Sustaining Global Growth and Development: G7 and IMF Governance (Global Finance)

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SUSTAINING GLOBAL GROWTH AND DEVELOPMENT

Global Finance Series Edited by Michele Fratianni, Indiana University, U.S.A., John J. Kirton, University of Toronto, Canada, and Paolo Savona, LUISS Guido Carli University, Italy The intensifying globalisation of the twenty-first century has brought a myriad of new managerial and political challenges for governing international finance. The return of synchronous global slowdown, mounting developed country debt, and new economy volatility have overturned established economic certainties. Proliferating financial crises, transnational terrorism, currency consolidation, and increasing demands that international finance should better serve public goods such as social and environmental security have all arisen to compound the problem. The new public and private international institutions that are emerging to govern global finance have only just begun to comprehend and respond to this new world. Embracing international financial flows and foreign direct investment, in both the private and public sector dimensions, this series focusses on the challenges and opportunities faced by firms, national governments, and international institutions, and their roles in creating a new system of global finance. Also in the series

Governing Global Finance New Challenges, G7 and IMF Contributions Edited by Michele Fratianni, Paolo Savona and John J. Kirton ISBN 0 7546 0880 8 Related titles in the G8 and Global Governance series

The New Economic Diplomacy Decision-making and Negotiation in International Economic Relations Nicholas Bayne and Stephen Woolcock ISBN 0 7546 1832 3 Governing Global Trade International Institutions in Conflict and Convergence Theodore H. Cohn ISBN 0 7546 1593 6 New Directions in Global Economic Governance Managing Globalisation in the Twenty-First Century Edited by John J. Kirton and George M. von Furstenberg ISBN 0 7546 1698 3

Sustaining Global Growth and Development G7 and IMF Governance

Edited by MICHELE FRATIANNI

Indiana University PAOLO SAVONA

LUISS Guido Carli University JOHN J. KIRTON

University of Toronto

AS HGATE

© Michele Fratianni, Paolo Savona and John J. Kirton 2003 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher. Michele Fratianni, Paolo Savona and John J. Kirton have asserted their right under the Copyright, Designs and Patents Act, 1988, to be identified as the editors of this work. Published by Ashgate Publishing Limited Gower House Croft Road Aldershot Hants GU11 3HR England Ashgate Publishing Company Suite 420 101 Cherry Street Burlington, VT 05401-4405 USA Ashgate website: http://www.ashgate.com British Library Cataloguing in Publication Data Sustaining global growth and development : G7 and IMF governance. - (Global finance series) l. Group of Seven (Organization) 2. International Monetary Fund 3. Economic development 4. Globalization - Economic aspects I. Fratianni, Michele II. Savona, Paolo, 1936- III. Kirton, John J. 338.9'1 Library of Congress Control Number: 2003103792 ISBN 0 7546 3529 5 Reprinted 2005

Printed in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

Contents

List of Tables List of Figures List of Contributors Preface and A cknowledgements List of A bbreviations 1

Introduction, Observations, and Conclusions Michele Fratianni, Paolo Savona, and John J. Kirton

viii ix xi xvii xxi

1

PART I: GENERATING GROWTH THROUGH PRODUCTIVITY, ICT, AND TRADE 2

3

4

5

6

Globalisation, International Competitiveness, the New Economy, and Growth in the G7 Dominick Salvatore

19

Productivity Growth in Canada and the G7 A llan Crawford

35

The Global Information Society and Development: Smoke without a Fire? A ndreas Freytag

65

The World Trade Organization, Multinational Enterprise, and Civil Society A lan M Rugman and A lain V erbeke

81

Globalisation, Growth, and Health: The Private Sector Perspective Paolo Savona and Chiara Oldani

99

PART II: DESIGNING AFRICAN DEVELOPMENT THROUGH NEPAD 7

The New Partnership for Africa's Development and the G8's Africa Action Plan: A Marshall Plan for Africa? Nicholas Bayne

117

vi 8

9

Sustaining Global Growth and Development Designing for Development in Africa: The Role of International Institutions Ivan Mbirimi

131

Is African Development through the New Partnership for Africa's Development Synonymous with Sustainable Development? Stéphane Doumbé-Billé

141

PART III: CRITICAL CHALLENGES IN INTERNATIONAL FINANCE

10 The International Monetary Fund and Its Critics Michele Fratianni 11

Evaluating Koizumi's Reforms and the Implications for the Global Economy Takashi Kiuchi

12 The Chinese Crux of Monetary Union in East Asia George M von Furstenberg and Jianjun W ei

155

177

191

PART IV: CONCLUSION

13 The G7/8 Contribution at Kananaskis and Beyond John J Kirton and Ella Kokotsis

207

ANALYTICAL APPENDICES

A

B

C

D

E

Impressions of the Kananaskis Summit, 26-27 June 2002 Nicholas Bayne

229

Summit Achievement Grades, 1975-2002 John Kirton

241

Commitments by Summit, 1975-2002 Ella Kokotsis and John J. Kirton

243

Summit Performance Assessment by Issue and Country, 2002 G8 Research Group

245

Keeping Genoa's Commitments: The 2001-02 Compliance Report Ella Kokotsis, John Kirton, and the G8 Research Group

247

Contents

vii

DOCUMENTARY APPENDICES F

G

H

I

J

K

L

M

N

O

Statement of G7 Finance Ministers and Central Bank Governors Ottawa, 8 February 2002

251

Statement of G7 Finance Ministers and Central Bank Governors W ashington DC, 20 A pril 2002

255

Statement of G7 Finance Ministers Halifax, 15 June 2002

259

G8 Africa Action Plan Kananaskis, 27 June 2002

263

Statement by G7 Leaders: Delivering on the Promise of the Enhanced HIPC Initiative Kananaskis, 27 June 2002

277

The Kananaskis Summit Chair's Summary Kananaskis, 27 June 2002

281

Statement by G7 Finance Ministers on the Framework for the International Monetary Fund Program for Brazil 8 A ugust 2002

285

Statement of G7 Finance Ministers and Central Bank Governors W ashington DC, 27 September 2002

287

G8 Development Ministers Meeting, Chair's Summary W indsor, 27 September 2002

293

G20 Finance Ministers and Central Bank Governors Meeting, Delhi Communiqué 23 November 2002

297

Bibliography Index

301 321

List of Tables

Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 3.1 Table 3.2 Table 3.3 Table 3.4 Table 3.5 Table 3.6 Table 4.1 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 10.1 Table 10.2

Growth of Output per Hour in Manufacturing in the G7, 1992-2000 Growth Potential in the G7 Countries in 2000 The Spread of the New Economy among the G7 in 2000 Average Yearly Growth of Real GDP and Labour Productivity in the G7, 1981-1999 Growth Rates of Output per Worker (Business Sector) Labour Productivity Growth Sources of Labour-Productivity Growth: U.S. Non-farm Business Sector Sources of Labour-Productivity Growth: Canadian Business Sector Sources of Labour-Productivity Growth: U.S. and Canadian Business Sectors, 1996-2000 ICT Use and Production The Digital Divide, 1999-2001 World-wide Trade No Ponzi Game Condition Calculation for Sub-Saharan Africa and Southeast Asia Post-1980 Globalisers Capital Accumulation Standards and Standard-Setting Institutions Yield Spreads in the 1990s and During the Gold Standard in Basis Points

27 28 28 31 36 37 43 44 45 46 67 101 104 106 107 162 167

List of Figures

Figure 2.l The Making of the New Economy Figure 3.1 Labour Productivity Growth in Canada Figure 3.2 Relative Labour Productivity in Canada versus the United States Figure 3.3 Labour Productivity Growth Figure 3.4 Stock of Computer Hardware per Person-Hour Figure 3.5 Business Investment in Machinery and Equipment as a Share of GDP Figure 3.6 Percentage of the Population Aged 25 to 64 with Completed Post-Secondary Education, 1999-2002 Figure 3.7 Employment by Educational Attainment in Canada, 1990-2002

32 38 39 40 41 48 50 51

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List of Contributors

Sir Nicholas Bayne, KCMG, is a Fellow at the International Trade Policy Unit of the London School of Economics and Political Science. As a British diplomat, he was High Commissioner to Canada from 1992 to 1996, Economic Director at the Foreign and Commonwealth Office from 1988 to 1992, and Ambassador to the Organisation for Economic Co-operation and Development from 1985 to 1988. He has published widely, including Hanging In There: The G7 and G8 Summit in Maturity and Renewal (Ashgate, 2000); he is co-author, with Robert Putnam, of Hanging Together: Co-operation and Conflict in the Seven Power Summits (Harvard University Press, 1987) and, with Stephen Woolcock, of The New Économic Diplomacy: Decision-Making and Negotiation in International Économic Relations (Ashgate, 2003). Sir Nicholas also contributed to New Directions in Global Économic Governance: Managing Globalisation in the TwentyFirst Century (Ashgate, 2001) and New Directions in Global Political Governance: The G8 and International Order in the Twenty-First Century (Ashgate, 2002). Allan Crawford is Research Director in the Research Department of the Bank of Canada. In recent years, his work has focussed primarily on issues related to the inflation process and inflation targeting. Specific areas of past research include inflation uncertainty, the predictability of average inflation over long time horizons, measurement biases in price indices, and downward nominal wage rigidity. Stéphane Doumbé-Billé is a Professor of International Law and the Environment at Jean Moulin University (Lyon 3) in Lyon. Originally froin Cameroon, he has also taught at the universities of Toulouse, Limoges, and Littoral-Côte d'Opale. A legal consultant for the United Nations, he is also a member of the World Conservation Union's Commission on Environmental Law, the International Council of Environmental Law, the International Centre for Comparative Environmental Law, and the Droit de l'environnement francophone network of the Agence Universitaire de la Francophonie. Along with many articles and chapters, Professor Doumbé-Billé's publications include Droit de l'environnement et développement durable (PULIM: Limoges, 1994), Droit, forêts et développement durable (Bruylant, 1996), and Recueil francophone des traités et textes internationaux en droit de I 'environnement (Bruylant, 1998), all co-authored with Michel Prieur. Michele Fratianni is the W. George Pinnell Professor and Chair of Business Economics and Public Policy at the Kelley School of Business at Indiana University in Bloomington, Indiana. He has also taught at the Catholic University of Louvain, the Universit y Cattolica of Milan, the Universit à Sapienza of Rome, Marquette University, and the Free University of Berlin. He has served as economic advisor to

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the European Commission in Brussels and senior staff economist with the U.S. President's Council of Economic Advisers. Recipient of the Medal of the President of the Italian Republic for scientific achievements, Professor Fratianni has also received the Pio Manzú Center Gold Medal, the Scanno Prize in economics, and the Saint Vincent Prize in economics. He is the managing editor of Open Économies Review and is a widely published author of many articles and books; among his latest books is Storia Monetaria d 'Italia (Etas, 2001). He is co-editor of Ideas for the Future of the International Monetary System (Kluwer Academic Press, 1999) and Governing Global Finance: New Challenges, G7 and IMF Contributions (Ashgate, 2002). Andreas Freytag is Associate Professor of Economics at the University of Cologne,

and has been a Visiting Scholar at the Faculty of Economics and Politics at Cambridge University. He has published widely on international economic relations and globalisation, and is currently working on the political economy of international monetary policy. He is co-editor, with John Kirton and Joseph Daniels, of Guiding Global Order: G8 Governance in the Twenty-First Century (Ashgate, 2001). John J. Kirton is Director of the G8 Research Group, Associate Professor of Political

Science, Research Associate at the Centre for International Studies, and a Fellow of Trinity College at the University of Toronto. He is the principal investigator of the University of Toronto's Centre for International Studies project on 'Strengthening Canada's Environmental Community through International Regime Reform' (EnviReform). He co-edited, with Michele Fratianni and Paolo Savona, Governing Global Finance: New Challenges, G7 and IMF Contributions (Ashgate, 2002), and is co-author of Environmental Regulations and Corporate Strategy: A NAFTA Perspective (Oxford University Press, 1999). As editor of Ashgate's G8 and Global Governance series, Professor Kirton is co-editor of The G8's Role in the New Millennium (Ashgate, 1999), Shaping a New International Financial System (Ashgate, 2000), Guiding Global Order: G8 Governance in the Twenty-First Century: Challenges of Governance in a Globalizing World (Ashgate, 2000), New Directions in Global Économic Governance: Managing Globalisation in the Twenty-First Century (Ashgate, 2001), and New Directions in Global Political Governance: The G8 and International Order in the Twenty-First Century (Ashgate, 2002). He is also co-editor of Ashgate's Global Environmental Governance series, and co-editor of Linking Trade, Environment, and Social Cohesion: NAFTA Experiences, Global Challenges (Ashgate, 2002). Takashi Kiuchi is Economic Advisor of the Shinsei Bank, Ltd. He has been a guest

scholar at the Brookings Institution and a member of the Faculty of Economics at Yokohama National University. He served as advisor on government committees on numerous occasions and written many scholarly works, including 'The Asian Crisis and Its Implications' in Shaping a New International Financial System: Challenges of Governance in a Globalizing World, edited by Karl Kaiser, John J. Kirton, and Joseph P.

List of Contributors

xiii

Daniels (Ashgate, 2000), and 'Japan, Asia, and the Rebuilding of the Financial Sector' in Governing Global Finance: New Challenges, G7 and IMF Contributions, edited by Michele Fratianni, Paolo Savona, and John J. Kirton (Ashgate, 2002). Ella Kokotsis is Director of Analytical Studies for the University of Toronto's G8 Research Group. She served on the National Round Table on the Environment and the Economy's Task Force on Foreign Policy and Sustainability in preparation for the 1995 G7 Halifax Summit, and has prepared commissioned policy papers for the Canadian Centre for Foreign Policy Development at the Department of Foreign Affairs and International Trade. Dr. Kokotsis is author of Keeping International Commitments: Compliance, Credibility, and the G7, 1988-1995 (Garland, 1999). Ivan Mbirimi is Chief Programme Officer in the Economic Affairs Division of the Commonwealth Secretariat, and a contributor to The New Économic Diplomacy: Decision-Making and Negotiation in International Économic Relations (Ashgate, 2003), edited by Nicholas Bayne and Stephen Woolcock. Chiara Oldani is Lecturer of Economics and European Economics at LUISS Guido Carli University in Rome. She studied at Warwick University in 2000-2001, where she received a Master of Science in Economics. She is currently a doctoral student in Monetary and Financial Economics at Tor Vergata University in Rome. Alan M. Rugman holds the L. Leslie Waters Chair in International Business at the Kelley School of Business at Indiana University in Bloomington, Indiana, and is Thames Water Fellow in Strategic Management at Templeton College at the University of Oxford. Author of The End of Globalization (McGraw-Hill Ryerson, 2001), he has published widely, including 'From Globalisation to Regionalism: The Foreign Direct Investment Dimension of International Finance' in Shaping a New International Financial System: Challenges of Governance in a Globalising W orld, edited by Karl Kaiser, John J. Kirton, and Joseph P. Daniels (Ashgate, 2000), and 'Britain, Europe, and North America', in Governing Global Finance: New Challenges, G7 and IMF Contributions (Ashgate 2002). Dominick Salvatore is Distinguished Professor of Economics and Director of the Ph.D. Program in Economics at Fordham University in New York. He is a Fellow of the New York Academy of Sciences and Chair of its economics section. He served as President of the International Trade and Finance Association in 1994-95 and is a Research Fellow at the Institute for European Affairs at the Vienna University of Economics and Business. He has published extensively, including 'Forecasting Financial Crises in Emerging Market Economies' in Open Économies Review (co-written with Derrick Reagle, July 2000), 'The Euro, the European Central Bank, and the International Monetary System' in A nnals ofthe A merican A cademy of Political

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and Social Science (January 2002), and 'How Will the Euro Affect the Dollar?' in Eastern Économic Journal (January 2002). He is also a contributor to Governing Global Finance: G7 and IMF Contributions (Ashgate, 2002). Paolo Savona is Professor of Political Economy at LUISS Guido Carli University in Rome. A graduate of the University of Cagliari, he is also chair of Impregilo Group and of the Airports of Rome, deputy chair of the Aspen Institute Italia, and editorialist for the newspaper 11 Sole-24 Ore. Professor Savona is co-editor of the Open Économics Review, and author of, among other publications, The New A rchitecture of the International Monetary System (Kluwer, 2000). Formerly Italy's Minister of Trade and Industry, he has served in a variety of positions, including in the special studies section of the Board of Govemors of the Federal Reserve System in Washington DC, director of the fmancial market section of the research department of the Banca d' Italia, and secretary general for economic planning in the Ministry of Budget and Planning in Rome. Alain Verbeke holds the McCaig Chair in Management at the University of Calgary and is an Associate Fellow of Templeton College, University of Oxford. Previously a director of the MBA programme at Solvay Business School at the Vrije Universiteit Brussel, he has published widely on multinational strategic planning and complex project evaluation. His experience as an executive includes the position of senior economic and strategy advisor in the Tractebel group of companies (currently Suez). George M. von Furstenberg has been Rudy Professor of Economics at Indiana University in Bloomington, Indiana, since 1983. From 2000 to 2003, he was the inaugural holder of the Robert Bendheim Chair in Economic and Financial Policy at Fordham University. He was Division Chief at the International Monetary Fund from 1978 to 1983 and has served at various agencies of the Government of the United States including the Department of Housing and Urban Development, the President's Council of Economic Advisers, and the Department of State. He has also been a resident fellow, economist, or advisor at the Brookings Institution and the American Enterprise Institute. In 2000, he was president of the North American Economics and Finance Association, focussing on integration processes in the western hemisphere. His book projects include regulation and supervision of financial institutions in the countries participating in the North American Free Trade Agreement and leaming from the world's best central bankers. He is co-editor, with John J. Kirton, of New Directions in Global Économic Governance: Managing Globalisation in the Twenty-First Century (Ashgate, 2001). Professor von Furstenberg is a contributor to Governing Global Finance: New Challenges, G7 and IMF Contributions (Ashgate, 2002), as well as Shaping a New International Financial System: Challenges of Governance in a Globalizing W orld, edited by Karl Kaiser, John J. Kirton, and Joseph P. Daniels (Ashgate, 2000), and Guiding Global Order: G8 Governance in the Twenty-First Century, edited by John J. Kirton, Joseph P. Daniels, and Andreas Freytag (Ashgate, 2001).

List of Contributors

xv

Jianjun Wei, a Chinese national, is a doctoral candidate in economics at Indiana University. He specialises in international finance and macroeconomics, and is writing his dissertation on the issue of the monetary unification of Hong Kong and mainland China. Mr. Wei was an official visitor at the Hong Kong Monetary Authority from September to November 2002.

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Preface and Acknowledgements

This book is the second in Ashgate Publishing's new Global Finance series. The book continues a tradition, begun in 1998, of using the annual G7/8 summit as a catalyst for edited volumes that explore the central themes in the emerging dynamic of global governance. The current volume represents the fifth occasion, in both the Global Finance series and the related G8 and Global Governance series, for examining the field of international finance. It focusses on generating global growth, confronting key issues of international finance and dealing with the challenges of development in an era of intense globalisation. The current volume, centred on the work of the G7 leading up to, at, and after the 2002 Kananaskis Summit, continues the focus on intemational finance, while expanding the problèmatique in several ways. First, this volume confronts the question of how to sustain into the medium and longer term the global growth now reappearing in many G7 member countries, by producing permanent increases in productivity, trade liberalisation, and other policies required by global firms. Second, it takes a close look at the International Monetary Fund (IMF) as it copes with the critical challenges of a sovereign debt restructuring mechanism, private sector participation, and the financial and monetary challenges coming from the Asian major powers of Japan and China. Third, it examines how G8 growth can expand into global growth and genuine development, by focussing, as did the Kananaskis Summit itself, on poverty reduction in Africa and the role that the world's leading international institutions can play in this regard. To explore these broad issues, the Research Group on Global Financial Governance, a joint venture of the Associazione Guido Carli and the G8 Research Group, partnered with the University of Calgary to mount a conference on 'Sustaining Global Growth: Prosperity, Security, and Development Challenges for the Kananaskis G8'. The conference was held at the University of Calgary on 22 June 2002, in the lead-up to the 2002 Canadian-hosted G7/8 Summit in nearby Kananaskis, Alberta. The conference assembled a dozen scholars, practitioners, and policy makers from all G7 regions to present papers in an intense, day-long interchange with 75 expert colleagues and interested citizens. Taking place just after the G7 finance ministers had met in Halifax on 14-15 June to prepare their reports to leaders, and immediately before the leaders themselves gathered in Kananaskis on 26-27 June to consider these reports and related issues, the conference offered a timely opportunity to deepen the analysis and widen the array of options available to the G7 leaders. It also pointed to an agenda for intensified analytical work and policy analysis in the year leading up to the fifth sevenyear cycle (now eight-year cycle) of G7/8 summitry, starting in Evian-les-Bains, France, on 1-3 June 2003.

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This volume draws on work in four ongoing research programmes. The first is the work of the Associazione Guido Carli on the international monetary system, a programme in which Paolo Savona, Michele Fratianni, and Dominick Salvatore have been central figures. The second is the G8 Research Group's ongoing exploration of international finance, in which John Kirton, Nicholas Bayne, George von Furstenberg, Alan Rugman, Takashi Kiuchi, Andreas Freytag, and Ella Kokotsis have long been involved. The third and fourth are the University of Toronto's Centre for International Studies project on 'Securing Canada's Environmental Community Through International Regime Reform' (EnviReform) and the Department of Political Science– based project on 'After Anarchy: Co-operation, Coherence, and Change in the G8 Concert', both financed by the Social Sciences and Humanities Research Council of Canada. John Kirton, Ella Kokotsis, and Alan Rugman are involved in these projects. Sustaining Global Growth and Development draws its contributors from all of the G7's constituent regions of North America, Europe, and Japan, and all its constituent countries. It also reaches out to involve leading scholars and practitioners who, with first-hand continuing professional experience, come from the Commonwealth and la Francophonie communities and their African core. The contributors come from the disciplines of economics, the international political economy field of political science, management studies, and sustainable development and from leading universities and institutions in the United States, Italy, Britain, Germany, France, Canada, and Japan. Many of the authors have experience at senior levels within many of the core governmental and intergovernmental institutions at work in managing and governing the international economy, or have served in senior advisory capacities. With this wide variety of perspectives, analytical approaches, and judgements, the collection combines the insights of scholars and practitioners who draw on a rich assortment of regional experiences, theoretical traditions, interpretative frameworks, and concluding convictions, on a G7-wide and fully global scale. Yet all share a basic belief that fundamental changes are underway in the international economic system, that the existing arrangements for global economic governance are still struggling to identify and address them adequately, and that the G7 does or can play an important role in meeting these new challenges in a rapidly globalising age.

