There are at least four critical issues, all inextricably intertwined, facing the world's financial leaders who gather this weekend for the 32d joint annual meetings of the International Monetary Fund and World Bank group which open here formally Monday morning.
And while none of the leaders is promising any major decisions or new initiatives, there is nothing quite like this yearly extravaganza to concentrate the mind. Thus, lit is no small coincidence that both West Germany and Japan, roundly criticized for failing to meet their promised economic growth targets, announced some steps toward expansion just ahead of the Washington meetings.
Adding to the interest, of course, is the unexpected decision by the soft-spoken and highly regarded managing director of the IMF, H.J. Witteveen, to retire next Aug. 31, instead of being a candidate for a sure second term of five years.
Prior to Monday's formal session - which will be addressed at mid-afternoon by U.S. President Jimmy Carter, there will be meetings today of the Group of Ten rich industrial nations, land a meeting of the Development Committee, which is a joint group of the World Bank and the IMF. The honor of chairing the annual meetings goes this year to George Colley, finance minister of Ireland.
Throughout the sessions, which end Friday, many countries also will hold bilateral meetings on a wide range of economic topics. U.S. Treasury Secretary W. Michael Blumenthal, who is the U.S. governor for the bank and IMF, has 40 such bilateral sessions scheduled. He also will address the joint session on Tuesday, outlining U.S. views on growth, trade, and debt financing.
The major issues on the minds of 3,500 representatives from 131 countries attending the meetings can be sumed up this way:
The world economy has failed to recover as well as had been hoped last year. Unemployment is high, especially among young persons, and economic growth has been sluggish among industrial nations except in the United States. And even here, there are question marks about the future.
Large balance of payments deficits among the Oil-consuming countries are likely to persist for many years, because the Organization of Petroleum Exporting Countries surpluses - despite some wishful earlier thinking - just won't fade away.
The debt burden of the less-developed countries has risen to proportions that many consider alarming, and despite official protestations that the monetary system is in "no imminent danger," many worry that private banks have loaned money too freely and that some countries, extravagant borrowers, may be on the verge of default.
Under the combined impact of sluggish economic growth, high unemployment, and persistent balance of payments deficits, there is a growing concern that the world will lapse again into a period of protectionism and trade wars.
The IMF Annual Report, in describing the world economic outlook in rather grim terms, in effect said that nothing much could be done about it. "In the short run," the report said, "the scope for improvement in the present unsatisfactory (world economic) situation is . . . limited."
Because of fear of inflation, a go-slow, cautious approach was advanced at last year's annual meetings at Manila. It has been endorsed, as well, by the bureaucracy of the Organization for Economic Cooperation and Development and by the London economic summit last May. There, seven heads of state urged new stabilization measures on France, Italy, and Britain, and pressed the U.S., West Germany, and Japan merely to meet their own modest growth targets. Whether the strategy needs a chance will be a major topic of speeches given by various governors.
Clearly, the present strategy is not a howling success. West Germany, which set a 4.5 to 5.0 per cent growth goal for this year won't make it, and Chancellor Helmut Schmidt very recently put forward a modest expansionary program. Both French Prime Minister Raymond Barre and Treasury Under Secretary Anthony Solomon have said publicly that the German program would have been more useful if put in place earlier.
Japan also has announced a stimulus program, but it remains an open question whether it can hit a planned 6.7 per cent target. What is sure is that Japan continues to run enormous trade and current account surpluses. In contrast to its London summit count promise to eliminate its current account surplus, Japan apparently will run a $7 to $9 billion current account surplus this year.
Japan's brilliant success in the world's export markets has helped feed the new burst of protectionist sentiment.
The United States has initiated a device, attacked by some as borderline protectionism, known as "orderly marketing agreements," which unilaterally limit the imports of cheap shoes and color television sets. Prime Minister Barre, heretofore a leading free trader, has insisted on the concept of "organized free trade," which holds that trade must be allowed to grow, but should be controlled in some collective or multilateral way to prevent massive impacts on particular industries.
But there is little sign that U.S. officials are impressed with Barre's proposal.
