Demonstrators smashed bank windows, hurled stink bombs and surrounded the Berlin Opera House last week— taunting visiting monetary officials with charges of ignoring Third World poverty. But when the top bankers and government finance officials from 151 countries crowded into West Berlin’s vast Congress Hall for the annual meeting of the International Monetary Fund (IMF) and the World Bank, the mood was self-congratulatory. According to the IMF report, the world is enjoying buoyant growth almost a year after last October’s crash of equity markets had raised the prospect of a global recession. As well, finance ministers from the Group of Seven (G7) nations—Germany, Japan, Britain, France, Canada, the United States and Italy—noted that exchange rates are stable and that the U.S. current account deficit should drop to $156 billion this year from 1987’s $186 billion. Visibly heartened by the diagnosis, recently appointed U.S. Treasury Secretary Nicholas Brady, who is lobbying to keep the job if Vice-President George Bush wins the Nov. 8
presidential election, declared, “Prospects are excellent for a continuation of sustained growth with low inflation.”
But when the talks ended on Sept. 29, the chaos outside the meeting reflected the confusion inside. Doubts remained over whether the industrialized nations were progressing on the profound problems of foreign exchange instability, trade imbalances and the seven-year-old Third World debt crisis. IMF managing director Michel Camdessus criticized the United States and Canada for allowing their dollars to rise too high compared with other currencies. He added that, as a result, North American goods become more expensive and hamper attempts to relieve trade imbalances. Indeed, IMF statistics show that the U.S. current account deficit will remain at $156 billion in
1989 instead of dropping to $103 billion as many U.S. officials have been predicting for several months.
Officials from Third World debtor nations also claimed that the benefits of Western expansion have failed to trickle down to their level. Said Mexican Secretary of Finance Gustavo Petricioli Iturbide: “The so-called longest period of economic expansion since the Second World War has, for Latin America, meant six years of stagnation in which its per capita gross domestic product has fallen by five per cent.” New proposals to help combat starvation and debt received only mixed support from the officials at the World Bank and IMF annual meeting.
The most critical initiative to emerge from the talks was a new Japanese plan to restructure debt for the middle-ranking developing nations, including Brazil, Mexico and Nigeria. The debt of those three countries alone amounts to $266 billion. Under the plan, the developing countries would restructure some of their debt and convert the rest into bonds. Banks and other financial institutions would buy the bonds, and the debtor would guarantee the interest by placing collateral in escrow ac-
counts with the IMF. Bank of Japan governor Satoshi Sumita said that his country would substantially increase its direct foreign aid over the next five years to a reported $60 billion, compared with $30 billion in the past five. And the Japanese Export-Import Bank would offer a new program of loans at belowmarket interest rates.
Recipients of the loans could use the funds to buy products from other countries. But several central bankers raised concerns that the Japanese proposal would involve obligations from other G7 governments. And Brady said that the plan would conflict with the three-year-old program to award new loans only to countries that reduce the amount of state control over their economies and introduce market-oriented policies.
Some World Bank proposals were equally contentious. Members applauded plans to reduce hunger and increase the security of food supplies in sub-Saharan Africa. But World Bank president Barber Conable contravened IMF protocol by recommending $1.5 billion in new loans for Argentina before the IMF economic plan for all countries was in place. Observers said that the World Bank move could harm future co-operation between the two agencies, which are pivotal in global debt crisis management.
But it was the issue of exchange rates that seemed to command most attention among the Western finance ministers and central bankers, including Canadian Finance Minister
Michael Wilson. Meeting before the start of the main conference, the G7 officials renewed a pledge to work together toward stabilizing foreign exchange markets by keeping the U.S. dollar within a fixed, but unspecified, range against the West German deutsche mark and the Japanese yen.
The statement emerged as the greenback was trading at the upper end of the range that the G7 agreed upon last December, and the market interpreted that as a sign that monetary authorities had abandoned the G7 agreement and had decided to let the U.S. currency climb higher in value. But when traders pushed the dollar to 1.89 DM on Sept. 26, from 1.87 DM three days earlier, a number of central banks endorsed the G7 program by quickly selling U.S. dollars to bring it back into line.
The G7’s statement on exchange rates was aimed chiefly at preventing any disruption of financial markets in the weeks remaining before the American presidential election. Although some analysts had argued that the attempt to steady the dollar until Nov. 8 might benefit Republican presidential candidate George Bush, officials insisted that Western governments simply did not want the dollar to become an issue in the final stages of the election campaign by suddenly rising or dropping in value. Many experts say one reason is that the Reagan administration, on the way out, would be less influential or less willing
to take any major economic initiatives.
Still, many economists raised doubts last week that foreign exchange markets could remain calm until a new president is installed. Said a bank economist in Berlin last week, who asked not to be identified: “If the markets think [the U.S. dollar] is going to come unstuck after the election, they are not going to wait until Nov. 9 to sell dollars.” Some experts also said that the dollar would need to drop eventually to enable the U.S. trade deficit to continue shrinking. Said Italian Treasury Minister Giuliano Amato: “The recent dollar appreciation might itself be a source of market instability to the extent that it delays the long-awaited absorption of the U.S. external deficit.”
The tonic for the dollar is the toxin for the Third World. Higher interest rates will likely hold down inflation and strengthen the dollar, but each one-per-cent increase in interest rates adds $3.5 billion to the repayment costs of debtor nations. The World Bank’s Conable said that the existence of poverty is cause for “moral outrage.” But the Berlin session failed to come up with a decisive plan that would help ease poverty in the developing world while allowing those countries to pay their debts to foreign bankers. It did, however, heighten the momentum toward doing just that.
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