Acknowledgements In producing this volume, we have enjoyed exceptional support from those who have contributed in many different ways. Our first debt is to Antonio Fazio, Governor of the Banca d'Italia, who as Chairman of the Associazione Guido Carli provided part of the funding that made our conference possible. We are also grateful to David Dodge, Governor of the Bank of Canada, his senior advisor John Murray, and Canada's Associate Deputy Minister of Finance, Jonathan Fried, who offered support and practical advice along the way, and to Allan Crawford of the Bank of Canada who participated as a

Preface and A cknowledgements

xix

research colleague in our conference and in this book. We also owe much to Canada's exceptional Ambassador to Italy and G8 sherpa, Robert Fowler, and his team, who provided the financial support required to transform our Calgary conference from a focus on the G7 to a global dialogue, and who kept us abreast of the challenges facing the G8 governors as the Kananaskis Summit approached. We have a special debt to the University of Calgary and Stephen Randall, its impressive dean of the Faculty of Social Sciences. From the very start Dean Randall saw the unique opportunity that such a conference offered, provided the essential financial support, local arrangements, rich collegiality, and warm hospitality to make it a success, and mobilised the superb intellectual resources of the University of Calgary to produce an extraordinary event. We also acknowledge the financial support of the Social Sciences and Humanities Research Council of Canada, through the research projects noted above. We further appreciate the willingness to take a major role in our project of several members of the G8 Research Group's Professional Advisory Council: Nicholas Bayne, George von Furstenberg, Alan Rugman, and Takashi Kiuchi. Other members of the Council, notably Robert Fauver and Pierre Jacquet, provided valuable support. We are also most grateful to Robert Page of TransAlta and Professor Nicholas David of the University of Calgary for the insightful and inspiring keynote addresses they gave in Calgary, and to Bill Warden, Barbara Burggraf, Mary Zimmerhansl, and the others at the University of Calgary and in Calgary for providing and operating the splendid facilities in which our conference took place. In Rome and Milan, Francesca Camilli and Sabrina Canossi were models of tireless efficiency and co-operation in making the many transatlantic physical and financial arrangements required for our venture. In Toronto, we owe a special word of thanks to Madeline Koch, the Managing Editor of the G8 Research Group, whose managerial and editorial skills were essential in helping organise the conference and ensuring that initial thoughts and rough drafts were transformed into a polished integrated book. We are also grateful to Helen Walsh, president of Think Content, for her vital role in ensuring that our conference was webcast to the world. More broadly, we note with deep appreciation the indispensable contributions of Ella Kokotsis, Director of Analytical Studies of the G8 Research Group, of Sandra Larmour, the Director of Development of the G8 Research Group, of Shinichiro Uda, Director of the G8 Research Group's office in Japan and the author of an important paper presented at our conference, Désirée McGraw, Director of the G8 Research Group's office in Montreal, and Heidi Ullrich, Director of the G8 Research Group's office in Britain. Maros Handzak of Lexitech International translated Stéphan Doumbé-Billé's contribution from French. At the University of Toronto, we are grateful to President Robert Birgineau, former Vice-President Heather Munroe Bloom, and their colleagues for their support. We also acknowledge the continuing support of our colleagues at the Centre for International Studies: its director, Professor Louis Pauly, who oversees our research activities, and Professor Peter Hajnal, who assumed the essential task of securing the anonymous referees who reviewed our draft manuscript and who collectively approved

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it for publication. We owe much to those incisive but supportive criticisms, which have been taken fully into account. At Trinity College, we acknowledge the critical support of provosts Tom Delworth and Margaret MacMillan, bursar Geoffrey Seaborn who manages the G8 Research Group's accounts, head librarian Linda Corman, who oversees the development of the G8 Research Library Collection, and Professor Robert Bothwell, Co-ordinator of the International Relations Program. The Chair of the Department of Political Science, Professor Robert Vipond, and the Acting Chair, Professor David Cameron, have provided constant encouragement and sage advice. At the University of Toronto Library, chief librarian Carole Moore, internet director Sian Miekle, and project manager Marc Lalonde have been indispensable. As always, we reserve a special word of thanks for Kirstin Howgate, and her colleagues at Ashgate, for recognising the virtue of producing this volume and working so effectively to ensure the smooth adoption and speedy publication of the manuscript. We acknowledge, too, the understanding, patience, and support of our families as we laboured to convert raw drafts into publish text. We remain indebted to the alumni of the G8 Research Group and our students at universities throughout the G7, who provide a constant source of inspiration and constructive criticism as we pursue our work. The conference that made this book possible was held immediately before the 2002 Kananaskis Summit — the fourth summit hosted by Canada and the culmination of four cycles and 28 years of G7/8 summitry. It thus serves as an appropriate occasion to commemorate the outstanding carreer and contribution that Sylvia Ostry has made, as a Canadian and international public servant, as a G7 sherpa, and as a scholar, to the effective and equitable functioning and understanding of the G7/8 system and the global community as a whole. We are proud to claim Dr. Ostry as a colleague, and pleased to dedicate this book to her. We do so with the deep admiration and affection she so richly deserves. Michele Fratianni, Paolo Savona, and John J. Kirton May 2003

List of Abbreviations

ACBF ACP AfDF AFRITACs AML/CFT APEC AU COMESA DAC DPJ ECA ECOWAS EEC EFA EFTA EMBI EMU FAO FATF FDI FIU FSAP FTAA GATT GDP GEF GNI GNP HIPCs HKD ICT IDA IFIs IMD IMF

African Capacity Building Foundation African, Caribbean, and Pacific Group of States African Development Foundation African Regional Technical Assistance Centres anti-money laundering and combat against the financing of terrorism Asia-Pacific Economic Cooperation African Union Common Market for Eastern and Southern Africa Development Assistance Committee (of the Organisation for Economic Co-operation and Development) Democratic Party of Japan Economic Commission for Africa Economic Community of West African States European Economic Community Education for All European Free Trade Area Emerging Markets Bond Index European Monetary Union Food and Agriculture Organization Financial Action Task Force foreign direct investment financial intelligence unit Financial Sector Assessment Program Free Trade Agreement of the Americas General Agreement on Tariffs and Trade gross domestic product Global Environment Facility gross national income gross national product heavily indebted poor countries Hong Kong dollar information and communications technology International Development Association international financial institutions Institute for Management Development International Monetary Fund

xxii IT ITC LDCs LDP LOLR M&E MAI MAP MFN MFP MMT MNC NAFTA NATO NEPAD NGO OAU ODA OECD OEEC PGA PRGF PRSP R&D RMB SAR SARS SDDS SDR SDRM TRIPs Agreement UMEOA UNCED UNCTAD UNECA UNEP USD WEF WMD WWF WTO

Sustaining Global Growth and Development information technology International Trade Commission less developed countries Liberal Democratic Party (Japan) lender of last resort machinery and equipment Multilateral Agreement on Investment Millennium African Plan most-favoured nation multifactor productivity methylcyclopentadienyl manganese tricarbonyl multinational corporation North American Free Trade Agreement North Atlantic Treaty Organization New Partnership for Africa's Development nongovernmental organisation Organization of African Unity official development assistance Organisation for Economic Co-operation and Development Organisation for European Economic Co-operation People's Global Action Poverty Reduction and Growth Facility poverty reduction strategy paper research and development renminbi Special Administrative Region (Hong Kong) Severe Acute Respiratory Syndrome Special Data Dissemination Standards special drawing right sovereign debt restructuring mechanism Agreement on Trade-Related Aspects of Intellectual Property West African Economic and Monetary Union United Nations Conference on Environment and Development United Nations Conference on Trade and Development United Nations Economic Commission for Africa United Nations Environment Programme U.S. dollar World Economic Forum weapons of mass destruction World Wildlife Fund World Trade Organization

To Dr. Sylvia Ostry One of the world's finest public servants and scholars Sylvia Ostry is Distinguished Research Fellow at the Centre for International Studies at the University of Toronto. She holds a doctorate in economics from McGill University and Cambridge University. During her career as a public servant, she served the Government of Canada in several senior positions, among them Chief Statistician, Deputy Minister of Consumer and Corporate Affairs, Chair of the Economic Council of Canada, Deputy Minister of International Trade, and Ambassador for Multilateral Trade Negotiations. At the international level, she served as Head of the Economics and Statistics Department of the Organisation for Economic Co-operation and Development in Paris from 1979 to 1983. Within the G7, Dr. Ostry served as the Canadian Prime Minister's Personal Representative for the Economic Summit from 1984 to 1988. As Canada's longest serving sherpa, she organized the 1988 Canadian-hosted Toronto Summit, and pioneered the G7's treatment of microeconomic and social policy. Among Dr. Ostry's major contributions to the scholarly and public understanding of the G7/8 and world trade system are International Économic Policy Coordination (with Michael Artis, Royal Institute of International Affairs, 1986), 'The Role of International Surveillance and Policy Coordination' in Macroeconomic Policies in an Interdependent W orld (edited by Ralph Bryant et al., The Brookings Institution, 1989), 'Canada, Europe, and the Economic Summits', in Canada on the Threshold of the 21st Century: European Reflections upon the Future of Canada (edited by C.H.W. Remie and J.-M. Lacroix, John Benjamins Publishing Co., 1991), The Halifax G7 Summit: Issues on the Table (co-edited with Gilbert R. Winham, Centre for Foreign Policy Studies, Dalhousie University, 1995); 'From Doha to Kananaskis: The Future of the World Trading System and the Crisis of Governance', with Daniel Drache, in Trade Policy Research 2002 (edited by John M. Curtis and Dan Ciuriak, Department of Foreign Affairs and International Trade, 2002), and Globalization and the G8: Could Kananaskis Set a New Direction, O.D. Skelton Memorial Lecture, Queen's University, 2003. Dr. Ostry has received 18 honorary degrees. In 1987 she received the Government of Canada's Outstanding Achievement Award. She was made a Companion of the Order of Canada in 1990. In 1991 she was admitted as a Fellow of the Royal Society of Canada. She is a member of Advisory Group to the Director General of the World Trade Organization, the Inter-American Dialogue, the Advisory Board of the Institute of International Economics in Washington, the Group of Thirty in Washington, the Academic Advisory Council of the Deputy Minister for International Trade, and the Pacific Council on International Policy. In 1992, the Sylvia Ostry Foundation annual lecture series was launched by Sadako Ogata, United Nations High Commissioner for Refugees; subsequent lecturers include Jacques Delors, European Union (1993), Michel Camdessus, Intemational Monetary Fund (1994), Renato Ruggiero, World Trade Organization (1996), Enrique Iglesias, InterAmerican Development Bank (1999), and Paul Volcker, Federal Reserve System (2002).

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Chapter 1

Introduction, Observations, and Conclusions Michele Fratianni, Paolo Savona, and John J. Kirton

The Challenge of Growth and Development The central challenge facing the G8 leaders meeting at Kananaskis, Alberta, on 26-27 June 2002 was lifting economic growth in Africa — the one region most left out of the benefits that globalisation can bring. The issue of African development had also been at centre stage at the 2001 Summit in Genoa, but with a lesser focus and ambition. At Kananaskis the invited African leaders in attendance acknowledged, as their New Partnership for Africa's Development (NEPAD) had emphasised, that African governments must take responsibility for their own development and governance, be accountable for their actions, and link aid to domestic performance. The G8 leaders, in turn, in their G8 Africa Action Plan, promised to raise aid spending and to direct a significant portion of it 'to African nations that govern justly, invest in their own people and promote economic freedom' (see Appendix I). According to the plan, aid will be spent to enhance peace, security, governance, trade and investment, debt relief, knowledge, health, agriculture, and water resources. While G8 and African leaders agreed that most of the financing for Africa's development would flow from the repatriation of Africans' own savings, foreign direct investment (FDI), trade liberalisation and debt relief, enhanced flows of official development assistance (ODA) from G8 and other donors were critical components as well. Certainly, aid was the centrepiece subject as G8 and African commentators and citizens judged how successful the Kananaskis Summit had been, and how successful NEPAD and the G8 Africa Action Plan were likely to be. African leaders were pleased by the G8's reaction at Kananaskis. Yet the African leaders along with others waited for deeds to follow words. However, there also remain more fundamental questions, directed at whether even a fully implemented program will accomplish the ambitious task of actually delivering to Africans the development they deserve. Does ODA actually raise standards of living in the receiving country? Does aid affect the receiving country's economic growth, and do so in the desired way? Does the form in which aid is given materially affect outcomes in the receiving countries? These are legitimate issues that NEPAD and the G8 Africa Action Plan bring to the foreground, especially as their design for African development is significantly different than the approaches that have usually prevailed and often failed in the past.

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Sustaining Global Growth and Development

Determinants of Economic Growth To begin this inquiry into more fundamental questions, it is important to ask what the basic determinants of economic growth are (Fratianni and Huang 1995). The following essentials are clear. First, labour productivity is an important determinant of per capita output, which is a measure of economic well-being. In an economy where the ratio of working people to population is constant, changes in per capita output perfectly mirror changes in labour productivity. Second, labour productivity differs markedly among countries, with rich countries having higher labour productivity than poor countries. Third, capital deepening — a higher ratio of physical capital to labour — improves labour productivity, but at rapidly diminishing rates. Fourth, technological progress plays a much bigger role in the growth process than the accumulation of physical capital does. Such technological progress comes in different forms and shapes. Information and communications technology (ICT) is the latest wave of technological progress. The ICT revolution means that information is processed and delivered more efficiently; that business can manage production and distribution, including inventory, more efficiently; and that processes and products can be redesigned and improved faster than before. Thus ICT not only lowers production and transaction costs, but also speeds innovation. The data, at least for the United States and Canada, are now starting to show the positive effects of ICT, as Chapters 2 and 3 discuss in detail. In the U.S., as Chapter 3 indicates, ICT accounts for 75 percent of the almost one percentage point increase in labour productivity that has taken place from 1973-1995 to 1995-2000. In Canada, the contribution of ICT to labour productivity has been estimated at approximately one third. In both cases it is the use of ICT, more than the growth of the ICT manufacturing sector, that produces the greatest results. Fifth, productivity growth correlates positively with the stock of human capital. Education and learning by doing are two critical ways to raise human capital. In education, not surprisingly, quality works better than quantity. However, for a given level of quality, more schooling leads to more growth. For some growth theorists, human capital enrichment can potentially propel the economic system from a state of constant returns to the blessed state of increasing returns. The implication is that spending on education and training has high payoffs. Sixth, more open economies tend to have higher growth than closed economies. One possible mechanism is the effect of competition when borders are relatively open. Another, as Chapter 2 elaborates, is the spillover effect in the development of knowledge across industries and across borders. Seventh, population growth is a deterrent to economic growth, a result that partially vindicates the seminal work by Thomas Malthus (1798). Population growth is higher in poor countries than in rich countries, although causality between income and population growth may well run in both directions. The final facts relating to the nexus between growth performance and government policy are particularly important for foreign aid. Government policy matters a great

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3

deal for economic growth. There are at least three aspects of government policy relevant here. The first is the basic regime of law, order, and respect for property rights. Political upheaval and revolutions are negatively correlated with economic growth. The fact that peace, order, and good government are essential is not surprising, given the basic intuition that economic transactions must be hindered by chaos and enhanced by a stable rule of law and well-received customs and norms. The second aspect is that government can influence the stability of macroeconomic variables through regime choice. Stable macroeconomic policies foster economic growth. The third aspect is that a government can determine the international trade regime, making it open or closed. As already stated, open economies tend to grow faster than closed economies.

The Link between Aid and Growth There is full agreement that foreign aid can temporarily raise the consumption level in the receiving country, although this increase may benefit primarily a small elite. The interesting issue is whether aid can permanently raise consumption. The appropriate analogy is between catching a fish for someone and teaching someone how to catch a fish. Those who oppose foreign aid argue, implicitly, that foreign aid is equivalent to giving a fish to a needy person instead of teaching the skill of fishing. Thus, the effectiveness of foreign aid depends on whether the transfer is put to productive use. Unfortunately, money is fungible: a donor country may direct aid to infrastructure projects but it has no control over the behaviour of the receiving country, which opportunistically may divert an equivalent amount of domestic funds from infrastructure projects to less productive uses, but politically more important ones. So, what is the actual relationship between economic growth and foreign aid? How can foreign aid be structured to maximise intended results? The weakest evidence on the effectiveness of foreign aid comes from cross-country empirical studies that correlate sample averages of per capita output growth with the ratio of aid to gross domestic product. The relationship is negative, suggesting that aid has perverse effects (Dalgaard, Hansen, and Tarp 2002, Figure 1). But other variables, as noted above, do explain economic growth — in particular, government policy. In their careful study, Craig Burnside and David Dollar (2000) test the hypothesis that aid, after allowing for other determinants of growth, is sensitive to the quality of government policy pursued in the receiving country. The quality of government policy rises with a higher budget surplus, a lower rate of inflation, and a more open economy. The conclusion is that on average aid has little impact on growth, although a robust finding was that aid has had a more positive impact on growth in a good policy environment ... We found no signifîcant tendency for total aid or bilateral aid to favor good policy. On the other hand, aid that is managed multilaterally (about one-third of the total) is allocated in favor of good policy.

4

Sustaining Global Growth and Development These findings, combined with a separate finding that bilateral aid is strongly positively correlated with government consumption, may help to explain why the impact of foreign aid on growth is not more broadly positive (Burnside and Dollar 2000, 864).

Thus, the case for foreign aid as a catalyst of economic growth is weak unless it is tied to good government policy. Moreover, multilateral organisations are better equipped to direct aid to countries that follow good policies than are individual governments. There is an obvious parallel between aid linked to good policies and the conditionality lending of the International Monetary Fund (IMF). The IMF has a rather poor record on conditionality lending, as Chapter 10 explores. A key issue here is that the present regime of international trade and finance is not a level playing field (Fratianni, Savona, and Kirton 2002). The industrial countries have captured the bulk of the net benefits of the existing order, leaving an inadequate amount for developing countries. G7/8 summits, as Andreas Freytag points out in Chapter 4, can be interpreted as collusive agreements that give incumbent governments a competitive advantage over their rivals in domestic politics. These governments tend to blame international agreements and co-ordination for unpopular decisions at home. In particular, governments of industrial countries have preferred aid to trade, despite the overwhelming evidence that international trade is the strong engine of growth. The reason is that these governments respond more to pressure from domestic industries than to the legitimate calls of the developing countries. Labour-intensive agricultural products and textiles are protected in the industrial countries. For example, in 2002, the U.S. enacted a very protectionist farm bill, an action that will not inspire the European Union to dismantle its pernicious Common Agricultural Policy, or Japan and Canada to reduce their own costly protectionism. The industrial countries, in particular the U.S. and the EU, are also the most active employers of antidumping measures to restrict imports. It remains to be seen whether the Doha development round, launched by the World Trade Organization (WTO) in the autumn of 2001, will successfully conclude by its scheduled date of 2005 and offset these negative trends (Cohn 2002). Thus, while the G8's Africa Action Plan should be saluted, the more sure road to development is through trade and not aid. The developing countries have a legitimate complaint that the degree of globalisation is too narrow, not too broad. The right slogan for future G7/8 summits is more trade, finance, FDI, and aid directed at countries that implement good governance policies. Aid alone cannot substitute for trade and finance. On the other hand, aid is amply justified, as Paolo Savona and Chiara Oldani discuss in Chapter 6, to stem epidemics and lessen the impact of natural disasters.

International Finance and the International Financial Architecture Currency and banking crises have characterised the current age of global finance: Mexico in 1994, Southeast Asia in 1997, Russia in 1998, Brazil in 1999, and Argentina

Introduction, Observations, and Conclusions

5

in 2001; the Argentine crisis sparked, in turn, crises in Uruguay and Brazil in 2002. The reaction of the international community has gone through four different phases. The first was to go beyond the institutionalised procedures and resources of the IMF to contain the costs for those in the developing countries and developed world alike (Kaiser, Kirton, and Daniels 2000). The second was to move aggressively to relieve directly the debt of the poorest countries. The third, undertaken just as the IMF and G7 finance ministers meetings began to attract violent protests in 1999, was to assemble a new international financial architecture that would effectively govern the intensely globalised world of finance and to devise more socially sensitive ways to protect the losers in this process (Fratianni, Salvatore, and Savona 1999; Kirton, Daniels, and Freytag 2001; Savona 2000; Kirton and von Furstenberg 2001). The last, which is being implemented by the new IMF management, is to help countries that follow good economic policies (e.g., Brazil) or are caught in a crisis through no fault of their own (e.g., Uruguay) and deny help to countries that follow poor economic policies (e.g., Argentina). This distinction is oversimplified because politically important countries, such as Turkey, receive help regardless of the quality of their economic policies. In fact, multilateral institutions serve the foreign policy objectives of their critical shareholders, as Chapter 10 details. The G7 countries signalled their interest in redesigning the international financial architecture at the 1999 Cologne Summit. The adopted strategy was to improve sections of the building and fix the plumbing in preference to redesigning the entire construction. Thus, the G7 leaders called for more transparency in financial transactions, more transparency at the IMF, adoption of financial standards, better macroeconomic policies in emerging markets, improvement in crisis prevention and crisis management, a mix of official bail-outs and private bail-ins when financial crises erupted, and promotion of social policies to protect the poor. It is fair to say that not all of these objectives have been met. There has been progress on transparency, but the system has remained stuck on fixing the problem rather than preventing it. On the other hand, not much has been done to reconcile financial globalisation and monetary policies, in particular the extent to which financial innovation erodes the ability of monetary authorities to control the money stock (Savona 2002). Currency crises correlate with fixed exchange rate regimes. Fear of floating remains widespread among emerging economies, despite the risk of a crisis. Once a crisis explodes, the primary financial lever is the official bail-out. No significant progress has been made in institutionalising debt restructuring. Moral hazard, on the side of both debtors and creditors, remains the bete noire of official bail-outs.

