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Macroeconomic Assessment

T h is r e p o r t has been p r e p a r ed by a group co n v en ed by
CEA Chairman C h a rle s S c h u lt z e o f th e U n ite d S t a t e s a t th e
r e q u e s t o f th e P r e p a r a to r y Group f o r th e Bonn Summ it. The
group in c lu d e d r e p r e s e n t a t i v e s from th e se v e n l a r g e s t i n d u s t r i a l
c o u n t r i e s and th e E.C . Com m ission (a l i s t o f p a r t i c i p a n t s i s
a t t a c h e d ) . The group met in W ash ington on May 2 0 -2 1
to a s s e s s th e c u r r e n t m acroeconom ic s i t u a t i o n and f u t u r e
p r o s p e c t s in t h e i r c o u n t r i e s and t o c o n s id e r w hat p o l i c y
m easu res m ight be c o n s id e r e d in l i g h t o f t h e s e c ir c u m s t a n c e s .
The group r e c o g n iz e d t h a t t h e i r own eco n o m ies and th e
w o rld economy have n o t y e p f u l l y r e c o v e r e d from o r a d j u s t e d
t o t-he sh o ck s o f th e e a r l y 1 9 7 0 s , w h ich gave r i s e t o an
u p s u r g e o f i n f l a t i o n , th e em ergence o f u n p r e c e d e n te d d e f i c i t s
in th e c u r r e n t a c c o u n ts o f many c o u n t r i e s , and t h e d eep
w o rld w id e r e c e s s i o n o f 1 9 7 4 -7 5 .
Some a s p e c t s o f our econ om ic p erform an ce h ave im proved
in r e c e n t y e a r s .
I n f l a t i o n r a t e s in our se v e n c o u n t r i e s ,
w hich ranged from 6 p e r c e n t to 25 p e r c e n t
in 1975 have b een b r o u g h t down to a ra n g e from
3 p e r c e n t to 13 p e r c e n t .
C u m ulative r e a l o u tp u t g a in s a v era g ed 9 .7
p e r c e n t from 1975 t o 1 9 7 7 .
Some c o u n t r ie s w hose e x t e r n a l f i n a n c i a l
p o s i t i o n s w ere e x tr e m e ly p e r i l o u s have a c h ie v e d
s i g n i f i c a n t im provem ents in t h e i r paym ents p o s i t i o n s .
In a d d it io n , s e r i o u s t h r e a t s t o th e s t a b i l i t y o f th e
w o rld economy have been a v e r t e d .
D e s p it e p r e s s u r e s g e n e r a te d
by u n p r ec e d e n ted paym ents im b a la n c e s and d e p r e s s e d l e v e l s o f
em ploym ent and o u tp u t, a l i b e r a l w orld tr a d in g sy s te m has
been m a in ta in e d e s s e n t i a l l y i n t a c t , and th e momentum f o r
f u r t h e r r e d u c tio n o f tr a d e b a r r ie r s in th e Tokyo Round o f
tr a d e n e g o t i a t i o n s has b een s u s t a i n e d .
The econ om ic problem s t h a t s t i l l f a c e us a r e s e r i o u s ,
h ow ever.

Our econ om ies c o n t in u e t o f a l l s h o r t o f t h e i r
p r o d u c tiv e p o t e n t i a l and in many o f our c o u n t r i e s
th e gaps have w id en ed in th e p a s t y e a r .
s m a lle r i n d u s t r i a l c o u n t r i e s have had e v e n more
d is a p p o in t in g r e c o v e r i e s in o u tp u t and t h e
d e v e lo p in g c o u n t r i e s have^ n o t y e t r e c o v e r e d from
th e s e r io u s s e t b a c k s th e r e c e s s i o n d e a l t t h e i r
d evelop m en t p r o g r a m s.

