The G7 Summit and the Reform of Global Institutions

Nicholas Bayne*
First published in 1995 in Government and Opposition, vol. 30, no. 4, pp. 492-509.
Reproduced with permission.

Introduction
The G7 Summit
The Review of Institutions
International Financial Issues
The United Nations Family
Conclusions


In my Government and Opposition/Leonard Schapiro lecture in 1993 I attempted an incomplete analysis of international economic relations after the end of the cold war, in particular the unexpected tensions and difficulties (1). The end of superpower confrontation had not only removed one incentive for Western countries to settle their economic disputes. It had also lowered the priority given to security issues, where national governments were in control, and had exposed their dwindling ability to take economic decisions, because of the extent of the interdependence which was the price paid for their prosperity. I could not think of a single area of domestic policy immune from international influence. Professor Susan Strange has developed a more trenchant analysis of this trend in her Government and Opposition/Leonard Schapiro lecture this year (2).

In consequence the scope for disputes between governments over trade and economic issues was growing steadily. But the rule-based international institutions, which might have regulated or deterred these disputes, had been weakened by the cold war divide; and the later groupings intended to improve coordination through discretionary management - notably the G7 Summits - were overloaded and inadequate.

The partial, tentative answers which I then offered focused on restoring a rule-based international system, operated through multilateral institutions of universal membership. Governments could hardly manage their economies, either nationally or through international coordination; but they could usefully create and observe sets of rules which encouraged open, unrestricted international regimes but prevented abuses and provided for the settlement of disputes. The General Agreement on Tariffs and Trade (GATT) offered the best example of this, since it had finally concluded late in 1993, albeit three years late, its Uruguay Round of negotiations. This greatly expanded and strengthened the international rules for world trade and provided for further removal of trade barriers. There were good prospects for international rules also for direct investment and for the global environment. But I saw much less progress on international financial issues, despite the volatility of foreign exchange markets.

As for the institutions, the International Monetary Fund (IMF) and the World Bank, since the cold war ended, had achieved almost world-wide membership. The GATT, now transformed into the World Trade Organization (WTO), was well advanced in this direction, though problems remained (and still remain) over admitting China and Russia. But the economic side of the United Nations (UN), with its complex of overlapping agencies and programmes, had yet to find a coherent role. As the global institutions revived and more countries became active players, I foresaw a loss in prestige and authority for the G7 Summit and similar groupings. Their best future strategy could be to act as catalysts in promoting change within the wider institutions, a more modest and austere role than in the past.

I am very pleased to be able, in this article, to pick up the threads of this argument again and to take it a stage further. The international economic system remains full of imperfections. The rules are incomplete; even the major democracies fail to keep them; and economic disputes proliferate and persist. But the momentum towards a rule-based system already begun in trade, investment and the environment is being maintained, though unevenly. Furthermore, new progress is being made in international financial relations, which before were lagging behind. There is fresh impetus to reform the UN's operations, as it celebrates its fiftieth anniversary in 1995. As Ghita Ionescu has pointed out in his Reading Notes (3), much of the innovatory pressure has come from the leaders of the G7 countries, at their Summits in Naples in 1994 and especially at Halifax in 1995. There they launched a systematic policy of working through international institutions, in a way never attempted before.

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The G7 Summit

The G7 Summit is at the same time an institution and an anti-institution. This makes it hard to pin down, but it may be the secret of its survival. It has many of the attributes of established inter-governmental organizations meeting at head-of-government level, such as the North Atlantic Treaty Organization (NATO), the European Union, the Commonwealth or even the UN. But the Summit is meant to be quite different from such meetings. It was invented by President Giscard d'Estaing of France and Chancellor Schmidt of Germany, twenty years ago, in rebellion against the formality of large international meetings, which had frustrated them when they were finance ministers. Giscard and Schmidt wanted instead a direct, unscripted, unbureaucratic exchange between a few heads of government. Even today, after many disappointments, the G7 heads of government long for such a refreshing and stimulating encounter, of a kind they would never expect from a UN or NATO Summit or even a European Council.

