(1) Challenges Before Us

1. The Heads of State and Government, meeting at the Munich Summit in July 1992, requested us, the G7 Finance Ministers, to strengthen our cooperation on sound macroeconomic policies and to intensify the work on structural policies. They also asked us to report to the Tokyo Summit in 1993.

2. Economic growth in our countries has recently been rather weak, averaging around 1.3 percent since 1990, although there are signs of recovery in some countries. More fundamentally, growth rates have undergone a secular decline in most of our countries. The average annual growth rate was 4.8 percent in the 1960s, 3.3 percent in the 1970s and 2.6 percent in the 1980s. Also, our unemployment rate doubled from an average level of just over 3 percent in the 1960s to 7.2 percent now.

3. Sound macroeconomic policies are crucial to our common strategy for sustained, noninflationary growth. At the same time, it is vital to address structural problems which constitute obstacles to strong economic recovery, to improved longerterm growth potential, and to lower unemployment. Addressing these issues successfully is essential to the objective of fostering full and productive employment of our human resources.

4. The coordination on economic and financial policies that has developed among our countries has grown in importance as the economies become more interdependent. In particular, there were achievements of greater exchange rate stability and improvements in external imbalances. We are now strengthening our cooperative efforts particularly in order to pursue more effectively the reduction of obstacles to growth and employment creation.

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(2) Stable Macroeconomic Environment Conducive to Sustainable Growth

5. Macroeconomic policies should pay due attention to shortterm aspects in order to moderate cyclical movements and help overcome various shocks. Periods of inadequate growth may dampen investment and thus lower the growth path of potential output over time. At the same time, a sound and stable mediumterm perspective provides the best environment for efficient resource allocation and appropriate longterm investment decisions, which are prerequisites for sustainable noninflationary growth.

6. As for fiscal policy, it is essential for our countries to strengthen their efforts for fiscal consolidation at all levels of governments over the medium term. This will create room for private investment, help keep the stock of public debt manageable and thereby maintain scope for fiscal manoeuvre.

7. Regarding monetary policy, it should be conducted within a medium term framework with the objective of price stability. It should be supported by appropriate fiscal policy, and in some countries by wages and incomes policies. Such an approach would help keep real longterm interest rates low enough to provide a good environment for investment.

8. We have been cooperating closely on exchange markets, based on the recognition that misalignment of exchange rates, i.e., divergence from economic fundamentals, and excessive volatility of exchange markets could adversely affect international trade and hamper sustainable growth. Efforts to make exchange rates more stable and better reflect economic fundamentals will be most successful if accompanied by a close coordination of macroeconomic policies.

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(3) Structural Policies Enhancing Opportunities for Employment and Growth

9. There is evidence that structural unemployment has grown,while economic growth has decelerated. Macroeconomic policies alone will not be effective in reducing the structural element of unemployment and fostering longterm sustainable growth. Welltargeted structural policies are needed to enhance opportunities for employment and growth.

10. More attention should be paid to labor market reforms. We need greater wage flexibility. We should move from relying on income support programs to more active labor market policies,especially by strengthening the incentives for education, training,and productive job search. These are particularly important where youth unemployment is high. Industry could be encouraged to increase its investment in training, while government could reallocate funds toward education and programs that invest in human capital. Elements of social insurance schemes and regulations that unduly discourage employment creation should be reexamined. Such actions should improve functioning of labor market and could also benefit allocation of the public spending and reduce it in some cases. We look forward to the conclusion of the OECD study in this area.

11. Investment clearly is a primary factor which influences productivity growth, and national savings are the main source of financing investment. Most of our countries have experienced a decline in gross national savings as a share of GDP over the past decade. In order to enhance investment and savings in each national economy, it is of utmost importance to reduce fiscal deficits over the medium term. It is also important to restructure government spending from consumption to productive investment.Measures to encourage private investment and savings should also betaken.

12. In order to maintain and improve the multilateral free trade system which is a prerequisite for a sustainable world growth, it is necessary for the G7 countries to take initiatives to bring the Uruguay Round to an early and successful conclusion and to avoid protectionistic measures. Ensuring much increased access to the markets of industrialized countries is essential to improving growth opportunities for Central/Eastern European/FSU countries and developing countries. As for regional trade arrangements, it is important that they remain open to countries outside the region,thereby facilitating multilateral trade liberalization.