The unemployed constitute a greatly expanded group
compared with the record of the fifteen years prior
to 1975.
Productive investments are currently accounting
for smaller shares of total output in our countries.
Hence the growth of productivity has been impaired
and future employment opportunities have been reduced.
Although down from peak levels, continued high and
widely differing inflation rates pose a continuing
threat to economic stability and a constraint on
more rapid recovery.
Government budget deficits are very large by
Some important imbalances in current accounts
persist and new ones have emerged or become more
New and more subtle forms of protection are being
introduced, threatening both the health of the
international trading system and the longer term
rise in living standards.
Current Economic Conditions and the Outlook for this Year
and Next
In 1977 the growth of real GNP in our economies averaged
3.9 percent. Growth in the European Community was only 2.2
percent. The growth of industrial output was generally less
than total GNP growth, as shares of government and other
services in GNP rose. Unemployment rates were unchanged or
rose in 1977 except in the United States, and, in early
1978, unemployment rates in all countries stood substantially
above the average unemployment rate for the ten years prior
to the 1975 recession.
Several developments, which vary in importance from
country to country, have meant that the lowest unemployment
rates that could be achieved without accelerating inflation
are somewhat higher now than in the 1960s. These developments
include rapid growth in the numbers of young people and
women entering labor markets, higher levels of income maintenance
programs for the unemployed, and slow rates of capital
formation combined with rapid labor force growth. Nowhere,
however, do these factors account for the full increase in
unemployment rates. In differing degrees, scope remains in
our countries for expansion of employment and output before


, \


- 3 labor market tightness would lead to accelerating inflation,
although some shortages of workers with particular specialized
skills exist.
Real growth in our economies may average close to 3.5
to 4 percent in 1978, but outside the United States unemployment
is unlikely to be substantially reduced. Growth in other
industrial countries will average less than in our countries.
Some recovery in economic activity occurred in late 1977 and
early this year in those economies that had been particularly
depressed, but the hoped for continued acceleration to more
rapid growth rates is now in doubt. Growth of the U.S.
economy, despite a poor first quarter, should remain above
the growth rate of potential output but average much less
than in 1977 as labor constraints begin to loom closer.
Thus, actual growth for calendar year 19 78 might be less
than expected earlier in Germany, Japan, and the United
States. Moreover, in none of our countries would growth
exceed objectives set earlier.
The outlook for growth in 1979 with no adjustment of policies
would not appear significantly different from 1978. Profits
and capacity utilization rates do not currently seem favorable
to significantly stronger growth of investment, and consumer
savings rates are unlikely to come down sharply. Thus many
of our countries could enter a third year in which no progress
is made in closing sizable output gaps.
Outside of North America significant declines in
inflation occurred in 19 77 and have continued into early
1978. These improvements have been associated with a slowing
of nominal wage increases and a reduction of underlying
inflation trends, but part of the improvement from 1976 to
1977 in several countries is attributable to contrasting
exchange rate developments in the two years.
It will be
difficult to achieve reduction of inflation in 1978 in Italy,
the United Kingdom, and France. Inflation in Germany and
Japan is unlikely to hold at the very low rates of recent
months, but the pace of inflation should be moderate through
the rest of the year.
Although the Canadian and U.S. inflation records provide
little hope that the underlying trends of prices and wages
in these countries will be reduced most of the modest increase
in their inflation rates is attributable to increases in
food prices and the effects of exchange rate changes. These
movements are unlikely to be reversed, but their contribution
to inflation rates should subside in the period ahead.
For our countries to achieve reductions in inflation
rates in 1979 will require favorable developments in nominal

