Against a backdrop of worldwide economic stagnation and high unemployment, leading finance ministers and central bankers of rich and poor nations will meet this week in Helsinki, Finland--wearing their other hats as governors of the World Bank and the International Monetary Fund--to try to chart a course out of the morass.
It's an occasion bringing together key financial headline-makers of important governments: from the United States, for example, Treasury Secretary Donald T. Regan, U.S. governor for the IMF and the bank, and his alternate for the IMF, Federal Reserve Chairman Paul A. Volcker--and their counterparts from 21 other countries or clusters of countries.
The Helsinki sessions, to give them their proper technical label, consist of two main events: a meeting of the 22-member IMF Interim Committee, the top policy-making board representing all 146 member countries, followed by a meeting of the Development Committee, a joint ministerial group of both the IMF and bank charged with finding ways of improving the flow of resources to the developing world.
Regan will go to Helsinki Tuesday after a crucial session in Paris of the Organization for Economic Cooperation and Development, at which he plans to make yet another effort to persuade European and Japanese officials that, despite the impasse over the U.S. budget deficit, an economic recovery is at hand here.
The OECD ministerial meeting, in a way, is considered by American officials an important "dry run" for the heads-of-state economic summit in Versailles in early June. Unless Secretary Regan can persuade his fellow finance ministers that there is a good chance that U.S. real interest rates will decline significantly this year, tensions that already exist between Europe and the United States are likely to enter an uncomfortable phase extending to Versailles.
Last year at the Ottawa economic summit, West German Chancellor Helmut Schmidt decried real interest rates as the "highest since Jesus Christ." At that time, real interest rates (subtracting inflation from money interest rates) were about 6 percent. Today, as Treasury Undersecretary Beryl Sprinkel pointed out in an interview, plunging inflation rates measured against still high double-digit nominal interest rates in the United States have brought real short-term interest rates to an incredible 12 percent, and real long-term rates to at least 11 percent.
Sprinkel, who will accompany Regan to Paris and Helsinki, said candidly that other governments are "really concerned about interest rates and for good reasons: We have extremely high real rates. They are also concerned about a related issue--as they see it--about the induced volatility in exchange rates, resulting partly from the high rates of interest . . .
"The distressing part is that if we don't get these real rates down, an investment-led recovery is not going to come." Sprinkel said that interest rates haven't followed inflation rates down "because we haven't convinced people" that the administration will stick doggedly to its austerity program, and not reverse its field to fight unemployment.
"Now, what can we do to convince them?" Sprinkel asked. "I don't think talk's going to do it, you know. We've been saying this ever since we've been here. But they're not convinced. Otherwise I think those rates would come down." Nonetheless, Sprinkel made clear that the United States will continue to oppose the suggestion, made by the Europeans, that the United States intervene in the exchange markets to stabilize rates.
Where the Paris sessions are exclusively a brain-storming session among rich industrial nations, Helsinki brings together a cross-section of rich and poor. Representing the huge lending institutions on which poor countries heavily depend will be World Bank President A. W. (Tom) Clausen and IMF Managing Director Jacques de Larosiere.
There will be a communique at the windup of the Helsinki sessions, but few, if any, actual decisions. Nonetheless, Clausen and de Larosiere will get a better idea on how far the rich nations will go in funding the needs of their poorer constituencies for the balance of the 1980s.
The Helsinki sessions are also likely to underscore, again, important philosphical differences between the Reagan administration and most other leading industrial countries on the role of the multilateral lending institutions. The United States seeks to constrict them, emphasizing instead the role of the private sector. Most of the other rich countries have grave doubts about the wisdom of holding back the IMF and the bank.
The United States has such great power in the IMF and the bank that it usually gets its way. But differences will surface at Helsinki on a number of issues, regardless of the traditional smoothing-over operation that guides the production of final communiques.
The key IMF question to come up at Helsinki relates to expansion of the fund's "quotas" for a five-year period beginning in 1984. Quotas represent the amounts put on deposit by fund members in their own currencies. These quotas make up the agency's basic lending resources and determine relative voting power.
A related question is a realignment of quota relationships. The newly industrialized countries, such as Korea and Brazil, seek a larger relative share more representative of their new economic strength in the world. Some Arab countries, for the same reason, want to catch up with the recognition already accorded Saudi Arabia. And Japan, now the noncommunist world's No. 2 economic power, for some time has sought an adjustment in its quota that better reflects its position. Greater percentage shares for these countries would have to come at the expense of the United States and of Great Britain--whose share of world GNP has declined in the post-World War II era.
In his interview, Sprinkel said bluntly that the United States takes a dim view of any major increase in IMF quotas, despite open support by the professional staff of the fund, led by de Larosiere, for a substantial expansion. On reallocation, he said firmly that the United States might agree to let its quota "slip a little" as a percentage of the whole, but will reject any re-jiggering of shares that denies it the veto power it now holds on key policy matters.
