PRESIDENTIAL BRIEFING ON ECONOMIC POLICY COORDINATION AMONG SUMMIT COUNTRIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP92T00533R000100060011-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 10
• Document Creation Date: December 21, 2016
• Document Release Date: May 12, 2008
• Sequence Number: 11
• Publication Date: May 15, 1987
• Content Type: MEMO

Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
STAT
STAT
WHICH MAYBE S 6
(47)
Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
 25X1
15 May 1987
MEMORANDUM FOR: Stephen P. Farrar
Director, International Economic Affairs
National Security Council
Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3 j
Central Intelli
Chief, West Europe Division
Office of European Analysis
SUBJECT: Presidential Briefing on Economic Policy
Coordination Among Summit Countries
1. Attached please find the briefing you requested from
Deane Hoffman on the current account imbalances facing the Summit
countries. It is based on a typescript, also attached, done at
the request of several US policymakers involved in preparations
for the Venice Summit.
2. We hope you find the material useful in preparin for the
21 May bripfina of the n
As part of the pre-Summit work, we prepared a
collection of 24 papers dealing with a range of Summit issues,
including the typescript on policy coordination noted above.
Steve Danzansky and Fritz Ermarth have copies of the book at the
3. We have appreciated the opportunity to help you and if we
can be of further assistance please call me
Attachments:
As stated.
25X1
25X1
25X1
25X1
25X11
Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
 Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
Briefing Paper on the Current Account
Imbalances of the Summit Countries
We see ominous clouds on the world economic horizon.
The huge existing current account imbalances of the major
countries, in our view, are not sustainable, but the
dollar's extraordinary decline to date is not enough by
itself to solve the problem. The US-Japan imbalance is by
far the major problem, though the West GerFnan surplus is not
insignificant.
What is required, according to our analysis, is a
coordinated approach that combines a substantial increase in
fiscal stimulus in Japan and West Germany, planned
reductions in the US fiscal deficit, and further exchange
rate adjustments. Without such an approach, the risks are
high of the non-US OECD countries slipping into recession.
we believe that a
significant shift to fiscal stimulation is very unlikely,
and further, that there is a danger Tokyo may not follow
through completely with its proposed one-year stimulus
package. The willingness of both countries to take
appropriate measures depends on a host of domestic political
contraints and their own assessments of the severity of the
problems. Even a strong US demarche focused on the downside
risks would probably not work unless they perceive a real
threat to domestic economic growth.
-- While we doubt that Prime Minister Nakasone has much
room to maneuver at this time beyond the announced
$34 billion stimulation package, the danger is that
this package may contain a fair amount of window
dressing. A strong US demarche might help persuade
the Prime Minister to work hard to maximize the
package's stimulative impact.
-- West German Finance Minister Stoltenberg is a strong
advocate of fiscal austerity. Although Economics
Minister Bangemann indicated at the recent OECD
ministerial that Bonn would reconsider its economic
policy if growth remained slack, Stoltenberg
afterward stressed that West Germany already has
done all it can to promote growth. In any case, we
believe stimulative measures, if taken, would likely
be modest.
Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
 Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
Despite the dollar's extraordinary decline.,* our
analysis, as well as studies by the OECD,
and others, indicate that this is not enough
by itself to significantly reduce the huge current account
imbalances of the US, Japan, and West Germany. If we assume
no further changes in exchange rates, the US budget deficit,
or foreign government policies (beyond the fiscal packages
that Tokyo and Bonn are preparing for 1987 and 1988,
respectively), and if OECD economic growth, is steady at
2.5-3.0 percent annually, we find that (see Table 1):
-- The US current account deficit would merely level
off for two years and then resume its rapid rise
because of rising debt service costs, while the
Japanese surplus would remain huge and the West
German surplus would decline moderately.
-- Latin America -- which includes most of the troubled
LDC debtors -- would do well, registering solid GDP
growth and declining current account deficits
because exports would increase -- their currencies
have moved with the US dollar.
This projection, however, appears untenable because the
world will not continue indefinitely to absorb huge amounts
of US debt -- at least not at current interest rates.
Hence, we would expect further significant dollar
depreciation as a result of the continuing runup of US
foreign deficits.
An additional significant depreciation of the dollar --
on the order of 30 percent -- accompanied by success in
reducing the US budget deficit, in line with targets in
Gramm-Rudman, would result in a major improvement in the US
current account but cause serious economic difficulties for
Europe, Japan and the less developed countries (see Table
2).
*Since February 1985 we calculate that it has plunged 32
percent against the other OECD currencies on a real,
trade-weighted basis --.the sharpest decline ever recorded
by a summit country currency in a 26-month period (see
figure).
Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
25X1
25X1
 Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
-- The US current account deficit would fall to a
manageable $25 billion after four years. But the
Japanese and West German surpluses measured in
dollar terms would remain large, essentially putting
the burden of adjustment on other OECD countries.
-- The other Summit countries should find this policy
scenario particularly worrisome since this sharp
improvement in US price-competitiveness would lead
to zero economic growth in the rest of the OECD for
two years.
-- The Latin American economies would be hurt badly by
rising import prices and falling exports.
