The Last Roundup?

By ROBERT HORMATS and RICHARD HORNIK Robert Hormats is vice chairman of the investment firm Goldman Sachs International. Richard Hornik is TIME''s national economics correspondent.

Is this trip necessary? A handful of world leaders might ask themselves that question as they converge on Houston this weekend for the 16th Economic Summit of Industrialized Nations. Their visit will be attended by Wild West fanfare and reported by more than 3,000 journalists, but is any real work likely to get done? Many past summits, in fact, produced results as barren as the North Texas Panhandle. If the chief executives of the world's most powerful economies simply spend three days hammering out a pious communique and frolicking at rodeos and barbecues, then maybe this form of junket should ride off into the sunset.

But that would be a shame. The summit assembles what is effectively the world's Economic Security Council, comprising the leaders of the seven major industrial countries -- the U.S., France, Britain, West Germany, Canada, Italy and Japan -- plus the President of the European Commission. The end of the cold war should make this annual event more important than ever. Millions of people in the industrialized world see foreign business competitors as a greater threat to their security than alien armies.

The growing interdependence of the world economy makes cooperation in trade and finance vital to everyone's prosperity. This summit, whose members produce more than half the globe's economic output, is an ideal vehicle for marshaling support for common interests. Among them: ensuring the free flow of commerce, coordinating support for new democracies and promoting efficient solutions to environmental problems.

The tasks facing the world's industrial countries today are so huge that no major Western objective can be achieved without support from the three centers of economic power: the U.S., the European Community and Japan. Their combined resources will be critical to rebuilding the economies of the new democracies, not just in Eastern Europe but also in Latin America. That collaboration is especially vital because the U.S. budget and trade deficits have sharply constrained American largesse, in both psychological and economic terms.

Rather than drowning out America's once powerful voice, these summits could actually reaffirm the U.S. position as a global superpower. After wielding dominant military and economic power for the past half-century, the U.S. can no longer assume a central leadership role by dint of its muscle. Instead, the U.S. in the 1990s will have to lead by forging global consensus and coalition.

The summit leaders can also handle a growing list of political issues that bilateral alliances no longer adequately deal with. A top concern for these countries is the structure of post-cold-war Europe. The U.S. and Japan can use the summits to keep the E.C. open to the rest of the world as it consolidates its single market in 1992, creates a unified monetary system and develops special trade links with its European neighbors. The E.C. and the U.S., for % their part, will want to keep Japan from forging exclusionary trade and financial ties with its East Asian neighbors. The summits can also help bring Japan more fully into the Western political club, which will be crucial if Tokyo is expected to pick up a major share of the tab for Western initiatives. A successful summit would help President Bush and his successors dramatize at home a new rationale for continued U.S. involvement in the world: shared management of the global economy to promote commonly held interests and values.

How then to put more life into this institution? For starters, the participants should stop producing communiques that cover a laundry list of subjects. The time could be better used for achieving a genuine meeting of minds. The group should only announce significant agreements. To help ensure adherence to such commitments, the host country should henceforth report on how well past summit accords have been implemented.

More important than the mechanics of the meetings are the strategic goals they aim to achieve. When Helmut Schmidt of West Germany and Valery Giscard d'Estaing of France first arranged an economic summit of the leading industrial nations in 1975, their primary concerns were global stagflation and a persistent energy crisis. The industrial world faces a new set of daunting challenges, and the summits must tackle them systematically. A proposed agenda for the 1990s:

FREE TRADE The biggest danger threatening the world economy today is the nascent development of restrictive regional trading zones based on the world's three dominant currencies: the dollar, the yen and the deutsche mark (or perhaps the European Currency Unit). If barriers to trade and investment are dismantled around countries only to be reassembled around whole regions, the world could be headed for a return to the protectionist, beggar-thy-neighbor policies that helped create the global depression of the 1930s.

That is why an immediate goal in Houston should be to head off the collapse of current international trade negotiations called the Uruguay Round. World trade rules are outdated; one-third of international commerce is not covered by any global regulations at all. As a result, multinational companies in the U.S. and other countries are plagued by investment barriers, piracy of intellectual property and cross-border restrictions on such services as insurance and data transmission.

