65. Memorandum From the Special Representative for Economic Summits (Owen) to President Carter 1

SUBJECT

  • Summit Follow-Up

1. Attached is the report on Summit follow-up agreed by the International Summit Preparatory Group that met September 29 and 30. Each national delegation is now submitting this report to its country’s Head of State or Government. The report will not be released to the press.

2. The report suggests that most Summit decisions are being well executed. Two failures were noted:

—Germany did not achieve its pledged 4.5%–5% growth target in 1977.

—Japan did not reduce its surplus.

The Group discussed at some length the reasons for these failures. In the case of Germany, there were forecasting errors, which were not recognized in time. In the case of Japan there are structural problems, which will require considerable time to correct. Both the German and Japanese representatives said that their countries’ Summit commitments had played a role in the expansionist decisions that their governments took in September.

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3. The report stresses the importance of Germany increasing its growth rate and Japan reducing its surplus. The Japanese said that they would make a 6.7% growth in 1977 and 6% in 1978, and would begin to reduce their external surplus. The Germans said that their 1978 growth target was 4.5%.2

The weaker European countries did not believe that they should join in a general economic expansion in 1978. The Italians and French made clear that they were not about to throw away the gains achieved through their stabilization programs by premature and potentially inflationary expansion. The British position was similar but less clear. All three countries were prepared for moderate expansion if the stronger economies could achieve a good growth record.

4. This Group may meet in December to review the tentative 1978 growth projections that will have been discussed in the OECD in November. If the net effect of these targets seems unsatisfactory in terms of Summit commitments, the Group might say so to Heads of Government. If the targets look good, the Group might prepare a statement that the Heads of Government could issue in their respective capitals in January 1978, so as to put their full authority behind these targets. The German and Japanese delegates felt that this would make it easier to get agreement in their countries on action to meet these targets.

5. There was some discussion of future Summits. The British and Germans seem to be thinking of a meeting in mid-1978. Callaghan and Schmidt will talk further about this when they meet in Bonn in October. Clappier, the French representative, was attracted by the notion of a brief Paris Summit in late 1977 to discuss 1978 growth targets, at the time of your visit to Paris;3 but his enthusiasm cooled when he saw that the other countries were thinking of a later Summit.4

6. If you have any reactions to all this that you wish me to take into account in further planning, please let me know. I will be talking to my French and German opposite numbers further about these matters, when I go to a Trilateral Commission meeting in Bonn in late October.5

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Tab A

Report Prepared by the International Summit Preparatory Group 6

Report on Summit Follow-Up by International Preparatory Group

This report deals with actions taken since the Downing Street Summit under the five main headings of the Annex to the Summit Declaration.7 Some of these issues have been effectively addressed; in other cases there have been lags. The central follow-up issues requiring attention of Heads of State and Government appear to us to be (i) macro-economic policy—particularly achievement of non-inflationary growth targets by the stronger economies and a better distribution of payments imbalances; and (ii) trade—particularly early and substantial progress in the multilateral trade negotiations.

I. World Economic Prospects

The countries that pledged themselves at London to continue effective stabilization policies have done so. Taken together, they have made progress in reducing inflation; balances of payments have improved; reserves have increased; currencies have been strengthened. Unemployment remains very high and continues to increase, particularly among young people. Growth is low in the UK and Italy; in France it may be 3% in 1977. Recent limited steps by these countries to increase employment have been consistent with the agreed strategy, which gives first priority to the control of inflation in order to set the stage for later expansion.

Although these countries’ ability to fulfill that strategy depends mainly on their internal policies, it also depends on the external economic environment. That environment is shaped, in some degree, by the actions of the economies with greater freedom of maneuver. Germany, Japan, and the United States pledged at the Summit to achieve their growth targets—4.5%–5%, 6.7%, and 5.8%, respectively. They also promised to contribute to the adjustment of payments imbalances.

In September, the German and Japanese governments decided to undertake substantial programs to help fulfill their growth targets.

