February 21, 1998

We the Finance Ministers and Central Bank Governors of the G7 countries met today to review recent developments in the world economy and financial markets. The Managing Director of the International Monetary Fund, Michel Camdessus, joined us for part of our discussions.

2. Recent events have underlined the strong and growing interdependence of countries in the world economy. We believe that the successful resolution of current and future challenges requires increasingly close cooperation of national authorities. To that end, we will be intensifying our efforts for dialogue with all interested and affected parties. Regional and other groupings, including the ASEM and APEC processes, contribute to that dialogue. We will, through our membership of such groupings, keep each other fully informed of relevant discussions and developments.

Developments in the World Economy

G7 Countries

3. We discussed recent developments in our own countries, which have, on the whole, been positive. In the United States, United Kingdom and Canada, where growth has been strong, domestic inflationary pressures have been weaker than past experience would have suggested. Their authorities will continue to monitor developments closely and act if necessary to maintain conditions for non-inflationary growth.

4. In Germany, France and Italy, growth has generally continued to pick up. We welcome its greater balance but economic activity still remains below potential. While this recovery will help to create new jobs, reducing unemployment to acceptable levels in these countries on a sustainable basis will require implementing further significant structural reforms especially in the labour market but also elsewhere in the economy.

5. In Japan, activity is low, and the outlook is weak. Recovery will require continued action to strengthen the financial system and regulatory reforms of the financial and other sectors, so as to increase openness. We welcomed the progress so far on the "Big Bang" reforms of the financial system. In the view of the IMF there is now a strong case for fiscal stimulus to support activity during 1998.

6. In the context of surveillance, we reviewed recent developments towards EMU and discussed its implications for the G7 economies.

7. We discussed developments in our exchange and financial markets. We reiterated that exchange rates should reflect economic fundamentals and that excess volatility and significant deviations form fundamentals are undesirable. We emphasized that it is important to avoid excessive depreciation where this could exacerbate large external imbalances. We agreed to monitor developments in exchange markets and to cooperate as appropriate.

8. Improved employability will play an important part in ensuring the widest inclusion of our citizens in all our countries' prosperity, and improving prosperity overall. Finance Ministers look forward to the G8 Conference on Growth, Employability and Inclusion which will start this evening and continue tomorrow.

9. We also welcome and encourage the finalisation of the OECD's current work on curbing harmful tax competition. We look forward to receiving their report in April which will deal with the negative economic impact of tax havens and preferential tax regimes.

Developments in Asia

10. We reviewed the serious economic and financial problems in some Asian countries. We agreed that the basis for recovery can best be established through the adoption and vigorous pursuit of significant and far reaching reforms by the affected countries, with temporary financial assistance where necessary, led by the IMF and other financial institutions, with the private sector playing an essential role.

11. We emphasised our support for the approach taken by the International Financial Institutions, in particular the emphasis on structural reforms to reduce inappropriate government interference in the market economy, restructure financial systems, promote integrity and transparency and fight corruption in order to lay the basis for economic recovery. We recognized the importance of protecting, as far as possible, humanitarian expenditure including well designed and affordable social safety nets, and the International Financial Institutions' support for the work of the ILO in promoting core labour standards. We welcome the creation by the IMF of the new Supplemental Reserve Facility for the provision of finance at premium interest rates, where appropriate.

12. We believe that where countries pursue the necessary reforms, the prospects of a return of confidence to global investors and a resumption of vigorous growth in the medium term are good. As long as the affected Asian countries follow through with reform, and the rest of the world responds appropriately, the overall effect of the Asian crisis on world growth in 1998 should be manageable.

13. A vital contribution to recovery will be the maintenance of an open global trading and financial system. We welcome the recent GATS Financial Services agreement and believe that opening financial markets in emerging economies to foreign firms will make a significant contribution to their financial stability.

14. Continued access to trade finance will also be important for economic recovery in the region. We welcome the proposals made today by major export credit agencies to keep trade finance facilities open for countries in the region undertaking the necessary policy reforms in cooperation with the International Financial Institutions.

