International co-operation in economic policy making has had mixed reviews this week. Tuesday's meeting of the Group of Seven leading industrialized nations produced a minimalist response to the problem of the US$'s sharp fall against the Japanese yen and the German mark.
The G-7 - comprising the U.S., Japan, Germany, France, Britain, Italy and Canada - lived down to the expectations of financial markets when it eschewed short-term "quick fix" measures to reverse the US$'s fall.
But by late Wednesday, finance ministers from the industrialized, developing and former communist countries were able to agree on some useful improvements to the International Monetary Fund's early warning system, in an attempt to reduce the chances of another potentially destabilizing financial crisis of the kind that engulfed Mexico four months ago. The IMF's 24-member policy making Interim Committee agreed to a five-point program to improve IMF surveillance of member states' economies.
The G-7, by contrast, appeared divided on the top agenda item of currency turmoil. While stating that recent currency movements had been excessive and expressing a wish for their "orderly reversal", the G-7 effectively admitted that market forces were now too strong to be resisted by intervention on currency markets, and that the G-7 had been unable to muster the political will for co-ordinated interest-rate changes.
It is therefore tempting to suggest that some significant change has taken place in the pattern of international economic policy co-operation this week. Could it be that the G-7's influence is on the wane, and that the Interim Committee is taking its place as the preferred forum for co-operation?
Such a scenario has attractions for many countries. The Interim Committee, indirectly representing all 179 IMF members, can claim to reflect their diverse interests. Many find irksome the G-7's self-appointed role as the globe's premier economic grouping.
Philippe Maystadt, the Belgian finance minister and chairman of the Interim Committee, has sought to boost the committee's role in international economic policy making. Although an acrimonious row - over plans to boost global liquidity through an issue of Special Drawing Rights (the IMF's reserve asset) - grabbed the headlines at last October's Interim Committee meeting, Maystadt was able to get the 24 members to agree a "Madrid Declaration" on co-operation to strengthen the current global economic recovery.
This week, he instituted a review of the declaration and the policies adopted to secure growth. In so doing, he quietly increased the Interim Committee's role in the multilateral surveillance of IMF member states' policies.
The Belgian minister has tried in other ways to make the Interim Committee a forum that finance ministers from industrialized countries take seriously. He has tried to make the discussions less scripted and more informal and instituted a long working lunch in which policy decisions can be thrashed out.
To some extent, it is logical that the G-7 should appear in eclipse. The world has changed since the mid to late 1980s when the industrialized countries were actively seeking to influence exchange rates and each other's economies through high-profile international accords such as the Plaza Agreement of 1985 to depress the US$ and the 1987 Louvre Accord to stabilize currencies.
For nearly 20 years, the developing countries as a group have grown faster than the big industrialized countries, increasing their importance in the world economy. At the same time, the G-7 nations have diverged in several important ways.
The illustration accompanying this article shows how Germany and Japan among the G-7 countries have been significant exporters of capital in recent years while the U.S., Britain, Canada and Italy import capital. It is no coincidence that the division between stronger and weaker G-7 currencies follows the same pattern.
But it is too early to write off the G-7. Its members may differ and sometimes squabble among themselves but, once a policy has been discussed, they usually present a united front to the rest of the world. The compact nature of the group in contrast to the 24-member Interim Committee has contributed to a more pronounced esprit de corps, as does the fact that the G-7 meets three or four times a year, whereas the committee meets only twice.
As Theo Waigel, the German finance minister, argued this week, it is also a mistake to judge the G-7 solely in terms of co-operation on currency markets. The group co-operates in other areas ranging from economic support for Russia to the combatting of drug trafficking and money laundering.
Nor should the Interim Committee's agreement to strengthen IMF surveillance be overstated. The build-up to the Mexican crisis, which unearthed failures in the IMF's monitoring procedures, made such a move almost inevitable. Indeed, the Interim Committee could have gone further and given the five-point plan more teeth. Proposals from Kenneth Clarke, Britain's chancellor, for the IMF to list those countries which meet its standards on the provision of economic data and for the creation of a special "evaluation unit" to investigate IMF errors failed to secure agreement.
In spite of Maystadt's efforts, the Interim Committee is hampered by its narrow terms of reference that ties its activities to the IMF.
The G-7, meanwhile, still finds it difficult to involve other nations in its work. Symptomatic of its strengths and weakness is the group's approach to the June summit meeting of G-7 heads of state in Halifax. Although reform of the post-Second World War international institutions, including the IMF and World Bank, looks set to top the agenda, the G-7 nations have not seen fit to consult with or involve the other members of the IMF and World Bank.
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Revised: June 3, 1995
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