Chapter IV. International Economic Relations
1. World Economic Trends
Looking back on the world economy in 1986, the U.S. economy, which had led the global economic recovery since 1983, saw its growth slow down, but the economies of European countries and other developed countries sustained a moderate expansion as a whole, supported by stimulation of domestic demand amid declining interest rates.
As for the economies of the developing countries, the Asian NICs enjoyed an economic expansion on the strength of the correction of the overvalued dollar and declining interest rates, while many other developing countries suffered from a serious effect of falling export earnings as a result of lower prices of crude oil and other primary commodities. In particular, prospects are still dim for the solution of the Third World debt problem with developing countries' accumulated external debts estimated to reach $1 trillion at the end of 1987.
(1) Economies of Developed Countries
As for the U.S. economy in 1986, domestic demand followed a firm trend, led by personal consumption and private housing investment, on the strength of stable prices and declining interest rates. But the economy as a whole somewhat lacked vigor as equipment investment was sluggish and no signs of improvement were seen in the trade deficit. As a result, the United States saw its real GNP growth rate decelerate to 2.5% in 1986 from 2.7% of the previous year. On the other hand, consumer prices rose only 1.9% compared with 3.6% rise in 1985, evidencing a further calming down of prices. As for the employment situation, there were disparities among sectors or regions, the unemployment rate fell to 6.9% from 7.1% of the previous year, sustaining a trend of moderate improvement. As for the budget and the current account deficit trends, the budget deficit climbed to yet another record high of $220.7 billion in fiscal 1986, surpassing the unprecedented $211.9 billion registered in the previous year.
The current account of the United States also posted a record deficit of $140.6 billion in 1986, eclipsing the old peak of $117.7 billion registered in the previous year. The U.S. can no longer afford its massive current account deficit. No less unacceptable are current account imbalances among other developed countries. It is therefore necessary that all countries strive to solve the imbalance issue not only through exchange rate adjustments but through the overall economic policy coordination.
As for the taxation reform, a major issue in 1986, the Taxation Reform Act of 1986 was enacted on October 22 and became effective on January 1, 1987.
The European economy in 1986 achieved a moderate growth as a whole equal to that of the previous year, led by expansion in domestic demand, comprising of personal consumption and equipment investment, offsetting the slowdown in the increase of exports stemming from the appreciation of European currencies against the dollar. The consumer price increase rate decelerated further, owing to the decline of crude oil prices and higher currency values. But the employment situation remained severe with the average unemployment rate of the OECD member European countries standing at a high of 11%.
(2) Economies of Developing Countries
As for the economies of developing countries in 1986, sharp falls in crude oil prices led to a substantial deterioration in oil-exporting countries' current account balances with their growth slipping into a negative figure of minus 0.7% (IMF statistics) from the 0.3% gain in 1985. Non-oil-exporting countries, on the other hand, saw an improvement in their current account balances thanks to lower crude oil prices, the benefit of declining interest rates and increased exports to advanced countries with their growth rising to 5.4% from 4.6% in 1985. But no improvements were seen in primary commodity prices, which remained sluggish. The economies of developing countries as a whole saw their growth climb slightly to 3.5% from 3.2% in 1985.
By region, NICs in Asia such as the Republic of Korea achieved high growth rates on the strength of rising exports led by the decline of crude oil prices and interest rates as well as the depreciation of their currencies. On the other hand, ASEAN countries, which incurred the deterioration of growth rates under the impact of sluggish primary commodity prices in 1985, mostly saw signs of improvement in 1986. In the Central and South American region that is suffering from huge accumulated external debts, many countries saw improvements in their economic situations as evidenced by lower inflation rates owing to the decline of crude oil prices and adjustment efforts. But there was concern that oil-producing countries would face more difficulties in repaying their debts. In July, Mexico reached an agreement with the IMF on its economic adjustment program, resulting in the establishment of the framework for international support. In Africa, which includes many least less developing countries, no improvements were seen in the economic situation amid sluggish primary commodity prices and the shortage of development funds with the result of growth rate stagnation and increase in debt repayment burdens.
As for the economies of developing countries in 1987, in spite of favorable factors for oil-producing countries such as the rally of crude oil prices, drastic growth rate improvement is hardly expected as a whole with little expectation of major improvement in the international economic environment surrounding the developing countries, such as terms of trade, capital flow and economic trends of developed countries. It is therefore, necessary that each developing country step up its economic adjustment efforts, while developed countries strive to help improve the international economic environment.
2. International Cooperation
(1) Summit of Major Industrial Democracies
(a) The 13th summit meeting of major industrial countries (Venice Summit) was held in Venice, Italy, June 8-10, 1987, with the participation of the heads of state or government of seven countries-Japan, the United States, France, West Germany, Britain, Italy and Canada-and Belgian Premier Wilfred Martens of the European Council President and Jacques Delors, President of the EC Commission. The Summit adopted the Venezia economic declaration, the statement on East-West relations, the statement on terrorism, the statement on the Iran-Iraq Conflict and the freedom of navigation in the Persian Gulf, and other statements.
