Features & Departments World of Ideas: Robert Mundell
IN PRINT ARCHIVE CIR Fall 2000
|World of Ideas|
|Interview by Barb Clapham|
This interview is the first in a series of discussions with people who have made a significant contribution to the world of business. Their innovative ideas have had a profound impact on economic theories and practices of their country and have often challenged conventional wisdom. At the same time, their ideas have transcended national significance and have had lasting effects on the emerging world economy. The interviews probe the ideas of these great leaders as well as the men and women behind the ideas.
The first interview in the series is with Robert Mundell, the 1999 Nobel Prize winner in economics.
Winning the Nobel Prize is one of the more recent accomplishments in the outstanding career of Robert Mundell. Born in British Columbia, his influence has extended far beyond Canadian borders and his theories have influenced world leaders. Mundell is the co-founder of supply side economics, used during the Reagan administration, and has acted as an adviser to numerous organizations, including the International Monetary Fund, World Bank, European Commission, Federal Reserve Board, United Nations, and the Government of Canada. A renowned expert on currencies, his theories on a single European currency helped inspire the creation of the euro.
Mundell has also had a stellar academic career, having taught at McGill University in Montreal, the University of Chicago, Geneva Institute for International Studies, the University of Waterloo, and most recently, Columbia University in New York. This true citizen of the world is currently on leave from Columbia University and spends much of his time at his castle in Italy.
I met recently with Mundell, who shares his views on the euro, the yen, and why he thinks the Canadian dollar will never again be at par.
Much of your work revolves around the concept of optimum currency
areas. Could you comment on the effectiveness of this system?
What suggestions would you make to improve the exchange rate
policies currently used in North America?
What about Canada?
There is not the same sense of urgency for Canada as there is in Mexico and many Latin American countries which have a history of monetary instability. Canada doesn't have a history of monetary instability, it only has a history of lax monetary and fiscal policies which have not been as good as they could be. I believe that Canada would have been better off if it had maintained a fixed exchange rate with the U.S. dollar all the way through. If it went back to a very clear-cut, rigid fixed exchange rate system in which they locked the Canadian dollar to the American dollar, then they would have American inflation and American interest rates. Over the long run, Canadians would be much better off with that. But the Canadian dollar is a bit of a symbol of nationalism in Canada, and many people would have put it into perspective.
So, for Canada you advocate a fixed exchange rate. You are not
looking at a common currency for North America?
A good friend of mine, Herbert Grubel, formerly a Member of Parliament with the Reform party, has a proposal for an Amero, which would be a North American separate currency. That is a good idea in some ways, but politically I think it is a non-starter because I just don't think the United States would ever scrap the U.S. dollar for the sake of making life a little better for Canada or Mexico. As well, the fact is that the dollar has worldwide importance in a way that goes far beyond the continental importance of North America.
At what level would you fix the Canadian dollar?
It also is quite important because then Canadian pensions would be fixed in American dollars, too. Instead, over this long period, think of Canadian pensions fixed in Canadian dollars compared to American dollars. After all, the Canadian dollar has lost more than a third of its value against the American dollar. They would be much better off being fixed to the American dollar.
Once the rate was fixed, would an adjustment mechanism be required
to periodically change the rate?
The Canadian dollar was higher than the U.S. dollar in the mid-'70s.
Why can't this happen again?
When countries make mistakes with their monetary systems, they have to let bygones be bygones. They can't go back again. The Canadian dollar will never be the equivalent of the American dollar again, barring, as I say, a civil war in the United States or some big event that suddenly made the United States unstable, which of course would be a tragedy for Canada, too. I don't think that is going to happen.
Recently 13 Asian nations announced plans to form a currency
pact to protect their respective currencies. Is this the beginning
of a yen currency region?
Do you think it is undervalued?
Why do you think the euro is having so much trouble?
There are other reasons for the fall of the euro. One is the sudden liquidity effect created when one currency replaces 11 currencies. The one currency is much more liquid than the sum of the 11 currencies. Imagine carrying 11 currencies around in your wallet, compared to dollars. The dollars are much more liquid than the components. So what you get is a sudden liquidity effect. The euro is more productive, so it is as if you are creating, we don't know how much, 10 or 15% more money. So there is excess money slopping around Europe.
Do you think the euro should be fixed?
Interest rates in Europe are much lower than they are in the United States - about 2% lower, which is a reflection of the fact that people believe the euro is undervalued. I think it was a mistake to let the euro go down this much. In the same way, I think it was a mistake for the Bank of Canada to let the Canadian dollar go down to 62 cents American. That was a blunder, too. It doesn't do any good to the Canadian economy when the currency overshoots in a downward direction. Currency markets are by their very nature unstable. They fluctuate up and down.
What should the Bank of Canada have done?
Colin Clark (the Australian economist) has said that 25% is
the maximum taxable capacity of a country. If it is higher, ill
effects kick in, such as people moving out of the country, evading
taxes and the like. Do you think Canada has a "brain drain"
problem and, if so, do high tax rates account for it?