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The economic statement by the seven major industrial democracies and the European Union reaffirmed commitments made in Lyon to use structural reform to increase labour and product market efficiency, but an expert from the London School of Economics says that it does not go far enough.
“I would have like to have seen a way of geeing up the negotiations in the OECD, which after all seven of the eight are involved in,” said Professor Michael Hodges. “The economic communiqué is unfocused. What we need to do is to say we are still concerned about all the problems that we have mentioned before but then point to the ones that we really must do something about for next year. Some of that is in there, but I think we need to do more.”
The nine page statement outlined the different circumstances being experienced in each of the seven countries. While the United States is to continue to fight inflationary surges, Canada is predicted to experience a rise in job creation as a result of its low inflation, deficit reduction and increased growth in the second half of 1996. The Japanese goal is to achieve, “strong domestic demand-led growth and avoid a significant increase in its external surplus.” In order to further revitalize the Japanese economy, broader deregulation and structural fiscal reforms are to be used, the communiqué said.
Barriers to job creation are highlighted as the keys to tackling the unemployment problem in France, Germany and Italy. This may take place reshaping the role of the government with respect to the tax and social security systems. However, this action on unemployment must take place while efforts to restore “sound long-term fiscal positions,” continue.
The main barrier to job creation in continental European countries are the non-wage costs such as payroll taxes, contributions to social security. “In Germany they can reach up to a 100-110 per cent of wage costs, so it means that the employer is sinking a big financial commitment into every extra worker that they hire and they have to be pretty sure that they can actually employ those workers continuously,” said Hodges. “Removing the barriers is very difficult in social market economies as there is a compact between business, labour and government. It has been done in some cases, such as Volkswagen, by allowing more flexible shift work, but in turn they had to lower the number of hours in the work week, said Hodges. “Europe has pretty much gone to the end of the line to squeeze more productivity out of its workers. But very few politicians are willing to grasp this particular nettle and this was seen in the recent French elections in the reaction to the fiscal austerity imposed by the Maastricht Treaty. People don't like what they see and I think it is going to be a very difficult problem,” said Hodges. The way around this, if there are to be no changes to the laws or restructure the welfare benefits, is encourage those sectors of the economy that can create jobs such as small and medium businesses.
The United Kingdom's goal is to control inflation, maintain budget deficit reduction while at the same time strengthen long term growth potential through education and welfare reform. This is a reiteration for newly-elected British Prime Minister Tony Blair. “This turns what was a national commitment to reform the British welfare system and to improve training into an international commitment,” said Hodges.
The seven leaders welcomed the progress toward the Euro, but warned that only sound macroeconomic policies that contribute to the stability of the international monetary system. This concern for stability was repeated in a statement for international monetary systems as well. “This is the concentration, some would say obsession, on low inflation environment and whatever might be the consequences on the employment level. So we can see the consequences on the employment level because the unemployment level is much higher in Europe than in the United States or Canada for that matter and it is highest in those countries that have pursued Keynsian demand stimulation programs, said Hodges. According to Hodges the macroeconomic management tools in the global economy are becoming less and less effective such as elements of regional development policies, and management of the money supply and monetary policy. “I think that most of the mileage is going to come from government policies that stimulate at a microeconomic level which is why there is so much emphasis on SMEs, on grey power and getting senior citizens into the workforce so that they can contribute and thus mitigate for the aging demographic.”
Russian progress on economic reform was applauded by the leaders. Key to fiscal stability is the reform of the tax system with “structural reforms to improve the investment environment, promote competition, fight crime and corruption and strengthen the social sector.” To improve the investment environment it is key to implement a sound commercial law structure and having it implemented in a non arbitrary way, Hodges said.
The complexity of international financial markets is regarded as a positive challenge, according to the statement, as new opportunities are leading to increased functioning of the international financial system. The leaders looked to the Finance Ministers' report as the key to strengthening the international financial system. “I think what is most encouraging is increasing networks of co-operation between the banking supervisors, the securities markets supervisors and the insurance industry supervisors. That obviously matches the development of universal banks but I think it is enormously important that we not only have an exchange of information between financial markets and between regulators, but ,we have what you might call vertical communication, we have horizontal communication between functionally specific regulators so that we can get some idea of the whole picture,” said Hodges. Another area that needs work is the internal risk management system by financial systems and an admission that regulators are not clairvoyant and that it essentially depends on the banks themselves so they don't have another Nick Leeson, “bringing the whole castle of cards down.”
For emerging economies, the Working Party on Financial Stability in Emerging Market Economies has outlined strategies for them to strengthen their financial systems. The seven also encouraged wide use and implementation of the recommendations of the Basle Committee on Banking Supervision. “What they are doing is going beyond what were rather primitive capital adequacy ratios to looking at assets in terms of the amount of risk that is involved in these assets and to the degree to which the internal risk management system of those the banks concerned can reduce the need for reserves. Reserves are a dead weight for a bank so any way you can reduce reserves without going across prudential guidelines is a good thing and I think they are moving towards a much more sophisticated appreciation of what the risks are in various kinds of transactions,” said Hodges.