(b) Economic Relations
The latest summit was held at a time when general conditions of the world economy were not necessarily brighter compared with those seen at the time of the previous year's Tokyo Summit as exemplified by the persistence of huge external imbalances, uncertainties surrounding currency rates, growing worldwide protectionist pressures, snowballing debts of developing countries and the existence of other difficulties. But under these circumstances, it was significant in that the leaders of the summit countries refrained from criticizing each other and had constructive debate from the viewpoint of seeking a solution to various difficulties of the world economy through cooperative efforts.
(c) Major achievements of the latest summit as included in the Venezia economic declaration are as follows:
1) Strengthening of Policy Coordination and Promotion of Structural Adjustments
With the aim of achieving sustained economic growth, the reduction of external imbalances and the stabilization of foreign exchange rates, the leaders reaffirmed the need to further strengthen policy coordination and multilateral surveillance as agreed upon at the Tokyo Summit and the importance of promoting structural adjustments. As for the policy coordination, the declaration specified the policies that should be followed by the Summit countries with large trade surpluses and those with trade deficits in a respective manner and called on other developed countries and NICs to participate in such coordination efforts. The leaders concurred that wide fluctuations in the currency rates would be counterproductive to the efforts to raise economic growth rates and promote adjustment efforts, and agreed to cooperate closely for stabilization of the currency rates.
2) Trade
The leaders reconfirmed their strong political resolve to fight against protectionist pressures and reaffirmed the necessity of maintaining and strengthening the multilateral free trade system based on the GATT. To this end, they pledged their efforts to promote the Uruguay Round of multilateral trade talks.
3) Agriculture
The leaders reaffirmed the agreements contained in the communique issued after the OECD Ministerial Council meeting in May-the achievement of the coordinated improvement of agricultural policies in a balanced manner and the importance of gradual and coordinated reduction of farm subsidies as a long-term goal, while taking into account the stable food supply.
4) Support for Developing Countries
The leaders stressed the importance of government-level development assistance and welcomed Japan's measure to recycle surplus funds to developing countries. They resolved that the summit countries will extend positive support for the resolution of the aggravating accumulated debt issue, the primary commodity issue and the problems involving sub-Saharan countries. The leaders reaffirmed the importance of UNCTAD VII scheduled for July as a forum providing a significant opportunity for forming a common view of both developed and developing countries.
(d) At the latest summit, Japan explained "Emergency Economic Measures," as part of its contribution to the policy coordination among industrialized countries. Other countries appreciated the substantial and concrete contents of the package. Japan also explained its efforts to restructure its economy by referring to the progress being made in the implementation of the recommendations stated in the Maekawa Report. Other summit countries showed keen interest in the explanation.
As for relations with developing countries, the debt crisis was the central issue. Japan, taking into account the requests from other Asian and Pacific nations in advance of the Summit, noted the need to consider relations with developing countries from a wide point of view by paying attention to the primary commodity issue, UNCTAD VII and other points. This argument became the keynote of the relevant section in the declaration.
(e) Moreover, the summit chairman issued a statement, which called for international cooperation in combatting AIDS.
(f) Political Issue
The latest summit was a turning point in the future development of international political situation, and it was held at a time when East-West relations were entering an important phase in terms of Russo-American arms control and disarmament negotiations.
In the course of debate on political issues, the leaders had a lively exchange of views on East-West relations, in particular, (a) the assessment of the Gorbachev Regime's domestic and external policies, (b) arms control and disarmament issues, and (c) the Soviet Union's Asian and Pacific policy, on the freedom of navigation in the Persian Gulf, terrorism and various other important issues facing the international community. As a result of the debate, the leaders issued the following three statements expressing the positions of the summit countries, making the latest summit an extremely fruitful one.
1) "Statement on East-West Relations"
2) "Statement on Iran-Iraq War and Freedom of Navigation in the Gulf"
3) "Statement on Terrorism"
The leaders also had a meaningful exchange of views on regional issues. Japan explained the Asian and Pacific situation in particular. As a result, it was summarized in the chairman's statement, drawing other summit countries' keen interest in the situation in Afghanistan, Cambodia, China, the Korean Peninsula and the Philippines.
The statement on East-West relations called for Western countries to close their ranks and for the Soviet Union to show positive actions in the three areas of disarmament, regional conflicts and human rights in order to make East-West relations, the basic framework of the world politics, more stable and constructive relations. It thus clarified the West's and stance toward East-West relations.
In the latest statement on the Iran-Iraq war and freedom of navigation in the Persian Gulf, the leaders called upon the U.N. Security Council to adopt just and effective measures and agreed that new and concerted international efforts were urgently required to help bring the Iran-Iraq war to an end. They pledged to continue consultations on ways to pursue these important goals effectively.
The statement on terrorism welcomed the progress made in international cooperation in combatting terrorism since the issuance of a similar statement at the Tokyo Summit. They confirmed the commitment of each of the seven countries to the principle of making no concessions to terrorists or their sponsors, agreed to take measures to improve the safety of travelers and renewed their determination to further promote efforts to prevent terrorism.
