Section 2. Efforts to Solve Global Economic Issues and Other Multilateral Problems
I. Trends of World Economy and Tasks
(1) Trends of World Economy in 1980
As both inflationary and recessive effects of oil price rises since the beginning of 1979 permeated every aspect of the economy, the world economy in 1980 suffered a general setback in the face of the sharp rise in prices. At the same time, the balance of payments disequilibrium between oil producers and consumers was further expanded. As the employment situation worsened, protectionist pressure rose.
It may thus be said that 1980 was a year in which the world economy strove to absorb and adjust the various ills caused by the second oil crisis.
(a) Inflationary trend
In developed countries, consumer prices began to rise after the latter half of 1978 because of the sharp rise in the prices of imported goods triggered by the increased prices of oil and primary products. The rise reached a peak 12.5% in April-June 1980 (compared with the same period a year before). Although the rising tempo slowed down a little after that, the rise in 1980 marked an increase of 11.9% over the previous year, as against 9.1% in 1979. The United States in particular suffered a persistent inflation. Prices rose sharply in Britain and Italy partly through high wage increases.
In these circumstances, the developed countries gave priority to anti-inflation measures, pursuing various tight-money policies, including the raise in official discount rates and the compilation of austerity-type budgets. The recognition was heightened that productivity must be raised in order to stop the vicious circle of wage and price increases.
In non-oil-producing developing countries, consumer prices rose by 37-38% in 1980 over the previous year (an increase of 37.6% in July-September 1980 over the same period a year before; an increase of 29.3% in 1979 over the previous year) because of the oil price spiral and the sharp increase in wages and public utility rates. Consumer prices rose particularly sharply in Latin America, including Brazil and Mexico. Prices in Asia, which had been stable, began to rise particularly in the ROK and Sri Lanka.
In an effort to stop the inflation, the countries adopted various measures, including the raise in official discount rates and the compilation of austerity-type budgets, though somewhat belatedly.
In oil-producing countries, consumer prices quickened their rising tempo because of the rise in imported industrial goods (an increase of 14.9% in July-September 1980, compared with the same period a year before; an increase of 10.4% in 1979 over the previous year). However, the rise was moderate, compared with that in non-oil-producing countries. (The inflation rates shown above are based on IMF-IFS statistics.)
(b) Business trend
The real growth rate of developed countries marked a considerably large increase of 3.3% in 1979, but it showed an increase of only 1% or so in 1980 because of the fall in personal consumption and housing investment as a result of the drop in real income and the increasingly tight money policy. (OECD statistics) In the United States, the real growth rate in 1980 marked a minus for the first time in five years, although it showed weak signs of improvement in the latter half of the year. In Japan and West European countries, the growth rate showed signs of stagnation after the spring. Britain in particular suffered a far severer setback from the continuing slump in domestic demand and the adoption of a vigorous tight-money policy.
The countries learned from these economic realities that a short-term demand control policy alone would be insufficient to curb inflation and achieve steady growth, and began to pay more attention to the supply aspect of the economy, including the promotion of investment and structural adjustment for higher productivity.
The non-oil-producing developing countries seem to have fared well, except Argentina, etc., as far as agricultural production was concerned. The real growth rate in these countries marked an increase of 4.6% in 1979 (IMF-IFS) statistics), but apparently remained stagnant in 1980 because of the adoption of a tight-money policy and the slump in demand at home and abroad. The newly industrializing countries like the ROK and Taiwan suffered a setback after the middle of the year because of the slump in exports of industrial goods to developed countries.
In the oil-producing countries, the real growth rate in 1980 is estimated to have remained much below the 2.9% achieved in 1979 because of the reduction in oil production resulting from the fall in demand in developed countries and the slowdown in domestic economic development.
(c) Balance of payments trend
The balance of payments disequilibrium between oil producers and oil-importing countries, which had been widening since 1979 as a result of the oil price spiral, grew larger in 1980. According to OECD statistics, the oil producers' surplus rose from $68 billion in 1979 to $116 billion in 1980. By contrast, the developed countries more than doubled their deficit from $35 billion in 1979 to $73 billion in 1980. The deficit of non-oil-producing developing countries is estimated to have increased from $37 billion in 1979 to $50 billion in 1980.
Consequently an increasing number of developing countries with poor economic performance face serious balance of payments difficulties. The recycling of oil money has become an important question in world economics.