But by the early 1990s, the Summit had moved a long way from this ideal. The fundamental reason for heads of government to meet has always been that they can reconcile the domestic and external pressures of national policy, in a way that other ministers cannot. As the overlap between domestic and external policies has increased with globalization, so the requirement to reconcile conflicting pressures has grown, dragging heads of government into international disputes. But as economic levers pass from the hands of government into the private sector, both at home and abroad, so the ability of heads of government to determine policy and resolve disputes is eroded.

In consequence the agenda of the G7 Summit became hopelessly overloaded. The original list embracing macroeconomic and monetary policy, international trade, debt and development was long enough. But this was expanded to cover the environment, drugs and help for Eastern Europe and the former Soviet Union. An extra day of non-economic, foreign policy discussions was added, complicated by the requirement to accommodate the presence of the Russians. With this mass of intractable problems, it was hardly surprising if the Summit leaders failed to agree or if understandings reached at the Summit came apart later. But if the leaders tried to resolve matters and failed, this damaged their reputation and discredited the Summit process.

The worst example of this was the repeated undertaking, at the Summits of 1990, 1991 and 1992, to get the GATT Uruguay Round finished by the end of the year - only for it to fail each time because of disputes between G7 members. This conspicuous failure obscured the valuable contribution which the G7 leaders had made to the Round in other ways: by backing a strong dispute settlement mechanism and the conversion of the GATT into the WTO; by keeping the Round alive through a painful recession; and by using the 1993 Tokyo Summit to clinch the decisive deal on market access. The G7 heads of government began to share the dissatisfaction with the Summit process already widespread in the media. The British Prime Minister, John Major, started a movement to retrieve the informal, personal origins of the Summit.

So the first challenge for the Canadian Prime Minister, Jean Chrétien, in preparing to preside over the 1995 G7 Summit, was to lighten the process so that the leaders could have some direct, spontaneous exchanges. To that end, he cut back the ceremony and spectacle which had been associated with meetings in renaissance palaces in Munich (1992) and Naples (1994). He held the Summit in the medium-sized harbour town of Halifax, Nova Scotia, where the leaders, on their way to their meetings, mingled with the local citizens and holiday- makers, which they had never done before. They had one evening at the circus, but otherwise every minute spent together was used for discussion and every meal was a working meal.

But there are two risks in relying too much on spontaneous exchanges and Halifax was not immune from either. The first is that the leaders simply focus on the crises of the moment. At Halifax, Bosnia dominated the political exchanges and, on the first evening, threatened to drive everything else off the Summit agenda. The Bosnian Muslims timed their attempt to break the siege of Sarajevo to coincide with the Summit, while the Bosnian Serbs were still holding many UN peace- keepers as hostages. The leaders could not ignore these events and strongly denounced them; but in practice they could not affect what happened on the ground. Chechnya also occupied much time when President Yeltsin arrived, as Chechen terrorists had seized hostages in Boudonnovsk, though anyway the G7 leaders wanted to express their anxieties about Russian policy.

The second risk is that the leaders simply conclude their discussions by proposing more meetings in the G7 format. President Chirac of France, for example, suggested another G7 meeting on job creation, like the one held in Detroit in 1994. Yeltsin proposed a special G7 Summit on nuclear safety, to be held in Moscow in 1996. These extra meetings appear to clutter up the G7 apparatus, against the professed intentions of the leaders, and to siphon issues away from the wider international institutions competent to handle them.

