By Barry Herman, DESA
November 3, 1998
Less than a month after their regular meeting, the Finance Ministers and Central Bank Governors of the Gourp of 7 (G-7) met again in Washington on 30 October and issued a major policy declaration. At the same time, the leaders asking their Ministers and Governors to cosult with other key countries, including emerging market economies "to work up detailed reofrm proposals to be agreed at the next G-7 summit in June 1999. Also the same day, the Executive Directors of the G-7 at the International Monetray Fund (IMF) sent a joint memorandum ot the Managing Director and the other members of the Executive Board to propose priorities "as we develop the work programme of the Executive Board to address these issues", and to give more detail on the IMF-related proposals of the Finance Ministers and Central Bank Governors (the three documents can be found on the IMF web page: ww.imf.org).
All of the proposals have been voiced before with varying degrees of specificity and commitment. What is new is the G-7 "agreement on a number of follow up steps... which they will be implementing as rapidly as posible." It is thus meant as a firm statement of purpose and resolve addressed to a nervous and uncertain global financial audience, one that had seen the previous G-7 performance at the early October IMF meetings as less than decisive or united. Some analysts say the initiative came about now becaue the new German Government wishes to be more activist than its predecessor. Perhaps, but one could also point to certain sobering events in October that undoubtedly focused the attention of policy makers, such as the need for an officially arranged rescue of a prominent hedge fund in the United States, the unprecedented 15 per cent one days appreciation of the yen/dollar exchange rate, and the "flight to quality" that drained securitized credit from much of the corporate sector in the United States. The G-7 agreement is, in fact, one of several recent steps to bolster the sagging confidence of the financial markets, including the intereste rate reductions (albeit small ones) in several develped countries, the passage of a more credible bank rescue plan in Japan, US Congressional approval of the IMF funding request. In any event, it now appears that serious international economic reform is squarely on the table.
Policy for Pending Crises
A major part of the initiative is agreement to a set of measure to mobilize substantial foreign exchange resources so as to discourage and if necessary counter possible currency panics (such as threaten Brazil). The G-7 proposed establishment in IMF of contingent shor-term lines of credit for countries pursuing strong IMF-approved policies (in effect, this is the proposal made several weeks ago by the President of the United States). Use of the credit line would be expensive (the Executive Directors specified a 3 percentage point interest surcharge) and the drawings would have to be repaid rapidly (within 1 to 2.5 years, compared with 5 years in standard drawings). The G-7 wanted to provide an incentive for early return to private market financing; in addition, terms such as these were requested by the US Congress in legislation adopted in Octoer that endorsed US participation in the current IMF quota increase. In addition, the G-7 called for "appropriate private sector involvement" in such operations (which seems to mean an expectation that banks would agree to concerted "voluntary" refinancing of short-term claims during currency crises); also, use of the new facility might be complemented by "bilateral contingent financing", depending on what individual Governments might wish to provide in any particular case.
Reform of the international financial system
The G-7 also promised to seek specific reforms of the international financial "architecture". They aim, on the one hand, to reduce uncertainty about countries and financial markets through greater transparency and more complete and quicker provision of relevant information, and, on the other hand, to increase the risk of foreign lending to emerging market economies (the "moral hazard" issue). Argumentation and details for many of the proposals can be found in the October 1998 reports of the Group of 22 developed and emerging market countries and in work already under way in IMF, such as on codes of conduct in macroeconomic policy. In addition, the G-7 addressed governance of IMF itself in terms that go beyond previous general statements, as had been made in the Interim Committee communique in early October.
Transparency is to be fostered by adoption of agreed "codes of good practices" for fiscal and monetary policy, principles of sound corporate governance and accounting, and new standards of disclosure and transparency of internationally active financial institutions in developed and developing countries. The G-7 also called upon IMF to monitor compliance and publish regular "transparency reports" on individual countries.
In addition, the G-7 called for "establishing a process" for international surveillance and peer review of "national financial sectors and their regulatory and supervisory regimes. The "process" would involve "national and international regulatory and supervisory expertise". The G-7 also agreed to "bring together the key international institutions and key national authorities involved in financial sector stability" to cooperate on policies to "reduce systemic risk". More precisely, the G-7 Ministers committed themselves to focus on the risk exposure of their own financial institutions, including hedge funds, and to seek to involve off-shore financial centres and other countries in new regulatory exercises they might undertake. As a group, these proposals appear to reflect the Canadian proposal in April 1998 for a collaborative inter-agency secretariat of international supervisory agencies and bodies, presumably to be hosted by IMF.
In addressing the 'moral hazard" problem (wherein foreign private creditors were said to assume that they would be "bailed out" and so took excessive risk in lending to emerging market economies), the G-7 appears to have now accepted the 1996 recommendations of the Deputies of the Group of Ten to increase the risk borne by private creditors. They thus "called upon the private sector to facilitate 'collective action clauses', for more orderly debt workouts" (if bonds, in particular, had such clauses, it would be easier to restructure their debt servicing in crisis situations) and "market-based contingent financing mechanisms ... which might provide greater payments flexibility or the assurance of new financing in the event of adverse market developments." In addition, they asked the World Bank to take the lead in putting in place "effective insolvency and debtor-creditor regimes" and they voiced approval of the recently reaffirmed policy of IMF of "lending into arrears (i.e., lending to a Government in a currency crisis even if it did not yet have an accepted plan for a sovereign debt workout).
