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Joint Action by G-7 Can Break Old Barriers

Structural problems like deficits, unemployment, and protectionism can best be addressed through international cooperation

THE international coordination of monetary and exchange rate policy through the G-7 has made an indispensable contribution to the industrialized world. With the economic summit of the world's seven leading industrial countries now underway in Munich, it is worth considering how the summiteers' operating brief could be expanded beyond its traditional monetary and exchange rate policy framework.

In the 1990s, the great competition between the systems of East and West has yielded to the pursuit of efficient production locations and forward-looking policies on trade, the environment, labor, energy, and competition. As each country seeks to optimize its domestic economy, the world economy - producers and consumers alike - stands to benefit.

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Yet in the increasingly interdependent global economy, these processes in individual countries cannot be truly optimal unless they converge on an international level. It is apparent that structural economic issues - issues that cannot be resolved through central bank initiative alone - must now be addressed on a multilateral basis in order to maintain stability. This need is evident in the lack of clear economic direction that presently characterizes most industrial economies. The G-7, I believe, could s erve as the vehicle that provides that direction.

Mustering the political will required to address the structural problems, which are generally domestic in character, can often be actively supported by multilateral action. Take, for example, the European Community (EC), where convergence pressures force governments to lower deficits, rein in inflation, and maintain orderly bond markets. The G-7 mechanism can serve a similar function on a broader scale.

One structural issue that would be on everybody's list is budget deficits. In Germany, for instance, the present budget deficit can only be addressed through the reduction of subsidies, the privatization of public enterprises, and deregulation. Understandably, all of these steps face stiff opposition from certain domestic constituencies.

In the United States, deficit reduction measures such as defense cuts and the scaling down of entitlement programs face similarly stiff opposition. It is a fact of domestic politics on both sides of the Atlantic that one or the other vested-interest group can effectively bring progress to a standstill. Coordinated policy initiatives among the G-7 on structural budget deficits may be the only effective mechanism through which real progress can be achieved.

In a similar vein, protectionist pressures must be countered by further market openings in order for growth to resume. In the first instance, this involves a breakthrough on the current round of the General Agreement on Tariffs and Trade. Beyond that, it involves each G-7 country paying closer attention to de facto protectionism - unwritten and undisclosed barriers that stand in the way of free international trade and competition.

Like fiscal deficits, protectionism is supported by domestic constituencies that can sometimes prove immovable. Farm subsidies in the EC and elsewhere prove just how difficult it can be to dislodge entrenched interests. More intensive coordination at the G-7 level will go a long way toward breaking down these barriers.

Another obvious domestic problem that could benefit from international coordination is the question of labor. We must address the structural unemployment that typifies most of the G-7 economies. Over the past decade, a less regulated business environment has helped to alleviate some of the problems in the labor market. To tackle employment in the G-7 countries, we have to head in this direction with more vigor than in the past. Education and training programs play a critical role as we seek to introduce more efficiency to labor markets.

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A final structural issue of concern in the industrialized countries is the fragile state of the financial services industry, especially in the light of growing worldwide demand for capital. Over the past decade, national banking systems have been weakened almost to the point where the term "banking crisis" is becoming standard terminology. In addition, whole segments of the world's financial markets remain unregulated or face widely disparate regulatory structures. These issues would all benefit from for mal interchange and discourse among the G-7.

We must keep in mind that there is no single path to our economic goals. As we look for clues to solving our structural problems, we will all be best served if we learn from each other's domestic experience. In this sense, it is imperative that we engage in a cross-fertilization of successful economic policies. In other words, each of the leading national economies has its strong suits that the others should recognize and adapt to their own circumstances. Indeed, distinguishing the successes from the fai lures in the pool of world experience is what international economic policymaking is all about.