In a few days, the world's finance ministers and central bankers will be converging on Washington for the annual meeting of the World Bank and International Monetary Fund, and unless there is some divine intervention, they won't find much to cheer about.
As long-time international economic expert Gottfried Haberler says in a new American Enterprise Institute publication, "all recent economic reports by national and international agencies are tinged with pessimism and gloom, predicting more inflation, near-zero productivity growth, stagnating or declining GNP, and high unemployment."
According to the Organization for Economic Cooperation and Development's mid-year report, the jobless total in the industrial world is now about 24 million, or 7 percent of the labor force, and will rise to 26 million, or 7 1/2 percent, toward the end of l982. In Europe, the OECD said the rate could touch 9 percent, with youth unemployment in some countries going over 20 percent.
So much for the good news.
The bad news is that the expected revival of the U.S. economy that White House officials earlier this year had predicted would brighten world economic prospects is now called into question. The promise of a painless transition into a world responding to the tonic of supply-side medicine seems increasingly dubious.
Instead the prospect is that high interest rates will continue to prevail in North America and Europe -- a condition bitterly protested by the Europeans at the Ottawa Summit last July, because it frustrates their ability to stimulate lagging economies.
"Throughout 1980 and 1981," a Salomon Bros. report said at mid-year, "weak real economic activity restricted many monetary authorities, particularly in Europe. Most European authorities would have preferred lower levels of domestic interest rates to relieve downward pressure on domestic output. But most felt compelled, usually by the dollar's sharp appreciation, to elevate interest rates to lofty levels and to hold them there."
The consensus among international economic experts is that the current economic malaise in the rich, industrial world will last at least until the end of this year, for two basic reasons: first, the depressing effect of the 1979-80 oil price increase has not yet worked its way through the world's economic structure. And second, there is that distressing level of high interest rates.
With the Reagan administration embracing a textbook monetarist posture, the Federal Reserve has been encouraged to concentrate entirely on the control of the money supply and other monetary aggregates. The administration's reigning monetarist guru, Treasury Undersecretary Beryl Sprinkel, insists that this tactic is the one and only condition necessary to defeat inflation.
But this basic tenet of monetarist ideology ignores the effect on interest rates, which have fluctuated wildly at home, helping to shake the confidence of financial markets. Monetary targeting also has destabilized the foreign exchange markets, pushing the dollar to unparalleled heights.
A Morgan Guaranty Bank commentary explains the result: "The deflationary impact of the rapid increase of OPEC oil prices in 1979-80 is wearing off, but the rise in the dollar associated in part with exceptionally high interest rates in the United States has caused a worsening of the terms of trade in Europe, and to some extent in Japan.
"Although dollar oil prices have softened in recent months and non-oil commodity prices have sagged, their prices in European currency terms have risen 35 percent to 50 percent, and 7 percent to 16 percent, respectively, since October 1980.
"For the European economies, this spin-off from dollar appreciation is imposing almost as large a cut in real incomes as did the 1979-80 oil shock, and therefore is being dubbed the 'third oil shock.' "
There is yet another, if more subtle divisive aspect of American monetary policy, and that is the arrogance with which most Europeans feel it was formulated and carried out. Undersecretary Sprinkel ruled out all market intervention to smooth erratic fluctuations in exchange rates, reflecting "the market knows best" philosophy.
But as former German Central Bank President Otmar Emminger pointed out this summer at a Ditchley Foundation conference in England, "this is a little difficult to swallow in view of the foreign exchange market's notorious propensity to over-react."
Emminger went on to say that despite the American conviction that the Reagan policy is being fought in the interest of the whole world, "dogmatic monetarism . . . appears to have led to a different ball game as concerns international monetary cooperation, and in particular, coordination of interest rates."
At mid-year, the IMF's Annual Economic Outlook challenged the more optimistic note then being struck by the Reaganites. What the IMF foresaw -- the continuation of inflation and unemployment in both the industrialized and less developed regions for the next couple of years -- is now the dominant expectation.
Haberler called attention to the fact that the problems for major industrialized nations like West Germany are even more complicated than those in the United States. "After 30 years of almost uninterrupted current account surpluses," Haberler wrote, "large current account deficits developed in West Germany in the last three years, and the deutschemark weakened in the foreign exchange market. This development, combined with rising unemployment, and by German standards, excessive inflation -- about 5 1/2 percent currently -- has been very unsettling."
Haberler didn't mention it, but the only industrial nation doing well is West Germany's (and the United State's) tough competitor, Japan. As the OECD said in its Aug. 5 survey of the Japanese economy, that nation's economic performance has surpassed those of the rest of the OECD countries ever since the first oil shock, helped by "the dynamism of the private sector" and the special nature of the Japanese labor-management system that encourages cooperation instead of confrontation. Japan can look forward to a 4 percent real GNP growth next year.
For the entire group of the rich industrial nations -- on whose prosperity the less developed countries depend heavily -- the IMF sees real growth of only 1 percent to 2 percent at best, or only half of the gains registered in the 1976-79 period. Morgan Guaranty's numbers are only slightly more optimistic: 1.3 percent real growth this year, about unchanged from 1980, with the possibility of an increase to 2.8 percent in 1982.
Either way, that's painfully slow growth. It's slow enough to encourage protectionist tendencies, and that complicates life for the poor nations that must export in order to survive, let alone boost their living standards.
The squabble over interest rates got most of the attention at the Ottawa summit, but it shouldn't be overlooked that the leaders of the rich nations, who usually try to put the best face on things, also warned that their citizens had best brace themselves for reduced expectations about "growth and earnings," even though unemployment totals in the industrial world next year will be the worst since the Depression.
The signal thus being sent to the poor nations is that the rich world will be hard pressed to beef up the amount of its aid, a message that will be stresed again at the North-South summit in Cancun, Mexico, next month. In particular, the United States has made clear that it looks to the private sector rather than multilateral lending agencies to take on a greater role in development aid.
This emphasis on the private sector by the Reagan administration is certain to be a major issue between the United States, on the one hand, and the developing nations, supported by many European countries and Canada, on the other. Even World Bank president A. W. Clausen, who wants to move his agency into closer relationships with private lenders, said in an interview this summer that the free-enterprise system can't do the job alone.
Despite the usual sounding of alarm bells, the less developed nations were able to sustain surprisingly good growth rates around the 4 1/2 percent real level last year, considerably better than the industrial world. But this figure masked, as the International Finance Corp. pointed out this past week, the grim situation in the poorest nations, especially in Africa.
And the IMF's annual report raised another point of great concern to the poor nations: When high inflation rates disguised interest rate costs, as was the case in the late 1960s and 1970s, the poor nations could, in effect, borrow dollars and pay back with cheaper ones. But nominal interest rates have soared so high that "real" interest rates are now at record positive levels. That makes financing the debt a tough problem for many poor countries. And the only solution for that is what almost everyone would like to see, but doesn't: sharply lower interest rates.