SPECIAL REPORT

THE INS AND OUTS OF THE G-7 SUMMIT

Preparing a rich table of issues

MARY JANIGAN June 19 1995
SPECIAL REPORT

THE INS AND OUTS OF THE G-7 SUMMIT

Preparing a rich table of issues

MARY JANIGAN June 19 1995

THE INS AND OUTS OF THE G-7 SUMMIT

Preparing a rich table of issues

MARY JANIGAN

The leaders of the Group of Seven industrialized countries have a busy agenda during their summit meeting in Halifax. Although the ongoing Bosnian crisis is expected to dominate the discussions, there are many economic issues on the table. A handbook to the 1995 G-7 summit:

WHAT IS THE G-7 SUMMIT?

The Group of Seven—or G-7—summit is an exclusive club of the seven heads of state who represent the world’s mightiest and wealthiest industrial democracies. The list consists of France, the United States, Japan, the United Kingdom, Italy, Germany and Canada. Together, they are responsible for more than 70 per cent of the world’s economic output. Since 1975, they have met privately for two days each year, usually in glamorous resorts and palaces, surrounded by thousands of anxious aides and journalists, to ponder the world’s economic and political woes. On the second day, for the political discussions, the G-7 temporarily expands to become an informal G-8 with the addition of Russia. This year, from June 15 to 17, they will gather in Halifax.

WHAT IS THE G-7'S HISTORY?

The G-7 traces its ancestry back to April, 1973, when the finance ministers of France, Germany, the United States and the United Kingdom gathered in the White House library to discuss international monetary matters. They soon added the Japanese finance minister and, on occasion, the Italian. Their meetings were discreet, secretive affairs, treasured for the opportunity to compare strategies and to swap stories.

By 1975, two members of that original club had become heads of

state—French President Valéry Giscard d’Estaing and German Chancellor Helmut Schmidt. Both men realized that, in a blink of history, their world had changed forever. After decades of fixed exchange rates, their currencies now floated uncertainly against the U.S. dollar. Oil prices had gone through the roof, exacerbating inflation and deepening unemployment. The European Union had expanded, to the great unease of its potential rival, the United States. In November, 1975, Giscard hosted five fellow heads of state at the Château de Rambouillet, on the outskirts of Paris. In 1976, despite France’s vehement opposition, the United States invited Canada—to bolster the North American presence. A year later, the European Union gained observer status. In 1994, for the first time, Russia joined the participants for the full political session.

WHAT IS THE

MACROECONOMIC SITUATION FACING THE G-7?

Twenty years after the first summit, the world has changed far beyond the reckoning of its founders. In 1975, money moved around the developed world at a stately pace, usually at the direction of central bankers. The developing world was mostly dependent on foreign aid and low-interest loans from international institutions. The Cold War was very cold—and security issues usually weighed heavily in any policy consideration.

Today, more than $1 trillion whisks around the world in any 24-hour period. Huge amounts can move, with the poke of a computer key, from the stock market in Hong Kong to U.S.dollar-denominated Canadian bond issues in Toronto to purchases of shares in newly privatized Indian corporations. The banks have been joined by thousands of individual portfolio managers, pension funds and investment houses. Countries such as India, Indonesia, Brazil and China are becoming economic powerhouses. The private markets now supply developing countries with three times the amount of capital that the international aid agencies can muster. Most important, the Cold War is over. Because the price of disagreement is not so high, the Western industrialized democracies are clashing, more and more, as their economic self-interests take precedence over their security needs.

WHAT ARE THE ECONOMIC ISSUES TOPPING THE AGENDA?

Last year, the summit partners piously agreed that, in Halifax, they would talk about how to provide sustainable development with good jobs, economic growth and expanded trade in the 21st century. They added that they would examine the world’s institutions in that light, especially the two offspring of the 44-nation Bretton Woods Conference of July, 1944: the International Monetary Fund (IMF) and the World Bank. Few people paid much attention to the G-7 pronouncement.

