The Economic Summit of the Seven Major Industrialized Nations is a forum where the leaders of the Free World can discuss freely the major issues confronting the world economy with a view to enhancing cooperation and policy coordination mainly in the fields of macroeconomics, trade, science and technology. From time to time, those leaders take up political matters such as terrorism, but the major focus rests on economic matters.
The Heads of State or Government are free to take up any issue they wish for they are"almighty". But it would be surprising if they did not discuss at least the following five problem areas:
1) Macro-economic policy coordination, which includes economic growth, unemployment, the stability of monetary and financial markets, budget deficits and fiscal policy;
2) The fight against trade protectionism and the impetus to be given to the Uruguay Round Negotiations;
3) Relations with the developing countries;
4) The indebtedness of the developing countries;
5) A reaffirmation of the political solidarity of the nations sharing the same basic value system.
International society today is in the throes of massive structural changes. The rapid development of new technologies such as information and telecommunications, and the expanding role of multinational corporations are typical factors contributing to these changes. This dynamic process is creating an unprecedented level of interdependence in the world economy.
This new economic environment is fostering new industries and new development opportunities, thereby stimulating economic activity in both developed and developing countries, and providing significant opportunities for future growth. The rising level of economic interdependence will also be an important factor in building the foundations of global political stability and in maintaining world peace.
It is also true, however, that these fundamental changes now taking place in economic structures constitute a severe challenge. The major industrial democracies must devise an appropriate response to this challenge.
Today, the policies of one country have an immediate and extremely profound impact on the economies of other countries. It is thus vital that all nations give full consideration to the international compatibility of their policies. However, the process of international policy coordination requires the implementation of policies that frequently cause considerable pain on the domestic political front. Serious conflicts between the spirit of international cooperation and narrowly-defined national interests within individual countries can constitute a hurdle to coordination at the international level. So truly effective policy coordination is only possible through the relentless efforts of policy makers in each country.
The economic performances of the advanced nations are following a sustained albeit gradual growth trend, inflation has stabilized at a low level, and there are indications of significant progress in the alleviation of external imbalances in the world economy. Yet the world economic situation still contains some political dangers. The market has given a sharp warning about these dangers in the form of last October's "Black Monday". The most serious problems in this connection are America's budget and trade deficits and mounting foreign debts, and the underlying uncertainties that these factors are causing in the world's monetary and financial markets. It will not be possible to find a cure for these serious problems overnight. But, some of the positive effects of the adjustment in exchange rates are at last being manifested in the form of recent increases in U.S. exports.
The rising global trend toward protectionism is the second major threat to the world economy. The omnibus trade bill adopted by the U.S. Congress is highly protectionist in that its basic philosophy stems from "unilateralism", "bilateralism" and absolute "reciprocity",which are negations of the fundamental principles and spirit of the GATT, i.e. the "open and multilateral trading system." There is a genuine concern about the serious impact that this legislation could have on the free and multilateral trading system that has been the foundation of world economic prosperity since World War II.
Of course, the immediate task of policy coordination is not something to be undertaken by the United States alone. It is essential that the other industrialized nations play an active part in this process. Indeed, it is only through consistent and credible policy efforts by all the major industrialized nations that it will be possible to overcome the serious difficulties of maintaining market confidence and to ensure the smooth flow of goods, services and capital.
The European economy has recently shown a remarkable surge of vitality. Europe's task now is to build on this momentum and work to expand domestic demand, particularly in West Germany, while actively adapting to a new era through economic structural adjustment.
It particularly gratifying to notice that Canadian performances continue to be among the best of the major industrialized country members of the Economic Summit.
Japan must obviously play an important role because of its massive current account surplus and vigorous economic performance. We have succeeded in shifting from export led growth to a domestic demand-led growth pattern which will lead to a steady reduction in the current account surplus. Effectively, real G.N.P. growth in 1987 was 4.2%; the contribution of domestic demand to this figure was 5% while exports contributed "minus 0.7%". The current account surplus for fiscal 1987 is estimated to have fallen by around $10 billion. There has also been a sharp increase in the level of manufactured imports, which has risen from 24% of total imports in 1981 to over 44% in 1987 (and, for 1988, probably 50%). The New Economic Plan, soon to be finalized, will further reinforce the aforementioned policy directions.