Other Challenges In addition to the central focus on African development and ongoing concern with international financial system reform, at Kananaskis the G7/8 confronted the classic

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Sustaining Global Growth and Development

challenge of sustaining global growth. At the time of the Kananaskis Summit and afterward, the G8 members, led by Canada and the U.S., were coming out of the worst simultaneous slowdown in a quarter century. Yet the global economy still faces a series of critical economic challenges — stagnation in Japan, slow growth in Europe, high consumer and corporate debt in North America, corporate governance in the U.S., the large U.S. current account deficit, volatile world oil prices, financial collapse in South America, and anxieties about the prospect of deflation. Moreover, if current economic growth is to prove sustainable and be fed by the productivity increases promised by the information technology revolution of the 1990s, current fiscal and monetary stimulus will need to be converted into smart investments and sustained by structural reforms that build a genuine new economy for the twenty-first century. Such domestic changes will need to be reinforced by a new generation of deep reforms to the international financial system. These reforms should anticipate and prevent financial crises, install proper incentives for sound market behaviour, mobilise the expertise and resources of the private sector in this process, ensure high standards of transparency and corporate governance, build ecological and social capital, and give rising economic powers and the values of a rapidly globalising world their proper place. Sustaining prosperity in the wake of the shock and slowdown of 11 September 2001 is also vital to the conduct of the ongoing war against terrorism, another subject of central concern at Kananaskis and afterward. Sustainable growth is required to show that the confidence of citizens and corporations has not been destroyed and to produce the tax revenues required to finance a long campaign. 'Smart spending' is also needed to help ward off any inflation that would present painful choices between security and civilian spending. It can fuel a new generation of technologies to help combat terrorism more efficiently. It can also ensure security while keeping financial systems and borders open in the ways now required by globalised firms, their customers, workers, families, and communities. Reciprocally, wise security investments can foster the innovation that will enhance the productivity of the civilian economy for decades to come. Finally, producing sustainable growth within the G7 and other developed countries is equally essential to reducing poverty in Africa and the developing world as a whole. Sustained prosperity makes it easier for G7 governments and the international institutions they lead to provide the required increases in effective ODA, debt relief, market access, streamlined conditionality, and appropriate financial support at times of crisis. It will also, much as the earlier Marshall Plan did in Europe — discussed in Chapter 7 — encourage the private sector to undertake the investments required as the leading instrument of the NEPAD.

Introduction, Observations, and Conclusions

7

The Purpose and Approach This volume focusses on these new challenges for sustaining growth in the twentyfirst century, and the role of the G7 and IMF in meeting them at the G7/8 Kananaskis Summit in June 2002 and afterward. It has three central purposes. The first is to assess how and how well the G7 countries, both as individuals and as an interrelated group, have addressed their ambitious core 2002 agenda of sustaining global growth, reducing poverty in Africa, and combating terrorism and its financing. The second is to explore how the G7, IMF, and other international institutions are addressing global growth and development challenges in the context of the new processes of regionalism, such as pressures for currency consolidation in Asia and economic union in Africa. The third is to examine how the IMF has approached these issues, particularly in relation to the work of the G7. To address these issues, Sustaining Global Growth and Development combines the contributions of those based in each of the G8's constituent regions of North Ainerica, Europe, and Japan. The contributors coine froin the disciplines of economics, the international political economy field of political science, and management studies. They are based at leading universities and institutions in all G7 countries: the United States, Japan, Germany, Britain, France, Italy, and Canada; two have particular expertise in English- and French-speaking Africa. Many of the authors have experience at senior levels within, or through service in an advisory capacity to, inany of the core governmental and intergovernmental institutions at work in managing and governing the international economy. Others have a wealth of practical experience in private sector finance. They thus bring to bear a wide variety of perspectives, analytical approaches, and judgements. These authors come from a rich variety of theoretical traditions, interpretative frameworks, and observational vantage points. Yet they all share a basic belief that fundamental changes are underway in the international financial system, that the existing arrangements for global financial governance are still struggling to identify and address those changes adequately, and that the G7 institutions and member governments have an important role in meeting these new challenges of a rapidly globalising age.

The Contributions This book is divided into four sections, plus an introduction and analytical and documentary appendices. This first chapter offers introductory observations about the central challenges of global growth and development and conclusions about how well the G7/8 at Kananaskis and the IMF have addressed these challenges. The first part deals with 'Generating Growth through Productivity, ICT, and Trade'. In Chapter 2, 'Globalisation, International Competitiveness, the New Economy, and Growth in the G7', Dominick Salvatore examines first the globalisation process in the

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Sustaining Global Growth and Development

world economy and its impact on the U.S. economy and then the contribution of the new economy to economic growth in the G7 countries. The U.S., the leading industrial country in the world, has benefited from both a more open economic regime and the information revolution. Will Europe catch up with the U.S. or even outperform it in the future? For Salvatore, the answer depends on how rapidly Europe embraces the new economy, which means more than manufacturing ICT, investing in it, or even using it. In order to raise productivity, European countries must also make hard decisions, such as improving flexibility in the labour market and enhancing an entrepreneurial culture. In Chapter 3, 'Productivity Growth in Canada and the G7', Allan Crawford reviews, in the context of the G7, the evidence on the determinants of labour productivity in Canada. ICT was a major force underlying the productivity surge in the U.S. between 1995 and 2000; some evidence of the same force also appears in Canada. The decline of the relative price of ICT goods augurs well for the continued diffusion of ICT in all sectors of the economy. Canada, however, has adopted ICT at a slower pace than the U.S., and its spending on research and development has been smaller. These two factors may explain why the ICT sector is much smaller in Canada than in the U.S. and why it has made less of a contribution to productivity growth. It may also explain why Canadian growth suffered less than that of the U.S. from the bursting of the technology bubble after 2000. However, in Canada, as in the U.S. and elsewhere, it is the use rather than the production of ICT that remains the fundamental driver of future productivity and growth. In Chapter 4, 'The Global Information Society and Development: Smoke without a Fire?', Andreas Freytag takes a less optimistic view of the contribution of ICT to global economic growth. The 'stock' of ICT is very unevenly distributed in the world. The deep digital divide between industrial and developing countries is bound to accentuate the differences in standards of living further between the North and the South. Freytag goes on to discuss ways to launch an international strategy to foster ICT, especially e-commerce, in the South. But he is sceptical about the motives of industrial countries in promoting the diffusion of ICT. By shifting the 'focus in the development debate to a modern issue', Freytag believes that the North is trying to deflect attention away from those protected sectors where developing countries have a comparative advantage. His analysis points to the value of exploring G7 and IMF governance from a public choice and political economy perspective. In Chapter 5, 'The World Trade Organization, Multinational Enterprise, and Civil Society', Alan M. Rugman and Alain Verbeke diagnose the decline of the WTO both as a technical agency and as a political institution. The main activity at the WTO is to settle disputes among the big players, notably the rich countries from North America and western Europe. The most valuable human assets at the WTO are not business people, economists, or politicians, but lawyers. This is not an environment that fosters trade and FDI liberalisation. Another problem stems from the weakened relationship between the WTO and its traditional clientele of member governments. This has happened because WTO has granted standing not only to technical nongovernment

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9

organisations (NGOs) but also to true believer antiglobal mobilisers'. But, as Rugman and Verbeke state, globalisation, as portrayed by the mobilisers, was a myth anyway. The relative lack of deep integration at the multilateral level contributed substantially to the formation of regional trade and investment blocks, as has been demonstrated empirically. The relevance of the above for small, open economies and developing countries is that market access to the large triad markets of the U.S., EU, and Japan is of paramount importance. But although the WTO can help with a new round, such access may need to be bargained for on a regional or bilateral basis, rather than multilaterally.

In Chapter 6, Globalisation, Growth, and Health: The Private Sector Perspective', Paolo Savona and Chiara Oldani deal with several aspects of economic development, but especially with the relationship between international trade and foreign aid. They note that aid does not buy reforms and that developing countries would do better if they had unrestricted access to the markets of the industrialised countries. The big challenge is how to transform a non-cooperative solution, where each country maximises domestic goals, into a co-operative solution. Part II shifts the focus to 'Designing African Development through NEPAD'. In Chapter 7, 'The New Partnership for Africa's Development and the G8's Africa Action Plan: A Marshall Plan for Africa?' Nicholas Bayne argues that the combination of NEPAD and the Africa Action Plan has the potential of generating a repetition of the Marshall Plan. Unlike most aid, the Marshall Plan was very successful in its objective of bringing Europe back on its feet; moreover, the plan was the catalyst of European integration. For Bayne, lasting success of the original Marshall Plan did not just depend on the generosity of the Americans. It was also due to the response by the European recipients. Among them, they transformed the political attitudes and structures of governance in Europe. These factors had an influence that long outlasted the flows of Marshall funds and far exceeded anything that General George Marshall and his advisors could have foreseen.

Caution is in order, however, because Africa today lacks the human capital, the quality of governance, and the institutions of war-torn Europe in 1947. In Chapter 8, 'Designing for Development in Africa: The Role of International Institutions', Ivan Mbirimi implicitly agrees with Bayne that capacity and institution building are keys to the success ofAfrican development. As to the likelihood of this success, Mbirimi appears more sceptical than Bayne. Indeed, he suggests that development is all too often merely whatever development agencies are doing, rather than a dynamic, more comprehensive, mutually reinforcing process that leads to real results. In Chapter 9, 'Is African Development through the New Partnership for Africa's Development Synonymous with Sustainable Development?', Stéphane Doumbé-Billé

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Sustaining Global Growth and Development

explores the conceptual foundations, content, and freedom of choice surrounding the prospects of implementation for NEPAD. He concludes that delivering on the NEPAD promise is a formidable challenge. NEPAD contains a significant social deficit, as the corporations and the private sector on which it focusses cannot represent African civil society as a whole. In accordance with the first principle of the 1992 Rio Declaration, major importance should be placed on the social dimension of the development project. If it is, the development of Africa via NEPAD has some chance of success, as an innovative and genuinely sustainable path to development. It could thus finally deliver the promise of the Brundtland Report and the 2002 Johannesburg World Summit on Sustainable Development — 'development that meets the needs of the present without compromising the ability of future generations to meet their own needs' (World Commission on Environment and Development 1987). Part III deals with 'Critical Challenges in International Finance'. In Chapter 10, 'The International Monetary Fund and its Critics', Michele Fratianni analyses the evolution of the IMF since the end of Bretton Woods and considers various proposals to reform this institution. Undoubtedly, the IMF of today is a much more expansive international organisation than it was under the Bretton Woods regime: membership, resources, and objectives have all become much larger. Mission creep has more to do with the preferences of the IMF's biggest shareholders — the G7 countries — than with opportunistic behaviour on the part of IMF management. The proliferation of roles has led to several conflicts of interest that weaken the effectiveness and reputation of the institution. One conflict of interest arises between giving advice and lending, which is analogous to the conflict between security analysis and investment banking housed within the same financial intermediary. A second conflict of interest arises between setting conditions on a loan and monitoring their implementation. A third conflict of interest exists between the promulgation and the assessment of international standards. The obvious solution is to spin off some of these functions to different organisations in the big compound that defines the international financial architecture. In Chapter 11, 'Evaluating Koizumi's Reforms and the Implications for the Global Economy', Takashi Kiuchi looks at the roots of Japan's structural problems. Big and intrusive government, over-bureaucratisation of significant institutions, and an alliance between politicians and small private service providers are formidable obstacles to a much needed restructuring of the economy. Despite public disappointment, Prime Minister Junichiro Koizumi is going forward with his reforms. Given the difficulty of the task, the pace of reforms cannot be steady: failures alternate with successes. Among the latter, Kiuchi can count the reduction of public institutions, the re-establishment of fiscal discipline, and the avoidance of a financial crisis. To this list might be added the growing awareness among Japanese elites that trade liberalisation on a bilateral and plurilateral basis can be a valuable route to the multilateral trade liberalisation the Japanese have long preferred. In Chapter 12, 'The Chinese Crux of Monetary Union in East Asia', George M. von Furstenberg and Jianjun Wei begin with the observation that there are few historical

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11

precedents for maintaining the separation between the monetary arrangement of Hong Kong and that of mainland China. Their analysis predicts the end of this separation and evaluates alternative scenarios under which the monetary unification of China could take place. The preferred solution would entail issuing: [a] new common currency, introduced at the rate of l:l with 'the people's money' — the renmimbi — having shed its socialist image and nomenclature, [that] should not be legal tender for claims and obligations incurred originally in Hong Kong dollars. Instead, the currency and all claims in Hong Kong dollars should be converted into U.S. dollars at currency board parity to avoid selective expropriation unless alternative currency arrangements are made privately and voluntarily by the contracting parties involved.

Selective expropriation would damage the reputation of the new currency and impede its rise as an international currency. The alternative of pegging the new Chinese currency to the U.S. dollar would not only prevent the emancipation of the region from the dollar standard but would also represent a historical exception to the rule that large economies retain control over their own monies. Part IV, which contains Chapter 13 on 'The G7/8 Contribution at Kananaskis and Beyond', offers a conclusion on how the G7/8 coped at their 2002 Summit with these critical issues of growth and development, and the legacy and challenges that remain for the G7 and IMF in the years ahead. John J. Kirton and Ella Kokotsis judge the Canadian summit to have been one of the most successful in terms of agenda quality, ability of the host not to be distracted from the agenda, and commitments made by the G8 leaders. Kirton and Kokotsis conclude that it was one of the best performing summits in the 28-year life of the G7/8 forum, and could be one of singular historical significance, should its far-reaching but consciously conditional commitments be kept by all involved. Institutionally, it produced an intimate, informal, leader-driven, peacefully civil summit, with Russia securing full equality and being invited to host in 2006. Substantively, it delivered a major global partnership to eliminate safely weapons of mass destruction (WMD), mobilised US$20 billion over ten years for this purpose, and pioneered a new, more pre-emptive approach to global security as a guide. Above all, it delivered for Africa, with a new, democratically based philosophy and partnership for development, the detailed Africa Action Plan, and a new US$6 billion in ODA, US$1 billion in debt relief, and greater access to G8 markets for African exports. Propelling this highly successful performance in the first instance was the continuity with the agenda and work programme established at Genoa in 2001, and the G8's credibility in complying with its Genoa commitments (see Appendix E). The critical causes were the Kananaskis agenda's resonance with the common democratic convictions of the G8 and its new African partners, the collectively formidable and individually balanced resources of the Kananaskis participants, the domestic political capital wielded by G8 leaders, and the skilful design, preparation, and hosting of Canada's Prime Minister Jean Chrétien.

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Sustaining Global Growth and Development

The Kananaskis Contribution This judgement of the Kananaskis G8 Summit's performance is broadly shared by other analytically oriented observers (Bayne 2002; Maxwell and Christiansen 2002). Nicholas Bayne awarded the Kananaskis Summit an overall grade of B+, the third highest he and Robert Putnam had ever awarded (see Appendices A and B). A careful count of the specific, future-oriented, actionable commitments publicly made by the G7/8 leaders at Kananaskis yielded 188 — the highest in the 28-year history of the G7/8 Summit (see Appendix C). The G8 Research Group offered an overall grade of B, with the centrepiece subjects of the Africa Action Plan and terrorism each receiving A– (see Appendix D). Yet these judgements, together with less favourable evaluations, came with the great caveat — that success would only come if the G8 leaders and their new African colleagues remained true to the new principles they proclaimed and faithfully implemented the many, wide-ranging, ambitious commitments they made at the Summit. As time passes since Kananaskis, bringing new preoccupations, it becomes ever more easy to judge how prescient and appropriate the decisions made there actually were, and how the promises would be converted into promises kept. On both accounts, the initial image of Kananaskis as a successful summit has on balance been sustained. With 188 specific commitments, across a wide range of areas, Kananaskis was well equipped to put in place collective decisions to cope with a large number of uncertainties. But the sheer number of decisions and the ambitious nature of many of them compounded the implementation burden that the G8 governors faced. Moreover, in regard to the G8 Africa Action Plan, success depended not only on G8 leaders keeping their Kananaskis promises, but also on the African leaders doing so and bringing their African colleagues and citizens at home on board as well. As Canada passed its hosting responsibility on to France for 2003, and as the fifth cycle of summitry began with planning for the Summit at Evian-les-Bains in the French Alps on 1-3 June 2003, the legacy of Kananaskis appeared largely intact. The most durable achievement was in regard to the summit format and institution itself. As Kananaskis ended, French president Jacques Chirac proclaimed how impressed he was with the Kananaskis format. By subsequently choosing Evian-les-Bains in the mountains, 45 kilometres away from the medium-sized city of Geneva and 195 kilometres from Lyon, as the location for the Summit, he proceeded to replicate the Kananaskis-Calgary formula. His expansionist ambitions were usefully directed at outreach. By holding a Russia-EU Summit in Saint Petersburg immediately before the G8, and by inviting all the other G8 leaders to it, Chirac furthered Russia's sense of full inclusion and brought the smaller members of the EU into more direct contact with the G8 leaders than ever before. More importantly, Chirac not only promised to continue the focus on Africa, but also subsequently signalled that his summit would bring a broader array of developing country leaders to it, and spell out the financial, social, environmental, and ethical principles underpinning a responsible market

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economy, perhaps even by bringing a new economic and social partnership into being. The G8's emergence as an effective, legitinate, inclusive centre of global governance appeared to be moving into a new phase. The African development agenda at Kananaskis also had lasting moinentum. Immediately after the Summit's conclusion, the African Union was born, as an important institutional instrument for ensuring that Africa as a whole would be able and willing to deliver its side of the NEPAD bargain. With all G7 leaders except George Bush in attendance, the World Summit on Sustainable Development in Johannesburg in the late summer was able to move forward in several areas, through development-oriented partnerships between North and South, the private and public sectors, and the environment and development communities as well. In the months following Kananaskis, several of the deadly civil wars that had impoverished Africa for decades moved toward a clear resolution, offering a foundation of stable peace on which democratic development could be built. The worsening famine in southern Africa, which threatened to claim over 13 million victims, saw many African states turn away from the old path still followed by Zimbabwe's Robert Mugabe, to embrace the assistance and the technologies of the G8 world. Despite major new U.S. commitments of resources in 2003, how to combat the compounding pandemic of HIV/AIDS, and other infectious diseases remained an outstanding challenge for all, including the new G8 health ministers forum that had emerged on the road to Kananaskis. Deepening Kananaskis's G8 institution-building and African development achievements was the first meeting ever of G8 development ministers, held in Windsor, Canada, on 27 September 2002 (Ben-Ishai 2002, see Appendix N). The meeting was called to further the G8 Africa Action Plan, deal with aid effectiveness, education, and trade, and follow up on the Johannesburg World Summit on Sustainable Developinent, as well as explore how the G8 process could contribute more generally to development co-operation. By involving the chair of the NEPAD Steering Committee and an expert from Coluinbia University, the meeting reinforced the recent G8 impulse toward global outreach and civil society 'downreach'. Kananaskis's achievements in the realm of countering terrorism seemed equally durable. The Global Partnership against the Spread of Weapons and Materials of Mass Destruction announced at Kananasksis produced not only a detailed programme to dismantle WMD and a US$20 billion fund to accomplish it, but also a new philosophy of security that underlined the need for preventive action in the face of the new threats posed by the possibility of WMD falling into terrorist hands. Subsequent joint action by the U.S. and Russia to take possession of nuclear materials in Eastern Europe showed this new approach at work. Many G7 members moved quickly to commit their individual contributions to the fund. More generally, the initial willingness of G8 members, led by Britain and the U.S., to have the United Nations Security Council finally enforce its resolutions demanding that Iraq disarm demonstrated that the new sense of partnership was very real.

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The major disappointment after Kananaskis came again in the once core G7 realm of economics and finance. A short two-day summit with such a crowded agenda left little time for the G7 leaders meeting to have an extensive and engaged discussion of the G7 and global economy. And while their light touch and optimistic statements seemed to be all that might be required in June 2002, in the following months the inadequacies were dramatically exposed. During that time, growth forecasts were steadily lowered in the U.S., Europe, and Japan. The crisis of governance in the U.S. triggered by the Enron scandal spread to several other major firms. The slumping stock market and value of the U.S. dollar raised fears that a dreaded double-dip recession and even Japanese-style deflation might be on the way. Early signs of hope in Japan were quickly overwhelmed by the Bank of Japan's decision in September to purchase the slumping shares of asset-imperilled Japanese banks and by the failure of investors to purchase the full amount of ten-year Japanese government bonds. Throughout the global economy, concerns about military action against Iraq and an ensuing supply reduction and price increase of oil compounded the gloom. As the Al Qaeda terrorist network moved from money to gems and precious metals to finance its operations, the existing G7 measures to close it down became less adequate. In the field of global finance, the performance of the G7 at Kananaskis appeared even less adequate with every passing month. In August 2002, the IMF, under G7 leadership, provided a US$30 billion bail-out for Brazil, newly afflicted by financial contagion and domestic political uncertainty (see Appendix L). The package appeared to be effective in bringing short-term stability to the country. But as the largest package in IMF history, with no participation from private sector lenders, it called into question the IMF and G7's recent rhetorical emphasis on moving away from large public sector bail-outs in favour of private sector bail-ins. Nor did the G7 and IMF, despite considerable progress, seem close to a certain and convincing conclusion on how best to involve the private sector, through the construction of a sovereign debt restructuring mechanism (Dodge 2002). Amidst such inaction, Latin America remained in a precarious position, with a stubbornly stagnating Argentina, again bailed out by the IMF in 2003, a crisis-afflicted Uruguay bailed out by the U.S., and a populist Venezuela showing signs of being the next to collapse. In the face of such continuing crisis, the ongoing effort to construct a new international architecture appeared to be an inadequate response (Eichengreen 1999; Carptanis and Herland 2002; Santiso 2002). The optimists could point to the meetings of the G7 finance ministers, starting on 27 September 2002 at the IMF semi-annual meeting in Washington, and more broadly to the G20 finance ministers meeting in New Delhi on 22-23 November 2002 as adequate institutional vehicles to confront these issues (see Appendices M and 0). But with France planning an ambitious wide-ranging agenda for its 2003 summit, and with the prospective withering away of the leaders meeting 'at seven' by 2006 when Russia will host, the challenge of having the leaders themselves deal seriously with a rapidly globalising and still fragile global economy remained acute.

