G-7 Success in International Financial Management and Reform

With this changing focus and ambition in managing and reforming the international financial system over the past two decades the G-7 has had a mixed record of success, both in its ability to arrive at timely and well tailored agreements at the summit, and to keep those commitments in the aftermath. Those Summits judged to be most successful by leading academic authorities and by the participating personal representatives of the leaders tend to be those which produced ambitious package deals of macroeconomic policy coordination or created new regimes and institutions for managing monetary and exchange rate issues.[13] Thus Rambouillet in 1975, Bonn 1 in 1978, Tokyo 1 in 1979, and Tokyo 2 in 1986 are judged in their accounts to be the most successful Summits on record.[14]

Actually keeping commitments made at the Summit table through domestic policy adjustment when G-7 leaders return home to their national pressures is a second, and more challenging dimension of Summit success. The most systematic study thus far finds that overall compliance by G-7 members with their economic and energy commitments from 1975 to 1989 falls in the positive range, if rather weakly.[15] However compliance varies widely by country and issue area. Canada has the second best compliance record (after first-ranked Britain), whereas the United States has the second worst (ahead of seventh-ranked France).[16] The variation by issue area is as follows:

      International Trade       .734
      Energy                    .660
      Real GNP Growth           .397
      Inflation: Multicountry   .266
      Aid and Schedules         .265
      Fiscal Adjustments        .259
      Demand Composition        .233
      Interest Rate             .221
      Inflation Rate            .221  
      Foreign Exchange Rate    -.700

It is clear that the issues at the heart of monetary and financial policy are those where compliance has been least strong. Moreover, Summit agreements on managing exchange rates have been strikingly ineffective, producing on the whole the opposite of what was agreed. Given this record it is understandable why the Summits of the third cycle have been far less concerned with attempting to manage exchange rates, and why the leaders at Halifax should focus not on immediate intervention issues but on longer term questions of regime-building and institutional reform.

Maximizing G-7 and global economic welfare and keeping commitments made at one moment, regardless of subsequent changes in real world conditions, are not the only criteria of Summit success. Those who conceive of the Summit as the core of a "concert" system of global governance emphasize the G-7's performance in responding to shocks to the established international order, and in shaping the regimes and institutions that define and manage that order.[17] Here the record of the Summit is rather more impressive, particularly in regard to the shocks G-7 members are confronting for the second time and within those institutions which G-7 members effectively control. G-7 successes in shock management include the response to the 1979 oil price increase, to the October 1987 stock market crash, and, belated to the 1982 Mexican default and ensuing third world debt crisis.[18] Its achievements in regime building and institutional reform centre on the 1975 Rambouillet bargain, the 1982 move to policy surveillance, and the Plaza-Louvre-Tokyo managed floating and G-7 surveillance regime.

Explanations of successful G-7 management of the international financial system point to the importance of four factors.[19] The first is overall structure, or the distribution of relative capability, as the G-7 collectively has assumed the responsibilities once borne by the United States alone for ensuring stability.[20] This process has accelerated as the United States has moved from being the world's largest creditor to world's largest debtor, and as the use of the U.S. dollar as an international transaction and reserve currency has slowly declined, to be substituted for by Japan's yen. Of particular importance is the dynamic equalization of capability among G-7 members, as sharp, substantial relative declines in those American economic and financial capabilities most visible to political leaders give American Presidents a particular incentive to co-operate. For example, in the leadup to the Plaza agreement the U.S. dollar had become overvalued on a trade-weighted current exchange rate basis by an estimated 35%, the U.S. current account deficit was projected to reach U.S.$ 300 billion by 1990 at the current exchange rate, and the U.S. had become in 1985 a net debtor nation for the first time since the end of World War 1.[21] As Table 1 shows, in the period following the 1994 Naples Summit the significant sustained drop in the value of the U.S. dollar against the yen and the mark (if not against the Canadian dollar and Italian lira), the 1995 slowing of U.S. growth while that of most G-7 partners accelerates, and the resulting decline in relative U.S. GDP at current exchange rates within the G-7, provide such a broad incentive for co-operation at and after Halifax.

A second factor is increasing interdependence among G-7 members, and between the G-7 and the outside system.[22] Recent evidence suggests that growing economic interdependence among G-7 members is a primary cause of their monetary co-operation.[23] Although some argue that interdependence among G-7 members is decreasing in international trade as regional blocs emerge alongside the multilateral system, the globalization of finance and the slow rise of the yen and deutschmark as international currencies are intensifying G-7 links in the [24] Thus, while the Mexican default of 1982 initially appeared to be primarily a problem for the United States, requiring no immediate G-7 collective response, the 1994 peso crisis had far more rapid systemic effects and demanded the contribution of Japan and the G-7's European members, as well as that of the United States and Canada.

A third cause of successful G-7 action is the presence of a proximate shock to the global system, particularly when that shock is similar to previous ones where the individual response of G-7 members ended in failure. Thus memories of the "stagflation" caused by the 1973 oil shock were instrumental in convincing leaders at Tokyo 1979 to prevent an inflationary pass through, even at the cost of imposing far-reaching energy conservation programs and recession at home. Vivid memories of the 1929 stock market crash and ensuing great depression and world war, together with the new Tokyo 1986 habits of co-operation, produced the effective G-7 response to the October 1987 stock market plunge. For the first time among the Summits of the third cycle, Halifax will come in the immediate wake of not one but two financial shocks. The initial lack of enthusiasm displayed by some G-7 leaders and many G-7 officials for focusing on international financial institution reform at Halifax was overcome by the December 20, 1994 plunge of the Mexican peso, and with it the recollections of the cumulative cost to the G-7 in coping with the 1982 Mexican debt default. Moreover, the collapse of Barings Bank at the end of February 1995, while far less important, suggested the peso crisis was not an isolated event, and, once again, that a reliance on lightly-regulated private market forces could well bring substantial costs. The Barings collapse further showed that financial instability was a fully European and Asian as well as North American or western hemispheric problem. It also expanded attention beyond the Bretton Woods twins by raising questions about about the adequacy of the international structure for supervising the banking, securities, insurance and other financial industries.

A final cause of successful Summit performance is the presence of experienced, politically-secure leaders with policy ideas favoring international co-operation. The experience which France's Giscard D'Estaing and Germany's Helmut Schmidt had as finance ministers and Library Group participants and the strong mandates they had recently secured as leaders were important in the creation of the Summit itself and the 1975 monetary regime accords. Similarly the Plaza-Louvre-G-7 finance ministers' accomplishments depended critically on the move of James Baker and his team into the U.S. Treasury and their growing influence in the U.S. administration following President Reagan's election for his second and last term. At Halifax, success will depend heavily on President Clinton, who brings an economic preoccupation, a commitment to multilateral engagement, skill in informal Summit-level policy dialogue and exchange, and a search for subjects other than trade liberalization as the vehicle for his international and Summit activism in 1995. The advent of a Republican-controlled Congress and Clinton's modest political popularity as the 1996 presidential campaign season begins, however, somewhat reduce his political power and freedom of action.[25] Despite Canada's limited financial weight in the world, a further asset is the presence as host of Jean Chretien, a former finance minister who participated in the successful 1978 Summit, and an experienced politician still in the early stages of a massive majority mandate and commanding historically high personal and party approval ratings in the polls. Success, however, could ultimately depend on the engagement of consequential European leaders, including, importantly, newly-elected President Chirac of France.