Regarding governance of IMF, the G-7 sought to improve the "transparency and accountability" of the institution through a policy to limit IMF confidentiality. The presumption would now be to release all information except for clearly stated exceptions, albeit with a possible delay of up to three months in selected classes of situations (the need for specific restrictions would bereviewed periodically). The G-7 also agreed to seek development of a "formal mechanism for systematic evaluation [of IMF], involving external input". This seems to aim at meeting the recent critics of IMF head on and to reform the institution in order to strengthen it.
Implications for the United nations?
The measures amounced by the G-7 speak to serious concerns repteatedly expressed by Governments in the General Assembly and by investors in the financial markets about the fragility of the international financial situation and the extreme disruption of normal econoic activity in Asia and elsewhere that has been related to it. Clearly, the concerns about global financial instability are shared by the G-7 Governments. In developing their response, they have made an effort to consult widely, as reflected in the work of the US Treasury. The G-7 have also pledged to continue to consult, "particularly with emerging market and other industiral countries to build a broad consensus in support of this declaration...."
Consultation, however, is not power sharing. The tone of each of the three G-7 statements is strong and self-assured, with a clear awareness of the power at the disposal of the G-7, both as financial and economic centers in their own right, ad as the major contributors, holding a controlling share of the votes in the international financial instirutions. If, thus, it might appear to the poor countries that the rich countries were throwing their weight around, it may also be seen by the financial markets that finally someone is taking charge and has a programme to fix what is broken.
As the G-7 are thus about to make decisions on international economic policy that may affect development trajectories, the United Nations has an interest in contributing to the deliberative process. This is not to say that the policies advanced by the G-7 are necessarily wanting from a development as the uncertainty-reduction measures noted above. An additional case in importance of an orderly and progressive approach to capital account liberalization." John Lipsky, chief economist at Chase Manhattan Bank, was quoted in The New York Times as saying that "This kind of working could mean almost anything, including the ordaining of some kind of controls" (31 October 1998). Precisely! (The Interrim Committee on 4 October had already said that temporary controls might be appropriate and expeiences with them should be studied; it also said that cpital-account liberalization should be "Orderly, gradual and well-sequenced").
In certain cases, however, the G-7 policy prescriptions might be strengthend by discussion with other interested parties and in a broader forum. For example, the G-7 Executive Directors are now seeking additions to IMF conditionality to require borrowers to agree to schedule to "eliminate the systemic practice or policy of government directed lending on non-industries, enterprises, parties or instituions." Without defending any particular policy-induced distortion, such as a blanket condemnation of market interventions would deny developing couintries the policy tools used by the developed countries in their own development and that all G-7 member countries still emploh in one form or antoerh (the Executive Directors acknolwedged this by adding that "All (IMF) members, including our countries, should be some forces in the Government of tone or more G-7 members, it can be argued that adopting such a requirement would exceed the limits of appropriate conditionality for macroeconomic adjustment lending by IMF.
Importantly, the G-7admits to policy failures in its new satements; e.g., "We agree that more attention must be given in times of crises to the effect of economic adjustment on the most vulnerable groups in society." They thus endorse a new World Bank emergency facility, which is to "provide additoinal funding on special terms to the most vulnerable groups in society and for restructuring the financial sector" --- curiously, these two expenditure programmes are rarely grouped together and hopefully they will not have to compete over a fixed pool of resourcse. Moreover, the F-8 Ministers called "upon the World Bank to develop as a matter of urgency general principles of good practice in social policy in consultation with other relevant institutions" (perhaps the G-7 text was simply badly crafted here, as the Development Bank to work with the United Nations, the IMF, and otherpartners to develp general principles of good pratice in structural and social policies (including labour standards)").
Finally, the G-7 leaders and Ministers reieterated an agreement in the October communiques of both Bretton Woods committees, namely to "Assess proposals for strengthening the Interim Committee, Carlo Azeglip Ciampi, told journalists at his 4 Octover press conference that there had been "a long discussion" at the private luncy meeting of the Interim Committee about this issue (see IMF Survey, 19 October 1998, p. 316). It may be recalled that the Committee was called "interim" because the negotiations in the 1970s over the reform of IMF were not completed. Now there was unanimous agreement to consider proposals to transform the Interim Communique of the Development Committee, Ministers sought an addition, in the communique of the Development Committee, Ministers sought a review of both committees in the Executive Boardsof IMF and the World Bank.
In the light of the increasingly broad scope of IMF conditoinality and the frequent involvement of the Development Committee in broad social and economic development issues, the future of these committees might also be considered in a more inclusive development forum. Indeed, the Group of 77 has suggested including governance of the international monetary, financial and trade systems in the proposed consideration of "finance for development" at the United Nations. Developed countries have not wanted to take up the issue; but now that they have themselves placed it on the agenda for international discussion in Washington, they may have a hard time making the case that it should not also form part of the New York disucssions on "finance for development."
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