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430 April 30, 1985 REAGAN'S NINE POINTS FOR THE BONN SUMMIT INTRODUCTION The annual economic summit of the seven leading democratic industrial powers convenes this week in Bonn. United States, Japan, West Germany, France, the United Kingdom Italy, an d Canada will meet from May 2 to 4. Though the summit occurs at a time of economic improvement in the free world are needed to ensure continuation of economic expansion. Summiteers should be concerned about the domestic economic policies of some European countries, about growing pressures for trade protection, and about the economic problems of Less Developed Countries (LDCs). President Reagan should remind his colleagues that what many Western Europeans now describe as the ItAmerican Miracle the Reagan boom, is based on sound economics--which other countries should emulate, not criticize. He also should be ready to present his own action agenda at the summit. would The le a ders of the steps This 1) Stress that he does not consider the dollar to be artificial ly high, or harmful to the rest of the world The strength of the dollar is a reflection of the relative strength of the U.S. economy compared with the economies of the o ther industrialized nations. The Western Europeans especially have blamed the strong dollar on U.S. budget deficits and have even said it is responsible for the capital flight from Europe. In recent months this criticism has been toned down to a recogniti o n that increased European exports, made attractive because of the dollar's strength, accounted for about half of Europe's meager growth of 2 percent in 1984 the federal budget deficit through spending cuts. reduction will not necessarily cause a major dec l ine in the value due primarily Reagan has continued to push for a much-needed reduction in But this 2 of production, including labor, can Western Europe trim its rate of unemployment. This would help overcome the structural economic crisis in Western Euro p e by.phasing out declining industries and encouraging new industrial ventures And it would be a pro-growth of the dollar; indeed it may strengthen it by boosting confidence in the U.S. economy. If the U.S. economy remains buoyant and the economies of West e rn Europe remain stagnant, there is little likelihood of the dollar declining significantly As such, the Europeans should look to the reform of their own economies for economic salvation. Reagan should resist those in Bonn who call for policies that would equalize growth rates among summit members simply by weakening the U.S. economy 2) Encourage the Europeans to accelerate economic structural reform I The scorn heaped on Reagan's supply-side policies by Western I Europeans earlier in his Administration ha s turned to flattering imitation. Increasingly, tax cuts and stable monetary policies are seen as preferable to statist practices such as tax hikes and currency inflation 3) Urge the Japanese to liberalize the international use of the Japan last year lifte d some restrictions on the use of their .currency, the yen, for international economic transactions. Greater numbers of foreign corporations in Japan, for instance are allowed to issue yen bonds in the Japanese market. However, the U.S. and other industria l democracies want the yen traded freely on world markets. With low interest rates in Japan, the yen would be in great demand and its value would rise to reflect the strength of the Japanese economy. Restrictions on the free yen. I 3 movement of currencie s can create market distortions as serious as trade protection undervalued, harming not only countries seeking to export to Japan but the purchasing power of the Japanese consumer as well. The Japanese should be pressed to abandon remaining restrictions as soon as possible The Japanese regulations keep the yen 4 Resist trade protectionism and set'a date for a new GATT round. Free trade now seems threatened from many quarters. The current U.S.-Japan trade dispute is prompting many U.S. Congress men to threa ten protectionist retaliation against Tokyo. This plays into the hands of protectionists in all countries. The U.S Canada, Japan, and Western Europe are all guilty of unfair trade practices. Rather than threatening one another, the summi teers should take steps to liberalize trade. One of the most important steps would be to schedule a new round of talks of the General Agreement on Tariffs and Trade (GATT) for late 1985 or early 1986 for discussion. They should include, among other things, trade in service s (such as banking and insurance), strengthening patent and copyright protection and abolition of government subsidies to exporters that allow less efficient industries to compete with those more efficient overseas ly market-distorting, and should be on th e agenda, as should non-tariff barriers, such as quotas and discriminatory licensing practices In addition, the GATT enforcement mechanisms must be tightened; many countries are able to circumvent the current agreement Reagan also should seek preliminary a greement on the topics Agriculture subsidies are especial 5 Seek ways to bring the Less Developed Countries into new GATT talks. Currently,the LDCs are threatening to boycott a new GATT round, complaining that their key issues will be ignored by the indust rialized countries. While demands by the LDCs for the transfer of wealth from developed countries must continue to be opposed, there are other issues on which to bring LDCs into the new round. For example, the textile trade is still heavily restricted by many industrialized countries, including the U.S. Textiles and apparel manufacturing are areas in which many LDCs can compete with the industrial