Introduction

At the conclusion of their 1994 summit in Naples, the leaders of the world's seven major industrial democracies declared:

We have agreed that, in Halifax next year, we will focus on two questions: (1) how can we assure that the global economy of the 21st century will provide sustainable development with good prosperity and well-being of the peoples of our nations and the world? (2) What framework of institutions will be required to meet these challenges in the 21st century How can we adapt existing institutions and build new institutions to ensure the future prosperity and security of our people?[1]

This unusual decision to define the focus for the subsequent summit and to select the rebuilding of the world's economic institutions as the centrepiece subject, was largely inspired by the G-7's two North American members.[2]n taking this initiative President Clinton and Prime Minister Chretien were prompted by several factors. A run on the U.S. dollar on the eve of the Naples summit and the failure of President Clinton's reassuring remarks to halt the assault demonstrated how vulnerable even the world's most powerful economy and reserve currency could be to the massive, instant flows of capital in an age of globalized, private financial markets. Prime Minister Chretien, drawing on his experience as Canada's finance minister from 1977-78 and his attendance in this capacity at the highly successful 1978 Bonn summit, understood how exposed the G-7's smallest, most open, and highly trade-dependent economy had become to speculative financial flows. He knew how further pressure on a depreciating Canadian dollar would be seized on by political opponents at home and how the government acting through the G-7 could exercise collective management for the broader global good. Clinton, Chretien, and their G-7 colleagues were also aware that 1994 was the 50th anniversary of the birth of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), that 1995 marked the same anniversary for the United Nations (UN), and that widespread public dissatisfaction with the current performance of these institutions, as well as a host of anniversary-inspired reform proposals warranted a serious response.

Over the subsequent year, in their preparations for the Halifax summit, the G-7 leaders, led by their 1995 Canadian host, remained true to their Naples commitment. The Mexican peso crisis beginning on December 20, 1994, the subsequent collapse of Barings Bank, and the devaluation of the U.S. dollar by 20 percent against the Japanese yen and 10 percent against the German mark in the first four months of 1995 injected reality and urgency into the G-7's promise to initiate potentially far-reaching international economic institutional reforms. G-7 preparations concentrated on the core issues of money supply and capital flows, embraced ecologically sustainable economic development, and extended to related subjects such as international trade. The leaders' personal representatives through their first two summit preparatory sessions, their finance ministers through their three regular meetings, and their finance deputies through more frequent encounters shaped consensus on several key issues. Their progress to date and the pressures under which they operate suggest that at the end of the 24 hours of discussions at Halifax on June 15-16, the G-7 leaders will announce several agreements to strengthen the international financial system and, with the assistance of key non-G-7 countries, accelerate the ongoing process of reform within the multilateral institutions themselves.

The prospect that the G-7 leaders will arrive at decisions of any consequence and the question of what particular reforms they will and should undertake is still the subject of debate. On one side those who argue that political leaders cannot and should not manage the flow of the world's money by setting exchange rates among national currencies, mobilizing capital from governments to support economic development, and providing additional liquidity to meet a range of public purposes.[3] They point to the prosperity brought about by the present system of largely unmanaged freely floating exchange rates, the enormous growth of private capital markets in recent years, and the difficulty the G-7's generally unpopular, deficit-ridden, and debt-laden governments have in extracting additional funds for international activism. Having taken the market-based democratic world from the "crisis of governability" that seized it in the mid-1970s to its global triumph in the 1990s, G-7 leaders should thus refrain from intervention and allow their citizens to reap the rewards of the market system now in place. On the other side of the debate are those who argue for greater government intervention, social responsibility and equity, especially in a world of rapidly globalizing finance, liberalizing trade, and enduring Keynesian consensus on. . .? For example, the recent report of the Commission on Global Governance, while acknowledging the obsolescence of fixed exchange rates and strong public sector control of the international monetary system, affirms the need for the IMF and its developing country members to have a more effective role in the management of major economies.[4] The Commission calls for the IMF to support nominal exchange rates in the interests of stability, to play a more active and high profile role in the surveillance of policies in major countries, to issue more Special Drawing Rights (SDRs), and to lend more on highly concessional terms to low income countries. Institutionally, it recommends a more effective IMF Interim Committee, a more democratic IMF less dominated by a few major countries, a redistribution of quota weights based on purchasing power parity (PPP), and an IMF with more open and transparent procedures. Its central recommendation is the creation, as the apex body for global economic governance, of a new Economic Security Council within the UN system, structured like the Security Council with a mandate embracing international revenue raising to finance international public goods.

In between these two poles lie those who argue for a package of incremental reforms, designed to restore to governments under current conditions some of the instruments and influence they exercised, in part through the G-7 itself, in the quarter century following the collapse of the Bretton Woods regime on August 15, 1971. Most notably, the influential Bretton Woods Commission has called for a more formal system of coordination with flexible exchange rate bands, centred in an IMF focused once more on international monetary issues and macroeconomic adjustment among all members.[5] The IMF would be supported by a World Bank Group and regional development agencies dealing with long-term development, emphasizing the private sector, backed by ongoing official development assistance (ODA) and International Development Association (IDA) funding from the major industrial countries, and operating with reduced overlap, distinct roles, streamlined procedures, and significant staff cuts.

The G-7 leaders assembling at Halifax thus have a diverse and detailed menu of analyses and recommendations from which to draw in forwarding the process of, and shaping the participation, priorities, and direction for, international financial system reform. In doing so, they are likely to draw from, and offer something to, all three broad schools in the debate. Moreover, in doing so they could produce agreements as historic as, if less dramatic than, their predecessors did at the inaugural G-7 ummit in 1975, and in some respects as important as the decisions reached at Bretton Woods more than half a century ago. Indeed, the experience of the G-7 over its two decades of operation and the conditions that have generated its recurrent successes in international financial system management and reform suggest that Halifax will indeed meet the high standards set for it at Naples in 1994.

This judgment rests on three major conclusions. First, since its 1975 inception, the G-7 summit has had a central concern with, and played an important role in managing and reforming the international financial system. Its involvement has embraced the core issues of exchange rate and macroeconomic policy among the G-7 and within the developed the Organization for Economic Cooperation and Development (OECD) world, their relations with the developing "South" over development assistance, debt relief, and trade, and their economic relations with the communist and post-communist "East" over financial assistance and integration into the world economy.

Second, during these two decades the G-7 summit has produced several significant successes within each of the three domains. These successes have been brought about by several factors, most notably the recognition of the most powerful actors, above all the United States, Japan, and Germany, that the evolving equalization of capability and intensification of interdependence, revealed by major shocks and understood by individuals with new policy ideas, bring large and growing rewards for deeper international cooperation and occasional policy coordination.

Third, although Halifax alone will not be a "Bretton Woods Two" that will give birth to a new or restructured network of international institutions, it could well become an equally historic location and event. For the United States and Canada, working together to provide leadership within the G-7, and conscious of their responsibilities to their NAFTA partner, Mexico, should advance measures to prevent and respond swiftly and surely to shocks such as the December 1994 peso crisis. The G-7 should do so by addressing issues of timely and comprehensive policy surveillance and early warning, the rapid deployment, mobilization, and creation of adequate financial resources, and the efficiency and effectiveness of the international economic institutions' missions, policies, management, and governance.