<'l11 in ID7!i. Ovc'rall, t lw sanw gen<'ra l points ('an be mad about Fran · as about Britain. A mor<' (initially) ·autious reflation, mor<' 'supply-side fri ndly' than thos adually pursued, might have mitigated the loss of finan<"ial confidence which hot h suff red from, though this do s not SN'rn to have be<'n such a compelling tonstraint in Pran ·'as in Britain. Both attc'rnpt('(l w pursue reflation in an unusually unpropitious international nvironnwnl ; but it c·annot be said <'ither that th<' international ol'\iunctur<' or the structure of the int rnational <'tonomy ruled out a reflationary policy o/1 initio. Muth of the problem in both <"ountries lay as much in the internal poliC'i<'Sof I he ruling group and its allies, as in tlw extNnal conomic nviron llH'I\1. 5. Sweden in the 1980s 'w d n, lik France and Britain, i highly integrated with the inter·national onomy. Trad and capital flow form a ubstnntial ..at.io to NP, and multinational ar very ignificant; r· lative to it size, w di b manufacturing indu try rank a one of the mo t multinational in the world. A i very well known, w den combin th characteri tic with a highly 'U ·ce-'Sful ma ro conomi p rforman mo t notably registered in th un mploym nt figure, which i currently around 3 p r· ·ent, and ha 1970s and 1980s. Enormous amounts hnv<' lwen written 011 tlw ('Ondit ions or Sli('('('SS of Swedish <'ronomi<' poliry. llt'n' tlw oll.i<'<'li e is to focus on orw short episod<', llw rdln I ionnr·. IWriod from I!lH:... and I o con I rasl t h<' su<'<'<'Hs or poli<'. in I his tWriod with tlw r<'lat i <' failures, alr<'ad. dis <·uss<'d , ill Britain and Fnllll'< . Tlw Swedish <'<'Onomy did not <'S<'