Preparations and Prospects for Halifax

If the underlying conditions suggest that success is possible for Halifax on international financial system management and reform, the preparatory process thus far reinforces the likelihood of a productive performance. That process has unfolded on two tracks: the meetings of the personal representatives of the leaders themselves in Ottawa on January 23-4, in Vancouver on March 23-5, and outside Toronto in late May.[26] The second is the meeting of G-7 Finance Ministers, at Madrid in the autumn of 1994, on February 3, 1995 in Toronto, and on April 25, 1995 in Washington. As the June 15-16 Halifax Summit approaches, these two streams will progressively fuse into a single, leaders-driven approach.

Throughout the autumn of 1994 Prime Minister Chretien had emphasized IFI reform as the critical subject for Halifax, despite the concerns of some that it lacked the potential and relevance to serve as a Summit centrepiece. He sought to give serious attention to currency exchange transactions, money markets, monetary policy and the Bretton Woods twins. These choices were designed to give leaders a manageable agenda that could lead to meaningful results. Conscious of Canada's tradition of representing developing country concerns within the G-7, and of the developing country revolt over G-7 proposals for a special SDR allocation at the autumn Madrid meeting of the IMF, Canada also consulted actively with a broad range of countries outside the G-7 about international institutional reform.[27]

During the late autumn and winter, G-7 sherpas and finance deputies considered which international institutions, and which longer term institutional reform issues should be reviewed. The United States, aware that President Clinton himself had drafted at the summit the communique passage specifying that "prosperity" in the "global economy" was the purpose of the institutional review, wished to include all economic institutions, wherever found. The British sought a fully comprehensive review, embracing the United nations social and political institutions. With the British and French, Canada sought to broaden the institutional review process at an appropriate point beyond G-7 countries, and give added attention to environmental and African issues. By the end of January the G-7 had agreed to conduct their institutional review under the general theme, selected for the Summit as a whole, of the capacity of the international system to manage the challenges of the twenty-first century. Their intention was to have the leaders at Halifax discuss the future challenges facing the appropriate architecture of, and the relationship between, the Bretton Woods twins. However, they also wished them to embrace, as part of their concluding communique, the relationship of the IMF and World Bank to the broader UN system, and especially its development, environment, and trade institutions.

The finance deputies began work on a paper on the Bretton Woods institutions and how these could help withstand shocks to the international financial system. In view of the Mexican peso crisis, concern centred on the speed of the IMF response, the surveillance capability of the Fund and Mexico's use of a fixed exchange rate.[28] Other papers dealt with the reduction of poverty, enhancing global trade, protecting the environment, managing international conflict, and dealing with international crime and drugs. All G-7 leaders showed an interest in discussing Africa and the poorest of the poor, in particular, exploring why their traditional approach to assistance had not worked. Most ambitiously, the British proposed relieving, and if possible eliminating by the year 2000, the real burden created by the debt of the poorest of the poor.

On February 3, 1995, in Toronto, the G-7 finance ministers had a wide-ranging financial discussion of macroeconomic management and international institutional reform. After much effort they defined four reform priorities.[29] The first, spurred by the Mexican peso crisis, was the capacity of the institutions to respond to shocks. Discussion dealt with the possible need for a better consultative mechanism or new facility in the IMF, which could probably not cope as it now stood with another crisis of Mexican dimensions. The Europeans argued that the IMF should maintain a list of potential countries in a danger zone, but keep it private, for fear of provoking the very crises the IMF was trying to prevent.

The second item was resource allocation. Here the Europeans suggested responding to such crises as inevitably would occur on an ad hoc basis, as the international community had in Mexico, Peru, and peacekeeping and humanitarian intervention in Rwanda. The U.S., aware that its new Congress would not always allow America to take the lead in organizing ad hoc coalitions, was sceptical. Canada saw the need for a new special facility to meet short term emergencies, with clear rules about the conditions that would trigger its use and the resources that would flow from it. To fund such a facility some looked with favor on an expansion of the IMF's existing emergency mechanism, the General Arrangements to Borrow (GAB), in part because this would represent a claim only on foreign exchange reserves.[30] All G-7 members agreed that any new mechanism should extend to the G24 or the full IMF membership. The option of an SDR allocation faded, as Russia, the intended beneficiary, no longer seemed to need or warrant the additional support. The G-7 left this and other options for discussion in the IMF Board.

The third item - policy direction - included debt relief for the poorest. There continued to be outstanding questions about the wisdom or desirability of relieving the burden of multilateral debt, and the best way to structure such an exercise within the IFI's. Canada, which had forgiven almost all official ODA debt some time ago, continued along with the United States to support the British proposal to sell IMF gold and use the interest on the capital thus raised to apply to the debt owed by the severely indebted low income countries (SILIC's) to multilateral institutions. Canada remained sensitive, as it had in the leaders discussions at Naples, to the particular plight of the francophone west African countries, and looked for a proposal of the sort traditionally offered by the French. Canada, with some existing budgetary room in its contingency reserves for a new national contribution, was prepared to consider alternatives to a sale of IMF gold.