Then came the first major crisis of the new economic order: Mexico. On the surface, the nation was thriving, and money was pouring into its coffers. But Mexico was actually sending more funds out of the country to buy goods than it was attracting in what were often short-term investments. Last December, to diminish the international purchasing power of its currency, Mexico abruptly let its peso float against the U.S. dollar. Investors woke up—and realized that Mexico no longer had enough money to cover the value of its outstanding bonds. They began to pull out their money in a

panic. The IMF, which was created to ensure currency stability, was powerless. Money was moving too fast— and there were too many investors to control.

The United States cobbled together a massive $69-billion package of loans and loan guarantees, pledging $24.5 billion in IMF funds before" full consultations with the fund’s principle partners such as Britain and Germany. The situation stabilized—but traces of the Europeans’ outrage and suspicion still linger.

Meanwhile, as portfolio managers sought more stable investments, they took a second look at Canada.

And they did not like what they saw: nearly $550 billion in debt. In vain, Canadian politicians protested that they were putting their financial house in order. Instead, to placate its edgy lenders, Canada was forced to raise its interest rates, repeatedly, in the weeks prior to the late-February budget. That, in turn, increased the cost of servicing the debt, pushing up the size of the annual deficit. Prime Minister Jean Chrétien snapped to attention. Who were those faceless traders who could throw the entire Canadian budget out of whack?

Why did they not believe that Canada was mending its ways? Most important,

Chrétien was aware that the $1 trillion that moves around the globe each day was largely speculative money, chasing tiny interest rate differentials, doing little good and occasionally some harm to the world’s economies.

As the host nation, Canada can determine the priority of issues at the G-7 summit. Chrétien is focusing on ways to curb the enormous power of traders that he characterizes as “25year-olds in red suspenders.”

Initially, his government fixed on the so-called Tobin tax, which U.S. economist James Tobin proposed in the late 1970s, to discourage speculative financial trading by imposing a tax on transactions. But, after intense consultations with international experts, Ottawa concluded that the tax was simply unworkable—if only because most nations would refuse to apply it. It would also be impossible to distinguish between speculative flows and those that were trade-related or involved the repatriation of earnings. As Sylvia Ostry, the chairwoman of the University of Toronto’s Centre for International Studies, told Maclean’s: “The genie is out of the bottle. If you don’t like the power of the financial markets, you can’t put the $1 trillion back into the bottle, but you can take the signals to improve domestic policy to reduce vulnerability.” In other words, get your financial house in order.

WHAT IS THE APPROACH OF THE SUMMIT?

If nations do not heed that advice, there are ways to head off future Mexican crises before they happen—or to respond more quickly and more effectively if they occur. The G-7 partners are considering the following recommendations:

• The IMF should set standards for regular data reports— and its 179 members should meet those standards. Statistics would include the size of their currency reserves, their amount of short-term debt and their current-account balance (that is, the amount of money flowing in compared with the amount of money flowing out).

• The IMF should have more leeway to study its members’ economic health: that is, it should not simply rely on each nation’s reports for data. If it decides that a country is in trouble, IMF officials must be blunt—although their advice will be private. There is little G-7 agreement however, on what the IMF should do if a nation does not heed its warnings.

• One of the reasons that Mexico got into trouble was that it plunged, headfirst, into the new economic world. It offered new-fangled recipes for instability such as tesobonos— short-term bonds repayable in pesos but indexed to the U.S. dollar. In contrast,

Chile encourages a minimum one-year term for investment by imposing what amounts to a tax on investments of shorter duration. The G-7 will likely recommend that developing countries follow Chile’s example, moving more slowly into the capital markets.

• The G-7 ministers will urge the IMF to change its ponderous procedures for intervention. They will suggest the creation of a “fast-track” mechanism that would have the authority to disburse loans quickly. And they will discuss when those mechanisms should be invoked—and what strict conditions should be imposed on the recipients.