- 4 -

wages and productivity performance. For many countries the
most likely outcome is that price rises will be as large in
1979 as in 1978. The United States and Canada, which are
most likely to post some increase in inflation rates this
year, may be more likely to show a small decline next year.
Current account imbalances remain both a reflection of
the instability of the world economy and a source of additional
instability. The external balance situation has evolved
rapidly, however, and the focus of concerns has shifted.
The OPEC surplus has declined substantially, and, although
still large, it does not dominate the global pattern of
current accounts as it did. This surplus, which exceeded
$60 billion in 1974, declined to about $35 billion in 1977 and
will probably be in the vicinity of $20-25 billion this
year. A little more than a year ago the external deficits
of the United Kingdom and Italy were of major concern.
Over the past year both countries have moved into current
account surplus, although the stagnation of domestic industrial
activity that is partly responsible for these surpluses
means that the fundamental adjustments are less than might
first appear. Also, the large current account deficit of
France, which was a significant constraint on economic
policies there, has been reduced.
At the same time, the Japanese surplus and U.S. deficit
on current account have grown phenomenally and pose serious
adjustment problems. A Canadian deficit that is large relative
to GNP has persisted, and the German surplus is large, although
a smaller percentage of GNP than in 1974 and 1975.
The deficits of some of the smaller industrial countries
have shrunk, but there is still an important group of these
countries for whom current account deficits are an overriding
policy consideration. Another group of smaller industrial
countries has had persistent and relatively large surpluses
that have also contributed to instability in the international
economy. While the circumstances of the non-oil LDCs as
a group have improved, a number of individual countries
still have serious balance of payments problems.
In 19 78 the Japanese surplus and U.S. deficit and the
more modest German surplus could exceed their 1977 levels,
given the J-curve response of current accounts to the exchange
rate changes of 1977 and early 1978. The prospects are
better for some adjustment of these imbalances in 1979 as
past exchange rate changes begin to have a significant
effect on trade volume. No dramatic change is likely if
growth rates remain on their present course, however.

Nonresidential investment in fixed capital has declined
significantly as a share of GNP since 1970 in all of our
countries except Canada and France, and in these latter countries
investment growth slowed markedly in 1977. Weak investment
performance reflects lower expectations and greater uncertainty
concerning profits. Confidence is lacking that recovery can
be maintained until present margins of unutilized capital
are removed and profit margins are restored. Moreover, potential
investors are concerned over rising costs that appear less
controllable than before.
Real investment spending is expected to grow more rapidly
in our economies this year than in 1977, but performance is
still likely to be weaker than desirable. A stronger recovery
of investment in 1979 will depend on success in establishing
conditions for sustained expansion of our economies and rising
business confidence.
Finally, our countries are beset by serious imbalances
in important industries such as steel, shipbuilding, textiles,
and energy. While economic and structural change has been
very rapid throughout the postwar period, dislocations have
been even more severe since the early 1970s.
These dislocations
are due to rapid movements in oil and commodity prices, slower
productivity growth, the emergence of industrial competition
from less developed countries, and, of course, chiefly the
deep world recession.
Constraints on Improved Economic Performance
These constraints are of three types. First is the
constraint imposed by the relationship between the rate of
economic growth and inflation. Even where the limits of
resource availability have not been reached, institutional
factors in the setting of prices and wages set some limit to the
economic growth that is consistent with the objective of
controlling or reducing inflation. Pressing too close to
the limits set by the availability of labor, capital, and other
resources, or moving toward them too rapidly, may rekindle
inflationary pressures. Second, in addition to these internal
constraints, obstacles to growth may arise because of the high
degree of openness of economies today. An external
constraint is imposed on some countries by the need to maintain
sustainable current account positions and on others by the
importance of export growth to achieve a balanced expansion.
Third, there are political and economic constraints on the
use of policy instruments. Even where the threat of inflation
is not an obstacle to higher growth, and when external