Sprinkel suggested that the IMF is trying to bite off more than it should be chewing, reviving a theme that Secretary Regan introduced--and then backed away from--just before last year's annual meeting in Washington. As an initial bargaining position, Sprinkel said that "we are unwilling to state that any quota increase is justified."
A high official of the fund said that most member nations "agree that basically, the fund is doing the right things, that is, providing conditional balance-of-payments support to countries who are engaged in serious adjustment programs." In this sense, the word "adjustment" implies some retrenchment in consumer spending, and an effort to balance domestic budgets.
At the same time, as if in response to pressures from the United States, the IMF acknowledges that perhaps one-third to one-half of its lending programs begun in 1979-80 have gotten "off the track" for various reasons--sufficient for the IMF to halt the programs pending new "adjustments" based on more realistic assumptions by the borrowing country.
To be reasonably sure that a country given a second chance will actually toe the mark, an IMF source explained, "the IMF now places more emphasis on preconditions, that is, measures to be taken before we propose a new program to the board." In addition, the IMF is now more closely monitoring what goes on, in many cases demanding monthly rather than quarterly reports.
What the IMF must do, Sprinkel said, is resist the temptation to become a new development institution--"we've got enough of those." But there is unanimous agreement on the fund's board of executive directors--including the United States--that the IMF should play a major role in financing balance-of-payments deficits in the 1980s, and that most of its money should come from quotas, rather than special borrowings.
The big question on quotas is, how much? Confidential staff studies at the IMF argue that the fund's current total--equal to about $67 billion--should be doubled or even trebled. (Fund accounts are denominated in Special Drawing Rights. Each SDR, a composite of major currencies, is worth about $1.12 at the moment.)
Sprinkel scoffs at such a notion, painfully aware of the difficulty of persuading Congress to approve. Those with "grandiose ideas," Sprinkel said, must keep in mind that "we are the biggest member , and therefore any quota that comes up, we have to come up with a big hunk of it, nearly 20 percent, I guess. So, it's big money that we'd have to ask in terms of appropriations, although it does not end up as budget expenditures per se."
He predicts "there will be a considerable amount of discussion in Helsinki as to how the member countries view the IMF. What kind of a role do we want it to perform in the '80s? From our point of view, we do not believe that the IMF should continue trending as it did for a while, toward performing the role of an international financial intermediary, performing roles that we think can be better performed for the private market."
He stressed that the United States thinks the IMF is "absolutely critical to the health of the international monetary system, and we support it. But not at any level and not at any function."
Sprinkel also wants the recipient countries, as the price of getting help from the IMF, to adjust their macro-economic policies to put more stress on "the incentive effects" that can be obtained from the private sector.
All of this is taken with relative calm by the IMF establishment. De Larosiere has pointed out in public addresses that the $67 billion in quotas (SDR 60 billion) now represents only 4 percent of the world import total, whereas fund quotas in 1965 represented 12 percent of world imports. By such a yardstick, the fund has actually shrunk--while private-capital flows have taken up the slack.
Another way of looking at the fund's needs, its defenders say, is that by the time parliaments ratify new quotas, it will be mid-1985 before they come into effect--and that whatever decision on quotas is made between now and the end of 1983 will have to carry the agency almost to the 1990s.
Those who know de Larosiere's practical style suggest that without confronting the United States head on, he will try to nudge the major powers toward a big boost in quotas--especially since all agree that borrowing should be put on the back burner, reserved for exceptional circumstances. Actual decisions on quota size and distribution do not have to be made until later, toward the end of next year.
On the bank side, there is the delicate political problem of how to provide adequate funding for its soft-loan affiliate, the International Development Association, in the wake of a shortfall in U.S. contributions. Some of the other large contributor nations have considered making up the U.S. shortfall in a separate IDA fund, but "tying" such extra money to purchases in their own countries. Clausen has openly criticized the tight-fisted U.S. policy.
The Interim Committee is chaired by Allan J. MacEachen, deputy prime minister (and finance minister) of Canada. The Development Committee will elect a new chairman in Helsinki to replace David Ibarra Munoz, former minister of finance of Mexico.
Preceding the Interim and Development Committee meetings, Regan will chair a gathering of the Group of 10 (a rich nations' club more exclusive than the OECD) and of the Group of 24 (representing the poorer nations in the IMF). And somewhere over good wines and a splendid dinner there is likely to be the never-announced, but important meeting of the Group of Five (more exclusive than the G-10) consisting of the United States, West Germany, Japan, France and Britain.
The next stage of this traveling international financial circus will be the full-scale annual IMF-Bank meetings in Toronto in early September, and the Interim Committee/Development Committee sessions just preceding them.