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References

Bayne, Nicholas (2002). 'Impressions of the Genoa Summit, 20-22 July, 2001'. In M. Fratianni, P. Savona and J. J. Kirton, eds., Governing Global Finance: New Challenges, G7 and IMF Contributions, pp. 199-210. Ashgate, Aldershot. Ben-Ishai, Elizabeth (2002). 'G8 Development Cooperation Ministers Meeting, Windsor, Ontario'. (January 2003). Bumside, Craig and David Dollar (2000). 'Aid, Policies, and Growth'. A merican Economic Review vol. 90, no. 4, pp. 847-868. Carptanis, André and Michel Herland (2002). 'The Reconstruction of the International Financial Architecture: Keynes's Revenge?' Review of International Political Economy vol. 9 (Summer), pp. 271-297. Cohn, Theodore H. (2002). Governing Global Trade: International Institutions in Conflict and Convergence. Ashgate, Aldershot. Dalgaard, Carl-Johan, Henrik Hansen, and Finn Tarp (2002). 'On the Empirics of Foreign Aid and Growth'. CREDIT Research Paper No. 02/08. University of Nottingham. Dodge, David (2002). 'International Financial Architecture and the Resolution of Financial Crises'. International Journal vol. 57 (Autumn), pp. 624-630. Eichengreen, Barry J. (1999). Toward a New International Financial A rchitecture: A Practical Post-A sia A genda. Institute for International Economics, Washington DC. Fratianni, Michele and Haizhou Huang (1995). 'New Growth Theory: A Survey from a Policy Perspective'. Kredit and Kapital vol. 28, no. l, pp. 62-86. Fratianni, Michele, Dominick Salvatore, and Paolo Savona, eds. (1999). Ideas for the Future of the International Monetary System. Kluwer Academic Publishers, Boston. Fratianni, Michele, Paolo Savona, and John J. Kirton (2002). 'Introduction, Summary, and Conclusions'. In M. Fratianni, P. Savona and J. J. Kirton, eds., Governing Global Finance: New Challenges, G7 and IMF Contributions, pp. 1-25. Ashgate, Aldershot. Kaiser, Karl, John J. Kirton, and Joseph P. Daniels, eds. (2000). Shaping a New International Financial System: Challenges of Governance in a Globalizing W orld. Ashgate, Aldershot. Kirton, John J., Joseph P. Daniels, and Andreas Freytag, eds. (2001). Guiding Global Order: G8 Governance in the Twenty-First Century. Ashgate, Aldershot. Kirton, John J. and George M. von Furstenberg, eds. (2001). New Directions in Global Economic Governance: Managing Globalisation in the Twenty-First Century. Ashgate, Aldershot. Malthus, Thomas Robert (1798). A n Essay on the Principle of Population. Macmillan and Co., London. Maxwell, Simon and Karin Christiansen (2002). -Negotiation as Simultaneous Equation": Building a New Partnership with Africa'. International A ffairs vol. 78, no. 3, pp. 477-491. Santiso, Carlos (2002). 'Governance Conditionality and the Reform of Multilateral Development Finance: The Role of the Group of Eight'. G8 Governance no. 7. (January 2003). Savona, Paolo, ed. (2000). The New A rchitecture of the International Monetary System. Kluwer Academic Publishers, Boston. Savona, Paolo (2002). 'On Some Unresolved Problems of Monetary Theory and Policy'. In M. Fratianni, P. Savona and J. J. Kirton, eds., Governing Global Finance: New Challenges, G7 and IMF Contributions, pp. 177-183. Ashgate, Aldershot. World Commission on Environment and Development (1987). Our Common Future. Oxford University Press, New York.

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PART I: GENERATING GROWTH THROUGH PRODUCTIVITY, ICT, AND TRADE

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Chapter 2

Globalisation, International Competitiveness, the New Economy, and Growth in the G7 Dominick Salvatore1

During the second half of the 1992-2002 decade, growth in the United States accelerated and far exceeded the growth of the other leading industrial G7 countries.2 This improved, relatively higher growth performance of the United States has been attributed to the much more rapid spread of the new economy, which sharply increased the productivity of U.S. labour. This was encouraged and made possible by the more rapid globalisation and restructuring of the economy, which made the U.S. the most competitive nation in the world.3 This chapter examines the process of globalisation in the world economy and how this, together with more liberalisation and economic restructuring, made the U.S. the most competitive economy in the world. Subsequently, it discusses the meaning, measurement, and spread of the new economy among the G7 countries. It then explores how the much better U.S. performance in this area sharply increased labour productivity and growth in relation to the other leading industrial nations between 1992 and 2003, especially since 1995. It concludes by asking whether these trends will continue in the U.S. in the current decade and whether Europe might catch up to the U.S.

Globalisation in the World Economy There is a strong trend toward globalisation in tastes, production, and labour markets in the world today. This has led to increased competitiveness among firms and nations all over. The revolution in telecommunications and transportation during the 1990s led to a strong cross-fertilisation of cultures and a convergence of tastes. Tastes in the U.S. affect tastes around the world, and tastes abroad strongly influence tastes in the U.S. Coca-Cola has 40 percent of the U.S. market and an incredible 33 percent of the world's soft drink market. Today one can buy a McDonald's hamburger in most major cities of the world. As tastes become more global, firms increasingly respond by introducing truly global products. For example, in 1990, Gillette introduced its new Sensor Razor simultaneously in 19 countries in Europe and North America and used the same advertisement (in different languages) in all of them; by 1999, Gillette had sold more than 400 million of its razors and more than 7 billion cartridges. In

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1994, Ford spent more than US$6 billion to create its 'global car', conceived and produced in the United States and Europe and sold under the name of Ford Contour and Mercury Mystique in the United States and Mondeo in the rest of the world. The list of global products is likely to grow rapidly in the future and is likely to move the world closer and closer to a truly global supermarket. In his 1983 article, 'The Globalization of Markets', Theodore Levitt (1983) asserted that consumers from New York to Frankfurt to Tokyo want similar products and that success for producers in the future would require increasingly standardised products and pricing. In fact, in country after country, there has emerged a middle class lifestyle based on a taste for comfort, convenience, and speed. In the food business, this means packaged, fast-to-prepare, and ready-to-eat products. Market researchers have discovered that similarities in living styles among middle class consumers all over the world are much greater than once thought and are growing with rising incomes and educational levels. Many small national differences in taste do, of course, remain. For example, Nestlé markets more than 200 blends of Nescafé to cater to differences in tastes in different markets. But the converging trend in tastes around the world is unmistakable and is likely to lead to more global products. This is true not only for foods and inexpensive consumer products but also for automobiles, portable computers, cellular telephones, and many other durable products. Globalisation has also occurred in the production of goods and services with the rapid rise of multinational corporations (MNCs). These are run by an international team of managers, have research and production facilities in many countries, use parts and components from the cheapest sources, and sell their products, finance their operations, and are owned by stockholders throughout the world. In fact, more and more corporations operate today on the belief that their very survival requires that they become one of a handful of such corporations in their sector. This is true in automobiles, steel, aircraft, computers, telecommunications, consumer electronics, chemicals, drugs, and many other products. Nestlé, the largest Swiss company and the world's second largest food company, has production facilities in 59 countries and America's Gillette in 22. Ford has component factories in 26 different industrial sites around the world, assembly plants in six countries, and employs more people abroad (201 000) than in the United States (188 000). One important form often taken by globalisation in production in today's corporation is foreign sourcing of inputs. There is almost no major product today that does not have some foreign inputs. Foreign sourcing is often not a matter of choice for corporations to earn higher profits, but simply a requirement to remain competitive. Firms that do not look abroad for cheaper inputs face loss of competitiveness in world markets and even in their domestic markets. It is for this reason that during the mid 1980s, of the total cost of US$860 of producing an IBM personal computer US$625 was incurred for parts and components manufactured by IBM outside the U.S. or purchased from foreign producers. Such low-cost offshore purchasing of inputs is likely to continue to expand rapidly in the future, fostered by joint ventures, licensing

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arrangements, and other non-equity collaborative arrangements. Indeed, this represents one of the most dynamic aspects of the global business environment today. Foreign sourcing can be regarded as manufacturing's new international economies of scale in today's global economy. Just as in the 1980s companies were forced to rationalise operations within each country, now they face the challenge of integrating their operations for their entire system of manufacturing around the world to take advantage of the new international economies of scale. The firm must focus on those components that are indispensable to its competitive position over subsequent product generations and outsource other components for which outside suppliers have a distinctive production advantage. Indeed, globalisation in production has proceeded so far that it is now difficult to determine the nationality of many products. For example, should a Honda Accord produced in Ohio be considered American? What about a Chrysler minivan produced in Canada, especially now that Chrysler has been acquired by Daimler-Benz? Is a Kentucky Toyota or Mazda that uses nearly 50 percent of imported Japanese parts American? It is clearly becoming more and more difficult to define what is American, and opinions differ widely. One could even legitimately ask if this question is relevant in a world growing more and more interdependent and globalised. Today, the ideal corporation is strongly decentralised in order to allow local units to develop products that fit into local cultures, and yet at its very core it is very centralised in order to co-ordinate activities around the globe. The globalisation of labour markets around the world has been even more dramatic. Work previously done in the United States and other industrial countries is now often done much more cheaply in developing countries. This is the case not only for lowskilled assembly-line jobs but also for jobs requiring high computer and engineering skills. Most Americans have only now come to realise that there is a truly competitive labour force in the world willing and able to do their jobs at a much lower cost. If anything, this trend is likely to accelerate in the future. Even service industries are not immune to global job competition. For example, more than 3500 workers on the island of Jamaica, connected to the United States by satellite dishes, make airline reservations, process tickets, answer calls to toll-free numbers, and do data entry for U.S. airlines at a much lower cost than could be done in the United States. Nor are the highly skilled and professionals spared from global competition. A few years ago, Texas Instruments set up an impressive software programming operation in Bangalore, a city of four million people in southern India. Other American multinationals soon followed. Motorola, IBM, AT&T, and many other high-tech firms now do a great deal of research — even basic research — abroad. American workers are beginning to raise strong objections to the transfer of skilled jobs abroad. Of course, many European and Japanese firms are setting up production and research facilities in the U.S. and employing many American professionals. In the future, more and more work will simply be done in places best equipped to do the job most economically. If firms try to restrict the flow of work abroad to protect jobs in the United States, they risk losing international competitiveness or end up moving all of their operations abroad.

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Globalisation and the International Competitiveness of Nations The globalisation of tastes, production, and labour markets is a crucial determinant of the international competitiveness of firms, industries, and nations. During the 1970s and 1980s, the U.S. lost relative competitiveness in one industry after another to Japan and, in some industries, even to Europe and the newly industrialising economies of Asia. Since the late 1980s and early 1990s, however, the U.S. has recaptured most of its lost ground competitively. In 1994, it ranked once again as the most competitive economy in the world, displacing Japan, which had occupied that position since 1985. Since 1994, the U.S. not only retained its number-one position but it also increased its lead over Japan and many other industrialised countries. There are several measures of the overall international competitiveness of nations. One of the best is calculated by the Institute for Management Development (IMD, 2001) in Switzerland. Assigning a value of 100 to the U.S. competitiveness index in 2001, IMD found that the index for Canada was 76.9; that is, Canada was about 23 percent less competitive than the U.S. on an overall basis in 2001. The competitive index for the remaining five of the G7 (largest industrialised) countries was 74.0 for Germany, 64.7 for the United Kingdom, 59.6 for France, 57.5 for Japan, and 49.6 for Italy. Although Canada ranked second among the G7, it was in the ninth place when all 49 countries for which the competitive index was calculated were included. Ahead of Canada were Singapore (87.7), Finland (83.4), Luxembourg (82.8), Netherlands (81.5), Hong Kong (79.5), Ireland (79.2), and Sweden (77.9). Germany was 12th among the 49 countries, the United Kingdom was 19th, France 25th, Japan 26th, and Italy 32nd. Noteworthy was the sharp decline of Japan, from consistently being the most competitive economy in the world for several years up to 1994 to sixth place among the G7 countries and 32nd among all 49 countries in 2002 as a result of the serious economic and financial problems facing it since the early 1990s. Competitiveness was defined as the ability of a country or company to generate more wealth for its people than for its competitors in world markets. It was calculated as the weighted average of 300 competitiveness criteria grouped into four large categories. These are economic performance (macroeconomic evaluation of the domestic economy), government performance (the extent to which government policies are conducive to competitiveness), business efficiency (the extent to which enterprises perform in an innovative and profitable way), and infrastructure (the extent to which basic, technological scientific, and human resources meet the needs of business). The U.S. ranked first among the G7 on all four competitive factors in 2001. Canada ranked second on government performance, business efficiency, and infrastructure, but fifth on economic performance. Germany ranked second on economic performance but third on infrastructure, government performance, and business efficiency. The United Kingdom was third on economic performance, fourth on government performance and business efficiency, and sixth in infrastructure. France was fourth on economic performance, fifth on business efficiency and infrastructure, and sixth

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on government performance. Japan was fourth in infrastructure, fifth on government performance, sixth on economic performance, and seventh on business efficiency. Italy was sixth on business efficiency and seventh on economic performance, government performance, and infrastructure. Measuring international competitiveness, however, is a very ambitious and difficult undertaking. Although useful, the competitiveness study discussed above faces a number of serious shortcomings. One is the grouping and measuring of international competitiveness of developed and developing countries and of large and small countries together. It is well known, however, that developed and developing countries, on the one hand, and large and small countries, on the other, have very different industrial structures and face different competitiveness problems. Thus, using the same method of measuring the international competitiveness for all types of countries may not be appropriate. The results may not be very informative and may also be difficult to interpret. Another serious shortcoming with the above competitiveness measure is that the correlation between real per capita income and the standard of living of the various nations may not be very high. For example, the UK has a higher competitiveness index than does Japan, even though its real per capita income is more than a quarter lower than Japan's. Similarly, the UK has a competitiveness index much higher than Italy, even though its real per capita income is almost the same as Italy's. Questions naturally arise: If the UK is more competitive than Japan, how can its per capita income and standard of living be so much lower? Similarly, if Italy is so much less competitive than the UK, how can it have a similar real per capita income? Specifically, where do Italy's high per capita income and standard of living come from? Economists like to think that productivity determines per capita income and the standard of living. It disconcerting to see such a blatant variance between expectations and reality. As a result, the overall international competitiveness figures presented here must be taken with a grain of salt. Furthermore, a nation may score low on its overall competitiveness and still have some sectors in which it is very productive and efficient. Nevertheless, and to the extent that entrepreneurs and managers around the world rely on these measures in deciding whether to invest in one nation or another, these overall international competitiveness measures are important. Displeased by how the world competitiveness index was measured, the World Economic Forum (WEF), which had previously collaborated with the IMD in measuring the international competitiveness of nations, started to prepare its own index. The WEF (2001), also based in Switzerland, defines international competitiveness as 'the ability of a country to achieve sustained high rates of growth in GDP per capita'. The most significant difference between the two indices is that the WEF excludes such variables as growth in gross domestic product (GDP), export growth, and the inflow of foreign direct investment among the variables used in measuring international competitiveness because it regards these as the result or consequence, rather than the cause, of a country's level of international competitiveness. The WEF ordinal competitiveness ranking of the G7 in 2001, however, is very similar to the IMD's results, with the U.S. leading the list

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of the G7 countries and Canada in second place, but with the UK ahead of Germany in third place, followed by France, Japan, and Italy. The same general results were obtained by the European Commission (1998).

The Importance of International Competitiveness and Economic Restructuring Paul Krugman (1994) has stated that international competitiveness is an irrelevant and dangerous concept because nations simply do not compete with each other the way corporations do, and increases in productivity rather than international competitiveness are all that matter for increasing the standard of living of a nation. In trying to prove his point, Krugman points out that U.S. trade represents only about 10 to 15 percent of the country's GDP (and so international trade cannot significantly effect the standard of living, at least in the U.S.), that international trade is not a zerosum game (so that all nations can gain from international trade), and that concern with international competitiveness can lead governments to the wrong policies (such as adopting trade restrictions and engaging in industrial policies). All these statements are true. But Krugman's conclusion — that since international trade is only 10 to 15 percent of GDP, it cannot significantly affect the U.S. standard of living — simply does not follow. If a nation's corporations innovate and increase productivity at a faster rate than foreign corporations, then the nation will export products that are technologically more advanced, and this permits faster growth in the future. For example, the U.S. superiority in software makes possible faster productivity growth in the U.S. both directly (because productivity growth is faster in the software industry than in many other industries) and indirectly (by increasing the productivity of many other sectors, such as automobiles, which make great use of computer software in design and production). Thus, international competitiveness is crucial to the nation's standard of living. Krugman points out that some high tech sectors artificially protected by trade policies or encouraged by industrial policies have grown less rapidly that some low tech sectors, such as cigarettes and beer production; this misses the point. It only proves that wrong policies can be costly. Productivity growth and international competitiveness must be encouraged not by protectionist or industrial policies but by improving the factors that affect the degree of international competitiveness (such as liberalising the economy and improving the industrial structure). In short, a country's future prosperity depends on its growth in productivity, and this can certainly be influenced by government policies. Thus, nations compete in the sense that they choose policies that promote productivity. As pointed out by John Dunning (1995) and Michael Porter (1990), international competitiveness does matter. That industrial policies and protectionism provide only temporary benefits to the targeted or protected industries but slow down the growth of productivity and standards of living in the long run is clearly evidenced by the competitiveness situation in Europe

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vis-a-vis the U.S. and Japan today. Aside from banking, biotechnology, the space industry, and, perhaps, the chemical industry, there is practically no industry in which Europe can stand up to U.S. and Japanese competition. This is the case for the steel industry, the automobile industry, the commercial aircraft industry, the airline industry, the computer industry, and many others. Without the billions of euros that some of these industries receive in subsidies or for repeated restructuring and trade protection, and without alliances with U.S. or Japanese firms, most European firms in these industries would be unable to compete. Seven of the top ten computer firms (including the top five) in Europe are American; of the remaining three, one is Japanese and two are European. In software, America has an undisputed lead. In telecommunications, online services, biotech, and aircraft, the U.S. also has a big lead over Europe. In automobiles, Japan has an undisputed lead and even U.S. auto makers are much more efficient than Europeans. To be sure, European automobiles are of high quality, but command a much higher price than Japanese and a higher price than even American automobiles of comparable quality. Although Europe has been able to keep wages and standards of living relatively high and rising during the past two decades, the rate of unemployment is now more than double the U.S. and Japanese rates. And while the U.S., with a population smaller than Europe, has created many more jobs during the past 30 years, in Europe employment has stagnated. The U.S. has also been much more successful than European countries in meeting the growing competition from newly industrialising economies and other emerging economies in Asia (see National Science Foundation 1995). The restructuring and downsizing made necessary by rapid technological change and increasing international competition resulted in average wages and salaries not rising very much in real terms in the U.S. during the 1990s. But millions of new jobs were created. In Europe, on the other hand, real wages and salaries grew but very few new jobs were created. This left Europe less able than the U.S. to compete on the world market. Unable to fire workers when they are no longer needed, firms have tended to increase output by increasing capital per worker rather than by hiring more labour. This has made the return to capital lower and the wage of labour higher in Europe than in the U.S. Since the 1970s, the United States has moved faster than Japan, Germany, France, and other nations in deregulating (that is, in removing government regulations and controls of economic activities of an industry) airlines, telecommunications, trucking, banking, and many other sectors of the economy. For example, cut-throat competition makes U.S. airlines about a third more productive than the larger regulated or government-run foreign airlines. General merchandise retailing is twice as efficient in the U.S. as in Japan, and so is U.S. telecommunications in relation to German telecommunications. Most U.S. firms today face much stiffer competition from domestic and foreign firms than their European and Japanese counterparts. Stiff competition makes most U.S. firms lean and mean and generally more efficient than foreign firms.

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Labour Productivity, Financial Markets, Price Competitiveness, and Growth Potential In a 1997 study of labour productivity of German and French industry relative to U.S. industry, the McKinsey Global Institute (1997) found that German and French productivity increased over the past decade but at a slower rate than U.S. productivity. Thus it is now further behind U.S. industry than it was a decade ago. Overall, McKinsey found that, compared to U.S. industry, German industry is 30 percent less efficient and French industry is 40 percent less efficient. In general, the higher U.S. labour productivity is not due to bigger firms, more automation, or better managers (although these factors might be determinants in some specific industries). Rather, it is the result of greater competition and much more flexible labour practices. Specifically, the higher U.S. productivity depends on the ability of managers to introduce new and improved products much faster than abroad and the ability of engineers to invent new and more efficient ways of designing and manufacturing products that are easy to make. Furthermore, despite the fact that in recent years the U.S. has been saving and investing less than Japan, Germany, and France (and, for that matter, less than most other nations), it seems to have got more mileage out of its investments. In fact, the McKinsey Global Institute (1996) found that Germany and Japan use their physical capital only about two thirds as efficiently as the U.S. McKinsey looked at the economy as a whole and at five industries in depth: telecommunications, utilities, auto manufacturing, food processing, and retailing. It found that Germany uses excessive capital for the job at hand. For example, Deutsche Telekom's phone cables are built to withstand being run over by a tank, even though the cables are underground and may become obsolete in a few years. Such 'gold-plating' of equipment is expensive and wasteful. Japan keeps massive electrical generating capacity idle most of the time in order to meet peak demand on hot summer days, while the U.S. avoids this great capital waste by creative time-of-day and summer-electricity pricing schemes that discourage usage at peak times. Such higher capital productivity translated into higher financial returns for U.S. savers — 9.1 percent compared with 7.4 percent in Germany and 7.1 percent in Japan. This higher U.S. capital productivity more than makes up for its lower savings rate than Germany and Japan. Another reason that productivity is higher among U.S. labour than among Japanese and European labour is the much higher degree of computerisation in the U.S. than in Japan or Europe. The U.S. has 63 computers per 100 employed workers, compared to Japan's 17 and even fewer in Europe. Labour flexibility is still another reason for the larger U.S. labour productivity. While labour practices elsewhere are often constrained by unions, social policies, and regulation, U.S. firms are much freer to hire, fire, reorganise, and use labour and other resources where they are most productive. This makes life difficult for U.S. workers, who can lose their jobs when caught in a competitive squeeze, but it also enhances firm efficiency and labour productivity. Coupled with adequate job creation, this higher labour productivity is responsible for the higher GDP per capita and standard of living in the U.S. than abroad.

