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World: G-7 Plan Solid Reform Step

  • Robert Lyle

Washington, 2 November 1998 (RFE/RL) -- British Chancellor of the Exchequer (Finance Minister) Gordon Brown, who coordinated the G-7 plan on reforming the global financial architecture, will lay out more details before the British parliament in London today.

Brown, acting as chairman of the finance ministers of the group of seven major industrial nations, announced the plan on Friday (Oct. 30). Similar announcements were then made in the other capitals of the group -- the U.S., Germany, France, Japan, Italy, and Canada.

U.S. President Bill Clinton, using the announcement of an unexpectedly strong 3.3 percent growth of the American economy in the third quarter (July, August and September), went before the cameras on the White House driveway Friday to proclaim it a major victory for the global economy.

He said the world's leading economies had "linked arms to contain the financial turmoil that threatened growth, not only in emerging markets, but in all markets of the world."

Stock markets in Europe and the U.S. seemed to strengthen their rallies on the news, with many commentators suggesting the G-7 had come up with a solution to all the world's financial difficulties.

Once the rhetoric and hyperbole was pushed aside, however, what emerged was a solid but simple step forward in what will be a lengthy process of reforming and strengthening the global financial system.

U.S. Treasury Secretary Robert Rubin said it is a "framework within which the international community is going to be working for a long time." He told a White House briefing: "It's going to take time for the world to work its way through the problems."

The key, said Rubin, is for each country and each of the international financial institutions to do what they need to do now while the global community works to tune the whole system.

Brown said the major change the plan envisages is shifting the focus from crisis management within national economies to adopting what he calls "sensible global financial regulation, credible crisis prevention, (and) orderly mechanisms for crisis resolution."

For one thing, said Brown, the old architecture was not built to handle massive capital flows -- it did not have the necessary foundation of minimum standards and good practice.

It was sudden shifts in these massive capital flows -- from pouring in to pouring out -- that helped trigger the crises in Asia and Russia, experts agree.

The G-7 plan calls for establishing a surveillance system using both national and international regulatory and supervisory officials, to more closely monitor these capital flows. Along with that is a call for improved national supervision and far greater transparency of capital flows and of the actions of the private markets.

Far more transparency is needed, says the G-7, so that countries -- and the markets themselves -- are not taken by surprise as they were in Asia by the level, nature and placement of short-term lending and investment. Short-term money can be withdrawn in a flash in today's electronically connected markets.

There is disagreement among the G-7 on exactly how to handle these flows. Germany and France have suggested capital controls, but Britain and the U.S. disagree. Rubin told reporters that capital controls are "not the right answer," pointing to Malaysia's controls which have further isolated the country from the global economy.

Most helpful, said Clinton, will be greater openness along with stronger standards for every country to follow.

Another major part of the plan is a call for expanding a current International Monetary Fund (IMF) loan program for countries which are following good macroeconomic (overall) policies but are in trouble because of external conditions.

The loan program would become something closer to a line of credit which could be made available quickly, but a higher interest rates, to help nations with strong domestic policies weather storms around them. It will have to be adopted by the IMF's Board of Executive Directors, but U.S. Deputy Treasury Secretary Larry Summers said that since it is an evolution of a current program it could be done rather quickly.

Meantime, the executive directors representing the G-7 nations at the IMF signed a memorandum saying they have agreed to work together to support and implement the reforms.

Coincidentally, the reforms mirror those demanded by the U.S. Congress as a condition for approval of Washington's share of the IMF's membership quota increase. With the U.S. share approved, the other 180 member nations' assent is expected quickly, adding $90 billion to the fund's capital base, a 45 percent increase.