Thursday, October 20, 2005


Reform of G7+1

Which public organisation should oversee the global economy, regardless of how national finances are independently audited?

One answer is an improved International Monetary Fund. In this connection, it's worth listing some of the comments and recommendations in a paper last month from the Director of the Institute for International Economics - 'A New Steering Committee for the World Economy?'


The Fund’s management and staff have courageously publicized the current global imbalances that increasingly threaten both the world trading system (via their impetus to protectionism) and the health of the international economy itself (via a large and perhaps precipitous fall of the dollar). However, the Fund has been impotent in seeking remedial action. . . [although] the Fund’s rules provide ample scope for initiative that have been totally ignored.

IMF policy on major issues has always been directed by an outside group: the G-7 since the late 1980s. . . The fundamental reason for the increasing ineffectiveness of the IMF over the past decade or so has been the ineffectiveness of its steering committee, the G-7. Reforms are needed . . .The G-7 has little credibility in counseling other countries to adopt responsible fiscal and exchange rate policies when it permits huge budget imbalances and massively misaligned currencies to persist in its midst without any serious effort to correct or even address them.

A meeting of high officials and academics that I recently attended to discuss these issues reached the profoundly depressing conclusion that there is virtually universal agreement on the diagnosis of the current problem but virtually no possibility of governmental action until the inevitable crisis hits.

[In detail]
1. the G-7 can hardly expect to forge a coordinated and hence effective response to the global imbalances, even if it wants to, without the participation of China and preferably several other key Asian countries (at least Korea and India) as well.
2. the G-7 is equally ill equipped to deal with the global energy problem. . . the G-7 consists primarily of importing countries and could hardly expect to work out legitimate and hence effective solutions that require cooperation and joint leadership with the major oil exporting countries, presumably via OPEC.
3. the G-7 has failed to produce a "sustainable and comprehensive solution" for the Argentine default, the largest single episode of its type in modern history with potentially huge precedential effects for the management of future debt crises.

[Nevertheless, one option for reform of the G7 is to] build on the existing G-20, which has been meeting at the level of finance ministers and central bank governors (and their deputies) since 1999. This group would add six more countries: Argentina, Australia, Indonesia, Korea, Saudi Arabia and Turkey. The additions would include several oil exporters, including the most important one, and three major Muslim countries. Since the European Union is already counted separately, the group could be slimmed to a G-16 by dropping the four individual Europeans.

One crucial political factor must be addressed before choosing among these options. The G-7 has come to refer to itself in recent years (though not at its outset) as the group of "leading industrial democracies." . . . Much of the resistance to China’s addition to the G-7/8, particularly in the United States, has been based on the continued authoritarian nature of its political system. Similar questions could be raised about Saudi Arabia, which (like China) is nevertheless already a member of the G-20. [But these details may all be irrelevant if the object of the group is to manage effectively the global economy.]


Perhaps the UK chair of the G8 for 2005 (and EU president) should hold a summit before the year-end to discuss the proposals for improving the regulation of the global economy.
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