Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

164. Memorandum From Secretary of State Shultz and Secretary of the Treasury Regan to President Reagan¹

Washington, May 11, 1984

SUBJECT

• London Summit: Scope Paper

I. YOUR OBJECTIVES

You have three main objectives at the London Economic Summit:

— To send a message to the rest of the world that, under U.S. leadership, world economic recovery has taken hold;

— To strengthen the emerging consensus among Summit countries on policies which will assure that non-inflationary recovery endures and spreads to other countries; and

— To forge new partnerships and broaden the basis for future cooperation with our Summit partners in such areas as space, East-West relations and combating terrorism.

[Omitted here is information on the setting of the London Summit.]

III. ECONOMIC AND POLITICAL ISSUES FOR LONDON

A. ECONOMIC

Economic Outlook and World Recovery

All Summit countries are agreed that the major theme of this Summit should be to stress our confidence that economic recovery has taken hold and is developing into a sustainable economic expansion. The task is to pursue policies that assure that recovery endures and spreads to the rest of the world. There is broad, but nuanced, agreement that those policies must embrace more openness of trade and capital markets, and that national economic policies (especially in Europe) should be designed to keep (or bring) inflation down.

The Europeans and Canadians in particular are likely to concentrate discussion on the need to promote structural adjustment. (In fact, the Canadians introduced a specific proposal on this into the Summit preparatory process.) This will play directly to your strong suit and give you the opportunity to:

— Underline the need to remove obstacles to change in our individual economies in order to provide opportunities for growth and new job creation;

— Stress our desire to cooperate with others in advancing our collective understanding of the potential of market-oriented adjustment; and

— Emphasize the need to manage better our international economic policies (trade, finance, monetary) in ways that reinforce domestic strategies to enhance flexibility and growth.

Concerns will be expressed about high U.S. budget deficits and the fear that they will produce higher interest rates that could choke off recovery and reignite inflation. We suggest that rather than dwelling on our differences over the effect of budget deficits on interest rates, you should stress our agreement on objectives (i.e., to reduce structural deficits by reducing government spending and bring interest rates down), while emphasizing that progress on the first depends on agreement with Congress, and on the second, on convincing markets that we (and others) are serious in our commitment to keep inflation under control.

Debt, Finance, Monetary

We expect discussion to center on the interrelated issues of debt and finance (with the usual reminder from the French on the need for monetary reform). Our objective in the discussions on debt is to confirm that our strategy for managing LDC debt problems on the flexible, case-by-case basis is working and requires no fundamental change.

The strategy has been criticized for lacking a medium-term dimension. This is not true (both adjustment and more open markets are essentially medium-term objectives). However, this Summit offers an opportunity to expand and clarify these aspects of the strategy by stressing four major elements:

— The need for continued adjustment efforts by debtor countries with the support of the IMF and increased lending by commercial banks;

— The need to expand trade between developed and developing countries to promote growth in both and to assure that heavy debtors will be able to earn foreign exchange sufficient to service their debts and validate increased commercial bank lending;

— The need for developing countries to stimulate increased foreign direct investment to earn foreign exchange to service their debts, without further increasing indebtedness, while enhancing growth potential (and the desirability of strengthened IBRD role in acting as a catalyst for such new investment); and

— The need for closer coordination between the IMF and IBRD in order to make the role of the Bank more consistent with that of the IMF in promoting adjustment in LDCs, and in strengthening the IBRD’s contribution to longer-term development.

While these elements have received general support from our Summit partners, it is likely that France and others will want to put heavier emphasis than we on the need to increase resources available to the World Bank, IDA and other institutions; perhaps attacking us for our positions on IDA VII funding and the World Bank’s Selective Capital Increase. We should emphasize that we are supporting appropriate levels of funding for these institutions, that these resources are limited, that the proposed increases are adequate if properly used and distributed among those in most need and willing to follow effective policies. An increase in official flows alone will not solve the long-range problem if we and the LDCs do not take the actions we have stressed to make the market work more effectively.

You can also expect that concerns will be raised in this connection about the adverse effects of high U.S. interest rates on debtor developing countries’ ability to service their debts.

[Omitted here is information on monetary, trade, and other issues.]

1. Source: Department of State, Bureau of Economic Affairs, Office of Economical and Agricultural Affairs Files, Official Economic Summit Files, 1975–1991, Lot 93D490: London Economic Summit—1984. Confidential. Drafted by Robert Morris (E) on May 7; cleared in draft in John Holmes (EUR/RPE), Arnold Croddy, Jr., (EAP/J), Ruth Gold (EB), McMinn, and Sprinkel. Morris initialed for all clearing officials. A typed notation in the left hand corner of the memorandum reads: “Advance LDX’ed to WH per S/S on 5/11. CB.” An unknown hand wrote “done 5/15 cy MC for [illegible] 84 Summit” on the top right-hand corner of the memorandum. The full text of the memorandum is printed in Foreign Relations, 1981–1988, vol. I, Foundations of Foreign Policy, Document 194.