World Leaders’ Futures Ride on Economics

Big talk. President Bush meets Japanese Prime Minister Toshiki Kaifu on Thursday in Newport Beach before flying to Houston to meet Mexican President Carlos Salinas de Gortari--as Kaifu returns to Tokyo to meet Soviet Premier Mikhail S. Gorbachev.

The possibilities are historic. The Gorbachev visit to Japan could resolve a dispute over the Kurile Islands in the northern Pacific and be followed by $28 billion of Japanese investment in development projects in the Soviet Union.

Bush and Salinas have already proposed a U.S.-Mexico free-trade agreement that could greatly expand the two countries’ yearly total of $50 billion in trade.

But the promises are clouded. Most heads of state involved in these meetings are threatened with loss of their jobs. Powerful party factions in Japan are maneuvering to displace Kaifu, and their efforts will only get bolder as Japan sinks into recession.

Throngs marching in Moscow are calling for Gorbachev’s resignation. And the latest economic disaster--when even a tripling in the price of bread failed to produce loaves in the stores--can only swell that chorus.

Salinas is secure in Mexico’s single-term presidency until 1994. But he has staked his political prestige and effectiveness on a U.S. free-trade agreement. And that could run into opposition if the U.S. economy, now recovering from recession, falls back into trouble next year--as some are predicting. Even Bush, who enjoys a 90% approval rating, could be vulnerable in the 1992 election.

What’s going on? The global economy is suffering disequilibrium between the prosperous economies of the United States, Western Europe and Japan--that have little capital to spare--and underdeveloped or formerly Communist economies that have enormous appetites and ambitions but lack capital.

Bringing progress to the one group while maintaining the prosperity of the other is no simple matter and could take years to work out. Understanding what’s happening is important because the problems get highly political and emotional.

As witness Germany, reunified only six months ago. At that time, the 17 million East Germans were handed West Germany’s strong currency and invited to buy the goods they had been deprived of in 45 years under Communism. And so they are buying, with gusto. But they are not producing, and the effect is inflation in West Germany where workers are winning 7% pay raises, interest rates are high and the economy is strained.

Meanwhile, the East Germans are sunk in joblessness and anger. The head of a key economic office was murdered by German terrorists Monday.

The problem is how to clear away the debris of 45 years of Communism, as Peter Pascheck, a Frankfurt management consultant, illustrates in this account: “I know a tire maker who drove over to Erfurt (in the East) to see a plant there. It employed 900 people and was out of date and so the tire maker had no interest in taking on such problems. But on the way back, he went to a local garage and found a skilled mechanic doing a thriving, private business. ‘He will be my business partner,’ said the tire maker.

“So, what we are seeing now is the interval between the time 900 employees are laid off from a useless tire plant and before they can find places with the entrepreneurial garage mechanic and many like him who will be backed by West German know-how and capital.”

Note well, the solution will involve west Germans providing a market for east German goods, which could very well mean competition and lower wages for west German workers. The issue is politically ticklish--and similar to the U.S.-Mexico trade question.

There the challenge will be for the United States to find a way to buy more Mexican goods and ship more U.S. products and services south of the border--without causing major unemployment in U.S. business and agriculture. Fortunately, the two nations have a fairly balanced trade--about $25 billion each way--to build on.

Elsewhere, as in the Soviet Union and Eastern Europe, trading patterns of four decades have broken down and countries are seeking investment so they can join the larger, developed world economy. That’s why Gorbachev is going to Tokyo.

But now may not be the best time to look to Japan, as its economy slides into recession. Car sales, corporate earnings and exports are falling all at the same time. At home, the unwinding of years of real estate speculation is driving many to bankruptcy and increasing tensions in the banking system.

Overseas, the biggest market for Japanese goods, the United States, has been in recession--and may not be a big consumer even when it recovers.

The American consumer’s installment debt as a percentage of income has remained at an historic high throughout this recession, notes Charles Clough, chief investment strategist for Merrill Lynch. Normally, consumer debt gets paid off during recessions, so the continuing high level is ominous. It indicates that Americans may be borrowing to pay interest and that, in any case, consumer spending won’t be as strong as in past recoveries.

Thus, in so many places, the challenge of the next few years will be clearing away blockages to commerce and growth--whether in relics of communism such as east German factories, or in economies borrowed to the hilt such as Japan and the United States, or in trade barriers between neighbors--U.S.-Mexico, U.S.-Japan, etc.

If this week’s talks among heads of state can make progress on such questions, you’ll see stock and bond markets the world over rise to new heights. If not, some big politicians will soon be out of work.