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Case K12
Attempts at Harmonisation
Meetings of the G8
In recent years, governments of the major industrial nations have tried to come to terms with
the ever-growing interdependence of their economies. Economic disruptions in one country
(e.g. a worsening US budget or current account deficit or a unilateral decision by, say, the
ECB or Japan to raise interest rates) can have profound effects on the world economy.
G8 meetings
As a result of the potentially highly unstable nature of economic relationships, finance
ministers and heads of state of the Group of Eight (G8) countries – the USA, Japan,
Germany, France, Italy, the UK, Canada and Russia (previously the G7, before Russia
started participating) – have met on a regular basis to try to harmonise their policies. But the
key problem in this has been the nations’ overriding self-interest.
For example, in early 1987 the G7 countries decided to try to stem the fall of the dollar
caused by the huge US budget and balance of payments deficits and relatively low US
interest rates at the time. Under the Louvre Accord, as it became known, the G7 countries
would bring their interest rates closer together and would intervene on the foreign exchange
market to achieve greater exchange-rate stability. But although some intervention did take
place, markets were not convinced that there was a real commitment on the part of the USA
to tackle its twin deficits, or on the part of Japan or (West) Germany to support the dollar or
to limit their trade surpluses. Then, with the world stock market crash in October 1987, the
dollar fell sharply. The Louvre Accord collapsed.
Problems with G8 agreements
There are two major problems with G8 agreements. The first is that they are not binding. If
governments are not prepared to give up national sovereignty and submit to international
control, they are always likely to put purely national interests first. For example, the USA
may unilaterally cut interest rates in order to tackle domestic unemployment, raise them to
tackle inflation. Large and disruptive financial flows can result from such interest rate
changes and there can be significant effects on exchange rates. In such cases, the rest of the
world may suffer and countries may be forced to adjust their own interest rates.
Thus whilst G7 ministers may say ‘the right things’, in practice they may do little to
implement their recommendations. For example, in the communiqué from the April 2005
meeting, ministers stated that vigorous action was needed to address global imbalances and
foster growth. Such actions would include fiscal tightening in the USA and further structural
reforms in the EU and Japan. As it turned out, there was little or no resulting change in
domestic policy.
The second problem is the lack of international convergence. Successful policy coordination requires that serious imbalances in world trade should be kept to a minimum. But
such is the size of the US current account deficit and the Japanese and Chinese surpluses
that huge pressures are placed on the foreign exchange market. These imbalances also create
massive financial flows and great uncertainty. As a result, speculation is likely to be a far
more powerful determinant of events than any agreement made by finance ministers.
Exchange rates can thus be highly volatile (see section 32.2 and Box 27.3).
Response to the south-east Asian crisis
The need to establish greater co-operation was demonstrated by the south-east Asian crisis
in 1997–8 (see Web Case I.10) and the shock waves it sent round the global economy. The
fact that the crisis came as a total surprise to governments, international institutions,
international financiers and speculators clearly revealed the need to monitor more closely,
and when necessary, regulate the world economy.
Following weeks of negotiations with the IMF and World Bank, the finance ministers
and central bank governors of the G7 countries met in October 1998 to agree a package of
measures designed to prevent a repeat of the ‘Asian contagion’ and to restore greater
stability to the international financial system. The agreement included the following:
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The provision of credit facilities, through the IMF and the World Bank, for ‘well-run’
economies whose currencies were victims of speculative attack. The IMF would have
$90 billion for this purpose.
The establishment of closer links between national and international regulatory bodies
in order to provide more effective regulation of financial markets.
Greater fiscal openness by governments, in order to make policy co-ordination between
countries easier.
On the central issue of exchange rate regimes, however, the G7 had little to say, merely
calling for ‘consideration of the elements necessary for the maintenance of sustainable
exchange rate regimes in emerging markets, including consistent macroeconomic policies’.
Harmonising attempts to reduce poverty
The Genoa Summit in 2001 was dominated by riots and protests, and it was these that made
the news. However, the G8 made significant moves in extending help to the world’s poorest
countries. The G8’s aim was to co-ordinate strategies more effectively over a wide range of
development areas: debt relief, trade access, health and education.
In a subsequent meeting in London in February 2005, the G7 finance ministers backed
plans to cancel debts of some of the poorest developing countries. Under the plans, the IMF
and World Bank would review the debts of 37 countries and offer up to 100 per cent relief of
debt owed to governments and international agencies (but not private banks).
For many, the London Summit was seen as a new dawn in international relations, with the
world’s wealthiest nations now set to work together for the good of all nations, rather than
their own self-interest. Time will show whether such optimism was justified.
Encouraging freer trade
In recent G8 summits, much of the focus of the economic discussions has been on how to
advance the trade negotiations under the Doha Development Agenda (see Box 24.3). For
example, at the St Petersburg Summit in 2006, leaders from major developing countries were
invited to join the G8 leaders in trying to find ways of advancing the stalled negotiations. As
with previous G8 meetings, however, individual countries’ interests tended to dominate over
world interests. The summit called on countries to commit to reaching ‘a successful
conclusion of the Doha round’, but was short on specifics of how this might be achieved.
Question
To what extent can international negotiations over economic policy be seen as a game of
strategy? Are there any parallels between the behaviour of countries and the behaviour of
oligopolists? (See the section on game theory in Chapter 12 section 2.)
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