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—Following earlier German measures in June, the further German steps will have only a limited effect on German growth in 1977, which is likely to fall about 1% below Summit growth targets; these additional German measures should, however, contribute to improved growth performance in 1978. Germany runs a decreasing but still substantial surplus on current account.

—The Japanese expansion program will probably raise growth in FY 1977 to about the pledged 6.7%. It portends little early reduction in Japanese external surplus;8 the Japanese Prime Minister has accepted the necessity “to strive for an external equilibrium”, and some initial measures to this end have been announced.

Despite a recent slow-down, the United States should achieve its Summit growth target for 1977. The US current account deficit is very large and does not seem to be diminishing; part of this deficit is due to increasing oil imports, as the US economy grows. This deficit poses a potential problem for US policy because of its size, while large surpluses are being incurred simultaneously by other strong economies.

Unemployment has remained too high in all three of the strong economies; it has been slightly drifting up in Japan and Germany, and down in the United States. Inflation in Germany and Japan has declined—to 4% and 7–8%, respectively; it seems stuck around 6% in the United States. All three countries are concerned to curb inflationary pressures.

Canada’s real growth for 1977 will be less than the 4% projected at the Summit; unemployment will also be higher than expected. Canada’s inflation rate is running at about 7.5%, and it continues to run a substantial deficit on current account.

What can be learned from this record?

Summit commitments appear to have had a useful effect on the participants’ policies. Both the German and Japanese governments have referred to these commitments in announcing expansionist measures.

The obstacles to effective and timely concert of the industrial nations’ domestic policies are substantial. Economic trends cannot readily be predicted with accuracy; they depend on the decisions of millions of consumers and investors. Nor can these trends be altered quickly by public policies, which have to be agreed by diverse political and economic groups before they can be put into effect; and their results may be altered or offset by unanticipated movements in private consump[Page 219]tion and investment. The objectives of growth, price stability, and balance in external payments have proved difficult to reconcile, even in the countries which were thought to have the greatest freedom of maneuver; fear of heightening inflationary expectations compounds the problem. For all these reasons, a significant lag between commitments and execution in economic policy can often be expected.

The fact that concerting economic policy is difficult does not mean that we should abandon the task—only that we need to work harder at it and try to learn from experience as we go along. For example, in planning future Summits, it would be wise to recognize that some time must elapse before policies needed to fulfill Summit targets can take effect. More frequent international monitoring of Summit results may also help to identify shortfalls in time for useful corrective action.

Meanwhile, the job is to get on with fulfilling the commitments made at London. Growth and stabilization are still the dominant needs for the countries that pledged to achieve these goals. The two needs are interdependent: The strong countries’ prospects for non-inflationary growth would be damaged by a revival of inflationary pressures in other countries. The stabilization programs that some countries have to follow involve substantial social, political, and economic costs, and it will be difficult for them to continue these programs unless the agreed Summit strategy for non-inflationary recovery is being visibly fulfilled.

Whatever happens to 1977 growth targets, therefore, it will be crucial that overall improvement be achieved in 1978. Thus the November meeting of the Economic Policy Committee of the OECD will be of great importance.9

Growth must also be reflected in a much better equilibrium of balance of payments. This will require a reduction or elimination of existing large external surpluses. Failing this, it will be difficult for other countries to reduce their deficits, and existing protectionist pressures will grow dangerously. So far, the international financial system has been able to cope with the counterpart deficits to the OPEC surpluses. But the problems of doing so without further contraction and unemployment will be intensified, in the face of persistent OPEC surpluses, if the only strong economy accepting a corresponding deficit is the United States.

Even if the Summit targets are achieved, major economic problems will remain. Inflation will be difficult to reduce to manageable proportions, and the threat of its revival will be a continuing deterrent to precipitate expansion. Unemployment will be hard to eliminate without structural measures to deal with the special problems of young people [Page 220]and other groups. In several of our countries, measures have been taken since the Summit to deal with the particularly serious problem of youth unemployment. To help in further developing such measures, the proposal for a conference on youth unemployment foreshadowed at the Summit was agreed by the recent OECD Ministerial meeting,10 and plans are now being made to hold a Ministerial Conference in December.

