We Can Work It Out

For the second time in a month, Ronald Reagan is heading for a summit. This time the main topic will not be world peace and how to preserve it but a more immediate challenge: how to ensure the stability and prosperity of the global economy. The President will travel to Toronto on June 19 for the annual economic summit with the other leaders of the Group of Seven industrialized nations: Britain’s Margaret Thatcher, Japan’s Noboru Takeshita, West Germany’s Helmut Kohl, France’s Franois Mitterrand, Italy’s Ciriaco De Mita and the host, Canada’s Brian Mulroney. Inside the Metro Toronto Convention Center, the leaders will discuss such major problems as trade imbalances, protectionism and Third World debt.

Like Reagan’s parley with General Secretary Mikhail Gorbachev, the Toronto gathering will be notable more for showmanship than for substance. As they did after the 13 previous economic summits, the leaders will issue a predictable communique containing vague pledges of cooperation and general prescriptions for economic ills that have been left untreated year after year. Yet among economists in the U.S., Europe and Japan, there is an unusual consensus about what the seven leaders really ought to do to avoid a global recession. For starters, they should be ready to admit past failures, set aside nationalistic differences and take action that may be politically painful back home. After consulting with economic experts in the seven countries, prepared this version of the “Economic Declaration” that the world wants — and needs — from Toronto:

Introduction

We, the Heads of the seven major industrialized countries and the representatives of the European Community, have met in Toronto from 19 to 21 June, 1988, to review the progress that our countries have made, individually and collectively, in carrying out the policies to which we committed ourselves at earlier summits. Although we can look back at a number of positive developments since we met a year ago in Venice, and can congratulate ourselves on having weathered last October’s dramatic stock-market storm, we have been forced to confront an unpleasant truth: we have not lived up to our past pledges and thus are not doing as much as we could to ensure continued growth for our own countries and for the world economy.

Accordingly, and notwithstanding the likely political repercussions that await us back home, we have pledged not just to step up our rhetoric (although we reserve the right to do that as well) but to take firm and concrete measures to achieve greater economic convergence, exchange-rate stability, stronger growth, more open trade and greater generosity toward the developing world.

At the moment, the risk of a recession brought about by the global stock- market crash has receded substantially as business confidence and consumer spending have revived. Our economies have been growing at a healthy annual rate of 3%, and inflation is projected to stabilize over the next two years at about 3.75% on average. The debt crisis appears to have eased somewhat, and on the trade front, the U.S. has finally started to reduce its huge deficit.

The Risks

This progress should not be allowed to mask the dangerous underlying problems that we have failed to address in recent years. In particular, there will be a continuing need for the U.S. to finance its unacceptably large trade deficit by borrowing money from investors in other countries. If those investors balk at any time, the result could be another sharp decline in the value of the dollar, accompanied by a steep rise in U.S. inflation and interest rates. That could lead to a worldwide recession and a renewal of the Third World debt crisis. Such economic turmoil would cause severe disruptions in financial markets, which have yet to recover fully from last October’s debacle.

The Remedies

To prevent such an outcome, we have individually pledged to take the actions outlined below. In general, we intend to bring our growth rates into closer alignment to help correct trade imbalances. To reduce exchange-rate volatility, our central banks will agree to specific ranges within which currencies will be allowed to fluctuate. We will not hesitate to use all available means, including central-bank intervention in the foreign-exchange markets and adjustments in our interest-rate policies, to make sure that the currencies stay within these so-called target zones.

In the current trade negotiations, we will push for removal of tariffs and other barriers that impede commerce. To show we are serious about this goal, we will move immediately to curb the wasteful subsidies that each country pays to its domestic farmers — subsidies that hamper agricultural trade and lead to overproduction and inefficiency. Specifically, we have all pledged to reduce our agricultural payments by 20% over the next year. If a country does not comply (and the staff of the Organization for Economic Cooperation and Development will be the arbiter), each of the other nations will subject selected products from the offending country to tariffs equivalent in value to its excess agricultural subsidies.

We have agreed that substantial debt relief is vital to the resumption of strong growth in the developing world and the creation of viable markets for our exports in the future. Accordingly, we will follow the example of France, which prior to the summit announced that it was canceling one-third of the debt owed to it by the “poorest countries,” many of them former French colonies. For developing countries in general, we will forgive at least 20% of the debt owed to our governments. We will work toward a similar cancellation of private bank loans, offering tax incentives so that the cost of the action will be shared by the financial institutions and our governments.

