In the City

The summit of Summits

Nicholas Davenport

The flag poles are up again in the Mall – this time bigger than ever because not °rie but six heads of state from the OECD are coming for an economic stiromit conference. The head of heads, of course is President Jimmy Carter – making his frist trip to a foreign country skince he took over (and also suburbanized) the White House. Jim Callaghan must feel proud to play host to such an eminent gathering. Let us not begrudge "Int his pleasure. He has deserved his suee NS not only because he has demon 'rated his acute political sense in steering a Minority Labour government away from Silly Marxist socialism towards a viable Inixed-economy social democracy, but because he has always taken a special !Merest and made a special study of international monetary and economic affairs. Indeed, when he was last thrown out of office he let his name go forward the a candidate for the post of Director of tue International Monetary Fund. There could not be a better chairman for this difficult summit The mixed capitalist world is in a Monetary muddle, but by no means on the eve of its final crisis as the comniunists would have us believe. The western industrial nations went into a s!urriP three years ago and, because inflahOn accompanied unemployment, they did not find it easy to get out of it through the usual reflationary measures. L'n Tact, just after company restocking had urought some recovery in 1976 and When, in 1977, it was expected to show s,izable output growth throughout the beg world, the recovery process ,egan to slow down. In fact, slightly Slower growth is now projected for 1977.

The e trade cycle seemed to have

v_hanged its usual course. Britain being in kne most difficult position, with the u.ighest rate of inflation and the most intractable rise in unemployment, Mr Uallaghan naturally went to the economically stronger nations, West Germany and the United States – to reflate their e,,,eonomies to help our export recovery. he failed. Chancellor Schmidt was unwilling and President Carter willing but raestricted by Dr Burns of the Federal eserve, who was concerned about the 6 In cent rise in the price level last year. 411 fact President Carter has been obliged drop his somewhat silly $50 tax rebate VoPosal. So it is not going to be easy to indle economic recovery by the stronger countries pumping out money a la 1(eYnes.

Apart from the continuing fear about

inflation, there is another problem which is holding up recovery. The OPEC oil surplus which was cut in half between 1974 and 1975 is likely to be higher this year. The Saudi Arabians are expected to raise the price by $5 a barrel in order to bring the unworkable two-tier system of oil pricing to an end. This will make 10 per cent rise in oil prices universal for 1977. An OPEC surplus estimated at about $42,000 million in 1977 cannot fail to be deflationary for the rest of the world, especially for the big oil importers, especially for the Americans, if President Carter gets Congress to agree to raise prices shortly at the pump in order to conserve energy.

The recycling of these huge Arab credits for the financing of world trade is only partly feasible. Before the OPEC upset to the world monetary system the rich exporting countries used to give aid, loans and trade credits to the nondeveloped countries, but the continuation of this finance is becoming almost impossible now that the combined trade deficits of these poor countries may exceed $40,000 million this year. Their combined total debt at the end of 1976 had reached the staggering total of $180,000 million, of which $75,000 million was owed to commercial banks. A default in the

payment of interest would put some of the contributing New York banks into serious trouble. A debt moratorium is proposed but not yet agreed to. A

breakdown in the finance of the non-oil developing world would bring on a really serious world slump. No doubt the summit, confounded by this terrifying fact will turn to the IMF and the World Bank for help, but both are now short of finance.

The finance ministers have recently been meeting in Washington to discuss

the two major problems. First, the raising of an immediate new oil facility to counter the OPEC deflation, and secondly the raising of members' quotas.

As regards the first, the amounts suggested range from $8,000 million

Special Drawing Rights to $16,000 million, provided that the Arabs contributed half. The Saudi Arabians seem

reluctant to commit themselves and insist that at least half of the resources of the new facility should go to the developing

countries. The Japanese refused to ask their parliament's consent until the American Congress had approved. They were apparently angry that Congress had not passed the establishment of an OECD support fund of $25,000 million which had been generally agreed.

The optimistic Mr Healey has, however, expressed his confidence that by the summer a supplementary financing for the IMF worth about $10,000 million Special Drawing Rights (about £6700 million) could be functioning. Dr Witteveen, the Director of the IMF, is not so sanguine. Congressional approval is not so easily obtained. So what seems to have emerged from this meeting of the Finance ministers is merely that an agreement has been reached in principle to establish a supplementary oil facility for the IMF of an indeterminate amount.

As regards the raising of members' quotas, the proposal is that for an increase of at least 50 per cent which would increase the IMF lending power b‘ $10,000 million. The Germans oppose any increase above 30 per cent, and Mr Healey seems to think that a 30 per cent increase will he agreed on by the autumn. It is clear, however, that all these financial expedients take time to get activated on a world front. Unfortunately the world recession does not stand still while finance ministers sit around and talk at conferences.

Apart from this major world problems there is the awkward local problem of the restrictive exchange rates of the OECD members. The finance ministers at their recent meeting in Washington decided that some procedure must he worked out for the surveillance of the foreign exchange markets in view of the extent to which "dirty floating" has become common practice (especially in the United Kingdom). There is always the protectionist urge, to put on tariffs against unethical exports. I hope that the opportunity will be taken to tell the Japanese (as our trade minister told them in Tokyo) that they are not behaving as a good trading partner in the OECD if they set their gross programme entirely on exports and not on domestic consumption – and refuse to buy British manufactures in particular.

So this summit meeting is obviously not going to be an easy one for Mr. Callaghan to chair. The six visitors from the US, Canada, France, West Germany, Italy and Japan appear to be at sixes and sevens, and Chancellor Schmidt to have a special quarrel with President Carter. And Mr Jenkins the EEC Commission President, who has been allowed to attend to put the EEC view only when called upon, is not likely to go out of his way to help Mr. Callaghan. I can only end by wishing the Prime Minister good luck. If he brings off an agreement to take some meaningful concerted action to stop the recession, it will be a miracle.