THE SCALE of worldwide economic decline now requires the governments of the rich industrial countries to pull together as never before. In economic policy, governments are accustomed to thinking mainly in terms of their own domestic necessities. Until a few years ago, the strong countries' separate recoveries were always enough to draw the others along. But it won't happen this time. The signals and warnings of recent days deserve careful reflection.
First item: The United States has just reported a record trade deficit in the third quarter of the year. That's the effect of an overvalued dollar, making U.S. products uncompetitive abroad. The overvalued dollar is, in turn, the result of the very high American interest rates, which are related to the prospect of huge deficits in the U.S. budget. The widening trade deficit over the coming year will exert a dangerous drag on recovery here.
Second item: The decline in foreign trade is not limited to the American economy. The International Monetary Fund reports that exports of all the industrial countries dropped in the third quarter, and the total decline was severe. That hasn't happened since World War II. Imports also fell in all of the industrial countries except the United States, and that downward spiral is having a devastating effect on the poor countries that live by selling to industrial markets.
Third item: The World Bank's job is to help poor countries raise their standards of living. A. W. Clausen, the president of the bank, observed in a speech that, as a group, the developing countries have suffered actual reductions in income per capita over the past two years. But, he added, the effects are not limited to the poor countries. When they cannot sell, they cannot buy--and the developing countries are an important customer of U.S. industry. "The slump in Third World development is also aggravating unemployment in the United States," Mr. Clausen accurately pointed out.
Fourth item: The IMF reported that the Third World's accumulation of debt accelerated this year. Most of the bank loans are concentrated in four countries--Mexico, Brazil, South Korea and Argentina--and most of those loans return interest that floats with current rates. This year, the rates averaged 17.5 percent, which helps explain the crisis in meeting payments. Each percentage point on the interest rate means well over half a billion dollars a year to Mexico and nearly as much to Brazil -- money that might otherwise be spent on industrial imports. 10 2 Fifth item: The German government, struggling to reduce its deficit, enacted a budget with severe cuts in social spending. The Japanese seem about to do the same. That's wrong, and perverse. Both are countries with high savings rates and low inflation. They can afford classic stimulation to raise demand. Instead, they are sitting back cautiously and waiting for others -- i.e., the Americans -- to take the initiative. But it may be a long wait because . . .
Sixth item: In Washington, the House of Representatives responded to the unemployment rate by passing a bill to keep most foreign cars out of this country. If it were actually enacted, it would be the most savagely protectionist legislation since the Smoot-Hawley Tariff of 1930, which contributed greatly to the depth and duration of the Depression of the following years.
The reality is that the prosperity of all the rich countries, and most of the poor ones, now depends crucially on the international flows of trade and money. That's why not even the most powerful of them, the United States, can rescue itself without the active cooperation of the others.
The rescue has to begin with lower interest rates in the United States. To keep the rates moving down, the Reagan administration has to start bringing down, forcefully, the budget deficits for 1984 and beyond. President Reagan said in an interview published in this newspaper yesterday that he is counting on an economic recovery to reduce the deficit. He had it exactly backward. Without lower deficits, there won't be much of a recovery. Fears of inflation would keep interest too high.
In fact, a thoroughly sensible outline for the rescue operation has been published by the Institute for International Economics, outlining a natural division of labor in this rescue. While the operation has to begin in the United States with lower interest rates and budget deficits, it also requires important contributions elsewhere -- especially in Tokyo, Bonn and London. The banks and the IMF have to keep lending. Currencies haveto be realigned, with the dollar coming down a bit and the Japanese yen coming up quite a lot.
Countries foolish enough not to work together do not deserve to be rich. If the great industrial powers do not work together now, fast and hard, they are likely soon to find themselves much less rich than they are today.