(2) Organization for Economic Cooperation and Development (OECD)
The OECD is an organization having 24 advanced countries upholding market economies as its members and aims for the promotion of cooperation among Western advanced countries in a wide-ranging socioeconomic area. It has the Economic Policy Committee, the Economic and Development Review Committee, and the Trade Committee each corresponding to the three goals of (i) economic growth, (ii) assistance to developing countries, and (iii) expansion of free and multilateral trade as specified in its founding treaty. Moreover, there are the Committee for Agriculture, the Committee for Multilateral Corporations and the Committee for Information, Computer and Telecommunications Policy, which deals with new problems. More than 10 committees are active all the time, analyzing, conducting research on and exchanging views on various socioeconomic issues and policies.
At the annual ministerial council meetings, OECD's activities for the past year are reviewed. As such meetings attended by cabinet ministers of advanced countries for debate on major economic issues usually take place just before the annual economic summit meetings, the course of discussions at the ministerial council meeting have no small impact on discussions at the following economic summit.
The 26th OECD ministerial council meeting was held on May 12-13, 1986, with macroeconomics, including relations with developing countries, agricultural problems and structural adjustments high on the agenda. In particular, the participants at the latest ministerial council meeting focused their attention on macroeconomics and agriculture in the course of their debate.
On the macroeconomic side, the participants shared the view that no undue optimism is warranted as to the outlook of the world economy because current account imbalances among major countries show no signs of improvement and the world economy is feared to slip into a disastrous situation if things are left as they are. They thus focused their attention on policy coordination among member countries, especially economic policies of the three major economic powers of Japan, the United States and West Germany. Specifically, a clear perception has emerged that the United States should trim its budget deficit and Japan and West Germany should use fiscal means to stimulate domestic demand in order to offset the deflationary impact of the United States' budget deficit reduction. In particular, high expectations were placed on and strong interest was shown in Japan's role. The dominant mood at the meeting was that other countries want Japan to further stimulate domestic demand and expand its imports to fulfill its part in the world economy. In general the participants agreed on the policy of international cooperation in the conduct of macroeconomic policy.
As for agricultural problems, OECD had conducted studies on farm trade during the past five years and its outcome was made public at the latest meeting. OECD tried to measure levels of member countries' farm subsidies by using a certain method and analyzed the impact of their reduction on farm product prices, production, consumption and trade. It reported that cuts in farm subsidies would produce favorable effects, such as the reduction of farm product output and exports. Through the studies, member countries have come to clearly recognize that their farm protection policies and technical innovation are generating a structural glut of farm produce, putting the situation surrounding farm produce critical. On the basis of such recognition, the participants at the latest ministerial council meeting agreed on the common direction of agricultural reform, which should be followed by member countries-(i) progressive reduction of agricultural support on a long-term basis, while taking into account various factors (ii) refraining from taking measures that would exacerbate the present situation in the short term.
With regard to the structural adjustment issue, OECD completed and made public the structural adjustment study pursued for the past two years. The crux of the studies is that the efficiency of the economy as a whole should be enhanced through the promotion of microeconomic adjustments by dint of the introduction of the market principle. At the latest ministerial council meeting, the participants reaffirmed the importance of promoting structural adjustments by using the above-mentioned view as a guiding principle.
In trade areas, concern was expressed about mounting protectionist pressures of late. The participants reaffirmed member countries' political will as to the need to maintain and strengthen the multilateral free trade system, in particular the effective acceleration of GATT's Uruguay round.
A broad range of committees concerned with trade at OECD have been studying and analyzing service trade and the participants confirmed the need to continue with such studies and analysis. Moreover, an agreement was reached in March this year on strengthening the rules of export credit arrangement, a gentlemen's agreement among the OECD members. It called for further reducing the distortion effect of trade using public funds, including assistance, and assistance per se. (Please refer to the "mixed credit issue.")
Relations with developing countries have become an increasingly important issue for developed countries in the world economy today where interdependent relations have become more pronounced. At the latest ministerial council meeting, the participants, recognizing the diversity of the economies of developing countries, agreed on the need to give a positive support to developing countries implementing an economic reform and on the importance of creditor and debtor countries, and international organizations and commercial banks strengthening their cooperation for the solution of the debt issue.
The above was the general review of OECD's activities. Japan for its part is striving to make a positive contribution for the sake of improvement of the global economy and social conditions by utilizing OECD. A case in point was the implementation in cooperation with OECD of the "Tide 2000 Project" launched in commemoration of the 20th anniversary of Japan's accession to OECD, which is designed to study the effect of information and telecommunications technologies on the economy and society on an international basis. Japan plans to have the fruit of the project reflected in studies on the effect of technological changes on the economy and society, which was agreed upon at the latest OECD ministerial council meeting. As part of the Tide 2000 Project, a symposium was held in Paris in February this year. At the outset of the meeting, a teleconference was arranged by linking Paris and Tokyo, in which Foreign Minister Tadashi Kuranari participated from Tokyo. Further, acting under the proposal made by Prime Minister Yasuhiro Nakasone, Japan held a high-level meeting of educational experts in Kyoto in January this year, in cooperation with member OECD countries and the OECD Secretariat. Experts from 24 countries were invited to the gathering.