Structural adjustment, dialogue, and U.S.-Japan economic relations - W. Allen Wallis' address before the Executive Committee Meeting of the U.S.-Japan Business Council in Kona, Hawaii, on Feb. 16, 1987

US Department of State Bulletin, May, 1987

Structural Adjustment, Dialogue, and U.S.-Japan Economic Relations

Address before the annual Executive Committee meeting of the U.S.-Japan Business Council in Kona, Hawaii, on February 16, 1987. Mr. Wallis is Under Secretary for Economic and Agricultural Affairs.

I do not have to tell you that the U.S.-Japaneconomic relationship is, today, the most dynamic--and controversial-- economic relationship in the world. You recognize better than anyone how wideranging, complex, and multifaceted it has become.

Just look at the statistics. As astatistician, I know that figures alone do not begin to tell the whole story. But they are, indeed, impressive. Together, the United States and Japan account for 60% of OECD [Organization for Economic Cooperation and Development] production; two-way trade now exceeds $110 billion annually; total direct investment in each other's economies has reached some $25 billion and is growing dramatically. The United States and Japan together provide 75% of all new internationally syndicated bank lending and 45% of all economic assistance to developing countries.

You, your companies, and theuniverse of companies that you represent are the ones who are largely responsible for making all this happen. You are the pioneers and explorers who have committed time, resources, and talent to the Japanese and American markets, risking the health of your balance sheets on these two economies.

The Importance of Structural Adjustment

I am pleased you have asked me to speakon structural adjustment as an element of U.S.-Japan economic relations. You, better than anyone, understand the constancy of change. New economic conditions develop, exchange rates shift, new technologies come on stream, new products enter the marketplace, and the less innovative, less productive, and less efficient producers fall by the wayside. As painful as this process of adjustment may be to individual companies, overall it strengthens our economies and helps them reach higher levels of growth by promoting the more efficient and more productive.

This assumes, of course, that governmentpolicies and programs, as well as private attitudes and practices, allow the adjustment process to go forward. In our market systems, adjustment is, and must be, a natural part of economic life. The economy does not change fundamentally at any one moment; if there are no barriers to adjustment, it reacts and adjusts continuously.

The decade of the 1970s gave us all asometimes harsh lesson in the importance of adjustment. The sharp breaks with the past--on exchange rates, energy, food and raw material prices, and inflation, just to name a few--called for major adjustments in our economies. Sadly, we found that the flexibility needed for adjustment was not always there. This was especially true in Europe, where government policies have impeded the natural processes of adjustment.

The United States and Japan by theearly 1980s had adjusted reasonably well to the dislocations of the 1970s. But new signs of international imbalance began to appear. The United States experienced a period of strong growth and even stronger expressions of confidence in the U.S. economy. Our currency appreciated rapidly, beyond anything explainable by relative inflation or by trade in goods and services.

Favorable investment opportunitiesin the United States, combined with low national saving and with a poor investment climate in most of the rest of the world, generated a large surplus on our capital account. We were the recipients of a sizable net inflow of the world's saving. This capital inflow led us to be also the recipients of a sizable net inflow of the word's goods. The U.S. trade and current account deficits reached record proportions, month after month.

Across the Pacific, Japan wasexperiencing a similar phenomenon in reverse. Strong domestic saving and sluggish investment, both public and private, led to a deficit on capital account. The Japanese sought remunerative investment opportunities abroad and found them in the United States. But the other side of the coin was that Japan's trade and current account position moved to record surpluses, both with the world as a whole and especially with the United States.

International imbalances are notinherently bad, at least in economic terms. Whether they are detrimental to our two economies, or to the global economy, depends largely on the efficiency with which each economy operates. It can be detrimental if saving or consumption is artificially encouraged or discouraged by governmental action, if investment decisions are directed or distorted by public policy, or if the public sector is simply too overbearing, either through regulation or sheer weight. In these circumstances, the international imbalances will reflect policy-induced domestic imbalances and inefficiencies. Policies that inhibit adjustment to change interfere not only in the domestic economy but also in the global economic relationship among countries.