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Revitalizing the G-7: Prospects for the 1998 Birmingham Summit of the Eight

by John Kirton and Ella Kokotsis

March 1998

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The Promise of the Birmingham Summit

Reinforcing this recent legacy are promising signs of a focussed agenda, stability in membership and participation, and innovations in the summit process that the British are pioneering in their preparations for Birmingham.13 The promise of Birmingham rests in the first instance on its ambitious and timely agenda, tailored to meet the pressing issues of the moment and to move proactively and preventatively to accomplish longer term reform. In both domains the agenda takes the G- 7 well beyond a concern with international relations and foreign policies into the core domestic issues of outside countries and G-7 members alike. Indeed, the Birmingham agenda goes some way towards making the G-7 an international centre of domestic governance on a global scale.

At the centre of the emerging agenda is global financial stability and the related issues of reforming both domestic banking and financial systems and the IMF and other public IFIs. The challenge is to strengthen the ability of the international system to prevent and deal with crises by improving transparency, early warning, and private sector burden-sharing. The G-7 leaders seem to have accepted the fact that securing genuine reform that will restore stability and growth requires their personal involvement in exerting pressure on recalcitrant leaders such as President Suharto of Indonesia. Even when, as in Thailand, the IMF had the necessary information to see a crisis looming, high level interventions with the Thai authorities were ineffective. There is also a sense that thus far in the Asian crisis the Japanese, preoccupied with domestic problems, have left too much of the burden of regional leadership to the United States alone. The Europeans, made painfully aware of the implications of the crisis in Asia for their economies, are also concerned that in a massive systemic crisis the United States might be forced to respond virtually on its own. They participated in the second line of defence to retain their influence, along side the United States, over IMF and World Bank decisions. Doubts about the adequacy of the IMF/World Bank response suggest that the G-7 leaders should return to the Halifax agenda of IFI reform and identify ways to go beyond it. Such a focus would respond to concerns within the United States about the performance of the IMF as an institution in the Asian currency crisis and would help to overcome congressional doubts about public bailouts when banks make poor lending decisions. It would also address congressional reluctance to authorize the funds required for the United States share of the New Arrangements to Borrow (created in the wake of the 1994 Mexican peso crisis to supplement the credit available for the 1962 General Arrangements to Borrow) and the IMF's quota share increase.

The second issues are the dominant domestic concerns of employment and crime. These were declared at Denver to be major themes for Birmingham, and they have retained that status. The employment issue was chosen in part because Blair is the leader of a Labour party and because he will be president of the EU at the time of the Birmingham summit. Within continental Europe unemployment is a serious concern, moving toward crisis proportions in Germany. Here the January 1998 rate reached 12.6 per cent, the highest amongst G-7 countries, and a currently unpopular chancellor, Helmut Kohl, faces an election in September that could affect the ease of the transition to a single European currency. Youth unemployment, an area in which Blair would like to get G-7 approval for his recent national welfare reforms and "new deal" programme, stands at about 33 per cent in Italy and 28 per cent in France, compared to 16 per cent in both Britain and Canada. Birmingham's contribution on employment is likely to come through comparing domestic experiences and sharing (and perhaps collectively identifying) best practices and lessons. There is as yet no clear consensus on how active international co-ordination can assist in ameliorating deep-seated problems of unemployment. However, by collectively agreeing on the best international practices, proven policies, and appealing new ideas in several areas, the G-7 can set policy directions that will inspire policy adjustment at home. The February 1998 meeting of G-7 employment ministers in London has provided a firm foundation on which the leaders at Birmingham can build.

The treatment of crime, which engaged the energy of the German, Russian, Italian, and American leaders at Denver, promises to be at least as productive. While the issue has domestic resonance, it is clear that improved international co-operation can produce results. Overcoming a culture of secrecy and ensuring open co-operation among various departments to combat transnational crime is a major challenge for many member governments. Although G-7 ministerial meetings, such as that held in Washington in December 1997, can and do help, the attention of the leaders is often required to ensure the requisite co- ordination. G-7 leaders, with useful help thus far from the Russians, also face the challenge of dealing with the wide-spread suspicion that parts of the Russian government are involved in organized crime. Nor is Russia the only G-8 government concerned about insulating the state apparatus from the intrusion of organized crime.