In addition to these measures the leaders urged national supervisors to implement proposals to enhance regulatory co-operation and for international financial institutions and the regulatory bodies to assist emerging economies. The finance ministers of the seven are to report before Birmingham on further actions to assist in this area.
The leaders will continue to work towards agreeing on amendments to the IMF Articles in order to give the International Monetary Fund, “the specific mandate to promote capital account liberalization to meet the new challenges in global capital markets.” “Essentially what they are trying to do is to is to increase the reserves available to international financial institutions so that they actually can play a greater role in promoting stabilization and promoting development. There has been a lot of controversy in the U.S which is essentially blocking the progress in this area because it is not happy with the arrangements that have been suggested,” Hodges said.
The seven leaders urged the World Bank to put a stronger focus on, “building institutional capacity, especially in the poorest countries, and its recognition of the central importance of transparency, accountability, and good governance.” The World Bank Group is to present new ways to support private sector infrastructure investment in developing countries. The regional developments banks are to participate in those goals.
“There are two things here. To some extent this reflects the American emphasis on increasing the efficiency of international financial institutions I am not saying that some of the other countries do not share some of those concerns as well but if there is going to be increasing aid it is going to come from savings in the middle men who are distributing the aid. The Europeans are much less insistent on that and more willing to contemplate absolute increases in aid. I think there is a consensus that the developing countries must move towards market based economies with sound governments and that there is really only disagreement on the means to achieve that rather than the end in itself.”
A strong statement aimed at securing more financial resources and support for international financial institutions. At the multilateral level, this means that all countries must meet their financial obligations “particularly with respect to vital concessional lending operations such as the IDA.” More financial support was also noted to be needed by the Multilateral Investment Guarantee Agency in order to support private sector investment in developing countries.”
“The message there is that you cannot expect the private sector to shoulder all the risk and that the most effective use of public money is by leveraging those funds and providing guarantees which then can bring in a multiple cost of those guarantees in terms of investment for the countries concerned,” Hodges said.
The seven leaders reaffirmed their commitment to working in tandem with developing countries. While the seven work on a sound global financial system, open trade and investment regimes and consistent and sustained growth, the developing countries must, “pursue sound macroeconomic policies; make fiscal choices that genuinely promote development and minimize unproductive expenditures, especially military expenditures; ensure the best possible use of our support; and respect the basic rights of individuals.” The section also place an emphasis on who should receive the support: “We must ensure that adequate development assistance is available, and that it be concentrated primarily where it will have the greatest impact, on the poorest countries in danger of being left further behind…”
In Sub-Saharan Africa the seven looked toward a deepened partnership that would take on a more market-oriented dimension and for the IFIs to identify priority problems and put in place steps toward openness, regional integration and a deeper participation of the world economy. This in turn, “should assist productive foreign investment and domestic capital formation.”
For the heavily indebted poorest countries, the communiqué reaffirmed the debt initiative from Lyon called the HIPC initiative. While the IMF and the World Bank have specific measures for multilateral debt reduction under the program, the Paris Club is now showing its readiness to participate on the basis of fair burden sharing. The communiqué also stated that additional countries are expected to qualify in the months ahead.
On the subject of corruption the IFIs, the OECD and the Financial Task Action Force are to work on different areas of crime. For the World Bank that meant raising its public sector procurement standards through greater transparency. The OECD is criminalizing the bribery of foreign public officials with a deadline of April 1 1998 for the proposals to reach the legislatures and for the laws to come into effect by the end of 1998. In the interim a convention is to be negotiated and completed by the end of 1997. The FATF is to fight the battle against money laundering, to expand its membership and to co-operate with regional organizations. The FATF is review ways to enhance its work in this area and to complete a report for Birmingham. “From the American perspective this statement is not strong enough, but frankly this is another example of how an army marches at the pace of its slowest member. I suppose the slowest marcher would be Russia and all one can say is that while the G8 all look pretty good in contrast to Nigeria on the corruption index, none of them are without stain,” said Hodges.
With a continued emphasis on liberalization, the section on global trade and investment urged all WTO members are to, “…secure a financial services agreement by the end of the this year, on a full MFN basis, that contains significantly improved market access and national treatment commitments from a broader range of countries.” Further market opening initiatives are to be explored. Labour standards are to be rejected when used a support for protectionist purposes, but internationally recognized core labour standards are to be recognized.
The section also dealt with the expansion of the WTO, the development of electronic commerce, the simplification of customs procedures and harmful tax competition.
The message to the Ukraine encouraged the country to attract more investors through a continuation of reform. The reforms which were announced by the Ukrainian government in the fall is crucial to gaining financing that is already available from the IFIs and the donors. The statement said all efforts would fail unless a development of the private business sector.
Also on the subject of the Ukraine is the crucial Memorandum of Understanding on the closing of the Chernobyl nuclear power plant. The goal set for the Ukraine to receive funding to meet its power needs. The seven also added to their commitments to the Ukraine through the MOU by adding a multilateral funding mechanism and contribute $300-million “for the lifetime of the project.” A conference in the fall will further deal with this issue.
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