nations. Currently, the GATT allows extraordinary restrictions on textile trade, through the Multi-Fiber Arran gement (MFA). Negotiations for renewal of the MFA begin in July. quickly to make the MFA less restrictive, the LDCs would have an incentive to join talks to liberalize world trade If the industrialized countries were to agree 6 Urge restructurinq the IMF and World Bank along market prin ciples to promote economic growth in LDCs. The foreign debt crisis eased somewhat in 1984 for several But it has become more serious of the larger debtor countries 4 for others as austerity measures, required as conditions for International Monetary Fund (IMF) loans often stifle LDC economic growth. In some countries, attempts to carry out IMF demands for austerity have triggered riots. Sudanese President Nimeiry's downfall, for instance, was attributed in part to IMF auste rity measures. And in light of local opposition, President-elect Alan Garcia of Peru has announced his intention to bypass IMF conditions on loans. Reagan should make it clear that it is the LDCs' socialist economic policies that are largely responsible fo r their continu- ing poverty. And IMF austerity measures often harm what little private enterprise exists in LDCs. Noted World Bank President A W. Clausen recently There is evidence enough that the most rapid economic growth in the developing world has be e n achieved in countries where governments have recognized that private enterprise has a critical role to play." The fundamental policies of the IMF and World Bank should be changed to recognize this fact by encouraging private sector growth and denational i zation of state industries 7) Stress that free capital flows and direct foreign investment are essential for LDC prosperity A major cause of Third World poverty was well illustrated by the recent attempt of IBM to build a wholly-owned subsidiary in Mexico . With a debt nearing 100 billion, a serious lack of capital, and high unemployment, it would seem that Mexico would welcome enthusiastically IBMIs plans to build a plant that would create jobs for Mexicans. Not so. Mexico followed its tradition of keeping out what it regards as foreign influence and effective ly blocked the plant. The result: continuing poverty and stagna tion. Developing countries, especially in Latin America, have regulated direct foreign investment strictly by prohibiting majority owner ship of local businesses by foreign companies, by restricting exports of capital and profits, and by other statist policies. These LDCs ignore the lesson that foreign investment and the free flow of capital are rarely issues in developed countries and tha t this is an important reason why they are developed. If LDCs are to prosper, they must abandon the policies that restrict investment and capital flows and integrate them selves into the world economy. Some debtor countries have experi mented with market-o r iented economic reforms. Mexico, for example should be congratulated for attempting to slow inflation and government spending, for announcing its intention to sell off many nationalized companies, and for opening its market to U.S pharmaceutical products. But it still has a long way to go. The summit participants should call on LDCs to change their self destructive policies 8) Encourage the summit to pledge relief for Africa's famine and help change those aqricultural policies that turned the famine into a catastrophe. 5 Increased emergency food shipments are needed to deal with the African famine. The allies should make concrete aid commit ments. They should also commit themselves to assure that the food is delivered to the famine victims, and not diverted by the Ethiopian government for political purposes. More important, however, are long-term measures. The summit participants should press the African countries to abandon those agricultural policies that actually have discouraged food produc tion. Restric tions on small private farmers and forced collectivi zation, for instance, which were imposed because of the dictates of socialist dogma, must be reversed since these have discouraged food output. Food price ceilings that keep food artificially cheap for city dwellers, while making it unprofitable for farmers to produce, must end, as should restrictions on the transportation of food. While drought was a primaiy cause of the current famine socialist agricultural policies turned a manageable bad situation in to a human tragedy. The industrial nations meeting in Bonn must be wise and courageous enough to prevent future famines by opposing the policies that cause them 9) Obtain a declaration on joint strategic defense technolo research All summit nati'ons were i nvited by the Reagan Administration in March 1985 to join the U.S. in research and development of advanced technologies related to President Reagan's Strategic Defense Initiative (SDI popularly known as "Star Wars." The civilian economic potential of this research program is vast and could well lift the participants to new plateaus of industrial development, while enhancing technology changes and private sector cooperation. Having already addressed common security problems at the Williamsburg summit in 198 3 , the assembled leaders of the key industrial democracies should make a political commit ment to share the costs and economic benefits of their defense industrial research efforts for SDI. Such a high-level endorsement would give the needed impetus to set aside narrow nationalistic interests, reaffirm the consensus reached by NATO military leaders at their Luxembourg conference, and signal private firms that their investment in SDI research will not be hampered by a lack of political commitment. Edward L. Hudgins, Ph.D. Walker Fellow in Economics