constraints have been removed, some governments feel that
measures taken by them to stimulate growth might themselves
set off inflationary expectations and prove ineffective in
increasing output. Moreover, unless they contribute to the
restoration of confidence and the reduction of uncertainty,
policies to promote higher growth may prove to some extent
If internal constraints were the dominant ones in all
cases there would be no scope for international cooperation
to improve economic performance. Most countries today,
however, have at least some scope internally to grow more
rapidly while still pursuing objectives with respect to
inflation. The external constraints that countries face
could be relaxed somewhat by international cooperation in
setting economic policies. Moreover, a concerted international
approach to an increase in economic growth would reduce the
amount of governmental stimulus required by an individual
country to achieve any given growth objective. Thus, for
most industrial countries, relaxing external constraints would
make increased growth possible in 1978 and 1979. To allow
continued progress beyond 1979, it will be necessary to introduce
policies that relax countries' internal constraints as well.
Internal Inflation Constraint
The ultimate constraint on economic performance
is the availability of resources and .productivity in their use.
Output cannot be pushed beyond the limits set by available
labor, capital, and resources. Moreover, moving close to
these limits causes wages and prices to accelerate. Outside
the United States, there is sufficient slack to allow significantly
faster growth over the next year and a half than contained
in the outlook above. Over the longer term, a strong investment
performance and measures to lower the rate of unemployment
consistent with non-accelerating inflation will be needed to
relax internal constraints on growth.
There does not appear to be an immediate threat of new
inflation from excess demand and tight labor markets.
Japan and Germany, inflation rates have slowed substantially
and are now at relatively low levels. Excess demand inflation
does not threaten in these countries, although care must be
taken that policies to achieve more rapid growth be designed
to avoid raising inflationary expectations. In other countries,
inflation rates still remain high. In some of these countries —
but not the United States — a small increment to growth
would not impede further progress against inflation. The
United Kingdom and Italy, which have made substantial progress
in reducing inflation over the past year, but in which rates of

inflation still remain high, must continue their efforts. In
France, where progress against inflation has been less, and
in the United States and Canada where the rate of price
increase has actually edged up, relatively greater priority
must be assigned to anti-inflationary measures. With this
in mind the United States announced in April a voluntary
incomes policy and in May scaled back and postponed tax
reductions for fiscal year 1979. The need to reduce inflation
in our countries implies caution in avoiding excessively
rapid growth, but it should not preclude a gradual reduction
of unemployment rates.
Emphasis must be given to policies that attack the
mechanisms of cost/price and wage/wage spirals. The success
of such policies will hinge on achieving a moderation of
income demands by all groups in our countries. The difficulties
in achieving this must be clearly acknowledged. Formal wage
and price controls have often not reduced the competition
for higher income shares, but only transferred them from the
marketplace and bargaining table to the political arena.
Moreover, controls, where used, lead to rigidities in wages
and prices that increasingly undermine their role in allocating
resources. Hence, countries have recently relied more
heavily on programs of voluntary wage and price moderation
backed up by guidelines and intensive consultations. Greater
stress has also been placed on efforts to reduce inflation
in the government sector. The United Kingdom has achieved
considerable success over the past year with a program along
these lines, and the United States, among others, has recently
taken steps in these directions.
External Constraints
Current Account Constraint — While a large current
account deficit is not necessarily a constraint on growth,
it raises the risk of a depreciation of the currency if
there are actual or perceived problems of financing the
deficit. Exchange rate changes can contribute to the adjustment
of imbalances and thus obviate the need to reduce growth in
order to keep the current account within sustainable limits.
Attempts to resist exchange rate pressures when there are
large imbalances are usually ineffective. On the other
hand, failing to deal with the underlying problems is costly.
Depreciation tends to add to inflationary pressures and may
involve a high inflationary cost for a small current account
improvement, particularly where trade involves a large share
of total economic activity and where wage earners are well
protected against inflation by indexing schemes.
In addition,