On a country-by-country basis, we have made the following commitments:

United States. Notwithstanding the rapid approach of this year’s presidential election, the U.S. has agreed to take tough action to curb its budget deficit. Specifically, the U.S. has vowed to slash the deficit by $40 billion a year over the next four years, creating a rough balance by 1993. Although the precise methods of deficit reduction will be determined by Congress, the Administration has agreed to drop its long-standing-opposition to tax increases. As a dramatic first step toward balancing the budget, the Administration will propose and push for a 20 cents-per-gal. increase in the gasoline tax, which with rebates to poor families will raise $16 billion a year.

While the U.S. is an outspoken advocate of free trade, it still maintains many tariffs, quotas and other barriers. As a strong gesture of its intention to reduce protectionism, the U.S. has agreed to liberalize its quotas on imported steel by 10% next year and to phase out sugar import quotas over a ten-year period.

Japan. The country’s growth rate in 1987 helped reduce its trade surplus by 15.3% last year, to $96.4 billion. But Japan recognizes that the surplus is still large enough to be destabilizing for the world economy and has set a goal of reducing it by another 15% over the next year.

To encourage more imports, Japan will increase public spending and continue its program of eliminating trade restrictions. Along those lines, Japan has consented to end all quotas on agricultural products except rice immediately, without raising tariffs on those products. Imports of rice will be considered within five years. Japan realizes, furthermore, that tearing down trade barriers is not enough. It will start a kind of affirmative-action program to increase imports. The government will ensure that specific percentages of its purchases are foreign-made. The goal for telecommunications equipment will be 20%, and in construction work, 10%.

European Community. To ensure the success of the plan to create a truly integrated market by the end of 1992, the twelve nations of the Community will introduce a common currency called the ECU on Jan. 1, 1992. It will immediately be legal tender throughout the Community and will replace national currencies by 1997. The new currency will be managed by a European central bank that is independent of national governments.

West Germany. The government concedes that West Germany’s projected growth rate of 2% this year is too low and its expected trade surplus of $63 billion too high. The Germans have an understandable fear of inflation, but since consumer prices rose only 0.2% last year, the government can afford to stimulate its economy. The Federal Republic has agreed to advance to 1989 a 9% personal-income-tax cut scheduled to take effect in 1990. The government has pledged to reduce subsidies to the coal, steel and aircraft industries by 25% in the next three years.

Britain. With one of the most dynamic economies in the G-7, Britain is properly committed to continuing its program of tax reductions and privatization of national industries. The only worrisome trend is a run-up in the value of the pound over the past few months. That has helped keep inflation under a 4% rate but widened the trade deficit, which is expected to increase by 64% this year, to $25.75 billion. To control the volatility of the pound, Britain has agreed to join the European Monetary System immediately. In addition, Britain has pledged to work more closely with itscontinental allies to eliminate trade restrictions in preparation for 1992.

France. High interest rates needed to defend the franc have helped reduce France’s growth rate to about 2%. An improvement will hinge in part on the willingness of other European countries to lower their interest rates and stimulate their economies. But France recognizes that it can help itself by maintaining consistent economic policies despite political uncertainty. The government acknowledges that it went too far in nationalizing industries in the early 1980s; it pledges to denationalize the automaker Renault and the National Bank of Paris within the next three years.

Italy. The country’s 1988 growth rate is expected to be only 2.5%. But any desire to use public spending to spur the economy is constrained by Italy’s budget deficit, which is likely to hit $105 billion, or nearly 10% of national production. By contrast, the U.S. budget deficit is only about 3.3% of GNP. Italy has agreed to cut its deficit by $20 billion next year, partly by ensuring that wage increases in the public sector are no greater than they are in private industry. The deficit reduction will allow Italy to lower interest rates, and a better balance between monetary and fiscal policies will promote growth.

Canada. The government of Canada is confident that it can push through Parliament the legislation necessary to create the proposed free-trade zone with the U.S., despite protests from certain parties and provincial ! governments. At this summit, Canada has pledged to lower barriers that block trade with other countries as well. As a first step, Canada has agreed to begin phasing out subsidies to its wine, liquor and fish-products industries.

Next Economic Summit

We have agreed to meet again next year and have accepted the invitation of the French President to gather in France. We will be ruthless in assessing our progress in achieving the courageous goals outlined in Toronto.