We conclude from the foregoing:

1. Viewing the Summit nations as a whole, progress in growth, reducing unemployment, and balance of payments adjustment will not be as significant in 1977 as was hoped at the May Summit. While inflation, especially in the weaker countries, is still much too high, the prospects for its reduction in most countries seem a little better than they did at the time of the Summit.

2. The principal routes to adjustment of present distribution of surpluses and deficits remain: (i) policies in the stronger surplus countries which increase domestic demand consistently with the control of inflation, and orient their economies toward expanded imports; and (ii) stabilization policies in the weaker deficit countries. Among the strong countries, only the United States has moved into deficit. Measures to increase home demand have recently been proposed in Japan and Germany; the Japanese and German current surpluses are still too high.

3. Unemployment is rising in all the countries represented except the United States. Increases in present rates of growth, along with continued restraint of inflation in prices and costs, are the best hope of reducing it.

4. Protectionist policies would increase unemployment and inflation. Unless a sustained recovery takes place, however, pressures for protection can be expected to grow.

II. Balance of Payments Financing

IMF Facility. Even assuming satisfactory growth and stabilization policies, there will remain a need for the provision of adequate international financing to complement commercial credits in meeting balance of payments deficits. Final agreement has been reached on establishment of the Witteveen facility, to which the Summit nations pledged their support at London, with firm commitments on financing amounting to SDR 8.6 billion ($10 billion) provided by fourteen industrial and oil-exporting countries. This should make substantial help available to countries whose deficits are large relative to their quotas and which are following stabilization policies.

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Quotas. Discussions are underway in the IMF on an increase in Fund quotas, as foreshadowed at the Summit; the present target is to reach agreement by the spring of 1978. Like the new IMF facility, the increased IMF quotas should both give countries in deficit access to money which will afford them time to adjust their policies at an appropriate pace and prevent further moves toward protectionism.

III. Trade

Protectionism. High unemployment in the industrialized countries has continued to generate protectionist pressures since the Summit. Nonetheless, there has not been widespread use of import restrictions. The commitments made at Downing Street and reaffirmed in renewing the OECD pledge have proved effective. Pressures for restrictive import measures are likely to continue, however; governments will need to exercise discipline to avoid measures that would transfer the burden of unemployment to their trading partners; they should continue to seek multilateral solutions, in appropriate forums, to pressing trade problems. The best way to reduce pressures for import restrictions is to accelerate overall growth and employment, to reduce substantial imbalances of international payments positions, and to achieve rapid and substantial progress in the Multilateral Trade Negotiations.

MTN. In the Tokyo Round of multilateral trade negotiations, agreement has been reached on a timetable for achieving substantive progress by the end of the year, as pledged at the Summit. As a first step toward meeting the timetable, a working hypothesis for tariff reductions, which will guide tariff negotiations, is being developed. The agreed approach should ensure that the Summit goals of substantial reduction, harmonization, and elimination of tariffs in certain cases will be achieved.

Progress has already been made in preparations for tabling requests in the sectors of agriculture and non-tariff barriers, and work has been set in hand on customs valuation, subsidies and countervailing duties, standards, government procurement, and safeguard mechanisms. Only if this momentum is maintained can the aims of Downing Street Summit be met within the time scale we envisage. The objective established for the MTN—a comprehensive set of agreements to the maximum benefit of all—will require a major effort on the part of all participants. The timetable for progress which has been agreed is ambitious; the temptation to delay and settle for limited results should be resisted; wider trade will help to stimulate growth and limit inflation.11

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Export Credits. Progress has been achieved in fulfilling the Summit agreement to reduce counter-productive competition in officially supported export credits, within the existing Consensus. The Consensus expiration date has been extended to December 31, 1977. The object is to improve the present international arrangements before the end of 1977.

