Global Economic Ills may Take Years to Resolve

A study by the Organization for Economic Cooperation and Development says it may take years to resolve the huge economic imbalances now plaguing the world economy, U.S. and western officials said.

The paper was expected to stimulate policy debate among senior officials of leading industrial nations preparing for next month’s annual meeting of finance ministers in Paris.

The May 11-13 ministerial meeting of the 24-nation OECD, a forum for coordinating economic policies, has taken on added significance in view of the difficulties dogging the attempts of major nations to achieve joint goals.

Despite two meetings of the seven leading industrial powers – the United States, Japan, West Germany, France, Britain, Italy and Canada – pledges to change policy have still to be turned into action.

As a result, financial markets have been unusually unstable and have focussed their attention on every international meeting for clues that change is in the air.

The study concludes that there needs to be much greater fiscal action by the United States, West Germany and Japan to reduce their massive trade imbalances, a U.S. official said.

“We looked at what we could do to get from here to there. We’ve got to continue cutting the deficit, and there needs to be domestic expansion (in West Germany and Japan),” the official said, noting that significant actions are called for.

Officials noted the study strongly underscores the need for action by West Germany and Japan.

Seperately, western officials said they understood that U.S. overtures to Japan and West Germany to cut their short-term interest rates have been rebuffed for now.

Such rate reductions would have helped stabilize the steep decline of the dollar, by widening the difference between bond yields in the United States, on the one hand, and in Japan and West Germany on the other.

One official said that while the policy actions called for were similar to those urged by the seven, the study shows “it’s going to take several years to resolve (the trade imbalances).”

The OECD has set three pct as the necessary target for average annual growth in the industrial world if trade imbalances are to be corrected and the Third World debt crisis kept under control.

The study strongly implies these targets will not be met without major action by the three leading nations, officials said.

Equally, it suggests that without major fiscal expansion by Bonn and Tokyo, and a corresponding deep reduction in the U.S. budget deficit, the current trend of an upturn in U.S. interest rates and a weakening dollar will go uncorrected.

U.S. Treasury Secretary James Baker says the dollar’s deep decline alone will shave only 15 billion dlrs off the roughly 140 billion dlrs U.S. deficit in goods and services this year.

But the study group also found that progress has been made and the seven main nations are moving in the right direction.

In Paris this February, the seven agreed that fiscal actions by the three major powers would help them stabilize currencies around levels ruling then.

The Reagan administration, this week facing the prospect of a tough trade bill aimed at curbing foreign trade surpluses, also promised to fight protectionism.

The officials said Washington must move ahead with budget deficit cuts of around 36 billion dlrs, a figure set as a goal by the Democratic leadership of the House of Representatives.

They also called for significant increases in the budget deficits of Japan and West Germany. Since the study group met, Japan has announced a roughly 35 billion dlr supplementary budget which was warmly welcomed by Washington.

Nonetheless there is caution over both the timing and the content of the proposed Japanese budget.

Financial markets, unconvinced by yet another Japanese promise of action, have pushed the yen sharply higher against the dollar.

While no West German fiscal action is promised before January 1988, U.S. officials would welcome such a move. “We’d love them to accelerate their tax cuts,” one official said.

West German economic growth fell steeply in the first quarter this year, but the official said Bonn has reassured U.S. officials they expect growth to pick up again.

If faster German growth fails to emerge, Bonn could find itself under pressure to speed up tax cuts planned for early 1988 when leaders of the seven meet in Venice this June.