But Yeltsin's proposal for a special summit on nuclear safety shrewdly disposed of another controversy hanging over Halifax. Ever since the G7 leaders invited Gorbachev to meet them in London in 1991, they have wrestled with their precise relationship with the Russian President. Associating the Russians with the Summit helps to reconcile them to the loss of their superpower status and encourages them to persist in economic and political reform. But the Russians always disliked coming to the summits as supplicants. At the Naples Summit in 1994, and again at Halifax, Yeltsin was invited as a full participant in the political discussions, making G7 the G8. This was greatly welcomed by Yeltsin, but encouraged him to seek access to the economic discussions as well. The G7 leaders did not think the Russians could contribute anything to the economic discussions but disliked rebuffing Yeltsin outright. The special meeting on nuclear safety will enable the G7 leaders to involve Yeltsin in another summit-related event, while keeping their economic circle intact.

This Russian bid to attend all the Summit, not just part of it, opens the whole question whether the G7 Summit still has the right membership. Though called the Group of Seven or G7, the participating countries at the Summit - US, Japan, Germany, France, Italy, UK and Canada - are always joined by the European Commission, making a minimum of eight delegations. The country holding the presidency of the European Union (EU), when that is not held by Germany, France, Britain or Italy, makes a ninth participant. If the Halifax Summit had been held in July 1995 rather than June, Spain would have taken part as presidency.

Many have argued in recent years - I did so myself in 1993 - that the G7 is no longer representative of the range of countries active in the international system. In particular, large, populous countries, like China, India, Mexico and Brazil, deserve more weight as they open up their large, internal markets. But the strongest argument against this is that the present G7 members need more than ever the close links provided by the summit process to defuse disputes among themselves and to counter the strains of globalization. The present G7 membership provides the best opportunity for exerting reciprocal pressure between the highly developed countries of Europe, North America and Japan, which would be lost if the composition were changed.

1995 provided several good examples of bitter economic disputes between the G7 members while they prepared for Halifax:

These examples illustrate well the sort of economic disputes which disturb the post-cold war world. First, the security restraint no longer applies. It is hard to imagine a major power like Canada forcibly arresting a trawler of another NATO member country while the cold war was on, even if a small country like Iceland might have done so. Secondly, the frontier between domestic and external policy is obscured. Canada claimed that foreign over-fishing had destroyed its native Atlantic fishing industry, on which Newfoundland in particular depended. The American complaints were about the way the internal Japanese market for cars operated, not about any restrictions at the border.

Thirdly, the disputes were aggravated by the absence of a multilateral dispute settlement mechanism or the failure to use one. The Northwest Atlantic Fisheries Organization (NAFO), which regulates fishing in the region, contained no such mechanism to which Canada or the EU could apply. The new draft UN Convention on Straddling Stocks, agreed in New York in July 1995, now provides for such mechanisms and obliges members of regional fisheries organizations to use them. There should not therefore be a repeat of the Canada/ EU clash. For the cars dispute, Japan and the United States should properly have used the dispute mechanism of the new WTO, but the United States declined to do so. A bilateral US/ Japan deal was finally concluded within the deadline. If the Americans had proceeded to retaliation, this would have been a serious set-back for the new multilateral trade regime.

The media presumed that the US/Japan cars dispute would be a main item for the Halifax Summit and were disappointed when, wisely, it was not put on the agenda. But the G7 Summit, with its wide exposure to the media, is a bad place to resolve such acute bilateral disputes where domestic interests are strongly engaged. Summits are much more successful in helping to anticipate or deter such disputes and to reinforce the international machinery for solving them. That was, in fact, the principal achievement of the Halifax Summit, through the medium of its review of international institutions. The remainder of this article examines and assesses this review.

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The Review of Institutions

In preparing for Halifax, Chrétien and his team had not just to provide for spontaneous exchanges between the leaders, the limits of which have been explained. A second and harder challenge was to prepare, with the help and consent of the other G7 partners, a meeting from which the leaders could show convincing and durable results. He needed to select topics carefully and not overload the agenda. He had to avoid the pitfall of the G7 promising what they could not deliver Chrétien has always been keen on that. But he needed to identify topics where the G7 Summit could make a difference.