- 8 imbalances can become so large and so persistent that a
slowing of growth becomes an indispensable element of the
adjustment process.
Although a number of countries are in much improved
positions today compared with a year and a half ago, concerns
about their current accounts would prevent them from
strongly pursuing more expansionary policies. The United
Kingdom, Italy, and possibly France have eliminated their
deficits, but faster growth than projected for these countries,
without correspondingly faster growth by others, could lead
to a reemergence of current account problems. For Canada,
which has the largest external deficit relative to GNP among
the major countries, current account problems impose some
constraint on growth, but internal constraints appear to be
dominant and would inhibit policies to achieve more than a
marginal increase in growth even if the current account were
to improve. Any shortfall in growth abroad, however, would
significantly tighten the external constraint in the future.
Current account constraints are more serious in some of the
smaller industrial countries and a number of developing
countries, and could soon force some countries to take restrictive
Current account deficits would bind less tightly if our
countries were to increase their growth rates by moderate
and varying amounts. Each country could then anticipate
stronger export growth to match the increased imports
resulting from additional domestic demand stimulus.
addition, leadership by our countries in a cooperative effort
would make policies to achieve somewhat more rapid growth
feasible for other countries.
It is necessary for countries
in surplus to ensure that their growth potential within their
internal constraints is indeed achieved. It should not be
expected, however, that countries in surplus would alone
provide the demand stimulus to raise worldwide growth rates.
Rather, their actions would be part of a process of relaxation
of current account constraints as other countries were able
to export more. Within the limits imposed by internal con­
straints, other countries would then be in a position to follow
more expansionary policies. These policies, in turn, would
serve to alleviate further the external constraints on other
countries. A mutual effort to achieve faster growth in 1979
could add significantly to the average growth rate in Europe
where external constraints are most important, without exceeding
either external or internal constraints. Some countries would
be able to raise growth more than the average while there would
also be a few countries that would be unable to do more than
accept the relatively small additional stimulus they received
from stronger exports.

- 9 Although the U.S. deficit is very large, it is not the
limiting factor on U.S. growth. Internal constraints would
prevent aiming for higher growth even if the deficit were to
shrink. Moreover, since foreign trade is relatively small
compared to total U.S. output and since wages respond relatively
slowly to higher import prices, real exchange rate movements
can be an effective adjustment mechanism for the United
States. Nevertheless, it must be recognized that given the
central importance of the U.S. dollar in international
financial markets, excessive depreciation of the dollar
would be a destabilizing factor in the world economy. Thus,
steps that the United States could take to reduce its deficit
consistent with its internal goals would enhance global
prospects for growth.
Global Energy Constraint — Over the medium term, global
economic growth may be constrained by limited potential for
increased oil production. A rapid rise in oil consumption
could remove the current glut of oil and lead to sharply higher
prices. Fears that future growth might be limited by an oil
constraint also tend to depress business investment in the
short run. Thus measures taken by countries to reduce energy
consumption and develop alternatives to imported oil can make
possible stronger gtowth, both for themselves and for others.
The United States must play a central role in implementing
strong energy policies. A reduction of U.S. oil imports would
not only help to alleviate the global energy constraint but
it would also contribute to a reduction in the U.S. current
account deficit without posing the risk that current account
constraints on others would impinge more closely.
Constraints on Exports — In a world of slow economic
growth, countries with current account surpluses face an
obstacle to more rapid growth from slow growth of export
markets. Their ability to sustain expansion solely from
internal demand is limited because opportunities for profitable
investment are restricted and there is a risk that some sectors
would reach capacity while other sectors remained depressed
and unemployment remained high. Moreover, surplus countries
with low internal growth face the threat of significant
exchange rate appreciation that would disrupt export markets
and depress growth further.
Constraints on Policies
Government Deficit Constraint — Although the appropriate­
ness of any particular government deficit depends crucially
on other economic variables, for several reasons governments
are inhibited from adopting expansionary fiscal policies when

