`Big Three' called to action. Economists urge joint US, Japan, W. German effort to steady exchange markets and trade imbalances
Recession clouds threaten the economic skies as ministers from 24 leading industrial nations gather here this week at a meeting of the Organization for Economic Cooperation and Development. In a report released yesterday for the meeting, senior OECD officials revised downward their estimate of economic growth in the industrial world. After December's forecast of 3 percent annual growth for 1987 and 1988, the OECD experts now predict growth nearer 2.5 percent.
Even that target remains unsure. Unless the ``Big Three'' - the United States, Japan, and West Germany - cooperate to steady foreign exchange markets and trade imbalances, OECD officials warn of a recession.
Founded in 1961, the OECD replaced the group set up in 1948 to administer the Marshall Plan and aid Europe's post-war recovery. The OECD constitutes a forum where member governments attempt to coordinate economic and social policies.
The OECD meeting represents a key warmup to next month's economic summit of the seven major industrial nations in Venice. Though a communiqu'e will be released today, the OECD gathering is expected to produce no immediate solutions. But the officials hope that propositions discussed here will pave the way for meaningful commitments to be made in Venice.
General agreement reigns on what needs to be done. According to the OECD experts: the US must find a convincing way of reducing its swollen budget deficit; Japan must push ahead with its $35 billion supplementary budget; and West Germany must stimulate its economy by bringing forward planned tax cuts and lowering interest rates if a worldwide recession is to be avoided.
Trade figures show the global imbalances most clearly. While the US is running a huge trade deficit of some $170 billion and must cool its consumers' free-spending habits, the report says, Japan and West Germany each are running sizeable trade surpluses of some $90 billion and $56 billion respectively. These two countries must curb exports and boost domestic demand to stir domestic economic growth, the economists say.
Such measures mean all sides must take risks and make sacrifices. For Japan and West Germany, stimulating their economies risks increasing budget deficits.
The US, in turn, could be forced to raise taxes or curb government spending. But in his speech yesterday, US Treasury Secretary James Baker ruled out any tax increases, saying: ``We don't think tax increases are the way to reduce our deficits.'' The treasury secretary said that the Reagan administration had already enacted sufficient spending cuts.
While OECD experts admit that cutting the US budget deficit would weaken US growth prospects, they argue that the move's psychological impact would inspire confidence and stimulate business investment.
Convincing politicians to take such risks is difficult even in the best of times, and these are not the best of times for the Big Three's political leaders.
President Reagan is reeling from the Iran-contra scandal, and Japanese Prime Minister Yasuhiro Nakasone from his defeat on a proposed sales tax measure. Even West German Chancellor Helmut Kohl's strength is ebbing amid squabbling in his government coalition.
Action, nonetheless, must be taken - and taken now - the OECD experts warn. Otherwise, they envision a disaster scenario, which goes roughly as follows: The dollar falls further and US interest rates rise. This throttles US growth. Third-world debtor countries are hurt. And Japanese and West German economies, dependent on exports, are pushed deep into recession.
``There is a risk,'' write the OECD experts, couching their warning in the diplomatic phrasing required of all international bodies, ``that if stronger growth appears elusive, all that has been done'' over the past few years to reduce inflation and raise corporate profits ``might well be jeopardized.''
If this happens, the OECD experts warn, ``frictions, misunderstandings, and tensions would multiply'' between countries.
One specific area of friction and tension is agriculture, and the talks this week will give special attention to the problem of farm subsidies.
Over the last five years, the OECD report says, such subsidies have increased dramatically: by 70 percent in the US, by 36 percent in the European Community, by 38 percent in Australia, and by 18 percent in Canada. A dramatic misallocation of resources results. According to the OECD report, Japanese consumers pay eight times the world price for their rice and each European family pays $900 a year in the form of subsidies, higher prices, and higher taxes to support famers.
The OECD recommends dismantling the financial supports. Although officials realize that this remains a long-range goal, they hope that the ministers will make a commitment this week to freeze the subsidies, or even better, bring them down by 10 percent next year.