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Economic Co-operation: Summitry, Institutions, and Structural Change

by John Kirton

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1. Bergsten and Henning's analysis notes such successes as the falling inflation, stable US dollar exchange rates, full employment in the US, the conclusion of the Uruguay Round and creation of the WTO, regional trade liberalization initiatives and the global spread of outward, market-oriented economic strategies, but highlights very modest growth in the industrialized countries, unemployment far above traditional levels in Europe and for the G7 as a group, stagnant average income levels in the US for over two decades, and a rapid rise in unemployment in Japan (Bergsten and Henning 1996: 49-50). In their analyses, the causes of the G7's broad failure are traditional differences among the members, especially the US and Germany, on key issues, America's declining economic and security power, inconsistent policies and inept performance, and above all, an inaccurate “new consensus” among members that ambitious co-ordination is impossible given massive global flows of private capital, pervasive large fiscal deficits, the increased importance of independent central banks and poor memories of past achievements in G7 co-ordination.

2. The exception argues that in the 1990's “...the momentum towards a rule-based system already begun in trade, investment and the environment is being maintained, progress is being made in international financial relations...There is fresh impetus to reform the UN's operations...much of the innovatory pressure has come from the leaders of the G7 countries, at their Summits in Naples in 1994 and especially at Halifax in 1995. There they launched a systematic policy of working through international institutions, in a way never attempted before.” (Bayne 1995: 493-4). Bayne argues the G7 judged that “strong and effective international institutions would help them to resolve the tensions of globalization, between domestic and international pressures” and “counter-protectionist and inward- looking tendencies” but required the G7 to lead by example by drawing up multilateral rules, observing them strictly and co-operating in their enforcement.” (Bayne 1995: 500-1).

3. Co-operation, as used by Bergsten and Henning, refers to “all collaborative activities among governments,” whereas, co-ordination is “the process by which national policies are adjusted to reduce the adverse consequences (or reinforce the positive consequences) that the policies of one or more states have on the welfare of other states.” (Bergsten and Henning 1996: 13, Putnam and Henning 1989: 15). Others offer a more extended scale, ranging from consultation, through co- ordination, then harmonization and finally confederation, with each step progressively reducing national independence and weakening political accountability (Lawrence et al. 1996:45). The classic work on the G7 defines co-operation as “episodes in which the policies of one or more states are modified to reduce the costs (or increase the benefits) that those policies entail for the welfare of other states, so that national policies differ from those that would have been expected from purely unilateral or autarkic policymaking,” and offers the scale of mutual enlightenment, mutual reinforcement, mutual adjustment, and mutual concession (Putnam and Bayne 1987: 2, 261-265). The Putnam formulation is employed here.

4. It has been further suggested, following the logic of Mancur Olson, that the slower growth in the second half of the post-1945 half century is a result of the accretion of international institutions which the international community is quick to create and eager to continue, but almost never ready to abolish. (Portes 1994). By this logic the G7 compares favourably as a lightly institutionalized body devoid of an organization, that provides impetus in eliminating or downsizing the multilateral institutional inheritance.

5. At a more detailed level, there continued to exist consequential differences among the US market economy, British socialism, German ordungspolitik and Japanese consensus corporatism (Portes 1994).

6. On the critical importance of small size and shared values in creating and rendering effective the major multilateral institutions of the immediate post world war two period see Eichengreen and Kenen, 1994.

7. It was only at the trade ministers meeting in May 1997 that APEC agreed to identify sectors that it could proceed to liberalize among itself and then within the broader WTO.

8. For example, on such performance (as opposed to power) indicators as the UN Human Development Index (measuring life expectancy and literacy as well as production), Japan and Canada regularly outrank the US.

9. In a change of an earlier (1993) position recommending more weight for China, India, Mexico and Brazil, Bayne (1995: 497) now argues that the G7 should retain its current membership, as “the present G7 members need more than ever the close links provided by the summit process to defuse disputes among themselves and to counter the strains of globalization. The present G7 membership provides the best opportunity for exerting reciprocal pressure between the highly developed countries of Europe, North America and Japan, which would be lost if the composition were changed.”

10. The list includes the dinner the G7 had with 15 developing country leaders invited by French President Mitterrand on the eve of the 1989 Paris Summit, the dinner the Japanese Prime Minister and President Clinton had with the Indonesian President (then chair of the Non-Aligned Movement) on the eve of the 1993 Tokyo Summit, and the broad and intense series of consultations Canada held in the lead up and follow up to the 1996 Halifax Summit.