The United States marked a surplus in the balance of current account in 1980 for the first time in four years, thanks to the drop in oil imports and the increased export of computers, agricultural products, etc. Britain further increased its surplus in the balance of current account in 1980, thanks to the fall in import resulting from the stagnation in domestic demand and improvements in the oil account. Japan and West Germany registered in 1980 a deficit far larger than that of the previous year because of the oil price spiral. France and Italy suffered a deficit in 1980 after registering a surplus in the previous year.
(2) Tasks of World Economy and Necessary Measures
A number of problems remain to be solved before the world economy can develop on a stable basis in future. First, necessary energy programs have to be carried out actively so as to cut the link between economic growth and oil consumption. Secondly, an adequate demand control policy has to be adopted so as to curb inflation and achieve steady economic growth. At the same time, various programs with emphasis on the supply side of economy need to be implemented, including improvements in productivity and industrial structure. Thirdly, world trade has to be expanded on a sound basis by preventing protectionism from spreading and by abiding by free trade.
(a) Promotion of energy programs
It is most likely that the oil situation will remain uncertain in future as a result of the producers' policy for conserving their resources and their price maintenance policy. The oil problem is no longer transient, it is chronic and structural. It is therefore necessary to break with the present economic structure dependent on oil, by reducing oil consumption and developing alternative energy sources.
With this recognition in mind, the determination "to break the existing link between economic growth and consumption of oil" in the 1980s was expressed at the Venice Summit, and a basic strategy centering on the expanded use of alternative sources of energy was hammered out.
In Japan the government and the private sector are cooperating in an effort to further reduce domestic oil consumption. As a consequence, Japan was able to achieve the intended economic growth in fiscal 1980 while lowering its dependency on oil.
Japan needs to step up such an effort and participate actively in international cooperation to overcome the energy problem, fulfilling its responsibility as the second largest energy consumer in the Free World.
(b) Promotion of supply control policy
A trend toward stagflation (the coexistence of high inflation and high unemployment) has grown stronger mainly in developed countries. Behind this trend are the following factors: (i) Productivity has leveled off as a result of lack of investment in new facilities and equipment. (ii) The wage mechanism has been stiffened as a result of the wide adoption of various wage arrangements, including a price sliding system. (iii) As a result of the expansion in the government sector, the economy has lost its efficiency as a whole. (iv) The implementation of energy-saving programs and the development of alternative energy sources have been delayed.
The developed countries have deepened their recognition that a short-term demand control policy would not be enough to overcome this problem and that greater attention should be paid to a medium-and long-term supply control policy.
The declaration issued at the end of the Venice Summit in June 1980 says:
"We are also committed to encouraging investment and innovation, so as to increase productivity, to fostering the movement of resources from declining into expanding sectors so as to provide new job opportunities, and to promoting the most effective use of resources within and among countries. This will require shifting resources from government spending to the private sector and from consumption to investment, and avoiding or carefully limiting actions that shelter particular industries or sectors from the rigors of adjustment. Measures of this kind may be economically and politically difficult in the short term, but they are essential to sustained non-inflationary growth and to increasing employment which is our major goal."
Japan has emphasized on various occasions, such as the meetings of the OECD and other international forums, that a medium- and long-term supply control policy, including a rise in productivity and technological innovations, would be necessary to achieve sustained economic growth without inflation.
(c) Avoidance of protectionism
Protectionist pressure has mounted in the industrialized countries in recent years. Behind such a trend are stagnant economic growth and increased unemployment under inflationary pressure. It should be noted that protectionists in each country are demanding that foreign competition should be restricted as a defensive measure for some key industries whose competitive edge has been blunted.
Protectionism, however, is bound to prevent world trade from developing on a sound basis and hamper a country's economic growth in the long run, as such a measure would retain inefficient industries in that country, and deprive the consumers of their opportunity to select better and less expensive goods. It is thus obvious that protectionism would never contribute to any essential solution to the problem, but it is a fact that the voices calling for such a measure have become politically louder.
Japan has been endeavoring to discourage the further spread of protectionism, on every possible occasion at the GATT, OECD, Summit Meetings, etc., so as to preserve and promote the system of free trade. As part of its effort to maintain and develop a favorable trading climate, Japan accepted all the arrangements made in the Tokyo Round of multilateral trade negotiations and has undertaken to implement them in a sincere manner.
II. Efforts to Solve the North-South Problem
(1) Major Developments
The world economy faced various difficulties in 1980, particularly the increasing problem of non-oil-producing developing countries. Developed countries were also confronted with increasing difficulties which hampered their cooperation with developing countries. Despite these circumstances, the international community made some progress towards the solution of the North-South problem, such as the adoption of the International Development Strategy for the 3rd U.N. Development Decade (new IDS) and the Agreement on Establishing of the Common Fund for Commodities. In addition, the Brandt Commission announced a report on the North-South problem. Based on the suggestions contained in the Brandt Commission report, the idea of a "North-South summit" took a step toward its realization.