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27

Table 2.1 presents data on the growth of labour productivity in manufacturing in the U.S. in relation to the other nations of the G7 from 1992 to 2000. It shows that the growth in labour productivity in manufacturing in the U.S. was higher (in some cases much higher) than for the other G7 countries for that period. This represents a reversal of the experience in the previous decade. Table 2.2 provides data on the functioning of labour markets, the efficiency of financial markets, the degree of price competitiveness, and the growth potential of the G7 countries in 2000. It shows that the U.S. performed better than the other G7 countries in all of these areas. That is, the U.S. has more efficient labour markets, more sophisticated financial markets, the highest degree of price competitiveness and, as a result, the highest growth potential among the G7.

The Spread of the New Economy The 'new economy' refers to the rapid improvements and spread in the use of information and communications technology (ICT), based on computers, software, and communications systems. Table 2.3 shows that the new economy has spread the most in the U.S. among the G7. Specifically, in addition to being the most computerised of the G7, the U.S. economy has the largest number of internet connections per 1,000 people and is the heaviest user of new technology and electronic commerce. The new economy has spread much faster in the U.S. than abroad not only because the U.S. is at the frontier in ICT development and production but also because ICT has spread the most and permeated more sectors of the U.S. economy than anywhere else. The greater use of the new technologies has been stimulated by the more rapid globalisation of the U.S. economy and by the fact that the U.S. has the most liberalised and restructured economy among the G7. In short, there has been a more rapid increase in the supply and the demand of new technologies in the U.S., which has increased its labour and multifactor productivity much more than the other leading industrial countries during the past decade, especially since the mid 1990s. Table 2.1 Growth of Output per Hour in Manufacturing in the G7, 1992-2000 1992 1993 1994 1995 1996 1997 1998 1999 100.0 U.S. 102.1 107.3 113.8 117.0 121.2 126.5 135.3 Japan 100.0 101.7 103.3 111.0 116.1 121.0 121.2 126.9 Germany 100.0 101.8 109.6 112.3 114.0 119.5 120.4 120.5 100.0 France 100.6 108.6 114.7 115.3 123.8 132.9 129.5 UK 100.0 103.9 107.1 104.9 103.8 105.2 106.9 111.6 Italy 100.0 101.8 106.1 111.2 110.8 113.7 113.1 113.5 Canada 100.0 104.9 109.7 111.3 110.1 113.2 113.1 114.9 Source:

United States Department of Labor (2002), p. 13.

2000 142.8 134.1 128.0 141.1 117.6 117.8 116.3

28

Sustaining Global Growth and Development

The widespread use of the new technology also resulted in more widespread changes in the way businesses are organised in the U.S. than elsewhere in the form of new production methods and human resource management practices, new types of relationships with suppliers and customers, and new forms of finance and compensation. It also led to new business strategies, such as spreading the scope of the enterprise through mergers and acquisitions and streamlining operations to utilise core coinpetencies to their best advantage. To be sure, these results occurred in the other leading industrial countries, but to a much smaller extent than in the U.S. because of the slower progress of globalisation, more rigid labour markets, and generally less liberalised and restructured economies. Table 2.2 Growth Potential in the G7 Countries in 2000 (10 = best result; 0 = worst)

Country U.S. Canada UK France Japan Germany Italy Source:

Table 2.3

Country U.S. Japan Germany France UK Italy Canada

Labour Market Financial Market Flexibility Sophistication 6.8 6.8 6.3 6.0 6.1 6.8 4.4 5.6 4.7 5.2 6.0 4.6 4.9 4.6

Price Competitiveness 6.8 6.3 5.8 4.8 4.2 4.7 4.1

Lehman Brothers (2001, 87), and World Economic Forum (2001, 287). The Spread of the New Economy among the G7 in 2000 Computers per 1,000 People 581 389 373 369 442 308 549

Internet Users per 1,000 People 488 268 245 152 281 218 501

Electronic New Information Technology a Commercea 8.3 8.1 4.7 6.1 6.2 7.7 5.0 6.8 6.2 6.9 4.9 3.6 7.9 6.9

a. 10 = highest; 0 = lowest.

Source:

Growth Potential 5.9 5.4 5.3 5.1 5.1 4.6 4.0

Institute for Management Development (2001), pp. 489-492.

Globalisation, Competitiveness, the New Économy, and Growth

29

The New Economy, Multifactor Productivity, and Growth One can measure the spread of the new economy by the growth of multifactor productivity (MFP). This involves starting by calculating labour productivity (LP), which measures how much output (Y) is produced, on average, by each unit of labour (L) employed in production. That is, LP = Y/L

(1)

In terms of growth rather than the level of labour productivity, there is lp = y -l (2) The growth of labour productivity (lp) can, in turn, be decomposed into the contribution of capital deepening, the growth of the capital-labour ratio (L/K), and MFP. MFP measures the increase in productivity attributable to technological advances or improvements in the organisation of production, as opposed to increases in the quantity of factor inputs used. This requires specifying the following production function: Y = F (K, L, MFP)

(3)

Thus, MFP is obtained by subtracting the combined growth of total factor inputs (L and K) from the growth of total output (Y). Total input growth is calculated as the weighted average of labour and capital growth, with the marginal contributions of each of these factors to output being used as the weights. Assuming that the marginal contribution of each factor of production is proportional to the share of total production that it receives in compensation, this gives q = (w1)1 + (wk)k

(4)

where q represents the combined growth of labour and capital, wl is the weight of labour (usually the share of labour compensation in total income), 1 is the growth rate of labour input, wk is the weight of capital (usually the share of capital compensation in total income), and k is the growth rate of capital services, assumed to be proportional to the capital stock. Given the measure of overall input growth, MFP can be defmed as MFP = y — q = y — [(w1)1 + (wk)k]

(5)

30

Sustaining Global Growth and Development

In this framework, any increase in the growth of output (y) in excess of the contribution of the growth in the quantity used of factor inputs is attributed to an increase in MFP growth. If equation (5) is rearranged, output growth can be expressed as the sum of total factor input growth (q) and MFP growth: y = q + MFP = [(w1)1 + (wk)k] + MFP

(6)

If the growth of the labour input (l) is subtracted from both sides and given that w1= 1– wk, equation (6) can be further rearranged to decompose the growth of labour productivity into its two components: (k–l)wk, or the rate of capital deepening adjusted by the contribution of capital to the production process, and MFP. This produces: y – 1 = (k – l) wk + MFP

(7)

If capital is relatively unimportant (that is, if the wk term is small), then labour and MFP would be virtually identical. Similarly, if the K-L ratio remains constant, then 1 and MFP would also remain almost identical. If, however, capital is an important factor and the K-L ratio is not constant, then 1 and MFP need not move together. Table 2.4 provides data on the growth of real GDP, the growth of labour productivity, and the growth of MFP — the latter used as an estimate of the relative contribution of the new economy to the growth of the G7 from 1981 to 1999. The table shows that, after growing at a similar rate from 1981 to 1989 and at a slightly higher rate from 1990 to 1995, real GDP grew much faster in the U.S. than in the other G7 countries between 1996 and 1999 (it was 4.43 in the U.S., 3.53 in Canada, 2.78 in the UK, 2.53 in France, 1.38 in Italy, and 1.321 in Japan). Table 2.4 also shows that after growing less rapidly between 1981 and 1995, labour productivity grew much faster in the U.S. than in the other G7 countries from 1996 to 1999. As discussed in the previous section, the growth of labour productivity reflects the growth in capital deepening (that is, the increase in the K-L ratio) and the growth in MFP (the difference between the growth of real output and the growth in the quantity of labour and capital used in production). Furthermore, Table 2.4 shows that after growing less rapidly between 1981 and 1995 (except for Canada between 1990 and 1995), MIFF grew much faster (about three times faster, on average) in the U.S. than in the other G7 countries between 1996 and 1999 (it was 1.80 in the U.S., 1.12 in France, 1.07 in Germany, 0.95 in the UK, 0.85 in Japan, 0.27 in Canada, and –0.14 in Italy). It is noteworthy that in Germany for that period, the growth of labour productivity was higher than the growth of real GDP because of a reduction in the use of labour and capital. As pointed out earlier, the growth of MFP can be used as a rough measure of the contribution of the new economy to the growth of the nation. Thus, the new economy contributed about three times more to the growth of

Globalisation, Competitiveness, the New Économy, and Growth

31

the U.S. than to the growth of the other G7 countries between 1996 and 1999. This is indeed a remarkable performance, especially since MFP had been lower in that country than in the other G7 countries in the earlier periods. From 1996 to 1999, the growth of labour productivity due to capital deepening was higher than the growth of the labour productivity itself in Italy, thus showing a negative growth in MFP. Table 2.4 Average Yearly Growth of Real GDP and Labour Productivity in the G7, 1981-1999 (percentages)

1981-1989

1990-1995

1996-1999

3.44 1.31 1.09

2.41 1.02 0.85

4.43 2.30 1.80

4.09 3.12 2.00

2.15 2.89 1.31

1.31 2.07 0.85

N/A N/A N/A.

1.62 2.26 1.02

1.72 2.14 1.07

2.40 3.41 2.26

1.30 2.26 0.89

2.53 1.61 1.12

3.54 3.37 2.90

2.37 1.78 1.21

2.89 1.47 0.95

2.36 2.33 1.45

1.59 2.72 1.32

1.38 0.67 -0.14

3.25 1.42 0.14

1.51 1.32 0.26

3.53 0.92 0.27

U .S.

GDP Labour productivity of which MFP Japan GDP Labour productivity of which MFP Germany GDP Labour productivity of which MFP France GDP Labour productivity of which MFP United Kingdom GDP Labour productivity of which MFP Italy GDP Labour productivity of which MFP Canada GDP Labour productivity of which MFP MFP = multifactor productivity Source:

Gust and Marquez (2000).

32

Sustaining Global Growth and Development

Is the New Economy Here to Stay? This conclusion that the U.S. has experienced the creation of the new economy must be tempered, however, for two reasons. First, there are significant problems of data availability and comparability (such as measuring the capital stock and the high tech sector). Second, the period for the exceptional U.S. growth performance and the spread of the new economy is rather brief. It cannot be stated for certain that 1995 represents the beginning of a new trend of superior U.S. growth performance, especially in view of the sharp (unanticipated) reduction in the U.S. growth rate in the fall of 2000 and the recession in 2001. The fact that rapid growth resumed in the U.S. in early 2002 and labour productivity had continued to increase at a rapid pace even during 2001 (a recession year), however, is ample evidence that the new economy is not a mirage. It is real, and it is here to stay. The recession in the U.S. in 2001 arose from the need to correct the excesses that developed in that economy (especially in the financial sector) during the high-growth period in the second half of the 1990s. The new economy never postulated that there would be no recession. The danger in 2002 arose from the rash of financial scandals in the United States, which led to a loss of confidence of U.S. and foreign investors and the collapse of stock prices in the U.S. and abroad. Although unlikely, the loss of investors' confidence and the collapse of stock prices could conceivably lead to a double-dip recession in the U.S. What no one can deny is that, after two decades of disappointing performance, the decade of the 1990s represents one of the most rapid and consistent periods of rapid growth in the U.S. As Figure 2.1 shows, during the 1990s, the U.S. was able to reconcile

Figure 2.1 The Making of the New Economy Council of Economic Advisers (2001). Source:

Globalisation, Competitiveness, the New Économy, and Growth

33

what until then seemed irreconcilable — that is, a rapid growth rate, a low and declining core inflation rate, and a low and declining rate of unemployment. It is this situation that gives rise to the belief that the world has witnessed the creation of a new economy. What is the situation in Europe? Will Europe catch up with the U.S. or even outperform it in the future? During the second half of the 1990s, the leading European countries invested heavily in ICT. As a result, they are also very likely to experience more rapid growth and the spread of the new economy after the current financial crisis comes to an end. As the U.S. experience indicates, it takes time before ICT can become a significant part of the economy and result in a rapid increase in the national growth and lead to the new economy. As Robert Solow (1987) said, 'Computers are everywhere but in the productivity statistics'. The answer, of course, was that at the time computers were not used everywhere in the U.S. and so did not make a difference in its productivity and growth statistics. As a late starter, Europe is in a similar situation now. But if Europe continues to invest in ICT as heavily as it has during the last few years, it too will very likely experience rapid growth in a few years. Whether Europe will outperform the United States in the future only time will tell. Investing heavily in ICT is not, however, the only requirement to creating the new economy in Europe. European nations must also restructure their economies, cut costs, improve flexibility, and make better use of technology; they must increase the pace of deregulation, especially in telecoms and labour markets; they must encourage an entrepreneurial culture and make it easier to start new businesses; they must liberalise financial markets to funnel capital to the best uses; they must develop venture capital to finance innovative companies; and they must adjust monetary policy to the realities of the new economy by waiting for inflation to appear before raising interest rates.

Notes 1 2

3

This chapter draws on an earlier work by Dominick Salvatore (1998). It makes no sense to discuss the G8 countries (i.e., including Russia) in this context because Russia's gross domestic product (GDP) is smaller than that of the Netherlands (which has barely one ninth of Russia's population). That the new economy is real and not a cyclical mirage is confirmed by the fact that growth has resumed quickly and rapidly in the U.S. after the short and shallow recession of 2001. The new economy never postulated that it would eliminate recessions. The recent U.S. recession can be viewed as a necessary correction from the grossly exaggerated growth and profit expectations engendered by the new economy.

References Council of Economic Advisers (2001). Economic Report of the President. Government Printing Office, Washington DC.

34

Sustaining Global Growth and Development

Dunning, John H. (1995). 'Think Again, Professor Krugman: Competitiveness Does Matler'. International Executive vol. 37, no. 4, pp. 315-324. European Commission (1998). The Competitiveness of European Industry: 1998 Report. Office for Official Publications of the European Communities, Luxembourg. Gust, Christopher and Jaime Marquez (2000). Productivity Developments Abroad'. Federal Reserve Bulletin, October, p. 669. (January 2003). Institute for Management Development (2001). The W orld Competitiveness Y earbook. Institute for Management Development, Lausanne. Krugman, Paul R. (1994). 'Competitiveness: A Dangerous Obsession'. Foreign A ffairs vol. 73, no. 2, pp. 28-44. Lehman Brothers (2001). Faster, Higher, Stronger: A n International Comparison of Structural Policies. Lehman Brothers, New York. Levitt, Theodore (1983). 'The Globalization of Markets'. Harvard Business Review May-June, pp. 92-102. McKinsey Global Institute (1996). Capital Productivity. McKinsey Global Institute, Washington DC. McKinsey Global Institute (1997). Removing Barriers to Growth and Employment in France and Germany. McKinsey Global Institute, Washington DC. National Science Foundation (1995). A sia's New High-Tech Competitors. NSF 95-309. National Science Foundation, Arlington, VA. (January 2003). Porter, Michael E. (1990). The Competitive A dvantage of Nations. Free Press, New York. Salvatore, Dominick (1998). 'Europe's Competitiveness Problems'. W orld Economy March, pp. 189-205. Solow, Robert M. (1987). 'We'd Better Watch Out'. New Y ork Times Book Review, 12 July, p. 36. United States Department of Labor (2002). 'International Comparisons of Labor Productivity and Unit Labor Costs in Manufacturing'. Washington DC. World Economic Forum (2001). The Global Competitiveness Report. World Economic Forum, Geneva.

Chapter 3

Productivity Growth in Canada and the G7 Allan Crawford1

Productivity issues have received a high profile in academic and public policy discussions in recent years. This interest in productivity is understandable, given the important effects that it has on economic performance. Higher labour productivity — defined as the amount of output produced per hour of labour input — is a key source of growth in real output. Thus, to analyse the likely evolution of the economy, policy makers need to have a good grasp of the factors that are likely to influence future movements in productivity. Another reason for caring about productivity is that it is an important source of long-run improvements in real incomes and the overall standard of living. These links to economic growth and the standard of living provide the motivation for this chapter's focus on the outlook for future productivity growth.2 Recent events have led many observers to consider the possibility that future rates of productivity growth will tend to exceed those observed since the mid 1970s. In large measure, this debate was spurred by the performance of the economy of the United States. In the U.S. business sector, labour productivity has risen at an average annual rate of approximately 2.5 percent since the mid 1990s — about one percentage point higher than the average from the previous 20 years. An increase in productivity growth over a relatively short period does not necessarily mean that the future trend rate of growth has risen. However, proponents of this view also point to technological developments that have the potential to sustain growth at a higher pace for some time. In particular, they argue that further increases in the use of information and communications technology (ICT) will provide a continuing boost to productivity growth in many sectors of the economy. By all indications, the other G7 economies have not shared the U.S. experience of a significant pickup in labour productivity growth since the mid 1990s. Table 3.1 shows estimates published by the Organisation for Economic Co-operation and Development (OECD) of the growth rate of output per worker in the business sectors of G7 countries. It should be noted that output per worker is an imperfect measure of labour productivity, because it is calculated using the number of workers rather than the total hours of labour input. This means that the OECD estimates do not capture the effect on productivity of changes in the average number of hours worked per employee.3 Another complication is that these international data may not be fully comparable because the statistical agencies of different countries may use different methods to construct the data (see Appendix 3.1 for further discussion of measurement issues).

Sustaining Global Growth and Development

36

These data limitations suggest that international comparisons of productivity should be interpreted carefully. Nevertheless, Table 3.1 does show a notable difference between the U.S. and other G7 countries in recent years. The average growth rate of output per worker increased significantly in the U.S. business sector between 1996 and 2001, whereas in other G7 nations (apart from Canada) it either fell or was unchanged compared to the early 1990s. Thus, unlike the first half of the decade, the U.S. recorded much stronger productivity gains than other G7 economies from 1996 to 2001. 4 Christopher Gust and Jaime Marquez (2000) demonstrate that this conclusion about the relative strength of U.S. performance in the latter part of the 1990s is not sensitive to changes in the periods selected for these comparisons. As already noted, an important question is whether the recent surge in U.S. productivity growth is likely to persist in the form of a higher trend rate of productivity growth. Another critical issue is whether the strong U.S. performance will be replicated in other countries. This chapter addresses the latter issue, with a particular emphasis on the Canada-U.S. case. The focus on the United States is motivated by its position as Canada's major trading partner and as the productivity leader in many sectors. In addition, Canadian data are probably more comparable with U.S. data than are those of many other countries. Nevertheless, this discussion has more general relevance for other countries, as the types of issues discussed here are also pertinent when analysing prospects for productivity growth elsewhere. This chapter describes trends in productivity growth in Canada and the U.S. since the early 1960s and summarises current knowledge about the causes of these historical patterns. A good understanding of historical developments will help observers judge what may happen in the future. The analysis of the sources of productivity growth begins with a review of studies using the standard growth-accounting framework. Particular attention is given to the role of ICT in explaining the post-1995 divergence in productivity growth between the U.S. and Canada. Similar evidence is summarised for other G7 countries. Table 3.1 Growth Rates of Output per Worker (Business Sector)

Average annual rates

Canada France Germany Italy Japan United Kingdom United States G7 average

Source:

1990-1995 1.2 1.6 2.0 2.2 1.2 1.8 l.2 1.6

OECD Economic Outlook No. 72 (December 2002).

1996-2001 1.6 1.2 0.9 0.9 1.2 1.2 1.8 1.2

Productivity Growth in Canada and the G7

37

Evidence is also presented on the importance of a broader set of underlying determinants of productivity, such as human capital formation and openness to international trade and investment. Based on an assessment of these factors, the chapter concludes by discussing whether trend productivity growth is likely to rise in Canada over the medium term. This is difficult to forecast, as it depends on such factors as the evolution of new technologies and how they are applied in the workplace. Nevertheless, there are reasons for cautious optimism that there will be some increase in Canada's trend rate of productivity growth.