11. Ideological cleavage and consensus, as measured by party in power in the G7 governments, has little effect in predicting the ability of the G7 to reach ambitious agreements. This is probably due to the presence of number two Japan, with its Liberal Democratic Party hegemony, as the great stabilizer that prevents a divide into two powerful poles with few consequential countries in the middle (Kirton 1989).

12. “The fundamental reason for heads of government to meet has always been that they can reconcile the domestic and external pressures of national policy, in a way that other ministers cannot. As the overlap between domestic and external policies has increased within globalization, so the requirement to reconcile conflicting pressures has grown...” Bayne 1995: 494.

13. This argument thus sustains that of Eichengreen and Kenen (1994) who note the importance of flexibility in propelling the success of the 1945 institutions during their first 25 years, and the greater success enjoyed by the lightly organized GATT in contrast to the heavily organized IMF and IBRD.

14. Cf. those who argue that “These extra meetings appear to clutter up the G7 apparatus, against the professed intentions of the leaders, and to siphon issues away from the wider international institutions competent to handle them.” (Bayne 1995: 486)

15. This forum has now become an annual institution as environment ministers met again in Florence in 1994, Hamilton in 1996, Cabourg in 1996 and most recently in Miami, Florida on May 5-6, 1997. This last meeting focused on climate change, the forthcoming United Nations Special Session reviewing the Rio commitments, international efforts on environmental enforcement and compliance, and environmental hazards and children's health. As this forum involves only environment and not development ministers, it is an institutions directed at the “global commons” rather than “sustainable development” embracing issues of north- south redistribution. As with the 1945 galaxy, the G7 has been slow to evolve a component institution for development at the ministerial level.

16. The 1997 hosting may breed a Japanese hosted ministerial level G7 meeting of the “Caring Society,” focused on the social policy (pensions and health care) component of the microeconomic agenda.

17. The terrorism ministerial, an extension of the G7's longstanding concern with this issue, can be seen as the leading edge of the G7's attempt to respond to the globalization of migration, while the information society meetings embrace both border and domestic barriers. The 1997 interruption is best seen as a temporary result of US hosting, rather than an end of the impulse towards institutionalization in these domains.

18. A “commitment” is defined as “a discrete, specific, publicly expressed collectively agreed statement of intent; a “promise” or “undertaking” by Summit members that they will take future action to move toward, meet, or adjust to an identified target.” (Kokotsis and Kirton 1997).

19. There is certainly no “crisis of governability” in the 1990's as the apparent “wholesale rejection of incumbents throughout the G-7" (Bergsten and Henning 1996: 51) in the 1990's, is arguably a “post cold war success” rather than a “G7 failure” effect and is no greater than the transition centred on 1980 which largely brought the “new cold war” (including Mitterrand) or “neo-conservative” generation into power. The Bush-Clinton transition of 1992 is equal to that of Carter-Reagan, the LDP has returned to power in Japan after a brief interlude, and Kohl has continued in Germany.

20. Projections for 1997 place inflation (as % consumer price index increases) within the G7 as follows: US 2.9; Japan 1.3; Germany 1.8; France 1.6; Italy 2.4; Britain 2.6; and Canada 1.7. Fiscal balances (as a % of nominal GDP are: US -1.5; Japan -2.9; Germany -3.3; France -3.3 Italy -3.3; Britain -3.1; Canada -0.3. (Sources: International Monetary Fund, April 23, 1997, OECD December 1996). By May 1997, the US budget deficit for 1997 was widely forecast to be less than 1% of GDP, paving the way for the bipartisan balanced budget agreement reached that month. In Canada, the government was well ahead of its deficit reduction targets and widely expected to be in surplus by the year 2000. While Germany and Japan, afflicted by slow growth, faced cyclical budget deficit difficulties, the economic foundations for the “new consensus” among the G7 had disappeared on the fiscal front.