13. Subsidies often lead to inefficiency. Also, many subsidies represent an unproductive use of taxpayers' money. Further efforts to reduce such subsidies can increase efficiency, help fiscal consolidation and reduce the dangers of protectionism. Particularly, in the areas of traded goods and in export credit systems, we should intensify within the existing forums the ongoing efforts to reduce distorting subsidies.

14. The aging of the population is progressing rapidly in most of our countries. In order to deal with the rise in public expenditures, measures to control the increasing costs of medical care, public pensions and other welfare programs should be considered. In response to prospective declines over time in the proportion of the workingage population, labor market reforms may have to be considered to promote participation of older workers. In addition, in view of the possible decline in the savings rate in the future, efforts must be made to reduce fiscal deficits, to strengthen private savings, and to make more efficient use of those savings in productive investment.

15. The cost of health care has been increasing rapidly in our countries. In the absence of changes in policies, this trend is likely to continue because of a rise in the proportion of the elderly, the unique association in the health care industry of technological progress with higher rather than lower prices, and other factors. It is, therefore, necessary to better control overall outlays, for example, through "global budget systems" or,in some countries, direct control over fees. It is also necessary to improve efficiency of the health care systems by such measures as reviewing the coverage of the medical insurance and encouragement of cost reducing competition in the provision of medical services.

16. Financial deregulation has contributed to the development of broader and more efficient financial markets, domestic and international, and has benefited consumers. However, in some countries, deregulation may have contributed to excessive indebtedness and asset price movements. While we should continue our efforts of financial deregulation, it may be advisable that monetary policies pay more attention to asset price movements and the level of indebtedness. Regulatory and supervisory authorities should continue to enhance prudential oversight of financial institutions and be assured of the powers needed to perform their task. We will continue to cooperate in this area as necessary.

17. There is a growing insight that the economy and the environment are interdependent. Sustained economic growth requires us to reconcile economic and ecological goals. Although national measures are important for reducing global pollution, international cooperation is also needed. Sustaining and further developing the mutual trust that emerged in the UNCED of June 1992 in Rio de Janeiro, and properly implementing decisions made there, are important steps to making progress on environmental issues.

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(4) Strengthening Our Cooperation

18. Sound fiscal and monetary policies, with more stable exchange rates that reflect economic fundamentals, are prerequisites to putting our economies back on the track of sustainable noninflationary growth. For each of us, candid policy discussions within the G7 Finance Ministers and Central Governors Meetings are important in formulating our domestic policy decisions. We are intensifying our policy coordination through the Meetings. To this end:

we have focused our discussions on our shared economic concerns, paying particular attention to the way our policies interact;
we have reviewed the procedures of the Meetings in order to increase the substantive content of the discussions. We have agreed to have more frequent and "informal" meetings with shorter,crisper communiques or occasionally without them, although at times communiques indicating coordinated actions could be considered in order to send appropriate signals to economic agents;
we are also striving to improve the "surveillance" discussions through more effective involvement of the IMF, improved analytical work on macroeconomic and structural issues, and expanded informal participation of central banks in the preparation of the Meetings.

19. As well as macroeconomic policy issues, our report focuses on eight structural areas. As Finance Ministers, we do not have primary responsibility for some of them, but do have a keen interest in all of them. Action in these areas is needed in order to enhance employment and growth over the medium term, reflecting the different circumstances in each country. Impediments in some of these areas, particularly trade, subsidies, financial deregulation and the environment, are more amenable to concerted or cooperative actions, while others should be addressed on a countrybycountry basis. In all, however, a concerted effort to improve our understanding would be helpful. In this regard, the OECD's continuing work on structural issues provides valuable information and analysis, which contribute to our understanding.

20. We, the Finance Ministers of the seven major industrial countries, strongly hope that this report will help our governments pursue the macroeconomic and structural policies essential to promoting employment and sustainable noninflationary growth. Success will improve the wellbeing of people around the world as well as in our seven countries. We intend to follow up these issues.

Source: Released by the Tokyo Summit, July 8, 1993.

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