budget deficits appear large by historical standards.
Institutional and political considerations discourage large
deficits in all of our countries. A major concern is that
stimulative fiscal policies may be difficult to withdraw once
introduced, and thus a budget deficit that might be quite
appropriate under current conditions would persist into the
future and would ultimately lead to overheating of an economy,
more rapid inflation, and crowding out of private investment
spending. Thus, stimulative fiscal policies could have
adverse effects on inflationary expectations. Fiscal stimulus
must be designed to avoid these risks. In general, this
might suggest a preference for general tax cuts over spending
and transfer programs, which are politically more difficult
to dismantle. Especially in countries with tax structures
that generate increases in revenues more than proportionally
to income growth, taxes may be cut with less risk that govern­
ment deficits will not come down as recovery proceeds. In
some countries, however, large leakages of tax cuts into
private savings have led some to question whether they can
provide an effective stimulus. Each country faces different
circumstances in making the choice as to what mix of fiscal
stimulus to employ.
A second source of concern with a large deficit is the
possible inadequacy of countries' financial markets to the
scale of financing that is implied. If financial markets
are segmented and institutional rigidities exist, it may be
difficult to transfer private savings to financing the
public deficit. Over time, development of improved financial
institutions and financing arrangements can alleviate this
problem, but in the near term some see limits on the deficits
their governments can incur without straining markets and
jeopardizing the flow of funds for private investment.
Whatever the extent and type of fiscal stimulus a country
chooses, additional growth that results will be greater if
other countries are also moving to higher growth rates. A
country with a large trading sector would find much of its
fiscal stimulus dissipated in higher imports if it were to
act alone. The hoped for improvement in the investment climate
would be limited. As a part of a concerted program, however,
the degree of fiscal stimulus needed in any one country would
be smaller, and to the extent that the government deficit is a
constraint, this constraint could be relaxed.
External Constraints on Monetary Policies — Our monetary
authorities have moved in recent years toward giving more attention
to the medium-term growth of monetary aggregates as a means
of restraining inflationary pressures. This shift in emphasis
has been intended partly as a means of ensuring that monetary

• -u J

- 11 ~

policy is consistent with reducing inflation over the medium
term. Within these self-imposed constraints, some countries
have at times found it necessary to tighten monetary conditions
further to prevent a too rapid or excessive depreciation
of their currency. As a result, the mix of monetary and fiscal
policies has retarded investment spending relative to other
forms of spending. At the same time, countries with appreciating
currencies have occasionally found their control over monetary
growth rates threatened by the need to intervene in exchange
markets in order to restore order.
Concerted policies to achieve growth rates among major
countries consistent with a reduction in current account im­
balances would permit monetary policies to be set more closely
in line with domestic needs.
Political and Regulatory Hindrances to Investment —
Challenges to planned government and private sector invest­
ment either in the political process or in regulatory and
legal processes, often because of environmental concerns,
have held down the growth of expenditures in some cases.
Uncertainties associated with regulatory processes may also
have inhibited private investment even when it has not blocked
New approaches to these problems will be needed. First,
governments should consider regulatory analysis programs, so
that the economic and inflationary consequences of regulations
will more explicitly be taken into account, and cost effective
solutions adopted to deal with social and environmental problems.
Even with improved analysis and procedures, it is likely that
new social and environmental concerns will lead to some delays
and higher costs. Therefore, more options for public projects
and new incentives for private investment may be needed to
compensate for the new risks and higher costs arising from
new concerns and to maintain adequate investment. The negative
impact on the growth of demand can also be overcome in the
short run by stimulus to other kinds of spending, public or
Feasible Economic Objectives
The paths that our economies are likely to follow through
1979 if current policies are maintained would be unsatisfactory
in several respects. Unemployment is unlikely to come down
significantly and may continue rising in Europe. Excess
capacity would remain substantial. Such an outcome would
have several consequences. First, of course, would be the
tragedy of unemployment — particularly among the young whose
development into productive members of the labor force is

