14 September Group of Seven (G7)

Date: 17/09/1998

SENIOR officials from the G7 group, meeting in London, agreed to switch the emphasis of international economic policy to stimulating growth rather than tackling inflation. Financial market analysts interpreted the statement as implying an internationally coordinated cut in interest rates.

IN A new mission statement, drawn up under the chairmanship of top UK Treasury official Sir Nigel Wicks, representatives from the G7 countries, which include four EU member states (Germany, France, the UK and Italy), agreed that the “balance of risks in the world economy has shifted” because inflation is low or is falling in many areas of the globe. In addition, there is a slowdown in demand in a number of economies, especially among emerging market nations like Russia and the Asian Tiger economies. They said the G7 group should therefore work “to preserve or create conditions for sustainable domestic growth and financial stability in its own economies”, and stressed that close cooperation over economic policy measures was needed at this point in time.

THE emerging market economies were praised for the “courageous measures” being taken and the “significant progress being made towards stability and recovery”. Delegates agreed that the G7's role was therefore to explore ways to reinforce existing programmes in support of growth-orientated policies. Acknowledging that these countries were still facing problems, with companies and banks unable to repay their debt burdens and being technically insolvent, they said the G7 should “accelerate efforts to promote programmes for corporate and financial sector restructuring”.

OFFICIALS emphasised that, as the Russian crisis illustrated, it was essential that the countries being targeted for international financial aid carried on the reform process. They said it was “particularly important that countries take appropriate steps to strengthen policies and improve confidence”. In order to combat manifestations of “crony capitalism”, such as awarding lucrative contracts on the basis of family ties rather than objective economic criteria, officials insisted that there should be “improved transparency of policy-making” in emerging market economies. Officials stressed, however, that if countries continued down the path of reform, the G7 would “encourage a cooperative approach to support those countries adversely affected by developments in global markets and which are implementing strong economic programmes”.

IN VIEW of the appalling social impact of the financial crises on local populations, plus the need to support ongoing reform, the G7 agreed to consider measures to alleviate the impact of the emergency on the poorest, if necessary via increased financial assistance.

REFERRING to Malaysia's decision to reimpose foreign exchange controls, to the annoyance of the international community, the G7 statement said: “Those embracing unilateral action on debt rather than reform and cooperation hurt the prospects for their own economies and for the world.”

OFFICIALS went on to tick off the financial markets themselves for overreacting to bad economic news by repatriating capital without waiting to assess the range of options being discussed with international financial bodies. The group expressed “concern” about “the extent of the general withdrawal of funds from emerging markets without respect to the diversity of prospects facing those countries and the significant progress that has been made in many countries in carrying out strong macroeconomic policies and structural reforms”. They also stressed the urgent need to approve new International Monetary Fund quotas so that the body could carry out its programmes. Contributions are currently being held up by the US Congress, although US Deputy Treasury Secretary Lawrence Summers said the Clinton administration would do its best to convince Congress to unblock the funds.