THE ECONOMY
A harmless agenda for Toronto
JOCK BRUCE-GARDYNE
Keeping our fingers firmly crossed, we might just find that summer has broken out at last, and not just at the Meteorological Office, in the counting-houses too. For all of nine months — ever since 'meltdown Monday' — the financial markets on both sides of the Atlantic have been scared of going out at nights. Good news, when it came along, has been swiftly rubbished: bad news has been seized on with avidity. The only way for the young men to save their Porsches has been to put somebody's — anybody's — business 'into play', or to spread the word that Nigel Lawson has done a Heseltine. Now, very hesitantly, there seems to be a feeling abroad that perhaps — for a week or two at least — the sun is going to shine. The US Treasury Secretary, James Baker, with pardonable hyperbole, and uncertain grammar, tells us that 'the world economy is in the best shape that it has been, going into any of the eight summits I have attended with Presi- dent Reagan': and just for once those monthly American trade returns which the world awaits with bated breath have gone some way to confirm his message.
Mr Baker has an election to win. All the same, the agenda for this weekend's gathering of the heads of government and finance ministers of the Senior Seven in Toronto could be a great deal worse. We might have been faced with the prospect of acrimonious lectures to the Americans, from Nigel Lawson and others, to put their rate of interest up. Or public rockets to the Germans about their sluggish economic Performance. Or an exchange of barrack- room epithets about which central banks are letting down the side by that other sort of dumping: the disposal of dollars accumulated surplus to requirements dur- ing last year's great central bank interven- tion to prop up the US currency. Or possibly most unsettling of all — another of those bland communiqués announcing that all is for the best in the best of all possible worlds. Instead we are promised a Dutch auction in compassion towards the Third World, with nothing more frightening than an argument about who thought of Sub- Saharan Africa first. Provided they stick to that, the leaders should not get up to too much mischief.
That they will get up to a great deal of good is, perhaps, too much to ask for. Mr Lawson's original proposals for helping the poorest African countries got short shrift last year from the Americans and the Germans because they involved retrospec- tive reductions in the rate of interest on government-to-government finance which, the Americans and the Germans argued plausibly, would have established prece- dents which the less penurious Latin Americans would then have sought to exploit. President Mitterrand's latest prop- osition is more acceptable, since it involves the writing-off of government-to- government loans to specific African reci- pients. As the prospects of repayment are obviously remote, and as the governments represented in Toronto, unlike the com- mercial banks which carry huge loans to Latin America (as well as more modest loans to African countries), can afford to write off their loans without provoking panic withdrawals by subscribers to their domestic public debt, this would be a pretty painless exercise.
Mr Lawson is reportedly still keen to cut the rate of interest due, and to lengthen the repayment terms, on commercial export credit. Since this was used essentially to force-feed equatorial Africa with Northern hemisphere artefacts in the interest of job-creation and preservation where the money came from, the case for reschedul- ing is persuasive, and no doubt it will have to be accepted one day, though probably not in Toronto. The grand conundrum remains: how can the great gentlemen (and lady) gathered in Toronto contrive to put effective pressure on what our Aid Minis- ter, Chris Patten, calls 'evil and stupid' regimes, to mend their ways and cease to spend the cash injections from the North- ern hemisphere on the acquisition of Air- buses, armaments, or numbered bank accounts in Zurich? The answer, assuredly, is that they cannot: but so long as the aircraft and armaments orders return to their national suppliers, they will not com- plain too loudly or too often.
Competitive compassion (with their tax- payers' money) will not scare the financial markets. Nevertheless it is doubtful whether many — any — of the other visitors to Toronto this weekend would put their shirts on Mr Baker's assessment of the outlook, not withstanding those Amer- ican trade returns for April. The central bankers, meeting in Basle last weekend, were obviously anxious not to cast a blight over the summit. Even so the annual report from the Bank for International Settlements, their trade club, sounded distinctly uneasy about the length of time the rest of the world will be able to go on financing the US trade deficit without trouble: 'Failures in the field of policy co-ordination can quickly lead to severe market upsets, with potentially damaging consequences for the stability and health of the world economy.' But since it is as plain as a pikestaff that the Americans are not going to cool their economy this side of the November elections, it was both tactful and judicious of M. Lamfalussy, the top official at the BIS, to express the convic- tion that the private sector will come up with the cash flow needed to bridge the US trade deficit this year. Judging by the -cent sales of dollars by the German central bank it might be difficult to reas- semble the sort of co-ordinated market intervention which saved the dollar in 1987. M. Lamfalussy had better be right.
The former Cabinet Secretary, Lord (Robert) Armstrong, has just produced a timely and judiciously downbeat assess- ment of the record of these economic summits over the past 13 years. He does not give them very high marks for achieve- ment: and there is no obvious reason why he should. But for those who will complain that by exchanging platitudes on aid the assembled summiteers have neglected their prime responsibility, which is to give a lead in managing currencies and markets, here is a consolirig thought. If governments and central bankers had really contrived to stop the slide of the dollar in 1986 and 1987 as they repeatedly pledged themselves to do we would hardly have witnessed the cur- rent turnaround in US trade performance. Moreover, on the other side of the coin, it might legitimately be asked whether West Germany's trading partners within (and adjacent to) the European exchange rate system should be duly grateful for the way in which that system subsidises German export industries by preventing the upward adjustment of the value of the mark which would have taken place without it.
As Mr Lawson remarked after the latest meeting of EEC finance ministers earlier in the week, their call for 'an increasingly higher degree of exchange rate stability' is the sort of thing often, too often, signed at summit meetings. Better to stick to Aid.
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