The Global Negotiations (GN), which are aimed at relieving the economic difficulties of the non-oil-producing developing countries, have yet to be launched, since preparatory talks on procedures and agenda failed to reach agreement.
Under the circumstances of ever-deepening interdependence between the North and the South, Japan considers it necessary that the North-South problem should be solved in such a way that international cooperation will be further promoted from a long-term perspective, taking into account improvement of the world economy. On the basis of this belief, Japan has been vigorously tackling the North-South problem.
(2) Global Negotiations (GN)
To relieve non-oil-producing developing countries in their economic difficulties, Global Negotiations on energy, raw materials, trade, development, and money and finance were proposed at the 34th session of the United Nations General Assembly held at the end of 1979. Preparatory talks were subsequently held at the U.N. to expedite the start of the GN. There was, however, disagreement over procedural matters between the West, which attached importance to the power and function of the existing U.N. specialized fora, and the South, which laid stress on the preservation of the results of the negotiations through the strengthening of the authorities of the central body to be established by the U.N. in New York. Although draft procedures on launching the GN, which were acceptable to the majority of Western countries including Japan and also to the South, were drawn up at the 11th special session of the U.N. General Assembly (August to September 1980), the matter remained unsettled as a result of the opposition raised by the U.S., Britain and West Germany. Thus preparatory talks on the GN have made little progress to date.
Recognizing the significance of the GN, Japan has taken part in various official and unofficial consultations as an important member of the Western group in an effort to enable the launching of the GN by drafting procedural plans and agendas acceptable to all countries.
(3) International Development Strategy for the 3rd U.N. Development Decade (New IDS)
The new IDS forms the basic framework for international cooperation in the 1980s. Virtual agreement was reached on the new IDS at the above-mentioned special session of the U.N. General Assembly on the basis of plans drafted through preparatory work which had been started in the spring of 1979. The new IDS was officially adopted at the 35th session of the U.N. General Assembly.
Japan participated actively in the preparatory work for the new IDS and succeeded in inserting the wording "development of human resources" which was advocated by the late Prime Minister Ohira, into the new IDS.
(4) Accomplishments at UNCTADO
One of the major accomplishments of the North-South dialogue in 1980 was the adoption in June of the Agreement on Establishing the Common Fund for Commodities at the United Nations Conference on Trade and Development (UNCTAD). This Fund is to be established to stabilize the prices of commodities and, at the same time, to promote research and development on commodities, thereby enabling developing countries to stabilize the export earnings of their commodities.
Japan has been making the utmost efforts to realize an early establishment of this Fund and will contribute a total of $60.67 million to the Fund.
General guidelines regarding debt problems which had been pending since the Conference on International Economic Cooperation (CIEC) and the 4th UNCTAD general meeting (Nairobi, 1976), were also adopted at the 21st session of the Trade Development Board of the UNCTAD in September. It was agreed that under these guidelines the debtor country would be able to avail itself of the expertise of appropriate international institutions for a consideration of a debt operation on the basis of this analysis.
Moreover, the Principles and Rules for the Control of Restrictive Business Practices and the Multimodal Transport Convention were adopted in April and May, respectively, within the framework of UNCTAD. They were the first step toward the formation of trading rules taking into consideration the interests of developing countries. As the chairman-state of the developed countries' group at UNCTAD, Japan has played a major role in the talks since the summer of 1980.
(5) Brandt Commission Report
The report announced by the Brandt Commission in February 1980 is expected to have a great effect on the philosophy of the North-South problem in the 1980s. Based on the fundamental recognition that the North-South problem is the most important task which international society has to tackle before the year 2000 arrives, the Brandt Commission studied various problems of the reform-seeking South and recommended that international society should forge a new order which would be more equitable and acceptable to both the North and the South in the long run.
(6) North-South Summit
The Brandt Commission report also recommended a summit meeting of about 25 leaders from North and South in order to solve various urgent problems. Based on this recommendation, Mexico and Austria have been making efforts to realize the "North-South Summit" (International Meeting on Cooperation and Development) of the leaders from major countries of North and South. This Summit is expected to expedite the launching of the above-mentioned Global Negotiations. Foreign minister-level consultations were held in November 1980 and March 1981. Preparations are now being made to hold the Summit in Mexico on October 22 and 23, 1981.
Japan regards the North-South Summit as a meaningful forum for free and frank exchanges of views among the leaders of major North and South countries, and intends to participate actively in it.