Global Finance Leaders Wary of Money Shortage

LAWRENCE SUMMERS, chief economist for the World Bank, tosses off some very large numbers. New demands for global capital, he estimates, could reach $1,750 billion to $2,500 billion for such needs as the reconstruction of war-torn Middle Eastern countries; the modernization of the former East Germany, Eastern Europe, and the Soviet Union; the United States's enlarged budget deficit; and infrastructure construction in Japan and Taiwan. Such fresh demands for money caused Washington to echo this week with such worrisome phrases as "capital shortages," "global problems of liquidity," and "inadequate savings."

Many of the world's key financial leaders, gathered here for the spring meeting of the policymaking committees of the International Monetary Fund (IMF) and the World Bank, spoke of their concern about this financial issue. For example, Ryutaro Hashimoto, Japan's finance minister, spoke April 29 of "the looming global imbalance of demand and supply of resources" and called for an increase in global savings.

In strict economic terms, a shortage of capital is something of a misnomer. Interest rates on loans of capital rise sufficiently to knock out those borrowers who cannot afford those high rates until demand and supply for money balance.

Mr. Summers estimates that each extra $100 billion in annual demand for capital in the world boosts average interest rates one percentage point - unless the supply of capital also increases.

Other economists have noted that the end of the cold war should free up billions of dollars in reduced military spending - money that could go to meet more constructive capital needs. Estimates of the "peace dividend" in the United States over the next six years run between $300 billion and $400 billion.

Summers's list of capital needs includes $25 billion to $50 billion for Kuwait, $20 billion to $30 billion for Saudi Arabia, $100 billion-plus for Iraq, $10 billion to $20 billion for Iran, $300 billion to $400 billion for German reunification costs, $500 billion to $1,000 billion for fixing up Eastern Europe and the Soviet Union, $250 billion-plus to cover the enlargement of the US budget deficit, $300 billion to $500 billion for an infrastructure program in Japan, and $250 billion to $300 billion for a similar program in Taiwan.

Not all those "needs" for capital will be met, Summers notes.

The anticipated shortage of capital worldwide has prompted numerous responses.

Rolf Kullberg, governor of the Bank of Finland, called on those countries running large budget and balance-of-payments deficits to reduce them. "Especially welcome," he said, would be a reduction in the US and German budget deficits because of the importance of these two nations' economies.

Japan's Mr. Hashimoto suggested that each debtor country enhance its own domestic savings with "appropriate economic policies."

He also altered Japan's policy by supporting a new issue of special drawing rights (SDR), a type of credit or money issued by the IMF. Such an issue of spendable funds should be directed toward those developing countries carrying out ambitious economic reforms, he said.

Because of US opposition, however, a new SDR issue is unlikely soon. Hashimoto himself said it should come only after approval of a $60 billion quota increase for the IMF, expected later this year if the US Congress approves it by then.

French Economy Minister Pierre Beregovoy said the inflationary impact of a new SDR allocation would be minimal. He added that the IMF would be asked to study whether more SDRs are needed to offset the global shortage of capital.

Michel Camdessus, managing director of the IMF, said he would be "delighted" if the 155-nation membership of the fund called for an "in-depth study to make the SDR really the instrument the world needs."

Another way of stimulating savings would be to remove tax distortions that discriminate against savings - in particular, tax deductibility of interest payments on mortgages, noted Hans Tietmeyer, director of the German Bundesbank. He granted that this could be politically contentious. The US gives homeowners such a tax break.

With the capital shortage implying a limit to foreign aid to developing countries, Summers emphasized that "more bang is actually much more important for development than more bucks." If the poorer countries improve their use of capital, it will often make a greater difference than investing more heavily, he notes. A 0.2 percent increase in "total factor productivity" (all elements affecting productivity) in developing countries would do more for their living standards than an additional $100 billion of capital invested at historical rates of return.