The Naples Summit of 1994 had called for a review of international institutions. President Clinton had come to Naples to propose a new programme of trade liberalization, to follow on from the Uruguay Round. But he had not prepared the ground in advance; and the European Union thought this premature, since the Uruguay Round had been long and painful and was not yet ratified. The Naples Summit agreed instead on a more open-ended institutional review, to consider how 'the global economy of the 21st century will provide sustainable development with good prosperity' and 'what institutional changes may be needed to meet those challenges'. This was set as one of the tasks for the next year's Summit. The Canadians decided to make it the principal objective for Halifax.

This was a wise decision, but not obvious nor without dangers. For example:

But there was ready agreement, in the preparations for Halifax, that all this should now change. The G7 members recognized, whether consciously or not, that the institutions had been transformed by the end of cold war confrontation, through world-wide membership and the emergence of new influential actors. They could no longer dictate to the institutions and expect them and their members to follow blindly. But they were still well-placed to take the initiative and influence the institutions profoundly, if they acted with tact and openness to the views of others.

The G7 recognized also that strong and effective international institutions would help them to resolve the tensions of globalization, between domestic and international pressures. They could counter protectionist and inward-looking tendencies which were feared in the United States, especially after the mid-term elections of November 1994 were so unfavourable for the Clinton Administration, and in the European Union, which seemed to the non-Europeans obsessed by its own internal dynamics. But to strengthen the institutions the G7 members not only had to contribute ideas; they also had to provide an example. This meant that they should identify themselves with the drawing up of multilateral rules and implement them effectively. They should commit themselves to observe the rules strictly and to cooperate in their enforcement. They should undertake to use multilateral dispute settlement mechanisms to resolve any disputes among themselves, to abide by the judgments and to work to create such mechanisms where they did not yet exist. Such an approach would strengthen the institutions, influence others to keep the rules also and help to restore the reputation of the G7.

The G7 Summit could not conduct a comprehensive review in a single year that would overload the agenda again. In their preparatory work the personal representatives of the heads of government the Sherpas surveyed the field, dividing the subject matter by issue rather than by institution at this point. In the process, several broad areas were set aside as not ripe for Halifax, though suitable for treatment later. In particular:

With these major issues reserved for later action, Halifax concentrated on:

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International Financial Issues

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 they do not offer a cure but rather concentrate on how countries can avoid becoming exposed to speculative financial crises. In particular:

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 considered 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 communiqué 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 government 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.

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The United Nations Family

The institutions of the United Nations family are the only ones which managed to preserve a world-wide membership throughout the cold war. But they often survived by dint of strained and laborious compromises between East, West and a group of non-aligned countries discontented with both. These rivalries made efficient organization and management extremely difficult.

When the cold war ended, the potential for collective UN action expanded hugely. The Security Council, for example, could usually count on Russian cooperation and at least Chinese acquiescence in international action. But the new demands on the UN have outrun its capacity. Its organizational structures and methods, eroded by the years of the cold war, have been strained to the limit, while its finances are undermined by persistent arrears from most member states. Only about a dozen UN members always pay their subscriptions in full and on time Britain and Canada being among them.

The preparation of UN issues for Halifax was less detailed than for financial reforms. The problems were more diverse and incoherent and concerned a more varied group of institutions. There was uncertainty among the Sherpas on whether proposals from the G7 would be received at all positively by the rest of the UN membership. But at Halifax itself the heads of government concluded that the fiftieth anniversary of the United Nations provided an ideal chance to start a process of renewal, which would not be repeated. The leaders themselves, including Yeltsin, had the most animated exchange on their second day at Halifax on this subject. Stimulated by Major, they strengthened the text offered by the Sherpas. The result is the most extensive treatment of UN issues ever attempted by a G7 Summit, taking up nearly another third of the published declaration.