There are some bright spots in the general outlook, lto be sure, not the least of which is the vastly improved economic condition of Great Britain. Last year at this time, before Britain submitted to the conditions imposed by a large IMF loan, the pound was in the midst of a collapse. British Chancellor of the Exchequer Denis Healey didn't even make it to Manila.
Now, and at least for some small time into the future, British prospects, bolstered by North Sea oil, look a good deal better. The pound is stronger - so much so that the Bank of England may be intervening to keep it from rising too high, which would put it at a competitive advantage.
France has made some progress, as well, with the help of "le plan Barre," which applied austerity brakes to an inflationary course. Now, Barre is trying to take his foot off the brake ever so slightly, in the hope that more jobs will be created, worsening the political prospects of a powerful-looking Socialist-Communist coalition in the March 1978 elections.
Italy also has surprised skeptics who thought the rise of the Communist Part influence would wash that country down the drain. But this past summer, Italy repaid $825 million, right on schedule, to the IMF, and early this month paid back to West Germany $500 million - again on schedule - or 25 per cent of the $2 billion loan obtained in 1974, backed by Italian gold reserves.
There are, to be sure, fundamental economic problems and disturbing trends in all three of these countries - but the authorities - of different political persuasions - have made some progress.
Another area where the mood is significantly better now than it was a year ago concerns the World Bank and the United States. It is now a certainty that there will be a general capital increase in the bank's resources, with the approval of the United States which, until the arrival of the Carter administration, had been fighting any expansion of the bank's role.
There also will be a significant expansion ofIMF resources through a 7th general quota increase. The quota question, like the bank's capital increase, won't be settled until next year, however, and thus it is unlikely that the decision will make funds available for lending until some time in 1979 or later.
It was for that reason that Witteveen generated a special pool of funds - actually, a line of credit - from seven OPEC and seven Western countries - amounting to $10 billion, and now known as the Witteveen Facility. This fund will become operative when 90 per cent of the pledges become a reality. In practical terms, that means when the U.S. contribution of $1.7 billion is approved by Congress, probably in January.
Witteveen originally set out to collect about $15 to $16 billion, half from the West, half from OPEC. But he was able to get only $24 billion from Saude Arabia, even though the funds are loaned to the IMF at commercial market rates. True, the $2.4 billion is the largest single commitment, but a $16 billion pool of money would have required $4 billion from the Saudis.
McNamara also has been frustrated by the Saudis, lwho stubbornly refused to put up more than $250 million on a concessional basis in the current replenishment of funds for the bank's soft-loan agency, the International Development Association. Whether the Arab countries, especially those with big surpluses, are doing their share is a real question.
That leads directly into the problem of the massive accumulated debts, especially among the poorest of the developing countries. The history of the period after the 1973 Middle East war is that the IMF and the World Bank financed only about $55 billion of total current account deficits amounting to about $225 billion after deducting receipt of grand aid.
In other words, $170 billion has been financed by private banks or borrowings in private securities markets. We seem to have arrived at the point where ideological opposites such as Sen. Frank Church and Federal Reserve Board Chairman Arthur Burns think the banks have become over extended.
There is a lot of talk about making the IMF - already a lender of last resort when a country is in a near extreme condition and willing to buy unpopular austerity measures - a partner with the private banking system. In a test-the-water speech in Tokyo, Blumenthal suggested ways by which the IMF could assess the soundness of provate loans sought by the poor countries.TheIMF is not anxious to become a credit-rating agency, nor are debtor countries anxious to spread on the record private data they give the IMF. But the wave of the future, if it can be discerned, may be found in the belief of U.s. officials that the old game ofjust "financing" the big balance of payments deficits must be ended, and a new one, relying on belt-tightening adjustment within the deficit countries, must begin. The era in which private banks pushed money at developing countries seems to be over. Over the next few years, the resources of both the IMF and the bank will be boosted, and increasingly will be a source of funds for the borrowers. The private system still will provide the bulk of funds. But the marginal shift will be important.
The problem central to everything to be discussed at these sessions - OPEC control of oil supplies and prices - is yet to be solved. As Church says: "There is no end in sight to this cycle of a few permanent financial surplus oil-producer countries, and burgeoning international indebtedness by weaker oil importing countries."