Our analysis indicates that the least painful way for
the world economy to get out of the current imbalance is
through a difficult-to-achieve combination of US fiscal
restraint, foreign fiscal expansion, and less drastic
exchange rate changes (see Table 3). The US suffers,
however, in that economic growth falls to 1.5 percent
annually in 1989-90:
-- Specifically we assume that:
o the US budget deficit falls to zero over four
years as prescribed by Gramm-Rudman;
o to offset this the Japanese deficit increases to
nearly 5 percent of GDP and the West German
deficit rises close to 3 percent of GDP;
o the yen and mark appreciate an additional 20
percent and 10 percent, respectively, in real
terms.
-- In this case the US current account deficit would be
cut in half over four years, while the West German
surplus would disappear and the Japanese surplus
would decline by three-fourths -- all without
inflicting recession on any country.
-- Latin America would do very well. Its current
account would move into substantial surplus while
economic growth would average slightly over 4
percent annually.
Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
 Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
This scenario is not falling into place, however,
because of Japanese and West German unwillingness to provide
the needed fiscal stimulus. In order to try to persuade
Tokyo and Bonn of the need for action, it may be useful to
stress that the likely outcome in the absence of any action
-- further dollar depreciation and cuts in the US fiscal
deficit -- would be much worse than in a policy scenario
based on coordinated action and much more expansionary
Japanese and West German fiscal policy.
Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
 Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
TABLE 1
Summit Countries: Baseline Projections of Current Accounts and Real GNP Growth*
United States Japan West Germany Other Summit Other OECD Latin America
Current Account
(billions US $)
1987
-144
71
43
-9
-5
-9
1988
-143
67
32
-20
-14
-8
1989
-156
73
24
-29
-7
-1
1990
-180
86
25
-33
-3
1
Real GNP Growth
(percent)
1987
3.0
3.0
1.5
2.6
2.1
4.1
1988
3.0
3.5
2.0
2.4
2.5
4.1
1989
2.5
3.8
2.8
2.5
2.5
4.1
1990
2.5
3.8
2.8
2.5
2.5
3.9
-----------------------------
*These baseline projections are not forecasts. They assume that the real exchange rates and foreign government
policies in place or planned in late April are unchanged. The US deficit as a share of GNP remains unchanged over the
projected period.
Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
 Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
TABLE 2
Summit Countries: Effects of 30 Percent Real Dollar Depreciation Combined with US Gramm-Rudman
Fiscal Targets
United States Japan West Germany Other Summit Other OECD Latin America
Change Change Change Change Change Change
from from from from from from
Level Baseline Level Baseline Level Baseline Level Baseline Level Baseline Level Baseline
Current Accoount
(billions US $)
1987
-142
2
77
6
60
17
-5
-4
-1
4
-18
-9
1988
-84
59
63
-4
56
24
-41
-21
-30 .
-16
-17
-11
1989
-44
112
65
-8
46
22
-76
-47
-45
-38
-6
-5
1990
-25
155
77
-9
45
20
-96
-63
-57
-54
1
0
Real GNP Growth
(percent)
1987
3.0
0
-1.0
-4.0
0
-1.5
.4
-2.2
.1
-2.0
3.8
-.3
1988
3.0
0
.5
-4.0
.4
-1.6
.4
-2.0
-.4
-2.9
4.1
0
1989
2.5
0
2.3
-1.5
1.9
-.9
1.5
-1.0
.4
-2.1
4.3
.2
1990
2.5
0
2.9
-.9
2.3
-.5
2.2
-.3
1.5
-1.0
4.0
.1
Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
 Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
Summit Countries: Combination of 10 Percent Real Mark Appreciation, 20 Percent
Real Yen Appreciation, Big Six Fiscal Stimulation, and US Fiscal Restraint
(Gramm-Rudman)
United States Japan West Germany Other Summit Other OECD Latin America
Change Change Change Change Change Change
from from from from from from
Level Baseline Level Baseline Level Baseline Level Baseline Level Baseline Level Baseline
Current Account
(billions US $)
1987
-129
15
64
-7
44
3
-11
-2
-6
-1
-8
1
1988
-100
43
32
-35
23
-11
-20
0
-5
8
-4
4
1989
-84
72
20
-53
8
-16
-30
0
5
12
7
8
1990
-72
108
20
-66
3
-21
-39
-6
9
12
13
12
Real GNP Growth
(percent)
1987
2.0
-1.0
3.0
0
1.5
0
2.6
0
2.1
0
4.3
.2,
1988
2.0
-1.0
3.5
0
2.0
0
2.4
0
2.5
0
4.3
.2
1989
1.5
-1.0
3.8
0
2.8
0
2.5
0
2.5
0
4.1
0
1990
1.5
-1.0
3.8
0
2.8
0
2.5
0
2.5
0
3.8
.1
Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
 I I! i I
Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3
o o ~ e
Summit Countries: Real Trade-Weighted
;Exchange Rates*
(1980 = 100)
QSource% Based on Morgan Guaranty Trust trade-weighted real exchange
rates against 15 Industr a lzed and 22 developing countries.
Approved For Release 2008/05/12 : CIA-RDP92T00533R000100060011-3