Past Trends in Productivity Growth

The broad trends in labour productivity growth over the past four decades in Canada can be summarised and compared with the U.S. experience as follows.5 A ggregate Business Sector The productivity performance of the Canadian business sector since the early 1960s shows two distinct periods, with the breakpoint in the mid 1970s (see Table 3.2 and Figure 3.l). 6 The annual change in output per hour averaged close to 4 percent up to 1973 and then fell sharply to 1.3 percent for the 1974-95 period. This prolonged slowdown in productivity growth was also experienced by other industrialised nations (Gordon 2002). Over the 1996-2001 period — when productivity gains accelerated in the United States — the average growth rate in Canada increased modestly to 1.6 percent. Since 1997, it has averaged 2.0 percent. Increases in the productive capacity of an economy (potential output) depend on the underlying or trend rate of productivity growth. Therefore, there has been much interest in evaluating whether the observed growth in Canadian productivity since the mid 1990s shows any signs of an increase in the trend rate. It is difficult to estimate the trend rate because year-to-year changes in productivity growth can be affected by Table 3.2 Labour Productivity Growth (average annual rates)

1962-2001 1962-1973 1974-1995' 1996-2001 1984-1988

Canada Business Sector Manufacturing 2.l 2.7 3.8 4.2 l.3 2.5 1.6 0.6 l.2 l.9

a. 1978-1995 for U.S. Manufacturing

United States Business Sector Manufacturing 2.2 3.3 l.5 2.9 2.4 3.6 l.9 3.9

38

Sustaining Global Growth and Development

cyclical movements in output. Since productivity growth tends to move pro-cyclically,7 some of the growth over this period could reflect the usual rebound during the recovery phase of the business cycle. It is therefore necessary to control for cyclical effects when estimating trend growth, and extreme caution must be used when drawing conclusions from short periods of time or from comparisons of periods spanning different stages of the cycle. It is interesting to note, however, that productivity growth in the Canadian business sector over the 1996-2001 period was somewhat stronger than over a similar stage of the previous cycle (1984 to 1988). Sectoral Patterns The post-1973 slowdown occurred in both business sector services and manufacturing in Canada. However, these sectors have moved in different directions in recent years. The average rate of productivity growth in the service sector increased from about 1 percent in the first half of the 1990s to 1.8 percent thereafter. In contrast, following strong gains in the late 1980s and early 1990s, productivity growth in manufacturing has fallen to less than 1 percent since the mid 1990s (see Table 3.2). U.S. Comparisons A productivity slowdown also occurred in the U.S. business sector after the early 1970s as the average growth rate fell to 1.5 percent from 1974 to 1995. Unlike the Canadian experience, however, there was a significant pickup over the 1996-2001 period, with the average growth rate of output per hour increasing to 2.4 percent. This rebound pushed labour-productivity growth in the U.S. business sector 0.8 percentage points above the Canadian rate over the same years.8 The recent pickup in U.S. productivity growth was broadly based across sectors. The difference between Canadian and U.S. performance since the mid 1990s has been particularly large in the manufacturing sector, where the average growth rate rose to 3.6 percent in the United States (versus 0.6 percent in Canada). The pace of

Figure 3.1 Labour Productivity Growth in Canada ( %)

Productivity Growth in Canada and the G7

39

productivity gains also increased in the U.S. service sector, most notably in wholesale and retail trade (Baily and Lawrence 2001; Rao and Tang 2001).9 Simple growth models would predict that the diffusion of technologies and factor mobility would cause productivity levels in Canada to converge over time toward the higher levels in the United States. To provide some longer-run perspective on convergence, Figure 3.2 shows indexes of relative labour productivity in Canada, defined as the ratio of Canadian to U.S. productivity using an arbitrary base year indexed to 100.10 During years with faster productivity growth in Canada than in the U.S., the level of Canadian productivity converges toward the U.S. level, so the index of relative productivity is rising. Conversely, for years with slower growth in Canada than in the United States, the index of relative productivity is falling. Fluctuations in these indexes will depend on both the relative cyclical positions and the relative trend rates of productivity growth in the two economies. Canada had a deeper downturn and slower recovery than the U.S. in the early 1990s, so the index of relative productivity will overstate the deterioration in Canada's trend performance over these years. Conversely, the U.S. economy experienced a sharper slowdown in 2001, which would tend to improve Canada's relative position. Nevertheless, the

Figure 3.2 Relative Labour Productivity in Canada versus the United States

40

Sustaining Global Growth and Development

indexes are helpful for identifying longer-run trends and placing recent developments in a broader historical context. The top panel of Figure 3.2 shows that there was some convergence of productivity in the Canadian business sector toward U.S. levels in the late 1960s and early 1970s, but these improvements have been more than reversed by downward movements in the second half of the 1980s and the period after 1995. Thus, while the late 1990s contributed to the decline in Canada's relative productivity, the beginning of the downward trend can be traced to an earlier date. The only exception to this pattern was a transitory improvement from 1993 to 1995. The deterioration in relative performance in the late 1980s coincided with a period of weak productivity gains in Canada's business sector, whereas the more recent deterioration reflects the stronger pickup in average productivity growth in the U.S. (see Figure 3.3). In the manufacturing sector, there was quite strong convergence toward U.S. productivity levels from the early 1960s until the mid 1970s. 11 Once again, this convergence has been more than reversed, with the index of Canada's relative productivity having fallen by almost 25 percent since the mid 1980s (bottom panel of Figure 3.2). Most of this decline has occurred since 1994, primarily as a result of very rapid U.S. productivity growth in the high tech sectors of electrical/electronic equipment and other machinery and equipment (Bernstein, Harris, and Sharpe 2002). Given the weak productivity growth in Canadian inanufacturing recently, Jeffrey Bernstein, Richard Harris, and Andrew Sharpe estimate that the absolute gap between the levels of labour productivity in Canada and the United States had widened to about 30 percent in the manufacturing sector by 2000 (compared with 18 percent for the economy-wide gap). 12

Figure 3.3 Labour Productivity Growth (%)

Productivity Growth in Canada and the G7

41

In summary, Canada's relative productivity performance has deteriorated since the mid 1980s. Most recently, U.S. productivity growth increased over the 1996-2001 period, with the result that U.S. growth was significantly above the Canadian rate over those years. Possible explanations for these trends are discussed below.

Sources of Recent Productivity Growth Many observers have attributed a large part of the recent surge in U.S. productivity to efficiency gains from the production and use of ICT. ICT is typically defined to include computer hardware, computer software, and telecommunications equipment. Driven by sharp declines in relative prices, the stocks of ICT capital, especially computer hardware, have increased at an extremely fast pace. From 1995 to 2000, the stock of computer hardware per person-hour in the U.S. business sector rose at an average annual rate of 36 percent (see Figure 3.4). Similar growth rates were observed in Canada over the same period. The hypothesised link between ICT investment and productivity growth is consistent with the view that ICT is a 'general-purpose technology' with productivity-enhancing applications in many sectors of the economy. To give just a few examples, ICT may raise productivity by providing: more efficient means of processing and delivering

Source:

Canadian data for computer hardware and person-hours are from Statistics Canada. U.S. data are from the Bureau of Economic Analysis and the Bureau of Labor Statistics.

42

Sustaining Global Growth and Development

information, better systems for managing product distribution and inventories, and more efficient methods of designing and producing manufactured goods. A number of studies have estimated the impact of information technology and other influences on labour-productivity growth using the 'growth-accounting' methodology. As described in Appendix 3.2, this technique uses the characteristics of a production function to decompose the observed data for labour-productivity growth into estimates of the contributions from each of the following channels: 1) changes in the capital-labour ratio for ICT capital goods (ICT capital deepening), 2) changes in the capital-labour ratio for non-ICT capital (non-ICT capital deepening), 3) changes in average labour quality (that is, skill levels), and 4) changes in multifactor productivity (MFP). Increases in MFP represent efficiency gains from sources other than capital deepening and improvements in labour quality.13 In empirical studies, the total effect of ICT on labour productivity is calculated as the sum of the contributions from the use of ICT goods by firms plus the contributions from the sectors that produce ICT goods. The former is measured by the capital deepening (or first) channel in the above list. The additional contribution from more efficient production by ICT producers is included in the term for aggregate multifactor productivity growth. Empirical results from U.S. and Canadian studies of this type are presented below. U.S. Studies Stephen Oliner and Daniel Sichel (2002) applied the growth-accounting technique to U.S. data for the non-farm business sector.14 As shown in Table 3.3, they estimate that increased contributions from ICT use and stronger MFP gains in ICT-producing sectors (particularly semiconductors) can account for all of the 0.9 percentage point increase in productivity growth since the mid 1990s. The net contribution from other sources was essentially unchanged. Using productivity data constructed from a broader measure of output, Dale Jorgenson, Mun Ho, and Kevin Stiroh (2002) estimate that greater ICT use explained almost 50 percent of the increase in productivity growth rates for 1996 to 2000, while ICT production contributed another 30 percent of the increase.15 Although the precise results vary somewhat across different studies, the evidence suggests that ICT was indeed the dominant factor underlying the recent increase in U.S. productivity growth. Some of the increase in productivity growth may reflect a pro-cyclical effect from the recovery in the U.S. economy in the late 1990s, rather than a change in trend growth. Robert Gordon (2002) attempts to separate these two effects. He concludes that faster trend growth caused most of the observed increase from 1996 to 2000 (relative to the 1972-95 trend) and that the acceleration in trend originated largely from stronger contributions from ICT use and ICT production. The growth-accounting exercises are mechanical decompositions conducted at the level of aggregate business sector output. If ICT has an important effect on productivity,

43

Productivity Growth in Canada and the G7

there should be corroborating evidence at a more disaggregated level. That is, after controlling for other factors, the firins or industries that use ICT most intensively should display significantly better productivity performance. Disaggregated econoinetric analysis has been done in a number of U.S. studies, including Kevin Stiroh (2001), who uses data from a broad cross-section of approximately 60 sectors, and Erik Brynjolfsson and Lorin Hitt (1995, 1998, 2000b, 2000a), who use microdata for individual firms. Overall, their results confirin that ICT use is an important determinant of productivity. Stiroh (2001) also examines the importance of ICT by breaking down the change in aggregate labour productivity into the contributions from three sets of industries: intensive ICT users, ICT-producing sectors, and the remaining sectors. This breakdown suggests that almost all of the increase in U.S. productivity growth can be traced to sectors that either produce or use ICT intensively. 16 Since the gains were broadly based throughout the ICT-intensive sectors and were not found in the less ICT-intensive sectors, he rejects the view that the cyclical recovery accounts for the surge in U.S. productivity. The significant role for structural factors is consistent with the fact that the productivity spurt occurred relatively late in the U.S. econoinic expansion (a time when productivity growth typically weakens). Table 33 Sources of Labour-Productivity Growth: U.S. Non-farm Business Sector

1974-90 1991-95 Labour-productivity growth° 1.36 1.54 Contribution from": i) Capital deepening 0.77 0.52 0.41 ICT 0.46 non-ICT 0.37 0.06 0.22 ii) Labour quality 0.45 iii) MFP growth 0.37 0.58 ICT-producing sectors c 0.27 0.41 0.77 0.36 Other 0.17 0.11 Total contribution from ICT 0.87 0.68 (ICT capital deepening + MFP of ICT producers)

1996-2001 2.43

Change from 1991-95 to 1996-01 0.89

1.19 1.02 0.17 0.25 0.99

0.67 0.56 0.11 -0.20 0.41

0.23 1.79

0.06 0.92

a. Average annual growth rate. b. Percentage points per year. c. Includes computer hardware, software, communication equipment, and semiconductors. Source:

Oliner and Sichel (2002).

44

Sustaining Global Growth and Development

Canadian Studies Philip Armstrong, et al. (2002) analysed the sources of labour-productivity growth in Canada. According to an updated version of their estimates in Statistics Canada (2002), ICT use contributed 0.5 percentage points to average productivity growth in the second half of the 1990s (see Table 3.4). Unlike the U.S. results reported earlier, there was only a marginal increase (relative to 1989-95) in the effect of ICT capital deepening over this period. For the other sources of labour-productivity growth, they report a sharp increase in MFP growth and lower contributions from non-ICT capital and labour quality. Armstrong and his colleagues do not estimate the contribution of the ICT-producing sector to MFP growth in Canada. For comparison with U.S. results, a rough measure of the total ICT contribution is obtained by combining the estimate of the capitaldeepening effect and estimated MFP effect used by Dirk Muir and Benoit Robidoux (2001). The estimated total ICT contribution over the 1996-2000 period in Canada (0.7 percentage points) is less than half of the Oliner-Sichel estimate of the U.S. level over a similar period, with virtually no increase relative to 1989-95. Thus, growthaccounting studies imply that differences related to the use and the production of ICT

Table 3.4 Sources of Labour-Productivity Growth: Canadian Business Sector

Labour-productivity growth a 1.31.2 1.8 Contribution from b : i) Capital deepening ICT Non-ICT ii) Labour quality iii) MFP growth (ICT producers`) Total contribution from ICT (ICT capital deepening + MFP of ICT producers)

1981-1988

1989-1995

1996-2000

0.6 0.3 0.3 0.5 0.3

0.8 0.4 0.4 0.6 –0.2 (0.2)

0.5 0.5 0.0 0.3 (0.2)

0.6

0.7

1.1

a. Compound average annual growth rate. b. Percentage points per year. c. From Table 3 in Muir and Robidoux (2001). Their estimates cover the periods 1991-1995 and 1996-2000, with ICT production defined to include only computer hardware. Source:

Statistics Canada (2002).

45

Productivity Growth in Canada and the G7

can explain the recent divergence in labour-productivity growth between Canada and the United States (see Table 3.5).17 The lower ICT effect in Canada reflects smaller estimates of the gains from both ICT use and ICT production. Table 3.6 presents information to explain these results. As noted in Appendix 3.2, the estimated effect from ICT use is calculated as the product of the growth rate of ICT capital services per person-hour and the ICT income share. The sinaller contribution from ICT use largely reflects the lower estimate of the income share for ICT capital in Canada. There is a smaller effect froin ICT production for two reasons. First, the industries producing ICT goods account for a smaller share of Canadian output. In addition, although rates of productivity growth in ICTmanufacturing are high in Canada, they are considerably lower than those in the United States (Rao and Tang 2001). Some of this gap in productivity growth reflects differences in the mix of goods produced by the ICT sectors in the two countries. For example, whereas the U.S. manufactures computer chips — an industry with very high rates of productivity growth — Canada is not a significant producer of these goods. John Baldwin and David Sabourin (2002) provide micro-econometric confirination that ICT investment significantly affects productivity in the Canadian manufacturing Table 3.5 Sources of Labour-Productivity Growth: U.S. and Canadian Business Sectors, 1996-2000

Labour-productivity growth° Contribution from': i) Capital deepening ICT Non-ICT ii) Labour quality iii) MFP growth (from ICT producers c) (0.61) (0.2) (0.41) Total contribution from ICT (ICT capital deepening + MFP of ICT producers)

U.S. 2.7

Canada 1.8

Difference 0.9

1.l 1.0 0.1 0.3 1.4

0.5 0.5 0.0 0.3 1.1

0.6 0.5 0.1 0.0 0.3

l.61

0.7

0.91

a. Compound average annual growth rate. b. Percentage points per year. c. Estimates of MFP growth in ICT production are from Oliner and Sichel (2002) and Muir and Robidoux (2001). For comparability with the Muir-Robidoux number for Canada, the U.S. estimate excludes computer software and telecommunications equipment. Source:

Statistics Canada (2002).

46

Sustaining Global Growth and Development

sector. They find that individual plants that had adopted computer-based technologies recorded stronger growth labour productivity over the 1988-97 period (compared with other plants in the same narrowly defined industry). The relationship between productivity gains and ICT use was particularly strong for plants that had adopted applications from all three of the major categories of ICT technologies (software, hardware, and network communications). Other G7 Countries Studies for other G7 and OECD economies suggest that differences related to ICT use and ICT production also explain a significant part of the recent differentials in productivity growth between those countries and the U.S. Using combined data for France, Germany, Italy, and the Netherlands, the European Central Bank estimates that the contribution of ICT use to productivity growth increased only marginally (by about 0.1 percentage points) in the second half of the 1990s (Vijselaar and Albers 2001). Similarly, while Alessandra Colecchia and Paul Schreyer (2001) find that contributions of ICT use to output growth have been rising in all G7 countries, the increase was significantly greater in the U.S. The lower rates of productivity growth in other G7 countries are also partly explained by ICT-manufacturing sectors that are smaller and have less rapid rates of productivity growth than in the U.S. (van Ark 2001).

a. From Annex Table 2 of Pilat and Lee (2001). The definition of ICT goods includes such categories as office and computing machinery, electronic equipment, and industrialprocess-control equipment. b. Armstrong et al. (2002) do not report the income share of ICT capital in Canada. The estimated share for Canada is from Khan and Santos (2002). The U.S. income share, taken from Oliner and Sichel (2002), covers the period from 1996 to 2001. c. The table reports growth rates of capital stocks per person-hour. Oliner and Sichel and Armstrong et al. use estimates of the growth rates of the flow of capital services per hour.

Productivity Growth in Canada and the G7

47

Outlook for Future Productivity Growth As already noted, the trend rate of productivity growth is a key determinant of the rate of increase in the productive capacity of an economy (potential output). Thus, knowledge of the future prospects for the trend rate of productivity growth is useful for evaluating the outlook for future increases in output, real incomes, and the standard of living. First, however, it is important to acknowledge the inherent uncertainties in forecasting future trends in productivity. Current rates of productivity growth are affected by the stage of the business cycle, so it may be difficult to identify the underlying trend. There is also uncertainty about the future impact of 'general purpose technologies' such as ICT on average rates of productivity growth over long periods, as well as the timing of these effects. The productivity gains can be spread over decades, depending on how the technology evolves and how organisational and institutional structures adjust to the new conditions (see Lipsey 2002). The growth-accounting framework discussed in the previous section above implies that the rate of labour-productivity growth depends on the rates of increase in capital intensity, MFP, and labour quality. Accordingly, forming a view on the future levels of these three variables would yield a forecast for the future path of labour-productivity growth. But what are the critical factors determining these variables? Some guidance on this question can be obtained from the cross-country growth literature. In these studies, time-series data from a number of countries are used to determine how growth rates of real output per capita are affected by changes in inputs (physical and human capital), structural government policies, and institutional conditions such as the development of financial markets. 18 Based on his assessment of the cross-country literature, Richard Harris (1999) concludes that the three most important factors affecting growth are investment in machinery and equipment, improvements in human capital (skills), and openness to international trade and investment. In various ways, each of these factors strengthens productivity growth by promoting innovation and the diffusion and effective use of new technologies. Other authors have emphasised the roles of business and organisational practices, structural and regulatory policies, and research and development (R&D). In order to assess the future outlook for trend productivity growth in Canada, some Canadian developments in these areas are reviewed briefly below. Although each of the channels will be discussed individually, in many cases, they interact with each other to affect productivity. Investment in Machinery and Equipment The ratio of business investment in machinery and equipment (M&E) to GDP tends to be an important determinant of productivity growth in the cross-country studies. One reason is that new capital goods incorporate productivity-enhancing technological

48

Sustaining Global Growth and Development

progress. On average, the ratio of M&E to GDP was virtually identical in Canada and the U.S. during the 1960s (see Figure 3.5). In recent decades, the ratio has trended upward in the United States but has remained relatively unchanged in Canada, with the result that the average ratio in the 1990s was about 1.5 percentage points lower in Canada. The evidence from cross-country growth studies suggests that the growing gap in this ratio contributed to the deterioration in Canada's relative productivity performance. High levels of spending on M&E (including ICT goods) led to a sharp increase in the U.S. ratio beginning in 1993. The lag between the start of the acceleration in the pace of investment spending in the early 1990s and the surge in U.S. productivity growth later in the decade is consistent with the view that some of the productivity payoffs from investments are not realised immediately. 19 The Canadian investment ratio did not rise above the level of the late 1980s until 1997, four years after the pickup in the U.S. If the timing hypothesis is correct, these high levels of investment should raise trend productivity growth in Canada over the next few years (Macklem and Yetman 2001). Despite the recent increases, however, the ratio of investment in M&E to GDP in 2001 was almost one percentage point lower in Canada than in the U.S. There is some evidence that average firm size could affect future rates of technology adoption and innovation in Canada. Smaller firms in both the goods and service sectors have been slower than larger firms to adopt new technologies (Earl 2002). 20 Moreover, relative to the U.S., adoption rates by small and medium-sized manufacturers are lower in Canada, and small firms account for a larger share of manufacturing output (see Baldwin and Sabourin 1998; Baldwin, Jarmin, and Tang 2002). These differences suggest that productivity growth may increase less in Canada than in the U.S.

Figure 3.5 Business Investment in Machînery and Equipment as a Share of GDP ( %)

Productivity Growth in Canada and the G7

49

Business and Organisational Practices Another determinant of future productivity growth will be the ability of firms to introduce better business and organisational practices into the workplace. In 1998-2000, approximately 40 percent of Canadian firms implemented improved organisational structures or management techniques (Earl 2002). One reason for such changes is that practices that were appropriate for older technologies may no longer be optimal under new conditions. Paul David (1990) and Richard Lipsey (1996) discuss the interesting historical example of the replacement of steam power by electricity. With steam-power technology, factories were constructed with two stories to enable more machines to be located close to a central drive shaft. With the introduction of electricity, it became more efficient to build factories with one floor and arrange machinery in the same sequence as the flow of production. This restructuring process was spread over decades, as firms needed to recognise the opportunities and implement fundamental changes in the layout of buildings. Over time, however, considerable improvements in productivity were achieved as business practices adjusted to the new technology. A similar phenomenon may help to explain the empirical evidence of long lags between the timing of ICT investments and their full impact on productivity. Using data for large U.S. firms, Brynjolfsson and Hitt (2000b) estimate that the returns from ICT investment are two to five times greater over periods of five to seven years than over a one-year period. The long lags may arise because firms must fundamentally alter their business practices in order to fully exploit the advantages of new ICT technologies.' It may take time for firms to learn what changes are needed to make effective use of these technologies, and delays may also occur because the adjustments are costly and time consuming. As a result, the productivity gains from information and computer technologies will rise over time as firms are gradually able to implement these changes. Susan Schaan and Frances Anderson (2001) report survey evidence of these types of adjustment problems in Canada. Approximately 90 percent of manufacturing firms that innovated (defined as having introduced new production processes or developed new products) between 1997 and 1999 experienced difficulties that 'slowed down or caused problems'. The most common problems were an inability to devote staff to projects because of current production requirements, high costs of development, and lack of skilled personnel. Econometric support for the complementarity of ICT and organisational changes is provided by Brynjolfsson and Hitt (1998), who find that ICT has a greater effect on productivity when U.S. firms adopt more decentralised decision-making processes. Elena Arnal, Wooseok Ok, and Raymond Tones (2001) survey a number of international studies that reach similar conclusions about the productivity-enhancing effects from combining new technologies and changes in work practices.