Growing international economic interdependence and the advent of a truly global economy has created a situation where events in developing countries may have a serious impact on the economies of the developed nations. This is particularly true in the case of the indebtedness of many developing countries. By the end of 1987, the aggregate figure of these countries' debts reached $1,200 billion. Because of the problem of the solvency of many of the indebted developing nations, constitutes a grave threat, not only to the developing nations, but also to the entire international financial system.
International institutions such as the World Bank and the I.M.F. have worked strenuously to avert crises through cooperation with the governments and central of banks debtor and creditor nations and private banks. Since the autumn of 1985, the case-by-case approach has been accompanied by a strategy proposed by the U.S. Treasury Secretary James Baker. The so-called "Baker Plan" encourages debtor nations to "grow out of debt" through economic growth. The appropriateness of this basic strategy has been repeatedly reaffirmed in economic declarations released at several previous summits.
But the problem now is how to set in motion a "virtuous cycle" in which the recovery of credit worthiness through international financial cooperation and the self-help efforts of the debtor nations prompts a spontaneous increase in the flow of capital from private banks
Growing international economic interdependence into indebted developing countries. A new concept that has been employed recently to supplement and reinforce existing debt strategies is the "menu approach", which involves the use of various financial techniques to alleviate existing debt burdens and boost the inflow of new capital. Some progress has already been made with this approach in Mexico, where a scheme to convert debt into national bonds has been implemented under a U.S. initiative.
However, all of these efforts have not yet been fully successful in setting in motion the virtuous cycle. No panacea in dealing with the serious debt problems of developing countries has as yet been found. So this will doubtless be a topic of discussion at the forthcoming Summit.
As far as Japan is concerned, it has been actively cooperating in this area through substantial financial contributions to the I.M.F the World Bank and other development banks, through a three-year program to recycle some $30 billion in surplus funds into developing countries and through an expansion of its O.D.A. Japan intends to further expand its policy efforts of this type in the years to come.
Another important question concerns relations with the emerging newly industrialized countries (NICs) and their role in the overall restructuring of the world economy. The NICs, particularly the Asian NICs, have achieved remarkably dynamic economic growth, led by a strong and rapid expansion in the exports of their manufactured products. Their economic growth rate estimates in real terms amount to 13% for South Korea, 10.6% for Taiwan, 12.0% for Hong Kong and 6 or 7% for Singapore. In 1986, South Korea and Taiwan registered current account surpluses of $4.6 billion and $16.2 billion respectively. The mounting surpluses of these and other countries in this group and the increasing competitiveness of their industrial products have led to increasing international pressure for them to accept a greater degree of responsibility, commensurate with their degree of development, for the management of the world economy. The economic declaration of the Venice Summit last year and recent G7 communiqués contain frequent references to the need for the N.I.C.s to work toward the correction of external imbalances through cooperation in such areas as the adjustment of exchange rates to reflect economic fundamentals, and the acceleration of import and financial market liberalization.
The importance of these messages is obvious, but the question is how to convey them with maximum effect to the NICs. The effectiveness of one-way communication from forums in which the NICs themselves cannot participate is limited. We need to work through an honest dialogue with these developing countries, towards the development of a relationship that takes full account of their political and economic diversity, and in which both the advanced nations and the NICs can cooperate constructively in the management of the world economy.
In this process, the advanced industrialized nations must realize that the NICs, through their growth, are injecting vitality and dynamism into the world economy, and that the advanced nations themselves need to foster an international division of labour with the NICs, both through increased efforts to open up their own markets to the products of those countries and through structural adjustments in their own economies and industries. How the discussions on this subject will evolve during the Toronto Summit will be of particular interest to Japan, which is the sole Asian nation among the Summit participants.
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