Power Sharing Is Key Issue
Top financial nations to discuss Japan's role, and managing the US dollar. IMF-WORLD BANK
BOSTON — FINANCIAL power sharing. When some 3,500 central bankers, finance ministers, and other officials from around the world start gathering in Washington later this week, that will be an important issue.
This multitude of managers of the global economic system, assembling for the joint annual meeting of the International Monetary Fund (IMF) and the World Bank, will be talking about:
Providing Japan with a greater role in the Fund, thereby recognizing the island nation's high economic ranking among the industrial democracies.
``It is overdue,'' says John Makin, a resident scholar of the American Enterprise Institute. ``Japan's contributions are such that it should get more voting power.''
Only last week it was reported that total Japanese investment this year will surpass that of the United States. A study by Data Resources Inc. found that Japan will invest $569.9 billion, some $46 billion more than the US.
Bringing the Soviet Union and China into the economic establishment.
China is already partly there, having joined the IMF and the World Bank some 10 years ago. According to C. Fred Bergsten, director of the Institute for International Economics in Washington, China's membership has encouraged that nation to shift away from a state-controlled economic system. Indeed, the World Bank provided fundamental assistance to China in its development planning.
Soviet membership in these institutions, Dr. Bergsten maintains, could similarly help wean that nation ``into a democratic, free-market way of thinking.''
Managing the US dollar. The greenback has been too strong on the foreign exchange markets in recent weeks.
Central bankers from as many as eight industrial nations have intervened in these markets, selling dollars in an attempt to reduce its price.
These financial officials are concerned that too strong a dollar would reverse the improvement in the US balance of payments. In the first seven months of 1989, the US trade gap narrowed 10.3 percent from the same period in 1988. Exports were up 15.1 percent, outpacing a rise of 8.4 percent in imports.
Bergsten predicts that the strong dollar, by discouraging exports and encouraging imports, could worsen the US current account next year and prompt a deficit as high as $200 billion by 1992.
The US, already the world's largest debtor, would sink further into red ink internationally.
The dollar issue will undoubtedly be discussed at a meeting, probably on Saturday, of the finance ministers and central bankers of the Group of Seven. The seven are the US, Japan, West Germany, Britain, France, Italy, and Canada.
Before that meeting, the Group of Five (the seven minus Canada and Italy) are likely to have supper or breakfast together.
These two groups exercise the world's greatest financial power. Their decisions are likely to be ratified by the IMF and the World Bank. The joint annual meeting, which begins this year on Tuesday (Sept. 26) and lasts into Thursday, is usually something of an anti-climax. If tradition is followed, President Bush will address the gathering early Tuesday.
Should the Group of Seven agree on a formula for increasing the resources of the IMF, the other members of the 151-nation body will have little alternative but to approve - given the dominant voting rights of the seven in the IMF.
It is not certain yet whether the US will back a quota increase at this meeting. US officials put off such an increase last year, arguing that it would be better to await congressional action on a major capital increase for the World Bank. Congress did approve a new US contribution to the bank's capital. But IMF officials still do not know the US position on quotas. Treasury Secretary Nicholas Brady has only committed himself to considering one by the end of this year.
IMF managing director Michel Camdessus is seeking a 100 percent increase in member's quotas. This would approximately double the institution's resources of about $120 billion.
``That's very important in the third-world debt context,'' Bergsten says. ``It is necessary for the Fund to stay on the map as a central player.''
The Fund has been at the heart of negotiations for rescheduling developing country debts, working out programs of economic reforms with leaders of many debtor nations, encouraging commercial banks to provide some debt relief, and making major loans itself.
There are reports that Britain is proposing a 25 percent increase in quotas, France and Japan 100 percent, and West Germany 70 percent.
Any such quota increase will almost certainly be linked to a significant increase in the quotas, and hence the voting power, of Japan. Tokyo likely would move from fifth place in voting might into second place after the US. West Germany would remain in third place.
Britain, now the second largest quota holder, would then drop to fourth place along with France - a prospect not relished by the prestige-conscious British. The US would keep enough votes to retain its veto power.
Many of the poor third-world debtors, because of payments of interest and principal, are exporters of capital while the rich United States is a big importer of capital.
``There is something wrong with that,'' notes J. Paul Horne, an international economist based in Paris for Smith Barney, Harris Upham & Co. He, like many other observers, believes that there should be a positive flow of money into third world nations to help them with their badly needed economic development.
The IMF-World Bank meeting takes place at a time when the world economy is far into the seventh year of an economic expansion.
The IMF's World Economic Outlook forecasts real growth after inflation for the global economy to be 3.1 percent in 1989 and 2.9 percent next year. Fund economists say the US economy will grow 2.7 percent this year and 2 percent next year.
Japan and the major European nations are booming. In West Germany, real output is growing at a 4.6 percent annual rate, the fastest in 13 years. In France, industry is operating at a high 88.2 percent of capacity and trade unions are striking for higher wages. Unemployment in Britain is down for the 37th month to 6.3 percent. The Japanese economy is probably overheated, with growth expected to run more than 4 percent this year.
Contrariwise, the US economy is slowing, with some economists anticipating a recession. Yet investors abroad are pouring money into the United States, seeking diversification for their investments.
One further reason for that flow, says Mr. Horne, is the growing regard for Federal Reserve Board chairman Alan Greenspan and President Bush. They believe Mr. Greenspan will manage a ``soft landing'' for the US economy - a slowdown without recession. They see Bush as ``pragmatic and pretty sensible'' - especially when compared with his predecessor in the White House.
But the inflow of money this encourages also drives up the price of the dollar - creating a problem for the finance ministers and central bankers getting together in Washington.