Looking ahead: lessons to be learned for the future

15. We discussed the wider implications of the Asian crisis. One clear lesson to date is that emerging and transition countries which strengthen their economic policies help avoid the consequences of contagion. While the actions of the international financial community and the affected Asian governments should bring about recovery, there will be lessons to be learned by countries, International Financial Institutions, private financial institutions and others who participate in the world financial system. We need to ensure the continued smooth and effective functioning of an open world financial market which is of great benefit to all. In the interest of the longer term proper functioning of the financial markets, it is essential for the private sector to play its role in resolving crises.

16. We look forward to a profound and broad-ranging debate over the coming months on the causes and lessons of recent events in Asia and their implications for strengthening the international monetary system, building on the reforms initiated at Halifax. We believe that it is important to consult widely, making full use of a number of forthcoming international fora that permit discussion with representatives of emerging market economies. The meetings of the Interim and Development Committees in April provide opportunities to carry this work forward. We will provide a progress report for the meeting of our Heads of State or Government at the Birmingham summit in May. The areas on which our initial efforts will focus are in the attached Annex.

Poorer Developing Countries

17. We agreed that the turbulence affecting some emerging markets in Asia should not distract attention from the problems facing poorer developing countries. We reviewed the G7 work put in train by the Denver Summit on the key difficulties in African countries. We also discussed the progress of the HIPC initiative which will relieve the poorest countries of the unsustainable burden of past debts and thereby improve their development prospects. We welcome the relief already agreed for Bolivia, Burkina Faso, Guyana and Uganda and hope for final decisions to be reached very soon on Mozambique and Cote d'Ivoire. We look forward to determined and speedy extension of debt relief to more countries, in line with the terms of the initiative. We call on all eligible countries to embark on the process as soon as possible, and to take steps to ensure that all can be in the process by the year 2000. We will also seek to support the initiative by working to ensure that future official credits to these countries are used productively.

Annex

Strengthening the international monetary system

Measures to promote more efficient functioning of global markets. We need to consider ways of strengthening the international financial system's infrastructure, including the appropriate supervision and regulation of financial markets to ensure adequate soundness of banks and other financial institutions. Work is already under way, following the Lyon and Denver Summits, within our own institutions and amongst the international regulators' bodies, to increase cross-border cooperation between regulators of internationally active conglomerates and to improve information exchange.

Measures to improve transparency and disclosure. This is also essential to efficient functioning of global markets. We look for improvements in the timeliness, accuracy and coverage of national statistical reporting; in the transparency of public policy making; and in the private sector in corporate governance and disclosure. We look forward to the IMF strengthening and expanding its data dissemination standards. We also look forward to the IMF making proposals soon for a code of conduct on transparency in fiscal policy as agreed in Hong Kong last year, and will look for further ways to ensure transparency. We also stressed the importance of transparency and accountability of the IMF arrangements.

Strengthening financial systems. Further action to strengthen financial systems and their operation, at both the national and international level, is needed to allow countries to take full advantage of global capital flows by opening their financial markets. A capital account amendment to the IMF Articles should be implemented quickly, to define the IMF role in capital account issues, and to help countries implement reforms with appropriate sequencing, taking account of the strength of financial systems.

The role of the international community. An early response by countries to the IMF's advice is vital. Countries' prompt and appropriate actions supported by the International Financial Institutions, are essential to prevent economic problems from turning into crises and to prevent contagion to other countries. Any international financial support must be consistent with the longer term proper functioning of financial markets. The institutions need access to all relevant economic data. In the light of the central role of the IMF we urge for early implementation of the IMF quota increase and the ratification of the NAB.

Steps to promote appropriate burden sharing by the private sector. Private sector borrowers and lenders need to face and act on appropriate incentives so as to ensure that they share both the profits and losses appropriately. With hindsight it is clear that the private sector's judgment has been inadequate in a number of instances. We encourage positive consideration of new mechanisms to ensure an orderly involvement of the private sector in the resolution of financial crises.

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Source: Canada, Dept. of Finance