Sustainable development, which featured so prominently at Denver in 1997, Lyon in 1996, and Halifax in 1995, is less likely to be a subject of major emphasis and achievement at Birmingham. The leaders will touch on the subject when they consider the impact of the Asian financial crisis on developing countries, both in finance and in trade. Any broader discussion of development would focus on the African agenda, which was highlighted at Denver. But it is unclear what value the G-7 could add to that agenda at this stage. With regard to the central global environmental issue, climate change, there is a general feeling that the third conference of the parties to the 1992 United Nations Framework Convention on Climate Change, held in Kyoto, Japan, on 1-11 December 1997, put in place the necessary framework to begin to grapple with this issue. Difficult decisions could, therefore, await the scheduled follow-up conference in Buenos Aires later in 1998. Another, often central, G-7 issue likely to be side-stepped at Birmingham, as it has been since Naples in 1994, is multilateral trade liberalization. Given widespread anxieties about globalization and that the president of the United States does not have fast track authority, there is little momentum for major initiatives such as an agreement to launch Sir Leon Brittan's proposed millennium round of multilateral trade liberalization negotiations. At Birmingham the leaders will thus applaud the values of the world trading system and the 50th anniversary of GATT, but leave to the 1999 summit in Germany the major task of shaping an agenda for new trade negotiations that GATT ministers must approve at the end of that year. Benign neglect on these central subjects could raise traditional criticisms about the episodic attention span of the summit, place an additional burden on the G-7 ministerial forums for trade and the environment, and underscore the need for a similar forum for G-7 ministers responsible for development co-operation.

The ability of the G-7 to take forward-looking, preventative action could be tested by Ukraine, whose widespread failure to pay its bills is generating a financial crisis. Yet preventative G-7 action is inhibited by a consensus that the G-7 has limited leverage and that it would be prudent to wait until after the Ukrainian presidential elections in March 1998. At the same time, the G-7 remains aware of its responsibility for Ukraine. The G-7 has made it clear that it will provide financial support, but only after Ukraine gets its house in order. The G-7's immediate task is to ensure that Ukraine continues to respect its agreement to contain the Chernobyl reactors, a task supported by the Shelter Implementation Fund pioneered by G-7 members.

In addressing this ambitious agenda, it appears unlikely that the Birmingham summit will deal with the distraction faced at Denver of finding new ways to give the Russians ever more participation and public status as a full member of the club. There is a widespread and wise conviction that given its serious economic agenda, Birmingham and subsequent summits should repeat the Denver formula, which set aside a block of time for the G-7 leaders to meet alone for frank discussions on delicate subjects, including the future of Russia. Such a meeting of the seven should be lengthy and substantive but packaged publicly in ways that save Russian face.

The repetition of the Denver formula will deeply disappoint the Russians, who are convinced that they were promised (and that they deserve) full membership in the G-8, especially now that real growth has returned to their economy after close to a decade of decline. Yet the speculative attack on the rouble early in February 1998, soaring Russian interest rates, a plummeting stock market, and an end to foreign portfolio investment inflows show that Russia remains a potential consumer of financial security in competition with Asia, rather than a partner providing such security alongside the G-7. Interest rate spikes increase the costs of servicing Russia's debt and compound its persistent difficulties in controlling its budget deficit. In the meantime, Russia continues to struggle with privatization, tax collection, property rights, and declining export revenues. Nor are Ukrainian authorities more likely to respond favourably to G-7 admonitions to reform their economy if they know the Russians are among those defining and issuing the requests. The Russians themselves, confronted with these realities, may be prudent enough to hide their disappointment at being excluded from all sessions and highlight the fact that at Birmingham the group (as distinct from the specific summit) will be called for the first time the G-8.

Holding the line on Russia, in practice if not presentation, should contain pressure to include other apparently large and growing powers in the G-8. Such a step would dilute the democratic-market foundations of the G-7 club and erode its ability to respond rapidly and cohesively to crises. Although a few retired officials and well-meaning columnists have called for the inclusion of the People's Republic of China, there is no support in official circles for such a move. Indeed, there is a deep, tacit consensus that China does not play by the rules of democracy and free trade and is immune to beneficial socialization through inclusion in the G-8 (as opposed to forums such as the WTO with their broader membership base and more limited purposes). Moreover, its burgeoning economic power has now been cast into some doubt. To be sure, China and Hong Kong essentially escaped the initial stages of the Asian currency crisis and moved to provide financial support as part of the Manila mechanism that was devised in response. Moreover, China is now proceeding to reform its financial institutions and shrink its unproductive state sector in the same way that its Asian colleagues, under the force of IMF programmes, are. Yet its earlier devaluation and non-convertible currency, along with the move of the European G-7 members to join the Manila mechanism, underscore how limited, if rapidly growing, China's role as a systemic supporter is.

The Asian currency crisis dramatically displayed the dangers of admitting or associating other powers, who may at one moment appear to have robust and rapidly growing economies and whose attachment would offer the G-7 greater regional balance and global representativeness. The most recent such claimant was Indonesia. President Suharto, who held the chair of the Non-Aligned Movement, secured a meeting in Tokyo with his Japanese and United States counterparts on the eve of the Tokyo summit in 1993. The current weakness of the Indonesian economy and polity is a stark lesson to those seeking to expand the membership of the G-7, an institution which has never downgraded or expelled an associated country and would find it difficult to do so once a member was in a state of collapse.

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