50

Sustaining Global Growth and Development

Investment in Human Capital (Skills) The average level of human capital increases when there is an improvement in the average skill level of workers. Human capital contributes to productivity growth by enabling firms to develop new technologies or to capture the full benefits when adopting technologies developed elsewhere. Investment in human capital can take the form of increased quantity of education (e.g., average years of schooling), increased quality of education, on-the-job training, and work experience. Eric Hanuschek and Dennis Kimko (2000) and Robert Barro (1998) report cross-country evidence that the quality of schooling, as proxied by student scores on standardised international exams in sciences, has a stronger effect on growth than the quantity of schooling. Historically, the average number of years of formal education has been very similar in Canada and the United States: in 1998, this measure was 12.9 in Canada and 12.7 in the U.S., coinpared with the OECD average of 11.3 (Bassanini, Scarpetta, and Hemmings 2001). As shown in Figure 3.6, close to 40 percent of Canadians aged 25 to 64 have completed some form of post-secondary education. This is the highest proportion among OECD countries. There are some compositional differences relative to the United States, as a higher percentage of Canadians have a non-university (college) post-secondary education, and a lower percentage have a university degree. In recent years, the average educational attainment of employed Canadians has risen steadily (see Figure 3.7). Edgar Rodriguez and Timothy Sargent (2001) compare alternative measures of human capital for Canada and the U.S., including the proportion of the population with higher education and indexes that take into account changes in the average quality

Figure 3.6 Percentage of the Population Aged 25 to 64 with Completed Post-Secondary Education, 1999-2002

Productivity Growth in Canada and the G7

51

of labour. On balance, they conclude that the current levels (and recent rates of change) of human capital per worker are similar in the two countries. Additional evidence on the quality of human capital is provided by a recent study, which reports that 15-year-old Canadian students outperformed their U.S. counterparts and the OECD average in international exams on reading, mathematics, and science (OECD 2001a). While there are encouraging signs, there are also challenges that could affect the pace of future productivity growth. Shortages of skilled workers are reported in some specialised areas. Strong international competition exists for people with these skills. Relative to the United States, Canada has a lower proportion of people with advanced research degrees. And employer-sponsored training is less prevalent in Canada than in the U.S. (Canada 2002b). Openness to International Trade and Investment

Cross-country growth studies proxy the degree of openness using measures of international trade flows and foreign direct investment. Openness may contribute to productivity growth by facilitating the diffusion of technologies. Low trade and regulatory barriers may also promote more efficient allocation of resources and the achievement of economies of scale in production. Canada depends heavily on international trade, with the ratios of exports and imports to GDP in 2001 equal to approximately 42 percent and 37 percent, respectively. Several pieces of Canadian evidence are consistent with the hypothesis that openness has favourable effects on productivity. 22 First, Daniel Trefler (1999) fmds that tariff reductions under the Canada-U.S. Free Trade Agreement increased labour-productivity

Figure 3.7 Employment by Educational Attainment in Canada, 1990-2002 1990 = 100

52

Sustaining Global Growth and Development

growth in the manufacturing sector between 1989 and 1996. Second, productivity growth has been stronger at foreign-controlled establishments in the manufacturing sector, and these establishments are more likely to adopt computer-based technologies than domestically controlled companies (Baldwin and Dhaliwal 2001). Other evidence of openness effects is provided by Surendra Gera, Wulong Gu, and Frank Lee (2002). Using industry-level data, they show that spillovers from foreign R&D spending (embodied in purchases of imported intermediate goods and services) are a significant determinant of labour-productivity growth in Canada. 23 These R&D spillover effects are particularly important in the case of imported information technology goods. The intensity of domestic R&D spending is a significant determinant of productivity growth in the empirical literature. To some extent, the spillover effects from foreign R&D offset the impact of low domestic R&D spending in Canada. In 1997, Canada had the second lowest ratio of domestic R&D spending to GDP among the G7 countries, although this gap has closed somewhat since 1990 (Rao et al. 2001). Structural/Regulatory Policies and Micro Reallocations The overall growth in economy-wide productivity reflects changes in productivity within firms as well as a compositional effect from the reallocation of resources across firms and different industries. For example, a shift in resources from less productive firms to more productive firms will raise the average level of productivity in that industry. Consequently, structural and regulatory policies that affect innovative activity, the entry/ exit decisions of firms, and factor mobility will have an impact on aggregate productivity growth. The OECD (2002) summarises empirical evidence on the effects of several types of regulation in product and labour markets. The importance of resource reallocation is shown by studies that analyse productivity using micro data for individual firms or establishments. These studies find that there is considerable heterogeneity of levels and growth rates of productivity across firms in the same sector; and that there is extensive reallocation of output and inputs among firms within sectors (encompassing both expansions and contractions of existing firms as well as the entries and exits of firms). Both of these stylised facts are evident in the Canadian manufacturing sector: small plants have lower levels and growth rates of productivity than larger plants (Baldwin and Dhaliwal 2001; Baldwin, Jarmin, and Tang 2002), and 47 percent of market share was transferred from losers to gainers of market share between 1988 and 1997, with the relative productivity of gainers rising by 23 percent (Baldwin and Sabourin 1998). These results imply that aggregate productivity growth is affected by any factors (including structural policies) that influence the pace of resource reallocation across different firms and industries. 24

Productivity Growth in Canada and the G7

53

Future Trends Critical issues for the future are whether the recent pickup in U.S. productivity growth will persist and whether it will be replicated in Canada and other countries. The preceding discussion can offer some views on these questions. There are some positive signs suggesting that the future level of trend productivity growth in Canada will exceed the historical average from the post-1973 era. While one should be careful drawing conclusions from short periods of time, Canada's productivity performance has improved since 1997. A number of other points can be made. First, investment in machinery and equipment increased as a share of GDP over the 1990s. Given the lags between the timing of investment and the realisation of productivity gains, this increased investment should support higher trend productivity growth, at least over the very near term. If the ratio of M&E to GDP is sustained at the higher level, a more persistent period of higher trend growth would be expected. Second, increased ICT use was a major source of the acceleration in U.S. productivity growth. Further decreases in the relative price of ICT goods, as well as the development of new applications, should support continued diffusion of these technologies and future productivity growth in many sectors. Third, Canada has a high exposure to international trade and investment. Empirical evidence indicates that this openness promotes the diffusion of knowledge and new technologies. Fourth, Canada's macropolicy framework of low (and stable) inflation and improved fiscal positions provides a good supporting environment for efficient decision-making by firms. Fifth, U.S. productivity growth was surprisingly strong through 2001 despite the cyclical downturn in the U.S. economy. 25 This suggests that a significant part of the recent increase in U.S. growth will be sustained. 26 To the extent that the underlying factors (such as ICT use) are common to Canada and the U.S., there is reason to expect stronger trend growth in Canada. There are, however, reasons for a more cautious perspective on future trend productivity growth (relative to the U.S.). First, ICT-producing industries, which have made major contributions to the high productivity growth in the U.S. manufacturing sector, account for a smaller share of Canadian output. Moreover, although productivity gains in ICT production have also been strong in Canada, they have been significantly lower than in the U.S. Some of this difference in growth rates reflects structural differences in the composition of ICT output. Second, Canadian firms appear to be slower to adopt new technologies. Third, Canada has a relatively low rate of domestic R&D spending. One characteristic of a general-purpose technology such as ICT is considerable uncertainty about the long-run consequences for trend productivity growth and the timing of these effects. This makes it very difficult to forecast the trends in productivity growth over the next decade. While recognising this uncertainty, on balance, it seems reasonable io anticipate some increase in trend productivity growth in Canada relative

54

Sustaining Global Growth and Development

to the levels observed since the mid 1970s. Future evidence will need to be examined carefully to refine this view.

Notes 1 This chapter draws from an article by the same author (Crawford 2002). The views expressed are those of the author, and no responsibility for them should be attributed to the Bank of Canada. 2 Unless otherwise indicated, the term 'productivity' refers to labour productivity, defined as output per hour. 3 The OECD uses output per worker (rather than output per person-hour) for international comparisons because data for average hours worked per employee in the business sector are not available for some countries. 4 The average difference between Canada and the U.S. over the 1996-2001 period is only 0.2 percentage points using the data in Table 3.1 for output per worker. As will be shown further on, the difference is greater when productivity is measured by output per hour. 5 This chapter uses data released up to December 2002. 6 Beginning in August 2002, the official productivity data for the Canadian business sector are based on real gross domestic product (GDP) at basic prices up to 1980 and real gross domestic product at market prices from 1981 onward (previously, data for all years used real GDP at basic prices). The change in definition appears to have caused a significant structural break in the 1981 level of the new series, as the growth rate for 1981 is based on different concepts of output for the current and previous year. To avoid this discontinuity, a spliced series is constructed by applying the growth rates of the new series for 1982-2001 to the 1981 level of productivity based on real GDP at basic prices. The adjustment has little effect on the average growth rates reported in Table 3.2, but lowers the measured level of business-sector productivity by about 3.5 percent from 1981 onward. The major conclusions of this study are not affected by the adjustment. 7 Because it is costly to adjust employment, labour input tends to fall less rapidly than output in the initial stages of a downturn. Thus, labour productivity growth tends to fall below its long-run trend at these times. Conversely, labour inputs may increase slowly as the economy starts to improve, so productivity growth tends to rise above its trend in the recovery stage of the cycle. 8 At the time that this chapter was written, preliminary data were available for the first three quarters of 2002. Relative to levels four quarters earlier, productivity in the third quarter of 2002 was about 2.5 percent higher in Canada and more than 5 percent higher in the U.S. As pointed out in Appendix 3.1, initial data may be subject to significant revisions. Nevertheless, when data for all of 2002 become available, it is likely that the average Canada-U.S. differential since 1996 will, if anything, widen. 9 Faruqui et al. (2003) decomposed the Canada-U.S. difference in business-sector productivity growth from 1997 to 2000 into the contributions from each of the major sectors. Although manufacturing accounts for a relatively small share of total output, it was the dominant source of the difference in overall productivity gains. Stronger growth in Canada than in the U.S. in primary industries and construction provided only a partial offset to the weakness in manufacturing. 10 These indexes measure changes in relative productivity since the base year. Therefore, the level of the index does not measure the absolute difference between the levels of productivity in the two countries.

Productivity Growth in Canada and the G7

55

11 Comparisons of the Canadian and U.S. manufacturing sectors in the 1960s and early 1970s must use productivity data calculated from different measures of output. U.S. data for this period are available only for a measure based on gross output less intra-sectoral sales and transfers, whereas the Canadian data use real value-added. The graph for the manufacturing sector (see Figure 3.2) begins in 1977, which is the first year for which the U.S. Bureau of Labor Statistics produces an alternative U.S. series on a value-added basis. At the time of writing, this altemative series had not been updated to incorporate the historical data revisions released in August 2002. Therefore, the conventional U.S. measure of productivity in manufacturing (which does include the revisions) is used for the 1998-2001 period in Figure 3.2 and Table 3.2. 12 In 1999, Canadian levels of labour productivity exceeded those in the United States in only a few industries (primarily resource-based industries and transportation equipment) and were substantially lower in the electrical/electronic equipment and other machinery and equipment sectors (Canada 2002a). 13 While informative, the growth-accounting calculations do not explain the underlying determinants of capital investment, changes in labour quality, or MFP growth. Some discussion of the underlying determinants is provided in the third section of this chapter. 14 The Oliner-Sichel study was completed before the release of historical U.S. data revisions in August 2002. Relative to the data they used, these revisions lowered the average growth rate of labour productivity between 1996 and 2001 by about 0.2 percentage points. 15 Unlike the output series used to construct the official U.S. productivity data, Jorgenson, Ho, and Stiroh's measure of output includes the non-profit sector and imputed capital service flows from residential housing and consumer durables. 16 Similarly, Martin Baily and Robert Lawrence (2001) argue that the increases in productivity growth in the U.S. service sector (particularly, finance and wholesale and retail trade) can be attributed to high levels of ICT investment in these sectors. Mark Siding, Mark Dumas, and Brian Friedman (2001) provide further analysis of the link between ICT investment and productivity gains in the U.S. retail sector. 17 Table 3.5 reports Statistics Canada estimates for the business sectors of both countries. The estimates for the U.S. business sector are similar to the Oliner-Sichel results for the nonfarm business sector in Table 3.3. 18 For example, policy and institutional variables in the recent study of OECD countries by Andrea Bassanini, Stefano Scarpetta, and Philip Hemmings (2001) include measures of inflation (level and variability), fîscal variables (tax rates and expenditures), intensity of research and development, measures of financial development (business credit and stock market capitalisation), and exposure to international trade. 19 This view is discussed further below. 20 In 1998, large firms in the Canadian manufacturing sector were more than twice as likely to use advanced technologies as smaller firms (Baldwin and Sabourin 2000). Similarly, Someshwar Rao, Jianmin Tang, and Weimin Wang (2002) report that smaller firms in this sector were less inclined to implement new or improved production processes over the 1997-99 period. 21 As noted by Brynjolfsson and Hitt (2000a): 'Most of our economic institutions and intuitions emerged in an era of relatively high communications costs [and] limited computational capability' (24) ... 'as the cost of automated information processing has fallen by over 99.9% since the 1960s, it is unlikely that the work practices of the previous era will be the same ones that best leverage the value of cheap information and flexible production' (26). 22 Bassanini, Scarpetta, and Hemmings (2001) provide evidence from OECD economies. See Francisco Alcala and Antonio Ciccone (2001) for results from a larger number of countries. 23 For the most recent period in their study (1990-93), the R&D embodied in imports accounted for approximately 65 percent of the total R&D intensity in the Canadian business sector

56

Sustaining Global Growth and Development

(defined as the industry's own R&D spending plus the R&D embodied in purchases of domestic and foreign goods and services). 24 The OECD (2001b) reports international evidence on the contributions of resource reallocation to productivity growth. 25 In the fourth quarter of 2001, productivity in the U.S. business sector was 1.9 percent higher than four quarters previously, despite a decrease of 0.3 percent in business sector output. 26 Based on a variety of scenarios, Oliner and Sichel (2002) conclude that the most likely range of outcomes for 'steady-state' productivity growth in the U.S. non-farm business sector is roughly 2 to 2.8 percent. This range implies a significant rise in the long-run growth rate, albeit to a level below the average prior to the 1973 slowdown. Jorgenson, Ho, and Stiroh (2002) also anticipate an increase in U.S. trend productivity growth over the next decade.

Productivity Growth in Canada and the G7

57

Appendix 3.1: Measurement Issues There are long-standing concerns that official statistics understate the true rate of productivity growth, because of measurement problems. Two of the most prominent concerns are that aggregate productivity will be understated if the price deflators used to calculate real output do not fully capture improvements in product quality, and that output (and therefore productivity) is particularly difficult to measure in many of the service sectors. Deflators and Quality A djustments Real output and productivity will be measured incorrectly if the price indexes used to deflate nominal quantities are not adjusted to eliminate the influence of changes in quality on observed prices. Statistical agencies use various techniques to construct quality-adjusted measures of price change. Biases are introduced, however, if the correct quality adjustments are not made, and this task may be especially difficult for durable goods in times of rapid technological change. In some cases, biased deflators may have a greater effect on the allocation of measured productivity growth across sectors than on the aggregate measure of productivity growth. This can be illustrated by noting that Statistics Canada uses the 'double deflation' method to construct real output (value-added). In this technique, nominal levels of gross output and intermediate inputs are deflated separately, and then the real value of intermediate inputs is subtracted from real gross output. An upward bias in the price deflator for an intermediate input would cause real intermediate inputs to be understated. Thus, real value-added and productivity would be overstated in sectors using this input, whereas the upward bias would cause output and productivity to be understated in the sector producing the input. Measuring Service Sector Productivity Measuring output may be particularly problematic in the service sector.1 In some service industries such as banking, there is not even consensus on the appropriate concept of output. Moreover, output in some sectors (such as some components of business services and financial services) is often imputed by Statistics Canada from the levels of inputs, thereby biasing downward the sectoral measures of productivity. These difficulties imply that extra caution is warranted when using productivity data for many of the service sectors.2 A final issue concerns the comparability of productivity data from different countries. Newly released data can be revised significantly over time. For example, in August 2002, previous estimates of productivity growth in the U.S. business sector were revised downward by 0.9 percent for 2001 and by 0.4 percent for 2000. This example illustrates that initial data releases may sometimes be a misleading indicator of the true differences in performance across countries. The Canada-U.S. comparisons reported in this article could also be misleading to the extent that the national statistical agencies use different techniques (such as different

58

Sustaining Global Growth and Development

methods of quality adjustment) to construct their data. 3 Some partial evidence on this question is provided by Lucy Eldridge and Mark Sherwood (2001). Based on a systematic comparison, they conclude that methodological differences have not had a significant net effect on the measured gap in labour productivity growth in the manufacturing sectors of the two countries.

Notes 1 The April 1999 special issue of the Canadian Journal of Economics contains articles on service sector productivity. 2 A Statistics Canada study (Beckstead, Girard, and Harchaoui 2001) assigns the productivity data for each sector in Canada a rating of 'reliable', 'moderately reliable', or 'unreliable'. Business services and finance, insurance, and real estate services are two of the sectors receiving the lowest ranking based on perceived shortcomings in the methods used to construct the real output series. Productivity data for manufacturing are given a rating of 'reliable'. 3 Tarek Harchaoui, Mustapha Kaci, and Jean-Pierre Maynard (2001) discuss the comparability of productivity data published by the Canadian and U.S. statistical agencies.

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Productivity Growth in Canada and the G7

Appendix 3.2: Measuring the Sources of Productivity Growth Labour productivity is the amount of output produced per hour of labour input. It depends on a number of factors, including the current state of technology and the quantities of other inputs used in the production process. The link between investment in capital goods and productivity is critical when analysing the sources of labour-productivity growth. To illustrate this relationship, let us consider a simple Cobb-Douglas production technology in which real output Y is produced using capital and labour inputs: Y = AKαKLαL

(1)

where K is the flow of services froin the capital stock, L is hours of labour input, and A is multifactor productivity (MFP). The exponent α K is interpreted as the percentage change in output resulting from a 1 percent change in the quantity of capital (holding technology and the amount of labour unchanged). The exponent α L, has a similar interpretation as the percentage change in output following a 1 percent change in labour input. Increases in MFP measure the increase in output from sources other than changes in the levels of capital and labour inputs (e.g., more efficient methods of production resulting from technological innovations or the introduction of new business and organisational practices). With perfect competition and constant returns to scale, the sum of the α exponents equals one, and α K and αL can be measured by the shares of aggregate incoine earned by capital and labour, respectively. In this case, the level of labour productivity is determined by MFP and the ratio of capital to labour in the following manner: Y /L = A(K/L)

αK

(2)

Thus, labour-productivity growth can be decomposed into the contributions from the change in MFP and the change in the capital-to-labour ratio.' An increase in the amount of capital available per person-hour (capital deepening) will raise labour productivity. In einpirical studies, the contribution of information and communications technology (ICT) to labour-productivity growth is estimated using modified versions of the framework just described. In these studies, equations (1) and (2) are extended to include different types of capital goods (e.g., ICT versus other types of capital such as structures and non-ICT machinery and equipment). The total effect of ICT on labour productivity is measured as the sum of the contribution to productivity growth from the use of ICT goods (by firms in all sectors) and the contribution from the sectors that produce ICT goods. The contribution from capital deepening by users of ICT is estimated by the product of the income share of ICT and the growth rate of ICT capital per person-hour. The contribution from MFP growth in ICT-producing sectors is included in the term for the growth rate of aggregate MFP.

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Note 1

Specifically, equation (2) implies that the growth rate of labour productivity is equal to the growth rate of multifactor productivity plus the income share of capital (c) multiplied by the growth rate of capital per person-hour. Although not included in the simple model described in this appendix, an increase in the average quality of labour would also contribute to increases in labour productivity.

References Alcala, Francisco and Antonio Ciccone (2001). 'Trade and Productivity'. Centre for Economic Policy Research Paper DP3095. (January 2003). Armstrong, Philip, Tarek Harchaoui, Chris Jackson, et al. (2002). 'Comparison of Canada-U.S. Economic Growth in the Information Age, 1981-2000: The Importance of Investment in Information and Communication Technologies'. Economic Analysis Research Paper Series, cat. no. 11F0027MIE. Statistics Canada. (January 2003). Aural, Elena, Wooseok Ok, and Raymond Tones (2001). 'Knowledge, Work Organisation, and Economic Growth'. Labour Market and Social Policy Occasional Paper No. 50. Organisation for Economic Co-operation and Development. (January 2003). Bally, Martin N. and Robert Lawrence (2001). 'Do We Have a New E-conomy?' NBER Working Paper No. 8243. (January 2003). Baldwin, John and Naginder Dhaliwal (2001). 'Heterogeneity in Labour Productivity Growth in Manufacturing: Differences between Domestic and Foreign-Controlled Establishments'. Statistics Canada. Productivity Growth in Canada pp. 61-75. Baldwin, John and David Sabourin (1998). 'Technology Adoption: A Comparison between Canada and the United States'. Analytical Studies Branch Research Paper Series, cat. no. 11F0019MIE. Statistics Canada. (January 2003). Baldwin, John and David Sabourin (2000). 'Advanced Technology Use in Manufacturing during the 1990s'. Canadian Economic Observer (March). Baldwin, John and David Sabourin (2002). 'Impact of the Adoption of Advanced ICTs on Firm Performance in the Canadian Manufacturing Sector'. STI Working Paper No. 2002/1 (January). Organisation for Economic Co-operation and Development. (January 2003). Baldwin, John, Ron S. Jarmin, and Jianmin Tang (2002). 'The Trend to Smaller Producers in Manufacturing: A Canada/U.S. Comparison'. Statistics Canada Research Paper, cat. no. 11F0027MIE. (January 2003). Barr, Robert J. (1998). 'Human Capital and Growth'. A merican Economic Review vol. 91, no. 2, pp. 12-17. Bassanini, Andrea, Stefano Scarpetta, and Philip Hemmings (2001). 'Economic Growth: The Role of Policies and Institutions. Panel Data Evidence from OECD Countries'. Economics Department Working Paper No. 283. Organisation for Economic Co-operation and Development. (January 2003).

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Beckstead, Desmond, Andrée Girard, and Tarek Harchaoui (2001). 'Appendix 3: Quality Rating of Productivity Estimates and Related Data'. In 'Productivity Growth in Canada', cat. no. 15-204-XPE. (January 2003). Bernstein, Jeffrey I., Richard G. Hams, and Andrew Sharpe (2002). 'Explaining the Widening Canada-U.S. Productivity Gap in Manufacturing'. International Productivity Monitor no. 5 (Fall). (January 2003). Brynjolfsson, Erik and Lorin Hitt (1995). 'Information Technology as a Factor of Production: The Role of Differences among Firms'. Economics of Innovation and New Technology no. 3, pp. 183-199. Brynjolfsson, Erik and Lorin Hitt (1998). 'Information Technology and Organizational Design: Evidence from Micro Data'. (December 2003). Brynjolfsson, Erik and Lorin Hitt (2000a). 'Beyond Computation: Information Technology, Organizational Transformation, and Business Performance' . Journal of Economic Perspectives vol. 14, no. 4, pp. 23-48. (January 2003). Brynjolfsson, Erik and Lorin Hitt (2000b). 'Computing Productivity: Firm-Level Evidence'.

