Group of 7 Countries Look Inward

MOUNTING domestic pressures in the world's richest countries have impinged on their ability to fulfill their collectively assumed policy: generating global economic growth.

During meetings in Washington this week, the Group of Seven (G-7) leading industrial nations - the United States, Britain, Canada, France, Germany, Italy, and Japan - are more absorbed in their own deficiencies than in tackling tough problems.

Germany's burgeoning budget deficits, Japan's financial downturn, and a sluggish US economic recovery have left these three major powers - the so-called troika of the G-7 - looking inward. Coordinated efforts, such as shoring up Russia's reforms and forging ahead with a world trade agreement, have been greatly compromised.

"G-7 growth this year will be significantly below potential and inadequate to reduce high levels of unemployment in many countries," says Undersecretary of the US Treasury for International Affairs David Mulford. That scenario jeopardizes the successful "transition of Eastern Europe and the [former Soviet republics] to market economies," he says, referring to the G-7's most formidable challenge.

Mr. Mulford focuses on Germany, the dominant economy on the European continent. Its huge bills for rebuilding eastern Germany have led to a large fiscal deficit. That, coupled with the Bundesbank's (Germany's central bank) tight monetary policy, hinders growth in former Communist countries now banking on Western European capital and markets. He faults Germany, for "causing high interest rates, slow growth, and contributing to unemployment" in Europe.

While German Finance Minister Theo Waigel claims that his country's deficit represents just 3 to 3.5 percent of gross national product, Mulford counters that including Bonn's big borrowing, the deficit registers at 6 percent of GNP.

German officials have repeatedly accused the US of holding up global economic growth with unmanageable deficits. But while Germany's rate climbs, "and prospects for its early relief are very uncertain," America's deficit has peaked, asserts Mulford. The US is not "holding up global growth," he insists. Washington's costs for bailing out failed US savings and loans "are widely behind us ... discretionary spending is curbed ... and revenues should begin to pick up" as the economy improves.

Japan, once seemingly unstoppable, is an international economic locomotive now running out of steam. Tokyo's 225-member Nikkei stock index has fallen dramatically during recent months, real estate values have plunged, and overexposed banks are tightening credit. Japanese investors, known for their cautious approach, have already taken an even more conservative position in finance outside the Asian region. Tokyo financial firms are now less likely to explore high-risk unknown markets, such as the cash-str apped Eastern European and former Soviet markets, than before its own slide.

Horst Schulmann, managing director of the Institute of International Finance, representing major international commercial banks, offers a private sector view of G-7 responsibility for world economic problems, such as slower growth in the main industrialized countries, the sharp contraction in the former East-bloc countries, and the breakdown of international trade talks. "The bottom line ... is a slump in the world economy, and a slump that has affected, in the first instance, private investment," he say s.

The private sector has an important stake in successful G-7 efforts to assist the Russian and other republics' economies, says Mr. Schulmann. "The interest of the taxpayers in the industrial countries is absolutely clear ... to let the private sector do most of the job."

"Competition for private capital will increase in the 1990s," says Schulmann, with claims coming from Latin America, Southeast Asia, India, Eastern Europe, the former Soviet republics, and even the cash-needy, oil-rich Middle Eastern states. "All of this is likely to occur against the backdrop of a structural savings deficit in the industrial countries."

SCHULMANN stresses that G-7-supported international financial institutions must offer the kind of assistance that makes these developing countries attractive to private capital suppliers, so that foreign investors and bankers are confident of a return on their money.

The G-7 must lead the way, urges Norbert Walter, chief economist at Deutsche Bank, Germany's largest commercial bank. He says the annual economic summit scheduled in Munich this July gives host German Chancellor Helmut Kohl the opportunity to redirect the G-7's course on aid to Russia and other former republics. Technical aid for building institutions such as a distribution system, a legal framework, and a commercial banking sector, must top the list.

G-7 Russian aid efforts, the policy body's most celebrated common cause, reveal the self-interest of individual G-7 countries and discord among them as a group. Japan is still smarting from President Bush's announcement on April 1 of a G-7 $24 billion aid package to Russia before Tokyo had committed its participation. Bush's eagerness to assume the leadership role and head off Democratic presidential rival Bill Clinton's foreign policy address alienated Tokyo, whose negotiators await Russia's return of f our Japanese islands before digging into their pockets. With the G-7 under duress, Mr. Walter says "there are not many success stories possible" for the Munich summit.