Best Lever on Deficit Is to Help Third World Grow Economically

A word of unsolicited advice to presidential hopefuls: You already know that your major foreign-policy challenge, aside from arms control, is reducing the trade deficit. The good news is that it is possible, but you are going to need the Third World to do it. Supporting resumed economic growth in the developing world looks like the only way you will have the deficit in hand by the end of your first term. You need to start thinking of the developing countries as important economic partners, not just troublesome areas of tension or a never-ending humanitarian challenge.

From 1950 to 1980 the developing countries compiled a spectacular record of economic growth. Their share of the world’s exports of manufactured goods grew from 7% in 1965 to more than 16% in only two decades. We now buy South Korean cars, Brazilian airplanes and Indian computer software. At the same time, the faster-growing developing countries became major export markets for the industrial countries, including the United States. By 1981, developing countries were buying 41% of American exports--more than we sold to Japan and Western Europe combined.

We all benefited from these developments until 1982. With the onset of global recession largely driven by U.S. policies, growth rates in the industrial world plummeted, interest rates soared and growth in developing countries came to a screeching halt. The effect on our economy was direct and sharp as exports dropped. Nearly 1.7 million actual or potential American jobs were lost in the first half of this decade due to the drop in purchases by developing countries. This total equals nearly 21% of official unemployment in 1986.

Given the size of the U.S. trade deficit and our growing level of foreign indebtedness, adjustment seems inevitable. The real question is how well the process is managed and whether the next President can improve our own position while avoiding a steep economic downturn. Many of the measures necessary will be essentially domestic. But it won’t be enough just to act on the conventional wisdom that the trade imbalance will be corrected if the dollar depreciates further and if industrial countries expand their economies.

An analysis by the Overseas Development Council of the prospects for American exports during the next Administration reveals the vital role that developing countries could play. These projections show that if the past year’s trends continue through 1992, the trade deficit could balloon as high as $200 billion. Before that happened, however, our foreign creditors most likely would have withdrawn their funds, leading to a sharp economic contraction that would spread worldwide.

Even if our industrial partners follow our admonitions and expand their economies, the best that could be hoped for is a trade deficit of about $115 billion. The only way the deficit will be reduced to a more manageable $80 billion by the end of 1992 is if our major developing-country export markets resume growth at rates close to those that they enjoyed in the 1970s.

The key element in any strategy to significantly reduce the trade deficit will have to address head on the major constraint on developing-country growth--the debts of our Third World trading partners. Contrary to much campaign rhetoric, our trade problems with developing countries are due far more to their debt predicament than to their unfair trade practices or to any decline in U.S. competitiveness. Renewed and sustained growth in these nations requires that their governments adopt appropriate economic policies and that the net transfer of resources to these countries once again be positive.

Resumed growth in our major export markets in developing countries will require an international effort, preferably under the aegis of the World Bank and the International Monetary Fund, to share adjustment costs among debtors and creditors and, on a country-by-country basis, to reduce the drain of resources in ways that support more equitable economic growth.

Restoring global growth rates to levels of the 1970s is not something that the United States can do alone. But American leadership and resources remain essential if our own interests and those of debtor countries are to be furthered.

Is that possible when we also must narrow the budget deficit? Any major proposal for budgetary resources to support growth in developing countries is out of the question. President Reagan’s successor will have to challenge his Administration and Congress to design imaginative measures to stimulate the flow of added public and private resources with minimum effect on the budget. The surplus countries, particularly Japan, should be encouraged to provide more resources for development; U.S. government guarantees can be used to foster greater flows of private capital, and funds in the aid program can be reallocated from security to economic programs.

Is there a choice? Sure, if the next President doesn’t mind running for reelection plagued either by a trade deficit that remains too high or by a widespread recession. If neither prospect is attractive, he is going to find that we need the Third World just as much as it needs us.