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.
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
Tab A
Report Prepared by the International Summit
Preparatory Group6
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
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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
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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,
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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.