21. Projections for 1997 place real GNP growth (% increase) for 1997 for G7 members as follows: US 3.0; Japan 2.2; Germany 2.3; France 2.4, Italy 1.0, Britain 3.3, and Canada 3.5. (International Monetary Fund, April 23, 1997). Real GNP growth in the G7 as a whole, weighted by members GNP levels at then current exchange rates, was +.982 in the “peak” low growth year of 1980, and almost double, at +1.78 in the 1990's peak low growth year of 1991. (See Table C). Unemployment in the USA peaked at 9.7% in 1982 compared to 7.5% in 1992 (and a level of 5.4% in January 1997), in Canada at 11.9% in 1983 compared to 11.2% in 1992 (and 9.7% in January 1997), in Britain at 11.8% in 1983 compared to 10.5% in 1993 (and 7.7% in January 1997). In Germany a peak of 7.2% in 1985 compares with 6.5% in 1994 and 1995, rising beyond 7.2% only by the fourth quarter of 1996 (to reach 7.8% by January 1997). In Japan peaks of 2.8% in 1984 and 2.9% in 1987 compare with 2.9% in 1994 (and a level of 3.3% in January 1997). Only in France and Italy is there a rise, with a French peak of 10.8% in 1987 comparing with a one of 12.9% in January 1997, and Italy's earlier peak of 7.2% in 1985 comparing with a recent peak of 12,5% in 1996Q2 (and 12.3% in January 1997). Source: Bureau of Labour Statistics, U.S. Department of Labor, May 1997. See Table C for GDP growth rates and Table D for unemployment figures.

22. The A6 is a group of six Asia Pacific countries assembled under US leadership in 1997 to address financial and economic issues within the Asia Pacific region.

23. This non-interventionist fostering of globalization has brought low interest rates across the G7. In December 1996 short term rates (in %) stood at: US 5.3; Japan 0.6; Germany 3.1; France 3.3; Italy 7.6, Britain 6.1; and Canada 3.0, while long term rates stood at US 6.5; Japan 3.1; Germany 6.1, France 6.1, Italy 7.7, Britain 7.4, and Canada 6.8. (Source: OECD, December 1996). In both cases, correcting for inflation and growth rates (and allowing for the politics of the OECD process), the interest rate differentials provide a strong incentive for the rapid appreciation of the US dollar against most G7 currencies, as experienced over the past year. The real short of the US dollar in 1996 and 1997. For example, the OECD's 1997 projected real short term interest rate for the US was 2.4% and for Japan -0.7.

24. The Economic Communiqué was entitled “Making a success of globalization for the benefit of all.”

25. In taking up international financial institution reform as the centrepiece of the 1995 Halifax Summit the G7 displayed a preventative as well as reactive capacity as the issue was identified at the Naples 1994 Summit, and promoted by Halifax host Jean Chretien, well before the peso devaluation added impetus to the process (Kirton 1995a).

26. While the GAB-NAB is not enough to handle another Mexico and a Russia at the same time , the G7, through the IMF, is handling Russia through regular relaxations of IMF conditions for the provision of financial assistance. There is thus no need for a major new allocation of SDR's. Indeed, the need had disappeared well before the apparent repudiation of the G7's proposal at the Madrid meetings of the IMF.

27. The more likely institutional evolution, based on the precedent of the trade ministers Quadrilateral, is the creation of a G4 or G5, with Canada and Britain included.

28. In 1997 projected current account balances (as a % of GDP) among G7 countries were as follows (with 1995 figures in brackets): US -2.3 (- 2.0); Japan 1.8 (2.2); Germany -0.5 (-0.9); France 1.6 (1.1); Italy 3.7 (2.5); Britain -0.9 (- 0.5); and Canada -0.0 (-1.4). (Source: IMF, April 23, 1997). In contrast, the 1980 peaks were as follows: US -3.4% in 1987; Japan 4.4% in 1986; Germany 4.8% in 1989; France -2.0% in 1982; Italy -2.4% in 1981 (and 1992); and Britain -4.4% in 1989. (Bergsten and henning 1996: 60-62). The current range is thus much narrower, and more closely clustered around balance within the G7.

29. For example in the world's largest trading relationship, that between the United States and Canada, and estimated 40% of trade takes place between different affiliates of the same multinational corporation while an additional 30% takes place between corporations linked by joint ventures, technology licencing arrangements, or strategic alliances.

30. More broadly, the G7 leaders made a “valuable contribution” to the Round “by backing a strong dispute settlement mechanism and the conversion of the GATT into the WTO; by keeping the Round alive through a painful recession; and by using the 1993 Tokyo Summit to clinch the decisive deal on market access.” (Bayne 1995: 495).

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