The fourth item - management and governance - centred on concerns about overlap and duplication among the many Bretton Woods and UN- based institutions. The immediacy of the Mexican shock meant that these longer term issues attracted little attention.

In late February in Ottawa President Clinton and Prime Minister Chretien discussed the reform of the Bretton Woods institutions at length and reaffirmed their desire to have it constitute the principal topic of deliberation at Halifax. They agreed that the operations and relationship of the World Bank to UN institutions such as the United Nations Development Program (UNDP) and environmental institutions should be the second concern.[31] The G-7 would seek to identify the work that needed to be done on these topics, advance and promote ideas, but leave decisions to the broadly-based IMF itself.[32] The collapse of Baring's Bank at the end of February reinforced the determination of the two North American leaders to maintain this focus on, and produce meaningful results in regard to, international financial institutional reform.[33]

Their determination, earned through the June 15-17, 1995 G-7 Halifax Summit, should make a substantial and comprehensive contribution to the improved management and reform of the international financial system, and to the related question of sustainable development and the mobilization of additional resources for the developing world.

The first set of results will relate to surveillance - the capacity of the IMF to prevent crises through improved monitoring, early warning and timely and tough policy dialogue. Both the G-7 and much of the IMF's Interim Committee agree on the need to establish a new set of reporting standards to keep a list of countries that meet the standards, and encourage reporting countries to release the data publicly as well as provide it to the Fund. The IMF and Financial Market would thus know which countries had reported adequate data and had therefore developed the sophisticated collection and analytic apparatus necessary to do so. The transparency of the policy advice the IMF provides to concentrate on the basis of such data is a more controversial question. Some feel that preserving the privacy of such advice would encourage the provision of the desired high quality data, permit a direct and detailed dialogue with reporting countries, and maintain overall confidence in the system. Others want more openness.

The discussions on surveillance should result in action on two newer issues. The first, forwarded by the U.S. is the possible need for an international bankruptcy mechanism. Although a complicated question probably not ripe for an initiative for Halifax, the G-7 finance ministers and the leaders will acknowledge its importance and the need for attention and analysis.

The second new issue, advanced by Canada, is the need for a more adequate and integrated international supervisory structure for banks and other private sector financial institutions. The leaders could well mandate further work on the adequacy of the existing supervisory structure, the operation and role of the BIS and OECD, and what architecture, embracing governmental and private sector institutions and activities, would be appropriate. Of particular concern will be the connections among the various bodies, and improved information sharing and co-operation among those supervising banking, securities and other components of the financial system. Concrete options for a review process include centering the activity in the G-7 and international supervisory bodies themselves, or involving other bodies, with considerable expertise, such as the IMF and Bank for International Settlements (BIS). In either case it is likely that the G-7 will serve as the co-ordinative lead for this exercise.

The second, and more controversial question of resource allocation is one which the leaders themselves at Halifax should seriously debate and provide clear recommendations on. The need to increase resources to equip the IMF to respond more effectively in times of the inevitable, non-preventable emergencies involve both a procedural and a substantive question. On the first, Halifax will endorse at a minimum a fast track system, or new rules to permit rapid reaction from the existing emergency facilities - if not the establishment of an entirely new facility, as Michel Camdessus had proposed in 1994. On the second - the adequacy of the existing resources - the leaders face four broad options: 1. increasing the IMF's permanent resources by doubling the member's regular overall quotas, 2. allocating new SDR's along the lines of the G-7's Madrid proposals for a special issue aimed at post-communist societies, 3. reinforcing the existing emergency mechanism of the GAB, and 4. activating the Articles of Agreement that allow the IMF to borrow funds from private capital markets rather than call on national governments.

The balance or blend achieved among these four will depend importantly on the kind of resources thought to be required, calculations of what the Republican-controlled Congress will allow President Clinton to do, and the position assumed by French President Chirac. The least likely choice is to rely on the IMF's existing ability to borrow on the private market. The G-7 and most IMF members feel that heavy reliance on the market, while a painless short term solution for governments, would be ineffective in a crisis, when the IMF would be least able to borrow the required sums at reasonable cost. Moreover, it would call into question the credibility and stability of the IMF as an international lender of last resort.

Also unlikely is a new SDR allocation in either general or special form. The G-7 as a group, and much of the Interim Committee, see no global liquidity shortage or region-wide problem. Halifax should thus call for a broader review of the role of SDR's in the future, and on this basis a new definition of appropriate policy for, and thus the desired quantity of, SDR's.

