The worsening political situation in Indonesia and the jolt of India's nuclear tests dramatically heightened and shifted the focus of this weekend's Group of Eight summit. The leaders of the world's largest economies originally had a narrow agenda -- global growth, jobs and international crime.

India's tests -- like a declaration of war to Pakistan -- raised the spectre of an escalating Asian arms race, although the G8 leaders were split on how to respond. There likely won't be a co-ordinated package of sanctions. The rioting in Indonesia raises the stakes in other Asian tensions left by the region's financial crisis.

Fortunately, British Prime Minister Tony Blair's decision to have foreign and finance ministers hold meetings a week earlier in London had already got a lot of the work on official agenda issues out of the way. The ministers' proposals on how to counter the worsening Asian financial crisis will be endorsed at the summit by their leaders. But the eruptions in Indonesia have underlined the urgency of getting on with more effective ways of dealing with these sorts of events and stopping their spread.

Blair was also hoping the informality of today's leaders-only retreat at a stately country house outside Birmingham would bring them closer together in strengthening resolve for a more co-operative process. Prime Minister Jean Chretien and his officials welcomed the new approaches although it would have been preferable if foreign and finance ministers had met even earlier.

The summit leaders will give their OK to moving ahead on modifying what in the jargon of officials is called the "architecture" of the international financial system.

The finance ministers had a five-point plan for this aimed at tougher supervision and surveillance and much better hard information. The approach would also include use of SWAT teams to go in, assess and report on the often-obscured true financial condition of major institutions and governments.

Finance Minister Paul Martin's proposals in this area have been useful. British Chancellor Gordon Brown described them as having "a great deal of strength." But no decisions have been taken on who will be responsible. Martin has suggested a new international secretariat that draws on the resources of participating countries and existing institutions, but wouldn't involve a large new bureaucracy -- "or a new building on Pennsylvania Avenue." Britain's Brown favors a joint department of the International Monetary Fund and World Bank.

A key problem either way is an acute shortage of the supervisory and monitoring expertise that will be needed to achieve the goals of the package. The heads of the IMF and World Bank have an October deadline to come back with some specific proposals.

Meanwhile, Indonesia's situation is rapidly deteriorating, and currency and stock markets in the region are generally falling again -- even though support packages of one sort or another already total US$112 billion. The economic downturn there will likely become far more serious than expected. Some economies are already severely distressed. Japan's position is disturbingly fragile.

Most of the leaders, including Chretien and U.S. President Bill Clinton, seem satisfied with Japan's stimulus package of tax cuts and public works spending. The Japanese government hopes it will lift gross domestic product growth into the 2% range from recession. Some private-sector economists are not as confident, especially because the tax cuts are at this point only temporary.

Japan's recovery is critical to the region's stability and prospects for world growth generally. A long recession there will bite into growth prospects for the U.S., Canada, and Europe and deepen the impact of the Asian financial crisis globally. Asia's share of world output is now 25%, compared with 20% in 1990. Protectionist pressures in many countries will also likely rise as struggling Asian economies limit imports but take advantage of devalued currencies to push exports to the rest of the world.

What would help bring stability back to the region is an increase in foreign direct inward business investment. But there are still many legal and other barriers to this as well as the confidence factor. The political failure of negotiations among countries belonging to the Organization for Economic Co-operation & Development on a multinational agreement on investment, the MAI, won't help the situation either. As Canadian economist Alan Rugman, now at Oxford University, pointed out in London this week, rescuing the MAI should be a priority for the G8 summit leaders. Its failure would be disastrous for the future of Asian economies, he says. With trade expansion increasingly linked to investment activity, failure would also limit growth of Canadian exports outside North America (where liberalized North American Free Trade Agreement investment rules have helped).

In Birmingham, the G8 summit leaders keep saying they believe in the benefits of trade and investment liberalization. Endorsing a restart of the stalled MAI negotiations would send a powerful political signal on this.

(Ed. note) Neville Nankivell is The Financial Post's editor-at-large, based in Ottawa.

	This Information System is provided by the University of Toronto Library and the G7 Research Group at the University of Toronto.
	Please send comments to: g8@utoronto.ca Revised: August 17, 1998.

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