- 12 being delayed. Second would be the continued waste of
material well-being, with lower investment and consumption
and delays in meeting important social and economic objectives.
Third, low rates of capacity utilization would continue to
limit investment demand and thereby lower the trend of
potential output and employment. Fourth, costs of adjustment
to longer term structural changes in patterns of demand and
supply would be higher than if the capital and labor that
was no longer needed in one industry could be immediately
employed in growing industries. Under conditions of weak
overall demand there are strong pressures to adopt defensive
policies that carry risks of inhibiting adjustment further,
rigidifying economies and rendering them less productive
and more prone to inflation. Finally, each year of slow
growth and heightened uncertainty results in a further
shortfall of capital accumulation and raises the spectre
of future supply constraints and structural unemployment.
At the same time that the growth of output would be less
than attainable with available resources, inflation would
continue to be an important problem in most countries. Given
the success already achieved in bringing down unemployment in
the United States, and with the persistence of inflation at
rates of 6 to 7 percent, inflation is the relatively more urgent
problem there. Only in Japan and Germany can the short-run
inflation situation be given a relatively low weight in current
economic policy decisions. Of course, these countries too must
avoid actions that would lead to significantly greater inflationary
pressures in the future.
The outlook for the period ahead also entails current
account imbalances that could continue to be a destabilizing
factor in the world economy. Thus, they point toward serious
risks of further disturbances in exchange markets that could
prevent the achievement of even the modest growth in the outlook
sketched above. Such disturbances could lead to worse than
projected inflation rates in some countries and disrupt export
industries in others.
The group has explored the scope for improving on the
current outlook, taking note of work by the staffs of interna­
tional organizations, and considered what measures would
contribute to a better outcome. In doing so it has paid close
attention to the constraints on economic policies and results.
Given the constraints, it does not seem possible to eliminate
our economic problems quickly. We do not expect that one set
of measures put in place this year will be sufficient to resolve
the current problems. It has been three years since the trough




- 13 of the recession and some of the origins of the current
constellation of economic problems can be traced back at least
ten years. Governments have taken steps to deal with the
problems, often with a noticeable effect, but they have not
yet been eradicated. Many economies have become so adapted
to slow growth and idle resources that, inter alia, a sustained
impetus to demand may be needed before the autonomous forces
of expansion become strong enough to maintain growth, let
alone pose the need for widespread restrictive action. More­
over, it is clear that inflation will not be unwound quickly
and that the mechanisms that sustain inflation, even in the
absence of excess demand, will not be dismantled easily.
Simply because solutions will take time, it is essential to
begin immediately and make progress as rapidly as possible.
The group agrees that the following principles should
govern the development of national policies as a part of a
cooperative international effort:

, A. The development of a common strategy for more growth
and employment must be regarded as a chief task of international
economic policy. All countries should pursue policies of
promoting growth as far as their constraints permit.
accordance with the different national starting points and
relative economic positions, the scope for action available
will, of course, differ from country to country.
B. To sustain recovery and attain full utilization of
resources requires that we continue to make progress in
reducing and controlling inflation. In countries where
inflation is now low, we should avoid rekindling inflationary
In countries where inflation remains high, the
goal should be to reduce inflation in 1979 through appropriate
fiscal and monetary policies and measures to deal with
structural impediments to price stability.
C. Raising the share of industrial investment in GNP in
our countries would be desirable. Governments should ensure
that growth occurs in ways that increase business confidence
and improve the prospects for profits.
D. Policies to achieve more sustained growth and better
control of inflation will support the achievement of greater
stability in exchange markets.
In turn, exchange market
stability is essential to sustained recovery. Thus, both
countries in surplus and countries in deficit should work

to reduce these payments imbalances and avoid extreme exchange
rate fluctuations. Countries in strong external positions
should also consider increased development assistance and
removal of any existing obstacles to capital outflows, although
such measures are not a substitute for adjustment of current
account imbalances.
E. Pressures to resort to protectionism or increased
government intervention must be resisted by our governments.
Often these prop up or subsidize uneconomic industries,
postponing inevitable structural adjustments.
In the long
run, such a course endangers productivity and the growth of
living standards.
In place of such policies, countries should
introduce policies to promote structural adjustment through
measures that aid the transfer of labor and capital to more
productive, fast growing sectors. Protectionist measures
should also be avoided with a view to assuring a growth in
world markets for the products of developing countries.
F. Our countries and others must pursue vigorous
policies of energy conservation and a development of new
energy resources with particular emphasis on measures that
will reduce oil imports.
Elements of a Concerted Action Program