Illicit Payments. The UN Economic and Social Council has directed the ECOSOC ad hoc inter-governmental working group on the problem of corrupt practices to complete an international agreement on illicit payments in 1978, and has recommended that the UN General Assembly convene a conference to conclude such an agreement. The working group’s ability to complete its assignment will require, among other things, that the Summit countries give their full support, as pledged at London.12

[Omitted here is discussion of energy.]

V. North-South Relations

The objectives which the Heads of State and Government set themselves for the Conference on International Economic Cooperation were broadly met.13 The Conference’s results did not meet all the wishes of the developing countries; nor did they entirely correspond to the interests of the industrial countries; but in general terms they should help to further the economic growth of developing countries within the framework of the world economy. The Conference established the basis for continuing the dialogue within international bodies.

Aid. Summit and other donor nations pledged at CIEC to increase effectively and substantially their official development assistance flows, and to contribute to a Special Action Program $1 billion in increased development assistance for low-income countries. It will be important for the Summit countries to follow up these commitments promptly; more effective development will not only enhance the developing countries’ welfare but also contribute to wider trade and economic opportunities for all nations.

Access to International Finance. The Witteveen supplementary facility contains provision for longer periods of adjustment as part of agreed conditions for IMF assistance to countries with balance of payments difficulties.

World Bank. The issue of the World Bank’s capital increase is now under active review in the Bank’s board. While there is general agreement that World Bank lending should continue to grow in real terms, [Page 223]as pledged at the Summit, the rate of growth remains to be decided. It should be possible to reach agreement on the general capital increase by June 1978.

Private Investment. The Development Committee of the IMF and IBRD has made recommendations on a variety of mechanisms to improve access by the developing countries to capital markets, as pledged at the Summit. These include the use of guarantee authority and technical assistance by the international development banks. The Committee has also decided to study the nature and role of private investment in developing countries, including how host government policies affect the investment climate.

Commodity Policy

a. Common Fund. At CIEC, the Group of Eight countries agreed that a common fund should be established, to be negotiated in UNCTAD. The participating governments have been meeting with other industrial countries to prepare a proposal to present at what will be a very difficult November session of the UNCTAD Negotiating Conference on a common fund.

Useful progress has thus been made in certain areas of North-South relations. But many key decisions, particularly on aid, remain to be taken. The natural interdependence between the developed and developing countries is clear to all. But, as the CIEC showed, their relationship remains uneasy and potentially divisive. The Summit governments will need to continue to give high priority to their policies and to concerting their actions in this field.

  1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 64, Summits: 5–12/77. Confidential. Sent for information. Both Carter and Brzezinski initialed at the top of the page. Attached is an October 6 note to Carter from Brzezinski that reads: “Henry’s memo provides a good summary. No need to read Tab A.” (Ibid.)
  2. At the end of this paragraph, Carter wrote: “Japan has got to reduce/eliminate trade surplus. They have not tried.”
  3. Carter was scheduled to travel to nine countries, including France, from November 22 until December 3; in early November the trip was postponed. (Charles Mohr, “Carter Postpones Foreign Tour To Deal With Energy Legislation,” The New York Times, November 5, 1977, p. 47) Carter eventually visited France January 4–6, 1978.
  4. Carter wrote “Prefer FRG idea—1978” at the end of this paragraph.
  5. The Trilateral Commission (see footnote 3, Document 6) met in Bonn October 22–25.
  6. Confidential.
  7. For the text of the London G–7 Summit Declaration and the accompanying appendix, see Public Papers of the Presidents of the United States: Jimmy Carter, 1977, Book I, pp. 819–824.
  8. Carter underlined the phrase “It portends little early reduction in Japanese external surplus” and wrote at the end of the paragraph: “We might be facing an unpleasant dialogue—Japan is blocking imports.”
  9. The OECD Economic Policy Committee dispenses macroeconomic policy advice.
  10. See footnote 2, Document 35.
  11. Carter wrote “We’ll give our effort” at the end of this paragraph.
  12. Carter wrote “Let’s push this—” at the end of this paragraph.
  13. See footnote 6, Document 27.