Economic Summit Faces Challenge of World Jitters

Times Staff Writer

It began in late March as an early-morning blip on a Tokyo computer screen. A trade war over computer chips was looming between the United States and Japan, and currency traders, afraid that the United States would be the big loser, were clamoring to sell U.S. dollars.

By the time the dust had cleared several weeks later, the dollar had plummeted in world money markets, interest rates in the United States had jumped sharply and inflation fears were rising again. Everyone from the first-time home buyer in Akron to the stolid Swiss bankers of Zurich had felt the fury of the latest global economic jitters.

"All that volatility in exchange rates and interest rates in recent weeks gives a little taste of how vulnerable our own financial markets and our economy have become to what other people think," Federal Reserve Chairman Paul A. Volcker said last month. "We are rather obviously in danger of losing control over our own economic destiny."

Financial Anxiety

As the leaders of the seven largest industrial democracies gather here Monday for their annual economic summit, that recent wave of financial anxiety will be very much on their minds.

Although the storm clouds have since diminished, the allies face the challenge of overcoming their very different approaches to economic policy. The risks if they fail: a decline in world trade and another plunge in the dollar that could bring their last five years of generally rising prosperity to a grinding halt.

"It really boils down to an ongoing impasse between the United States, Japan and West Germany," said Alan Stoga, a senior economist at Kissinger Associates, an international economic and investment consulting firm based in New York. "The deadlock over economic policy is at the heart of the industrial world's huge trade imbalances, our unstable capital markets and the dismal outlook for resolving the problems of Third World debt."

But the prospect for any break in the deadlock at the Venice economic summit appears bleak. With President Reagan besieged at home by the Iran- contra scandal and nearly all the other leaders facing equally intractable domestic political problems, few analysts expect any major breakthroughs during the three days of talks here.

'Just Drifting'

"We're just drifting because our leaders don't seem to have much of a shared sense of what they can do about these issues," said Robert Hormats, a senior partner for the investment firm Goldman, Sachs & Co. and a former high-level State Department official who was instrumental in planning the first economic summit 12 years ago.

"That doesn't mean we're facing any immediate crisis, but it does leave the world economy more vulnerable to a downturn than it otherwise would be."

Reagan Administration officials, arguing that their international economic goals can be reached once other nations follow through on previous agreements, acknowledge that few changes in policy are likely to come out of the summit.

"When economic waters seem to be troubled, the correct approach is a steady hand on the tiller, not any frantic search for a new course," said W. Allen Wallis, who, as undersecretary of state for economic affairs, prepared the advance work for the summit.

And leaders from the other nations represented at the summit--West Germany, Japan, France, Britain, Canada and Italy--also caution the financial markets against expecting any initiatives.

"The translation of previous announcements into practical policy is more important than new declarations and commitments," West German Chancellor Helmet Kohl said.

For the last five years, a buying spree by U.S. consumers has been the driving force behind not only America's economy but also the world's. Producers in Europe and Asia of everything from textiles to videocassette recorders grew by feeding the U.S. demand.

That worked as long as the dollar was highly valued on international currency markets, allowing Americans to buy foreign goods cheaply. But now that the dollar has fallen--more than 40% against the Japanese yen from its peak in 1985, for example--American consumers are no longer in a position to pull the international economy out of the doldrums. That leaves it up to other nations to stimulate their own economies.

'Main Engine of World Growth'

"Growth in the domestic United States economy has been the main engine of world growth, all the way back to 1983," Treasury Secretary James A. Baker III said. "This has caused our trade deficit to expand . . . and this, of course, is simply not sustainable in the long run. So it's our view that other industrial nations need to do more."

In particular, that means West Germany and Japan. But foreign leaders, especially in Germany, are reluctant to embark on a more expansionary course without a clear signal from Washington that the U.S. budget deficit will shrink fast enough to maintain currency stability and prevent a revival of worldwide inflation.

Administration officials contend that the White House is already fulfilling its end of the bargain. The deficit, which hit a record $221 billion last year, is now expected to fall to about $175 billion this year.

Further progress, however, will be more difficult.

"We've relied on smoke and mirrors for quite a while in managing the budget deficit," Washington economic consultant Michael Barker said. "But we're running out of mirrors."

The Democrats who now control Congress hope to forge a compromise with the White House on a $36-billion deficit-reduction package for next year, divided equally between spending cuts and tax increases. Reagan has steadfastly resisted tax increases.

"If the dollar becomes unstable or if world confidence were shattered, international financial stability would be shaken to the core," said C. Fred Bergsten, director of the Institute for International Economics in Washington. "If President Reagan were aware of how deep the risks are, then he might be willing to compromise more with Congress on a modest tax increase."

While many analysts point the finger at the White House for intransigence over the budget, they heap equal blame on other nations for their unwillingness to assume greater responsibility for maintaining the health of the world economy.

"To his credit, Jim Baker understands that austere policies in Germany and Japan, Third World debt burdens and rising protectionist pressures in the United States are threatening the global economy with recession and financial collapse," said Paul Craig Roberts, an economist at the Center for Strategic and International Studies in Washington and a former Reagan Administration official. "The problem is policy-makers abroad who are fighting non-existent inflation while their economies sink."

But just as most economists were far too optimistic about the prospects for world economic growth at the time of last year's Tokyo economic summit, some analysts are convinced that the majority may be much too pessimistic today.

"This talk of an impending U.S. recession is just crazy," argued Larry Kudlow, chief economist at Bear, Stearns & Co., a New York investment firm. "All the signs--higher inflation, rising commodity prices, growing employment, the sell-off in the bond market--are harbingers of a stronger economy ahead, not a weaker one."

Most Urgent Issue

Even if the summit is unlikely to lead to adjustments in national economic policies to achieve greater global balance, officials still hope they can make progress on a number of other issues. Most urgent is the need to ease the international debts of many Third World countries.

The heads of government are expected to endorse a proposal by their finance ministers to allow impoverished African nations to escape as much as $20 billion of their current debt burden.

But the biggest international debtors are in Latin America, where the burden is about $380 billion. The recent decisions by Citicorp and other big U.S. banks to set aside billions of dollars in expected losses from their unpaid Third World loans are an acknowledgment that many Latin nations are unlikely to work their way out of their debt burdens soon.

Japanese Prime Minister Yasuhiro Nakasone hopes to cap his political career by winning the summit participants' endorsement of a Japanese plan to provide as much as $30 billion in new funds to developing countries over the next several years.

And Treasury's Baker wants to gain support for the Administration's newly developed scheme for encouraging banks to offer a "menu" of options to debt-plagued nations. Instead of having to pay all the interest owed on their loans, the debtor nations would be able to convert some of the debt into longer-term bonds or direct ownership of the enterprises financed by the loans.

If the Third World debt problem remains intractable, the summit's best hope for concrete results may lie in a firm political commitment by all the summit nations to work together in forthcoming trade negotiations to cut government subsidies to farmers. Those subsidies, designed to protect farmers from foreign competition, have also strained some national budgets to the breaking point, created huge agricultural surpluses and depressed world prices.

"We want to see to it that farmers will be able to compete," said Canadian Prime Minister Brian Mulroney, who has been at the forefront in pushing the United States and Europe to scale back their immense farm subsidies.

But not until the costs of existing subsidies mounted to staggering heights did political leaders become willing to consider the possibility of changing them.

"What has finally begun to happen in agriculture is true for other economic policies as well," said Stoga. "The only thing that spurs action is a crisis. The danger is that by the time everyone agrees on a solution, it may be too late."

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