The world economy, already suffering from a severe recession and Third World debt estimated at $500 billion, could drift into a depression unless there is a recovery in the United States this year, Brookings Institution economist Lawrence B. Krause told a Senate Foreign Relations subcommittee yesterday.
Krause predicted that recovery will begin here soon, and strengthen in the second half of 1983. But because of a weak year in Japan and continuing recession in Europe, he said Third World countries--heavily dependent on their export trade--still will need to borrow heavily from commercial banks throughout 1983.
He warned that if, in a mistaken effort to enforce austerity, commercial banks merely attempt to roll over existing loans and not advance "new monies," it will cost the Third World a loss of 3 percent in economic growth, which would translate into a 1 1/2-point dip in the United States' gross national product.
Former Economic Council chairman Charles L. Schultze, commenting on these figures from Krause, said that would mean a loss of one million U.S. jobs.
Other witnesses at a hearing called by Sen. Charles McC. Mathias Jr. (R-Md.) also emphasized the need to maintain the flow of loans from private banks, as well as official credits through an expansion of resources of the International Monetary Fund.
The consensus of a day-long hearing seemed to be that, while the world economy is in serious trouble and no dramatic upturn is likely, a cooperative effort that includes greater funding for the IMF can halt the slide. "The present problems are manageable; there is no need for panic or despair," said former Treasury secretary W. Michael Blumenthal.
But Sen. William Proxmire (D-Wisc.) warned that a forthcoming administration proposal to boost contributions to the IMF by about 50 percent faces tough going in both the House and the Senate.
"A lot of people feel that this is nothing more than a bank bail-out, and that this problem may lie beyond the control of the IMF," Proxmire said. "And in any event, if we are going to extend $9 billion in credits to the IMF , why shouldn't we give it to the auto and housing industries here?"
Blumenthal rejected "the notion that an increase in IMF quotas will be used to 'bail out' the banks." He said that, "Because of its clout, the fund has been able to cajole the banks into increasing their loans to developing countries. Not one cent of IMF loans is being used to repay bank debt."
But Krause conceded that "some institutional changes are required in bank lending to developing countries to prevent a recurrence of today's problem." In responses to questions, Krause said that there had been overlending and overborrowing, and that the IMF should establish "guidelines on what is responsible behavior" by the borrowers.
Former Treasury secretary Henry H. Fowler suggested that, in addition to providing more money for the international lending institutions, there should be some better form of coordination of lending policies by the IMF, the Bank for International Settlements, and the large private banks.
All of the witnesses stressed that an economic recovery holds the key to stemming the international crisis. But John W. Sewell of the Overseas Development Council argued that recovery in the industrial world by itself is no longer enough to restore vitality in the whole global structure.