The Economic Assessment Group agreed:
Significant policy actions are economically
necessary and feasible to improve the performance
of our economies.
Achieving non-inflationary full employment will be
an extended process. Short-term measures alone
will not be sufficient.
It will require changes
in our attitudes and institutions.
But we must
begin now if we are to achieve results in 1979
and beyond.
Taken separately many of the necessary actions
are likely to be politically difficult and
economically risky; taken in concert they will
prove politically acceptable and enhance our
common economic prospects.


A necessary condition for sustained, non-inflationary
growth is the appearance of more tranquil exchange
markets and current account adjustment. The exchange
market and balance of payments conditions necessary
for world economic recovery will depend upon the
avoidance, especially in the United States, of


- 15 conditions which threaten accelerating inflation.
Another central requirement for such conditions is
a definite commitment by the United States to an
effective energy policy — in particular, a specific
commitment by the United States to raise domestic
oil prices to world market levels, beginning in 1978
and completed no later than mid-1980.

Throughout most of the industrial world, unused resources
are sufficient, in varying degrees, to permit an increase
in economic growth without setting off new inflationary
pressures. Only if efforts to increase growth are
undertaken on a concerted basis, however, can undesirable
balance of payments consequences be avoided and a proper
role for export industries be maintained.

While they should not be expected to make efforts
alone, Japan and Germany must play an important
role in this process. Both their balance of payments
and domestic inflation give them significant room,
over the next eighteen months, to achieve rates of
growth significantly higher than in 1977.


The principal Japanese contribution to concerted
actions consists of a determination to undertake
necessary actions to achieve its own growth and
current account objectives for JFY 1978 and beyond.
This may require (i) a relatively prompt decision
on whether supplemental measures will be necessary
to keep economic growth on the targeted course, and
(ii) the use of other measures to reduce and
eventually, under present international economic
conditions, to eliminate the current account


The central problems for Germany to resolve in
the context of a concerted action program relate
to (i) the effectiveness of alternative tax and
expenditure measures for promoting self-sustaining
growth, (ii) the timing of those measures, and
especially (iii) the political and institutional
feasibility of various policy decisions.


Outside of the United States, Japan, and Germany,
the Summit countries can increase their rates of
economic growth in the context of a concerted
action program. Some of the higher growth will
occur automatically as the resulting expansion in
world trade increases exports. Some non-inflationary

- 16 actions could also be taken by these countries to
increase growth.


In the spirit of concerted action, other members
of the European Community and other industrialized
countries could take action appropriate to the
strength of their economic positions to promote
faster growth. Others should avoid taking restrictive

A commitment to a free and open trading system on the
part of all countries is a central part of a concerted
action program. The specifics of the necessary action
are being developed elsewhere in the preparatory work
for the Summit. There are three essential components
of that commitment:
agreement to a sizeable reduction in tariffs
as part of the MTN, including fair access to
the markets of our countries for the products
of developing nations;
agreement to substantial removal of non-tariff
barriers to trade;
agreement to avoid protectionist measures.


Another essential element of a successful concerted action
program would be an agreement to a general policy of
promoting rather than impeding structural adjustment.
This requires: on the one hand, promoting mobility of
labor and capital, and increased scope for market forces;
on ther other, avoiding measures which perpetuate unviable
patterns of industry and trade.


Some countries have already taken actions within the
spirit of what we are suggesting. Constitutional
and political realities in each country must determine
the appropriate timing for the announcement of further
actions. We have not attempted to make specific
recommendations on this matter.
In general, however,
we believe that wherever possible, formal announcement
of measures be made in conjunction with the Summit even
though preparatory consultations within each country
may have already publicized the content of the measures.
The impact of simultaneous and coordinated annauncpraents
could well exceed the sum of the impact^ of ^^u^ces-sioj
of announcements.


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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102