430 April 30, 1985 REAGAN'S NINE POINTS FOR THE BONN SUMMIT INTRODUCTION The annual economic summit of the seven leading democratic industrial powers convenes this week in Bonn. United States, Japan, West Germany, France, the United Kingdom Italy, an d Canada will meet from May 2 to 4. Though the summit occurs at a time of economic improvement in the free world are needed to ensure continuation of economic expansion. Summiteers should be concerned about the domestic economic policies of some European countries, about growing pressures for trade protection, and about the economic problems of Less Developed Countries (LDCs). President Reagan should remind his colleagues that what many Western Europeans now describe as the ItAmerican Miracle the Reagan boom, is based on sound economics--which other countries should emulate, not criticize. He also should be ready to present his own action agenda at the summit. would The le a ders of the steps This 1) Stress that he does not consider the dollar to be artificial ly high, or harmful to the rest of the world The strength of the dollar is a reflection of the relative strength of the U.S. economy compared with the economies of the o ther industrialized nations. The Western Europeans especially have blamed the strong dollar on U.S. budget deficits and have even said it is responsible for the capital flight from Europe. In recent months this criticism has been toned down to a recogniti o n that increased European exports, made attractive because of the dollar's strength, accounted for about half of Europe's meager growth of 2 percent in 1984 the federal budget deficit through spending cuts. reduction will not necessarily cause a major dec l ine in the value due primarily Reagan has continued to push for a much-needed reduction in But this 2 of production, including labor, can Western Europe trim its rate of unemployment. This would help overcome the structural economic crisis in Western Euro p e by.phasing out declining industries and encouraging new industrial ventures And it would be a pro-growth of the dollar; indeed it may strengthen it by boosting confidence in the U.S. economy. If the U.S. economy remains buoyant and the economies of West e rn Europe remain stagnant, there is little likelihood of the dollar declining significantly As such, the Europeans should look to the reform of their own economies for economic salvation. Reagan should resist those in Bonn who call for policies that would equalize growth rates among summit members simply by weakening the U.S. economy 2) Encourage the Europeans to accelerate economic structural reform I The scorn heaped on Reagan's supply-side policies by Western I Europeans earlier in his Administration ha s turned to flattering imitation. Increasingly, tax cuts and stable monetary policies are seen as preferable to statist practices such as tax hikes and currency inflation 3) Urge the Japanese to liberalize the international use of the Japan last year lifte d some restrictions on the use of their .currency, the yen, for international economic transactions. Greater numbers of foreign corporations in Japan, for instance are allowed to issue yen bonds in the Japanese market. However, the U.S. and other industria l democracies want the yen traded freely on world markets. With low interest rates in Japan, the yen would be in great demand and its value would rise to reflect the strength of the Japanese economy. Restrictions on the free yen. I 3 movement of currencie s can create market distortions as serious as trade protection undervalued, harming not only countries seeking to export to Japan but the purchasing power of the Japanese consumer as well. The Japanese should be pressed to abandon remaining restrictions as soon as possible The Japanese regulations keep the yen 4 Resist trade protectionism and set'a date for a new GATT round. Free trade now seems threatened from many quarters. The current U.S.-Japan trade dispute is prompting many U.S. Congress men to threa ten protectionist retaliation against Tokyo. This plays into the hands of protectionists in all countries. The U.S Canada, Japan, and Western Europe are all guilty of unfair trade practices. Rather than threatening one another, the summi teers should take steps to liberalize trade. One of the most important steps would be to schedule a new round of talks of the General Agreement on Tariffs and Trade (GATT) for late 1985 or early 1986 for discussion. They should include, among other things, trade in service s (such as banking and insurance), strengthening patent and copyright protection and abolition of government subsidies to exporters that allow less efficient industries to compete with those more efficient overseas ly market-distorting, and should be on th e agenda, as should non-tariff barriers, such as quotas and discriminatory licensing practices In addition, the GATT enforcement mechanisms must be tightened; many countries are able to circumvent the current agreement Reagan also should seek preliminary a greement on the topics Agriculture subsidies are especial 5 Seek ways to bring the Less Developed Countries into new GATT talks. Currently,the LDCs are threatening to boycott a new GATT round, complaining that their key issues will be ignored by the indust rialized countries. While demands by the LDCs for the transfer of wealth from developed countries must continue to be opposed, there are other issues on which to bring LDCs into the new round. For example, the textile trade is still heavily restricted by many industrialized countries, including the U.S. Textiles and apparel manufacturing are areas in which many LDCs can compete with the industrial nations. Currently, the GATT allows