The general aim of the Halifax recommendations is to give the UN a stronger organizational structure, with less confusion of responsibility; to advocate more systematic management techniques; and to restore the UN's finances. The leaders looked especially at the humanitarian, development, environment and other economic and social work of the UN and its agencies. They recommended, for example:

The G7 gave much thought to how to follow up their ideas for reform, so as to gain the widest possible support from other UN member states and the staffs of UN bodies. They did not want to alienate others or to provoke suspicion of their intentions. So they agreed to work together to promote change in all UN contexts where reform is being considered, building up coalitions of support from all parts of the membership. Major UN events, such as the special anniversary meeting in October 1995, would be occasions to take their ideas forward. But other gatherings outside the UN framework, such as the Commonwealth Heads of Government Meeting and the Summit of Asia Pacific Economic Cooperation (APEC) countries, both due in November, should also be used to promote their ideas, seek reactions and gather wider support. Even more than with the IMF and the World Bank, the Halifax conclusions are meant to initiate a long process of UN reform, spread over several years.

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Conclusions

The international media were, in general, dismissive of the Halifax G7 Summit, as Ghita Ionescu has pointed out. Most of them were disappointed that there were no instant solutions for Bosnia or Chechnya, no US/Japan agreement on cars and no new exchange rate regime - though it was not reasonable to expect any of these things. Some commentators noted favourably the reduction in spectacle and ceremony. A few - notably the Financial Times - recognized the advance made in reform of international financial institutions.

But the institutional review was a real innovation for the G7 heads of government. The Summit had never tackled this sort of reform, since it started twenty years ago. For the first time, the leaders decided to work not from outside international institutions but from inside them. They placed their review clearly, if cautiously, in the context of globalization. The Halifax declaration introduces the institutional review by saying: 'The process of globalization, driven by technological change, has led to increased economic interdependence: this applies to some policy areas seen previously as purely domestic, and to interactions between policy areas.'

The Halifax Summit picked out the international financial institutions and the activities of the UN family as the first areas for treatment. It is striking that the heads of government did not begin with the easier parts of the system, where only a few adjustments might be needed. They started instead with the two aspects of the system which, in my earlier analysis, I had identified as being the most intractable, where there had been only limited advance towards open, rule-based international regimes.

I would not want to argue that the moves towards a rule-based economic system, with efficient institutions to operate it, which the Halifax Summit encouraged, will lead to a trouble-free world. If anything, the opposite is the case. The process of globalization increases the scope for international economic disputes and removes some incentives for settling them. The G7 leaders have recognized this and are trying to create and reinforce an international system which can set rules and resolve complaints, so as to prevent the inevitable

disputes driving them to bring in new economic restrictions. Countries will always be tempted to circumvent the rules or to break them openly. The US, the European Union, Japan, Canada and Mexico, for example, have all done so in different ways during the last twelve months. But all ended up worse off than if they had conducted their policies and settled their dis- putes openly and rationally, by multilateral means where these were available.

The Halifax Summit only began the review of institutions and did not attempt to complete it. Much more work will be needed, within the institutions and at future Summits. President Chirac will pick up the threads in preparing for and chairing the Lyons Summit due in June 1996. Chirac shares many of Chrétien’s objectives, but he also has his own. The Lyons Summit gives him, and his fellow G7 leaders, the opportunity to take them forward. For all its new involvement in global institutions, the G7 Summit remains the personal instrument of the heads of government.

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Notes

* The views expressed in this article are the personal views of the author and should not be taken as a statement of the official policy of HM Government of the United Kingdom.

1 Nicholas Bayne, "International Economic Relations After the Cold War", Government and Opposition Vol. 29, No. 1, Winter 1994, pp. 3-21.

2 Susan Strange, "The Limits of Politics", Government and Opposition, Vol. 30, No. 3, Summer 1995, pp. 291-311.

3 Ghita Ionescu "Reading Notes, Summer 1995: From International to Global Policies", Government and Opposition, Vol. 30, No.3, Summer 1995, pp. 394-7.

4 Robert D. Putnam and Nicholas Bayne, Hanging Together: the Seven-Power Summits, first edition, London, RIIA, 1984, p.141.


Copyright © Government and Opposition 1995.