It was Chrétien's personal decision that Halifax should concentrate on international financial questions. In his long political career before becoming prime minister he had been Canada's finance minister in 1977- 79 and had attended the first Bonn Summit. He and his advisers recalled that the aim of President Giscard, when he launched the first Summit in 1975, had been to put some 'viscosity' into the exchange rate system. Chrétien aspired to do something similar in 1995, believing instinctively that it was wrong for governments to be pushed off sensible economic and monetary policies by international speculators, who often judged currencies by past behaviour rather than by present performance.
Chrétien found very little support at first, except from France. The US, Germany, Japan and Britain were reluctant even to consider changes in the system or in the way the IMF and the World Bank operated. Since the international monetary and financial system depended on confidence, any suggestion that things were wrong could provoke the instability that everyone wanted to reduce. But all that changed when the Mexican financial crisis broke in December 1994.
Back in 1982, Mexico's debt problems had precipitated a crisis in the international banking system. But under President Salinas (1988-94) Mexico had been an international star of the open economic system, joining the US and Canada in the North American Free Trade Association (NAFTA) and becoming the first new member of the OECD for twenty years. The election year of 1994 was marked by political unrest, but everyone gave Mexico the benefit of the doubt in economic policies. So the haemorrhage of capital at the end of 1994 and the collapse of the peso were a total surprise. All neighbouring currencies were caught in the turbulence, not just those of Latin America but even the Canadian and American dollars. Funds flowed into the yen and the DM, the instinctive refuges, penalizing in the process traditionally weak European currencies, even where, as in Portugal, their governments were following blameless policies.
With Mexico on its doorstep, the United States took the initiative with the IMF in assembling a rescue package. But the first version was rejected by the US Congress and the crisis deepened. In late January the Americans faced their other partners with new proposals as a fait accompli, though it was the largest country rescue package on record and included $18 billion in IMF funds. The Europeans signed up reluctantly, believing Mexico should accept stronger conditions from the IMF in return for support on this scale.
But all the G7 accepted that the IMF was not equipped to anticipate or prevent speculative crises on this scale or to rescue countries overwhelmed by such huge financial shifts. The Mexican crisis also shifted the normal balance of power within the G7 on monetary questions. The Americans usually lined up with the Germans among the most resistant to change in the IMF and the World Bank; but they could not ignore the consequences of a Mexican collapse and thus shifted to promoting reform. The issue thus became firmly established on the Halifax agenda. Public interest was further aroused by the collapse of Barings Bank and by the intense speculation against the US dollar in the spring of 1995.
The Summit conclusions on financial issues were meticulously prepared in advance, so that they occupy about a third of the economic declaration and are supported by a separate background document issued on the Summit's authority. The recommendations were endorsed by the leaders essentially without change, but did not go through on the nod. The heads of government had their liveliest discussion on the first day at Halifax on this topic. Chirac, in a striking image, denounced international speculators as the AIDS virus of the world economy.
The Summit recommendations reflect the AIDS analogy in that
do not offer a cure but rather concentrate on how countries can
becoming exposed to speculative financial crises. In
These measures amount to a considerable strengthening of IMF disciplines. They tighten up surveillance of economic and monetary policy for all countries, not just those receiving balance of payments support from the IMF, and set new standards. They shift the IMF more towards a rule-setting and rule-applying function.
The reforms proposed for the IMF do not go so far as the
exchange rate regime itself. In this context, three ideas were
during the preparations:
But none of these were pursued. Capital controls were regarded as a retrograde step. A tax was too easily evaded. Defending exchange rates was impracticable, given the huge volume of daily transactions in the principal currencies. No one could gainsay the argument of Mr. Major, who pointed out that the total stock of G7 foreign currency reserves amounted to no more than half the turnover on the foreign exchange markets in a single day.
The G7 recommendations for the World Bank and regional development banks were less radical. But the Summit communiqu‚ and the supporting background document stressed that the concessional resources of the World Bank and the International Development Association (IDA) should be concentrated on the poorest countries, who had no access to other sources of finance, and on basic social programmes and other poverty-reducing projects, which did not attract private capital. For other aspects of development, the heads of govern- ment advocated the promotion of a healthy local private sector and measures to attract foreign private finance. This reflected the declining role of the public sector in G7 countries themselves and the reduced resources available to the state.
The heads of government were careful not to present these ideas for change in the IMF and the World Bank on a take-it or leave-it basis. But they were not acting in a vacuum. The IMF, for example, had already begun work on similar lines since the Mexican crisis, into which the G7 proposals would fit easily. Despite the rough treatment given to G7 ideas at Madrid in 1994, the IMF and World Bank staff and the other members were very ready for the G7 leaders to take the initiative, provided they could accommodate the ideas of others too. So the Halifax conclusions should provide effective stimulus to reform.
Even so, I doubt whether Halifax has exhausted the attention which the G7 Summit will give to international financial issues. The first and simplest reason is that the next Summit, in 1996, will be chaired by France. From the very beginning, France has been more attached to monetary issues and to fixed exchange rate regimes than any other G7 member. Chirac demonstrated this again at Halifax. The second reason is that the domestic pressure on governments to conceal unwelcome economic data and to avoid international criticism is extremely strong at times of political uncertainty, such as elections. The new disciplines proposed at Halifax may still not be enough to make countries come clean with the IMF about what is really happening. Even stronger and more transparent rules may be needed if speculation is to be deterred. But Halifax has made a good start.
||This Information System is provided by the University of Toronto Library and the G8 Research Group at the University of Toronto.|
Please send comments to:
This page was last updated .