Financial Post G7 Record

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Financial Post, Weekly edition, Wed 21 Jun 95, page 13

Keywords: Economic summits International finance Halifax International Monetary Fund

Status quo fuels cynicism

Marie-Josee Drouin

Before we cynically dismiss the usefulness and relevance of G-7 Summits it might be worthwhile to remind ourselves that important decisions have, at times, emanated from these discussions. The decision to forgive a substantial portion of African country debt was very meaningful. Likewise, support and commintment to trade liberalization and the very clear decision to complete the Uruguay Round were crucial to the achievement of a final agreement. This, especially, is an outcome that had been and will continue to be far-reaching and significant for the world economy.

Nevertheless, the spectacle which now surrounds these summit meetings makes everyone suspicious about their real meaning. As earlier planned these were to be ''fireside chat'' types of meetings intended to give industrialized country leaders the opportunity to discuss and reflect upon common issues which, in the course of their daily obligations, they could not always address.

The meetings were intended to provide an opportunity for dealing with issues which required infra-country collaboration and coordination. While they continue to seek to address such problems they now reflect the design of Sherpas, or rather plain, old, simple bureaucrats. Then again, they have been invaded by hordes of journalists and observers who thrive on the posturing of politicians.

Worse perhaps, these summits have come to be perceived as a meeting of the rich boys club which excludes countries with very rapid growth, big populations which represent a growing share of the world economy. The paradox of inviting Russia to G-7 meetings and excluding India and China for example is not overlooked in the newly industrializing countries. The main forum for debating policies and ideas affecting the world economy excludes some of the world's most vibrant countries and that is not an accurate reflection on today's economic and political environment. The same complaints are voiced repeatedly about the OECD or the Quadrilateral meetings and it might be useful for the G-7 members to give the matter closer attention.

Likewise, there have been recurring suggestions for revamping old institutions of cooperation such as the United Nations, the World Bank, the International Monetary Fund. Are these institutions geared to the economy of the future?

The G-7 did discuss the IMF but chose not to review its very objectives and role but rather to take these as given and set out to reinforce the Fund's supervisory and regulatory responsibilities. The group also decided to raise additional funds to mobilize the IMF to limit systemic risks or to preempt the likelihood of another Mexico.

While these proposals have merit, their implementation poses real problems. For example, if the IMF does assume responsibility for collecting and disseminating data in a timely fashion, will it also vouch safe the data's reliability? Will the IMF become more intimately involved in the design and operation of national data collecting systems? Under what terms? How would recalcitrant countries be forced to comply? Could the Fund reports acquire the status of officially-sanctioned credit ratings without changing the very nature of the institution?

The more fundamental proposals regarding the creation of an emerging fund raise even more problems. The issue of moral hazard continues to be widely debated and no one has yet explained how to implicit offer to blunt market forces would encourage countries to become more disciplined in their fiscal and monetary policies.

Of more relevance to the prevention of new crises than the creation of large new funding mechanisms would be the customary clear lender of last resort responsibility in a world of securitized finance, deregulated domestic financial markets and clear principles for cross-border capital flows. With ''clear rules of the game'' investors and borrowers would be able to assess potential risks and rewards more accurately and more confidently than is now the case.

These are the types of issues which the G-7 summits must address if they are to reflect today's realities. Boosting the status quo and posing for photo opportunities will merely fuel the prevailing cynicism .

(Ed. note) Marie-Josee Drouin is a Fellow of the Hudson Institute Inc.

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Revised: June 3, 1995

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