extraordinary restrictions on textile trade, through the Multi-Fiber Arran gement (MFA). Negotiations for renewal of the MFA begin in July. quickly to make the MFA less restrictive, the LDCs would have an incentive to join talks to liberalize world trade If the industrialized countries were to agree 6 Urge restructurinq the IMF and World Bank along market prin ciples to promote economic growth in LDCs. The foreign debt crisis eased somewhat in 1984 for several But it has become more serious of the larger debtor countries 4 for others as austerity measures, required as conditions for International Monetary Fund (IMF) loans often stifle LDC economic growth. In some countries, attempts to carry out IMF demands for austerity have triggered riots. Sudanese President Nimeiry's downfall, for instance, was attributed in part to IMF auste rity measures. And in light of local opposition, President-elect Alan Garcia of Peru has announced his intention to bypass IMF conditions on loans. Reagan should make it clear that it is the LDCs' socialist economic policies that are largely responsible fo r their continu- ing poverty. And IMF austerity measures often harm what little private enterprise exists in LDCs. Noted World Bank President A W. Clausen recently There is evidence enough that the most rapid economic growth in the developing world has be e n achieved in countries where governments have recognized that private enterprise has a critical role to play." The fundamental policies of the IMF and World Bank should be changed to recognize this fact by encouraging private sector growth and denational i zation of state industries 7) Stress that free capital flows and direct foreign investment are essential for LDC prosperity A major cause of Third World poverty was well illustrated by the recent attempt of IBM to build a wholly-owned subsidiary in Mexico . With a debt nearing 100 billion, a serious lack of capital, and high unemployment, it would seem that Mexico would welcome enthusiastically IBMIs plans to build a plant that would create jobs for Mexicans. Not so. Mexico followed its tradition of keeping out what it regards as foreign influence and effective ly blocked the plant. The result: continuing poverty and stagna tion. Developing countries, especially in Latin America, have regulated direct foreign investment strictly by prohibiting majority owner ship of local businesses by foreign companies, by restricting exports of capital and profits, and by other statist policies. These LDCs ignore the lesson that foreign investment and the free flow of capital are rarely issues in developed countries and tha t this is an important reason why they are developed. If LDCs are to prosper, they must abandon the policies that restrict investment and capital flows and integrate them selves into the world economy. Some debtor countries have experi mented with market-o r iented economic reforms. Mexico, for example should be congratulated for attempting to slow inflation and government spending, for announcing its intention to sell off many nationalized companies, and for opening its market to U.S pharmaceutical products. But it still has a long way to go. The summit participants should call on LDCs to change their self destructive policies 8) Encourage the summit to pledge relief for Africa's famine and help change those aqricultural policies that turned the famine into a catastrophe. 5 Increased emergency food shipments are needed to deal with the African famine. The allies should make concrete aid commit ments. They should also commit themselves to assure that the food is delivered to the famine victims, and not diverted by the Ethiopian government for political purposes. More important, however, are long-term measures. The summit participants should press the African countries to abandon those agricultural policies that actually have discouraged food produc tion. Restric tions on small private farmers and forced collectivi zation, for instance, which were imposed because of the dictates of socialist dogma, must be reversed since these have discouraged food output. Food price ceilings that keep food artificially cheap for city dwellers, while making it unprofitable for farmers to produce, must end, as should restrictions on the transportation of food. While drought was a primaiy cause of the current famine socialist agricultural policies turned a manageable bad situation in to a human tragedy. The industrial nations meeting in Bonn must be wise and courageous enough to prevent future famines by opposing the policies that cause them 9) Obtain a declaration on joint strategic defense technolo research All summit nati'ons were i nvited by the Reagan Administration in March 1985 to join the U.S. in research and development of advanced technologies related to President Reagan's Strategic Defense Initiative (SDI popularly known as "Star Wars." The civilian economic potential of this research program is vast and could well lift the participants to new plateaus of industrial development, while enhancing technology changes and private sector cooperation. Having already addressed common security problems at the Williamsburg summit in 198 3 , the assembled leaders of the key industrial democracies should make a political commit ment to share the costs and economic benefits of their defense industrial research efforts for SDI. Such a high-level endorsement would give the needed impetus to set aside narrow nationalistic interests, reaffirm the consensus reached by NATO military leaders at their Luxembourg conference, and signal private firms that their investment in SDI research will not be hampered by a lack of political commitment. Edward L. Hudgins, Ph.D. Walker Fellow in Economics