The leading options thus remain a doubling (or at least significant expansion) of IMF quotas, or an increase in the GAB. The suggestion of the IMF's Managing Director to double quotas is almost certainly an opening bid in a dynamic negotiating process. Canada accepts the IMF's need for additional resources, but is conscious of its responsibility as Summit host to secure an effective collective solution. Most G-7 members agree on the need for additional resources, but disagree over how much should be provided how quickly. Many in the G-7, believing the IMF now has sufficient resources to meet its normal requirements and responsibilities, favor expanding the GAB. Any expansion of this emergency reserve pool will probably be funded not only by the G-7, or the somewhat larger group of existing contributors, but by a broader group, including Asian counties with large foreign exchange reserves. On the critical issue of the timing of any increase, the enrging consenus points to a program of proceeding with a GAB increase first, while accelerating the pace of the quota review already underway, The leaders at Halifax should send a clear signal about what the G-7 itself is prepared to do, in order to lend substance and give impetus to a timely and approrpiate increase, and perhaps indicate which new countries they wish to include the the expanded arrangement and what role they envisage for them

The leaders at Halifax are also likely to signal stronger policy directions for the Bretton Woods and related institutions, particular in the areas of poverty reduction, environment, private sector involvement and multilateral debt relief. The initial separate treatment of development and environment institutions will give way to a single, more integrated, sustainable development approach.[34] Progress is also possible in relieving the debt, notably the multilateral debt to the Bretton Woods institutions, of the world's poorest countries. The leaders at Halifax should acknowledge the inadequacy of their past efforts on debt relief for the poorest, and agree that more should be done.[35] Britain has proposed the sale a small amount of IMF gold reserves, perhaps 5-7 percent of the total, and using the interest but not the capital from the proceeds to extend the terms, lengthen the repayments, and thus virtually eliminate the real burden of the multilateral debt owed by the SILIC's to the IFI's. The proposal has been supported by the United States, and Canada, despite the status of the latter a a major world gold producer that could suffer from increased supply and falling prices on on world markets. Opposition has come from the French who instinctively prefer gold over paper money as a store of value. They may receive sympathy from the Germans and the Japanese, who believe that now is a poor time, given price fluctuations to sell gold, and that the precedent will fuel demands for further sales for other welfare purposes. This is one area where the views of President Chirac will be important, and where the leaders themselves could well transcend the divisions among their finance ministers and deputies to make major progress.[36]

The leaders should spend less time on issues of management and governance, and the specific question of duplication. Earlier concerns about IMF-IBRD overlap, and the desirability of having the IMF retreat from its recently-acquired role in development, have faded considerably. Closer examinations of the Bretton Woods bodies have yielded few egregious instances of duplication. More importantly, in part under the prompting of prospective G-7 action, these bodies have moved to reform themselves. There will thus be no far-reaching suggestions from the leaders that institutions such as UNCTAD or the regional development banks should be abolished, that only the IMF should give macroeconomic policy advice, and that the IMF should return to its original mandate of administering a system of more fixed exchange rates. Rather they will declare themselves in favor of reviewing their mandate, establishing priorities and searching for ways to make them more relevant. They will encorage the IMF and IBRD to work more closely together, share their analysis and specialize in different components of the same broad subject. Given this approach, and the particular efforts of Canada as G-7 host to consult with these bodies and their consequential members, the prospects for progress are good.

Finally, the G-7 leaders will look to the multilateral organizations themselves to follow up the reform process and implement its results. They may have the G-7 itself pursue specific issues, for example, by asking their finance ministers to report back to leaders next year. But they will speak less of Halifax initiating processes or identifying reforms than of providing impetus and direction for the ongoing reform effort taking place within and among these institutions.[37] They will continue to invite the views of their members, and let the broader community look to the G-7 to provide leadership. Moreover they will stress their own continuing commitment to these broadly-based institutions. The longer term success of this approach will depend critically on the ability of th U.S. administration to ward off congress calls for severe funding reductions to the IFI's and UN institutions, notably IDA, and thus encourage other G-7 governments to persevere in the face of their own fiscal pressures.

Concerned about counterreactions to any perceived G-7 elitism or dirigisme, the G-7 leaders will signal their desire to work within the multilateral organizations themselves through the normal channels. Here they will work in tandem, along with consequential outsiders such as China, India and Brazil, and the IMF Executive Directors, at the autumn 1995 meetings of the IMF, World Bank and their Interim and Development Committees, and go to the September United Nations General Assembly with several proposals. The process that was started because of the Naples mandate, and acquired life because of Prime Minister Chretien's and President Clinton's commitment to it, will thus continue elsewhere. And while its results will be far less visible that decisions developed and delivered within twenty-four hours by G-7 leaders surrounded by several thousand journalists, they will constitute a worthy addition to the Summit's two decade legacy of achievement in international financial system management and reform.