The summiteers must confront the most divisive issue in the Uruguay Round: the huge agricultural subsidies doled out by these supposedly free-market economies. Each year taxpayers and consumers in the industrialized countries pay roughly $245 billion to support farm prices ($32 billion in the U.S. alone). The leaders of the U.S. and the E.C. should commit to a significant reduction of this gross distortion of world trade. And, just as the European Community is doing internally by 1992, the summit should pledge to eliminate tariffs on manufactured goods and restrictions on trade in services among all industrialized countries by the year 2000.

MONEY FLOWS The most significant economic development of the past decade has been the deregulation of financial movements across borders. This has created a worldwide pool of capital that enables borrowers in countries with low savings to tap into the cash of others. But because of this development, national policies that artificially encourage or restrict investment have an international impact and could lead to forms of economic conflict as dangerous as trade wars.

At the moment, the world's pool of savings has many claimants. Among them: the stubborn U.S. budget deficit and the new demands for capital by a unified Germany and an emerging Eastern Europe. Meanwhile, savings in industrialized nations have slowed as consumers spend more of their earnings on a better life. Will a shrinking pool of savings increase interest rates and stifle worldwide growth? The seven national leaders in Houston should ask their financial experts to gauge the impact of that worrisome trend. They should also examine the effect of high levels of government borrowing on future generations, who will inherit the bill. The conclusions might begin to instill a collective recognition of the need to pay now for government services the public demands.

Economic growth in the 1990s will be determined largely by how well countries use the limited savings available. Yet even in today's deregulated markets the flow of capital in securities trading and in direct investment is hampered by inconsistent national rules. The leaders should launch an effort to harmonize those regulations and consider creating new agencies to carry out that job, for example an international Securities and Exchange Commission.

OPEN ECONOMIES Bringing Eastern Europe and eventually the Soviet Union into the world economy must be done carefully but expeditiously. The summit leaders should remember that the isolation of Germany after World War I sowed the seeds of its economic collapse and of World War II. The Houston meeting should begin to reshape Western economic relations with the U.S.S.R. and its erstwhile satellites to reduce the potential for unrest in that region.

The most unstable economy in the Eastern bloc, the Soviet Union's, is the largest and most important to its neighbors. A Soviet economic collapse would devastate Eastern Europe. Assuming that the U.S.S.R. adopts constructive policies toward the Baltic republics and German unification, the summit nations could provide assistance that would also hasten demilitarization. The West could help the Soviets build housing to expedite the return and demobilization of soldiers in Eastern Europe and provide training for non- defense factory managers.

At the moment, the myriad aid programs being organized for Eastern Europe are threatening to overwhelm officials in the recipient nations. The summit leaders should commit their governments to coordinate those efforts, as well as open up Western markets further to East European goods. Another top priority should be debt relief for Poland, to help that country through its shock-treatment transition to a free market. Fresh capital is needed too for rebuilding roads and communications lines throughout Eastern Europe. That capital should come primarily from groups like the World Bank and from commercial loans backed by government guarantees.

DEVELOPING WORLD The diminished ability of the Soviets to exploit Third World instability does not mean the West can be indifferent to conditions there. Poverty and exploding populations are a potent formula for increased instability, religious fundamentalism and violence, which can accelerate the already heavy flow of economic refugees.

The Houston summiteers need only cast their eyes south to Mexico to see the potential for economic improvement when sound domestic policies are coupled with rational foreign-debt rescheduling. Now the leaders should focus on such countries as Peru and Bolivia to press for more ambitious reforms and find ways to provide relief from heavy debt owed to Western governments. For the poorest countries, this is the only real hope. President Bush made a commendable effort last week to reach out to the nations of Latin America by proposing to reduce tariffs for their goods, provide debt relief, and set up an investment fund to encourage free enterprise. This summit should extend that initiative to other regions, including Africa.

* The Economic Summit is one of the few international institutions with real clout because it represents the combined force of the leaders of the major economies, not just their Ministers and diplomats. The leaders have a perfect opportunity to harness the immense potential of the new global economy of the 1990s. On the evening before the Houston summit, President Bush has invited his colleagues to attend a rodeo. Perhaps they can take their cue from the cowboys: either grab the bull by the horns, or be left to ponder on the flight home why this group should go on meeting like this.