• The IMF now has a capital base of $314 billion—and a credit line of $40 billion, backed by 12 wealthy nations. The G-7 is unlikely to call for an increase in the IMF’s capital base, largely because some nations, such as Germany, suspect that more available funds will simply encourage more nations to get into trouble. Instead, the summit will probably call upon other industrialized countries to back, and thus increase, the IMF’s credit line.

• In the United States, companies on the brink of bankruptcy can invoke Chapter 11 of the U.S. Bankruptcy Code, get respite from their payments, access to additional cash and the chance to work out new repayment arrangements. The G-7 will likely ask if it is possible to create similar international regulations, perhaps even an international bankruptcy court, for some debtor nations.

• In the past decade, most industrialized nations have overhauled the internal regulations that govern their financial systems. The G-7 will ask the world’s central bankers, through their Swiss-based Bank for

International Settlements, and the world’s security exchanges to recommend ways to update the supervision and regulation of international markets.

WHAT ARE SOME OF THE OTHER INTERNATIONAL INSTITUTIONS INVOLVED IN THIS PROCESS?

Although the G-7 nations are simply too polite to say it, most aid agencies are in a mess. In 1992, for example, the World Bank, which was designed to provide long-term capital to needy nations, discovered that 35 per cent of its projects failed to meet even their minimum economic targets. The bank was also funding megaprojects that private capital could now build and that were often ecologically damaging.

The G-7 will stress that the bank should support smaller “people” projects for health and education. It should also devote its lowestinterest, longest-term loans to the poorest nations: China, for example, now receives such aid, although it could easily afford higher rates than those charged by the World Bank, while some African nations are barely surviving.

Summit partners will also probably clash over a British suggestion, which Canada supports: the IMF should sell a portion of its gold reserves, put the proceeds in a fund and use the interest to pay down the loans of the poorest nations. Furthermore, the seven will likely ask the United Nations to amalgamate its flock of tiny, competing agencies into single institutions with mandates such as development, the environment and human-rights support.

WHAT TRADE ISSUES ARE ON THE TABLE?

Scant months after the World Trade Organization was created in January—after years of arduous international negotiations— the United States and Japan are already embroiled in a trade

war that threatens the WTO’s authority and, perhaps, its very existence. The United States claims that Japan discriminates against imports of its automobiles and its automotive parts. Japanese officials counter that they are willing to make regulatory changes. But, they add, the United States has gone too far: it wants Japan to set numerical targets for its U.S. purchases of cars and parts.

Under WTO rules, the dispute should go to the WTO for settlement. Period. But although both countries have promised to abide by the WTO’s rulings, the United States has also taken unilateral action: it has slapped 100-percent tariffs on 13 Japanese luxury cars that will take effect on June 28 unless frantic, last-second negotiations bring about a deal.

To add to the tension, many Japanese and Germans are convinced that the United States has let the value of its dollar drop against their currencies, in order to damage their export trade. The United States will retort that it is getting its own house in order—and that it will ask for help, when it needs it, to support its dollar on the international markets. Such mutual suspicion will almost certainly exacerbate the trade dispute.

That rancor could overwhelm the entire summit. Both parties have promised to be civil—and to avoid the topic. But Chrétiens best efforts as chairman may not be enough to enforce those pledges or dispel the gloom. According to “The Halifax G-7 Summit,” an in-depth study by Dalhousie University’s Centre for Foreign Policy Studies, there are plenty of important trade issues on the table: the admission of China to the WTO, the ongoing negotiations on financial services and telecommunications, the upcoming talks on services, the pressing search for investment rules.

But the summit may count itself lucky if it simply manages to reaffirm trade civility. As British High Commissioner Sir Nicholas Bayne, an international expert in G-7 summitry, told Maclean’s: “The Europeans and the Japanese are convinced that what we need to get out of this summit is a strong statement of attachment to the multilateral rules governing world trade as embodied in the WTO.” Canada also has an enormous stake in that outcome. Gordon Ritchie, an architect of the Canada-U.S. Free Trade Agreement, pointed out that Canada had a $28.4-billion trade surplus with the United States in 1994: “It doesn’t take a rocket scientist to figure out that if this [U.S. tactic] pays off politically, were the next chumps.”

