Soviet Union's Demands Hover Over G-7 Agenda

But member nations are advised not to be distracted from mending own economic fences

WHEN leaders from the world's seven most powerful economies gather in London on Monday, their greatest challenge will be to focus on their original reason for meeting.Jokes that the Group of Seven - the United States, Britain, Canada, France, Germany, Italy, and Japan - has turned into the Group of Eight, including the Soviet Union, draw defensive responses from the globe's foremost industrialized countries. This group, whose self-appointed task is to coordinate economic policy, is already distracted by Soviet President Mikhail Gorbachev's urgent request to present his country's dire financial needs in London, say economists and political analysts. "Don't look for major shifts in economic policy," says Brookings Institution economist Stephen Bosworth. "It's atmospherics," he says, "all very helpful" for leaders to understand the position of other governments. The G-7 discussions scheduled Monday through Wednesday will likely be dominated by what the world's richest countries want to do to avert the biggest potential disruption to the post-cold war world - widespread economic collapse, violence, and chaos in the Soviet Union. But as the G-7 members wring their hands over staggering Soviet demands, other factors - high global interest rates, insufficient world capital supplies, and nagging trade disputes - threaten economic stability and long-term growth that G-7 countries have tried to ensure since they first met near Paris in 1975. Without a healthy international economy, G-7 countries will be less capable and even less inclined to meet Soviet demands and requests of other needy countries. The G-7 "should be mending economic fences at home and promoting open markets toward Eastern Europe," says Henry Nau, associate dean of George Washington University's Elliott School of International Affairs. "Without strong and open economies in the West, there is little chance that reforms will succeed in Eastern Europe or the Soviet Union." Jacob Frenkel, economic counselor and director of research at the International Monetary Fund, is confident that, in the short term, the three recessionary economies of the G-7, the US, Britain, and Canada, will begin to rebound this year. The average growth rate of the world's industrialized countries will register 1.25 percent this year, down from 2.5 percent in 1990. Mr. Frenkel's projection for 1992 is 3 percent. Mr. Nau, who coordinated economic summits in the Reagan White House, says G-7 countries must independently address their own obstructions to international economic growth, including subsidies, closed markets, or excessive public expenditure. Low national savings rates and big budget deficits have long been a concern of the G-7, and for years the US has been a principal target of criticism. Under the White House-Congress budget compromise reached last fall, the US will have to borrow $500 billion less over the next five years, and rely less on foreign financing. David Mulford, the US Treasury Department's undersecretary for international affairs, says the Bush administration "does not want to lose the growth impetus that we've enjoyed during the '80s. It's very important to keep that alive, given the kinds of problems [financing and investment needs] that we face in Eastern and Central Europe, the Soviet Union, the Middle East, Latin America." These matters, he says, "are a lot more easily addressed in a world where there is positive sustained growth." American calls for lower global rates spur spirited international disagreements. "Real interest rates will remain high unless we increase global savings" to accommodate demands for investment, Mr. Frenkel warns. If investors are short on capital and rates climb too high, economic activity will slacken. "Those countries who need investment capital must increase their own domestic savings," says Toyoo Gyohten, a leading international economist who served 30 years with Japan's Ministry of Finance. Japan's ability to export capital - it is the chief supplier of global capital - has declined in recent years and will continue to do so, Mr. Gyohten says. "We exported $80 billion in 1987, compared with $36 billion in 1990. Increased liabilities of the Japanese banking system" will contract Japan's capital bas e further. Paul Volcker, former chairman of the Federal Reserve Board, points to another principal source of world capital that is virtually drying up. "Germany, with tens of billions supplied to world financial markets just a year or two ago," is now diverting its resources to eastern Germany. "The untold billions [sought] around the world will also strain capital resources," says Mr. Volcker. While Mr. Mulford peppers his pre-summit statements with phrases such as "growth-oriented, coordinated policy approach," he concedes that "the visit of Mr. Gorbachev is certainly going to be a major event and will ... dominate the summit."