WHAT POLITICAL ISSUES ARE FRONT AND CENTRE?

The summit partners had a lengthy list of issues to ponder, including the future of the remaining Chernobyl-like nuclear reactors that are still operating in Ukraine. Then, along came the hostagetaking crisis in Bosnia, which challenged the United Nation’s very authority and power. And that issue, and its implications for all UN operations, will certainly dominate the summit’s second day. The partners will first want to examine how the crisis itself happened. They will listen carefully to the advice of Russian President Boris Yeltsin, whose nation has traditionally cultivated close ties with the Serbs. And they will mull highly unpleasant choices: they can simply leave; they can pull out and resume air strikes; they can halt the air strikes, maintain their ground force and perhaps watch the situation deteriorate.

But the Bosnian situation epitomizes broader questions facing the United Nations. As Foreign Affairs Minister André Ouellet told the General Assembly last year: ‘Too often, the [United Nations’] intervention comes too late, is too slow and is carried out under inadequate conditions.” He suggested that UN officials should concentrate on the detection of potential trouble spots. It should also have, at its fingertips, lists of experts in fields such as election supervision who would be willing to assist troubled countries. And he suggested that the time has come to study the creation of a permanent UN military force for rapid deployment in emergencies.

WHO’S WHO AT THE SUMMIT

CANADA Prime Minister Jean Chrétien, 61 In office since Nov. 4,1993 GDP: $711 billion

UNITED STATES President Bill Clinton, 48 In office since Jan. 20,1993 GDP: $8.13 trillion

JAPAN Prime Minister Tomiichi Murayama, 71 In office since June 29,1994 GDP: $5.42 trillion

GERMANY Chancellor Helmut Kohl, 65 In office since Oct. 4,1982 GDP: $2.4 trillion

FRANCE President Jacques Chirac, 62 In office since May 17, 1995 GDP: $1.62 trillion

ITALY Prime Minister Lamberto Dini, 64 In office since Jan. 18,1995 GDP: $1.32 trillion

UNITED KINGDOM Prime Minister John Major, 52 In office since Nov. 28,1990 GDP: $1.19 trillion

EUROPEAN UNION President Jacques Santer, 48 In office since Jan. 23,1995

WHAT ABOUT THE FUTURE?

It is easy, and perhaps wise, to be somewhat cynical about the summit process. After all, intimate gatherings in the White House library have sprawled into two-day circuses that often produce nothing but precooked communiqués. But the G-7 summit has also become an intricate part of an elaborate, year-long cycle that does actually get things done. Through its tentacles into the IMF, the World Bank, the 25-nation Organization for s Economic Co-operation and Development and the i United Nations—and through its own committees, such as the regular G-7 meetings of finance I ministers and central bankers—the G-7 has ac| complished much. It has prodded the world’s trade negotiators to an agreement and the creation of the WTO. It has reached out to Russia and to the central European nations after the breakup of the Soviet bloc. It has co-ordinated everything from currency-market intervention to the formulation of diplomatic approaches to China. Perhaps most important, it has brought world leaders into regular face-to-face contact, forcing them, and their bureaucrats, to concentrate on international issues—and to resolve international disputes.

Still, the summit’s future is cloudy. It is obvious that countries such as China and Indonesia are growing in economic might. But if the G-7 expands to include those nations, it loses the advantage of being a club of “like-minded” democracies. And if it adds one or two countries, why not three or four? Then, it becomes too big to be truly effective. Dalhousie University political scientist Gilbert Winham says that the G-7 may simply die over the next 10 to 15 years. “In that time,” he says, “we would probably see the Chinese become so strong that the G-7 might become irrelevant.” It is a future that the partners themselves must ponder as they gather, for the 21st time, around the summit table. □