(January 2003). Canada (2002a). 'Achieving Excellence: Investing in People, Knowledge, and Opportunity'. (January 2003). Canada (2002b). 'Knowledge Matters: Skills and Learning for Canadians.' (January 2003). Colecchia, Alessandra and Paul Schreyer (2001). 'ICT Investment and Economic Growth in the 1990s: Is the United States a Unique Case? A Comparative Study of Nine OECD Countries'. STI Working Paper No. 2001/7. Organisation for Economic Co-operation and Development. (January 2003). Crawford, Allan (2002). 'Trends in Productivity Growth in Canada'. Bank of Canada Review Spring, pp. 19-32. (January 2003). David, Paul (1990). 'The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox'. A merican Economic Review vol. 80, no. 2, pp. 355-361. Earl, Louise (2002). 'An Overview of Organisational and Technological Change in the Private Sector'. Science, Innovation, and Electronic Information Division Working Papers. Statistics Canada. (January 2003). Eldridge, Lucy P. and Mark K. Sherwood (2001). 'A Perspective on the U.S.-Canada Manufacturing Productivity Gap'. Monthly Labor Review vol. 124, no. 2, pp. 31-48. (January 2003). Faruqui, Umar, Wulong Gu, Mustapha Kaci, et al. (2003). 'Explaining the Canada-U.S. Business Sector Productivity Growth Difference over the 1988-2000 Period'. Draft version of Stalistics Canada Discussion Paper (forthcoming). Gera, Surendra, Wulong Gu, and Frank C. Lee (2002). 'Information Technology and Labour Productivity Growth: An Empirical Analysis for Canada and the United States'. Canadian Journal of Economics vol. 32, no. 2, pp. 384 107. Gordon, Robert J. (2002). 'Technology and Economic Performance in the American Economy'. NBER Working Paper No. 8771. (January 2003). Gust, Christopher and Jaime Marquez (2000). 'Productivity Developments Abroad'. Federal Reserve Bulletin October, pp. 665-681. (January 2003). Hanushek, Eric A. and Dennis D. Kimko (2000). 'Schooling, Labor-Force Quality, and the Growth of Nations'. A merican Economic Review vol. 90, no. 5, pp. 1184-1208.

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Harchaoui, Tarek, Mustapha Kaci, and Jean-Pierre Maynard (2001). 'Appendix 1 - The Statistics Canada Productivity Program: Concepts and Methods'. In 'Productivity Growth in Canada', cat. no. 15-204-XPE. (January 2003). Harris, Richard G. (1999). 'Determinants of Canadian Productivity Growth: Issues and Prospects'. Industry Canada Discussion Paper No. 8. (January 2003). Jorgenson, Dale, Mun Ho, and Kevin J. Stiroh (2002). 'Projecting Productivity Growth: Lessons from the U.S. Growth Resurgence'. Federal Reserve Bank of A tlanta Economic Review vol. 87, no. 3, pp. 15-43. (January 2003). Khan, Hashmat and Marjorie Santos (2002). 'Contribution of ICT Use to Output and LabourProductivity Growth in Canada'. Bank of Canada Working Paper 2002-7. (January 2003). Lipsey, Richard G. (1996). 'Economic Growth, Technological Change, and Canadian Economic Policy'. C.D. Howe Institute. Lipsey, Richard G. (2002). 'The Productivity Paradox: A Case of the Emperor's New Clothes'. ISUMA vol. 3, no. 1, pp. 120-126. Macklem, Tiff and James Yetman (2001). 'Productivity Growth and Prices in Canada: What Can We Learn from the U.S. Experience?' BIS Papers No. 3. Bank for International Studies. (January 2003). Muir, Dirk and Benoit Robidoux (2001). 'Information Technology and the U.S. Productivity Revival: Is Canada Lagging Behind?' Paper presented at the annual meeting of the Canadian Economics Association, 31 May-3 June. Montreal. Oliner, Stephen D. and Daniel E. Sichel (2002). 'Information Technology and Productivity: Where Are We Now and Where Are We Going'. Federal Reserve Bank of A tlanta Economic Review vol. 87, no. 3, pp. 15-43. (January 2003). Organisation for Economic Co-operation and Development (2001a). 'Knowledge and Skills for Life: First Results from PISA 2000'. Organisation for Economic Co-operation and Development. (January 2003). Organisation for Economic Co-operation and Development (2001b). 'Productivity and Firm Dynamics: Evidence from Microdata'. Economic Outlook June, pp. 209-223. (January 2003). Organisation for Economic Co-operation and Development (2002). 'Productivity and Innovation: The Impact of Product and Labour Market Policies'. OECD Economic Outlook vol. 71, no. 7. (January 2003). Pilat, Dirk and Frank C. Lee (2001). 'Productivity Growth in ICT-Producing and ICT-Using Industries: A Source of Growth Differentials in the OECD?' STI Working Paper No. 2001/ 04. Organisation for Economic Co-operation and Development. (January 2003). Rao, Someshwar and Jianmin Tang (2001). 'The Contribution of ICTs to Productivity Growth in Canada and the United States in the 1990s'. International Productivity Monitor no. 3 (Fall), pp. 3-18. (January 2003). Rao, Someshwar, Ashfaq Ahmad, William Horsman, et al. (2001). 'The Importance of Innovation for Productivity'. International Productivity Monitor no. 2 (Spring), pp. 11-18. (January 2003). Rao, Someshwar, Jianmin Tang, and Weimin Wang (2002). 'The Importance of Skills for Innovation and Productivity'. International Productivity Monitor no. 4 (Spring), pp. 15-26. (January 2003).

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Rodriguez, Edgar R. and Timothy C. Sargent (2001). 'Does Under-Investment Contribute to the Canada-U.S. Productivity Gap?' Department of Finance Working Paper No. 2001-11. (January 2003). Schaan, Susan and Frances Anderson (2001). 'Innovation in Canadian Manufacturing: National Estimates'. Cat. no. 88F0006XIE01010. Statistics Canada. (January 2003). Sieling, Mark, Mark Dumas, and Brian Friedman (2001). 'Labor Productivity in the Retail Trade Industry, 1987-99'. Monthly Labor Review vol. 123, no. 12, pp. 3-14. (January 2003). Statistics Canada (2002). 'Multifactor Productivity Growth'. The Daily, 12 July. (January 2003). Stiroh, Kevin J. (2001). 'Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say?' Federal Reserve Bank of New Y ork Staff Reports no. 115. (January 2003). Trefler, Daniel (1999). 'The Long and Short of the Canada-U.S. Free Trade Agreement'. Perspectives on North American Free Trade series. Industry Canada. (January 2003). van Ark, Bart (2001). 'The Renewal of the Old Economy: An International Comparative Perspective'. STI Working Paper No. 2001/05. Organisation for Economic Co-operation and Development. (January 2003). Vijselaar, Focco and Ronald Albers (2001). 'New Technologies and Productivity in the Euro Area'. European Central Bank Monthly Bulletin, July.

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Chapter 4

The Global Information Society and Development: Smoke without a Fire? Andreas Freytag 1

Today, it is widely acknowledged that participation in the information society benefits all. It is also claimed that developing countries could develop faster with the extended use of information and communications technologies (ICT) 2 by skipping certain steps of development. In particular, electronic commerce is regarded as a key to accelerate development. In other words, global growth can probably be enhanced by an increasing application of ICT. This very attractive idea has indeed garnered much attention from academia, the political realm (including international organisations), and the business coinmunity. In particular, the so-called digital divide is a popular policy issue, as its narrowing promises greater economic growth in developing countries. A global information society needs international policy co-ordination. There can be no doubt that many unsolved probleins related to standard setting, data security, consumer protection, taxation, and liability prevent economic agents from fully exploiting the potential economic gains, which may be provided by world-wide use of ICT, especially electronic commerce. However, it is also undoubtedly clear that the knowledge necessary to co-ordinate policies globally is limited with respect to information society. Even how to organise the standard setting process effectively and efficiently cannot be agreed upon. Because of — and despite — the poor knowledge about the form and direction of international policy co-ordination with regard to ICT, there are widespread activities to foster co-ordination globally. On the one hand, this is a good sign, as international efforts certainly enhance knowledge. On the other hand, one must be sceptical because these activities can be used pretend knowledge and deflect attention from other policy areas. This caution is mainly justified by political economy reasoning. This chapter first considers the growth-enhancing potential of ICT applications and the role played by policies in the process. It analyses the activities of international organisations to foster the global information society, concentrating on those activities directed at development, including the G8's efforts to increase the participation of developing countries. It goes on to exainine political economy considerations, leading to the conclusion that efforts to foster the global information society are motivated not just by economic motivations but to a great extent by the needs of politicians and bureaucrats to appear modern and alert.

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Sustaining Global Growth and Development

Information and Communications Technology, Economic Policy, and Global Growth It remains an unsolved puzzle why the increasing use of ICT in developed countries has not led to a similar increase in total factor productivity and higher world-wide average economic growth. So far, only the United States has experienced a rise in the application of ICT that has resulted in productivity increases (see, for example, Jorgenson 2000). In other countries such as Canada (see Chapter 3), there are the first signs of a similar rally due to ICT applications, although it has recently been hidden behind the dark prospects of global recession. The prospects of growth-enhancing ICT applications are often regarded as being even better for developing countries. It is argued that these technologies have the advantage of levelling the information and negotiation powers of enterprises in such countries, particularly with respect to primary goods. International trade in primary and processed goods has been enhanced and prices for sellers increased by the use of electronic commerce in developing countries (Goldstein and O'Connor 2000). For small and medium-sized enterprises (not only, but also in developing countries), direct contact to customers is possible using the internet. Although there is only limited evidence, the degree of both international and domestic divisions of labour in developing countries will likely be fostered by ICT applications. Furthermore, this process may result in higher economic growth (Hiemenz 2001). A closer look at the facts reveals that the relationship among growth, wealth, and ICT use is still very loose. First, ICT is one contributor to economic growth, albeit not well quantified. The causality may be vice versa: the higher past growth, the more ICT is used. Second, given that causality is from ICT to growth, it will be a major task to enhance economic growth in developing countries with the extended use of ICT. There is still a considerable gap between the member countries of the Organisation for Economic Co-operation and Development (OECD) and developing countries with respect to the use of the internet. This so-called digital divide can be seen in Table 4.1, which documents per capita use of the internet and personal computers for Africa, Asia, the Americas, and Europe. As the averages are somewhat misleading, the countries with the highest share in America (the U.S.) and Europe (Finland) have been added. The world average is included in order to facilitate comparisons of the continents; the last four columns show how the continents have developed compared to the average. Although world-wide use of personal computers and the internet has increased since 1999, it is still varies when compared across continents. There is no doubt that there is a significant digital divide, which is obviously declining only very slowly.3 Whereas in Asia the use of ICT has intensified relative to the world average, this is not true in Africa. In Africa, the relative position has declined. Development in Europe and America can be expected: absolute increase, but relative decline. This raises the question of what enhances the use of ICT in developing countries. We can distinguish three strategies. First, domestic policies can be aimed at supporting

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The Global Information Society and Development

ICT. Possible measures include direct subsidies for ICT firms or users, a tax moratorium for electronic commerce, and incentives to use the internet for communication with the government (such as tax reduction for electronically submitted tax declarations). This strategy has at least four disadvantages: • It is very costly. Given that developing countries lack the funds necessary to make a significant contribution to build up an ICT industry, it seems almost impossible to follow this strategy. Of course, it is attractive for governments both in developing and in developed countries to spend (or increase) development aid on it (for example, see United Nations Conference on Trade and Development 2002; see also below). In most OECD countries no such activities are planned due to limited public budgets. Therefore, international financial assistance is not considered in the following discussion. • Industries may see an incentive to time activities already planned, such as investments, so that they are entitled to subsidies. This would result in no or only limited net effect of the strategy. Table 4.1 The Digital Divide, 1999-2001* Hosts Users 1999 2000 2001 1999 2000 2001 2.47 2.76 3.44 37.46 59.09 84.73 12.55 19.88 29.29 188.27 303.19 437.49 208.18 365.65 559.22 2136.60 3709.42 4393.87 687.87 1029.57 1335.40 1518.16 1895.25 2169.39 1950.04 2923.32 3714.01 3740.50 4506.96 4995.10 565.28 794.07 963.20 3724.14 4265.90 4498.94 126.36 157.27 191.46 895.16 1359.48 1804.60 210.35 190.59 132.94 916.07 1443.32 2637.72 894.00 1022.53 1707.25 3227.44 3722.95 4302.83 199.00 248.08 294.32 2081.02 3015.25 3736.37 52.58 177.97 117.28 1429.99 2303.75 2826.71 6.21 22.22 2414 101.91 210.98 293.00 292.28 280.75 371.37 2100.81 3011.75 3995.01 122.27 177.93 232.70 485.35 641.37 823.24

Africa Asia Japan Americas U.S. Canada Europe France Finland Germany Italy Russia UK World Africa/ World 0.02 Asia/ World 0.10 Americas/ World 5.63 Europe/World 1.03 * per 10 000 inhabitants

Source:

Personal Computers 1999 2000 88 96 253 296 28.66 3152 2151 2447 5171 5852 3724 4031 1480 1674 2675 3043 3601 3901 2970 3361 1570 1798 374 429 3025 3378 681 772

2001 106 331 3488 2661 6225 4031 1794 3370 4235 3822 1948 497 3662 842

0.02

0.01

0.08

0.09

0.10

0.13

0.12

0.13

0.11

0.13

0.39

0.47

0.53

0.37

0.38

0.39

5.79 0.88

5.75 0.82

3.12 l.85

2.96 2.12

2.63 219

3.16 2.17

3.17 2.17

3.16 2.13

Adapted from statistics from the International Telecommunications Union (2003).

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Sustaining Global Growth and Development

• The government does not have the knowledge to identify future trends very well. If, for instance, special ICT applications are subsidised, there will be the danger that the wrong, poorly selling technologies will receive support. Decentralised markets regularly provide the knowledge necessary to differentiate between selling technologies and failing technologies. • Spending resources on one technology has opportunity costs, which may be high, particularly in developing countries. Because the government does not know these costs, it may forfeit projects with a higher social value. By the same token, special support means a distortion of the economy, which harms other industries. This holds even for a tax moratorium for electronic commerce, which may be regarded as acceptable given the high administrative costs associated with raising taxes on e-commerce. 4 Therefore, this strategy is an inferior one. A superior way to enhance ICT is the second strategy, which focusses on the overall economic environment. The main aspects of economic development are also important, namely openness, price stability allowing prices to reflect scarcities, and education. This strategy also includes the liberalisation of telecommunication services as the bottleneck industry for the use of ICT. The OECD has developed a blueprint to enhance e-commerce readiness it calls 'DIALECT', which stands for digital infrastructure, access, literacy, entrepreneurship, content, and trust (Bastos Tigre and O'Connor 2002). In other words, it stands for a liberal and open economic order. Marcin Piatkowski (2002) has calculated the 'New Economy Indicator', which refers to similar elements: the quality of regulations and contract enforcement, infrastructure, trade openness, the development of financial markets, spending on research and development, the quality of human capital, labour market flexibility, product market flexibility, entrepreneurship, and macroeconomic stability.5 As can be seen in developed countries, the liberalisation of telecommunication services in combination with a general market orientation leads simultaneously to a significant reduction of telecommunication prices and an enormous quality shift. Therefore, it is no surprise that the U.S. is the most advanced country with respect to the interne, as it was the first to liberalise telecommunications. Another example is Estonia, which has outpaced some countries in the European Union with respect to ICT applications (Kitsing 2002; Piatkowski 2002). Estonia has liberalised its trade policy and stabilised its economy, but it did not spend resources on any special support for ICT. This seems to be a good way to enhance ICT. The third strategy involves joint international efforts to help developing countries enhance their use of ICT. In particular, the work of international organisations and international forums such as the Digital Opportunity Task Force (the Dot Force, discussed in more detail below) must be mentioned. From an economic point of view, this sort of co-operation makes sense if the use of ICT generates spillovers or externalities, and if there is certainty about their extent and direction (Klodt 1999).6 Current economic knowledge about spillovers and their direction is not sufficient to engage heavily in international co-ordination (Freytag and Mai 2001). In particular,

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69

knowledge of— and also consensus on — the problem of standard setting in electronic commerce remains limited (Mai 2002). Hence, international activities to foster e-commerce must be carried out very carefully. Premature policy advice and policy action would probably do more harm than good.

International Policy Co-ordination for Fostering E-commerce and Development Despite poor knowledge, almost every international organisation is dealing with policies to enhance the global use of ICT. As already mentioned, some activities aim at enhancing knowledge and sorting out practical problems, in particular for bilateral efforts such as the negotiations between the U.S. and the EU on data security that resulted in the U.S.-EU Joint Statement on Data Privacy7 (Mai 2002). This form of policy co-ordination occurs frequently and is directed at specific practical problems of electronic commerce; it is not the focus of development policy. Similarly, the work done by the OECD does not focus on developing countries, although it could be said that the experience of OECD countries has led to the criteria of e-commerce readiness recommended in the OECD's DIALECT for developing countries. As these criteria are mainly domestic issues, the OECD's activities are also not discussed here.8 Thus, for the purposes of this discussion, development-related efforts started under the auspices of the World Trade Organization (WTO), the United Nations Conference on Trade and Development (UNCTAD), and the G8. To begin with, the WTO concentrates on electronic commerce, which it treats rather carefully as one of several ways to trade services (domestically and internationally). It is therefore determined to safeguard free cross-border e-commerce, which implies an extension of the principle of most-favoured nation (MFN) to e-commerce (WTO 1998). In particular, the WTO deals with market access and trade barriers, and intellectual property, brand name protection, and rules of origin are also on the agenda. The WTO proceeds as it has done in the past, striving to reduce trade barriers and enhance world trade as one important source of development and growth. Consequently, e-commerce is not treated as a separate issue within the multilateral trading order. 9 From an economic point of view, the WTO's efforts can be judged positively, as they surely fall into its main competence. To remove obstacles to cross-border electronic commerce will — at least indirectly — contribute to the wider use of ICT. It avoids the problems related to special treatment of ICT already mentioned. UNCTAD has also addressed the issue of ICT and development. In general, UNCTAD publications stress the role of domestic policies to foster ICT. In a survey carried out in ten least developed countries, insufficient entrepreneurial spirit and regulatory failures have been identified as the major and common shortcomings in the development of electronic commerce (UNCTAD 2001, Chapter 9). The role of the international community is seen as generally providing information and some

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Sustaining Global Growth and Development

assistance and taking a holistic approach, which apparently reflects UNCTAD's critical attitude toward trade and open markets (Sally 2001).10 Policy conclusions can be seen in line with OECD recommendations. An interesting and detailed example of international policy co-ordination is the Okinawa Charter on Global Information Society, agreed upon by the G8 (2000) in Okinawa in 2000. The G8 does not have a track record as an international agency promoting technological progress; the Okinawa Charter is indeed the first official document on that topic in its history.11 Since the G7 first met in 1975 (without Russia), it has been primarily concerned with the macroeconomic development of its members as well as political instability, terrorism, and related issues.12 During the 1980s and 1990s, the economic situation in the developing countries increasingly became a major issue. Today, the G8 is more concerned with problems of global governance than with purely domestic economic problems.13 Thus, the consideration of ICT at the Okinawa Summit does not come as a complete surprise. The actual debate on the new economy and the possible contribution to higher growth rates without cycles are reasons enough for the G8 to consider the role of ICT. In addition, the economic prospects in many less and least developed countries are still very dissatisfying. In such a situation, fostering ICT seems a very attractive and effective means to combat poverty while at the same time increasing the use of electronic commerce and other applications within the G8.

Global Participation in E-commerce

The G8 outlined its plans to facilitate global participation in e-commerce in the Okinawa Charter (G8 2000; see also Bayne 2001). The charter contains five sections divided into 19 paragraphs. The first five paragraphs praise the virtues of ICT and claim the necessity of global partnership. This is best summarised in paragraph 5: Above all, this Charter represents a call to all, in both the public and private sectors to bridge the international information and knowledge divide. A solid framework of IT-related policies and action can change the way in which we interact, while promoting social and economic opportunities worldwide. An effective partnership among stakeholders, including through joint policy co-operation, is also key to the sound development of a truly global information society.

In the section on 'Seizing Digital Opportunities', ICT is incorporated into the overall economic policy and seen as a bottleneck to further development (paragraph 6). The division of labour between the public and the private sector is discussed in depth, including the role of the WTO and the OECD. These organisations and national governments are correctly identified as being responsible for the rules of the game, rather than being directly responsible for the outcome, which is left to private initiatives.

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The section entitled 'Bridging the Digital Divide' identifies some critical areas that restrict the access of people in developing countries to global communication. In particular, inappropriate regulations, insufficient facilities, and inadequate education impede global access. From an economic point of view, it is not clear what role the state should take in overcoming these problems, as illustrated in paragraph 10: We will continue to: – Foster market conditions conducive to the provision of affordable communications services; – Explore other complementary means, including access through publicly available facilities; – Give priority to improving network access, especially in underserved urban, rural and remote areas; – Pay particular attention to the needs and constraints of the socially under-privileged, people with disabilities, and older persons and actively pursue measures to facilitate their access and use; – Encourage further development of 'user-friendly ', 'barrier-free' technologies, including mobile access to the Internet, as well as greater utilisation of free and publicly available contents in a way which respects intellectual property rights.

The first two points promote the issue of universal service, which is an important topic in network economics. In other words, no one should be excluded from access to the information society in general and from e-commerce in particular. Such an obligation must be undertaken very carefully and must follow rules to prevent discrimination against foreign suppliers in the domestic market (Fredebeul-Krein and Freytag 1999, 642). The third point leaves additional room for governments to manoeuvre because 'encouragement' can imply various things, such as an appropriate set of rules for technological competition, financial help for selected technologies, or public provision of such a technology. The short fourth section on 'Promoting Global Participation' stresses again that participation in ICT is crucial for development (paragraph 12), admits that the task to enhance participation of developing countries is demanding (paragraph 13), and emphasises (paragraph 14) that there is no 'one-size-fits-all' solution. This is an important warning as it reveals the limits of global collaboration. It also shows that the governments of the G8 members are well aware of these limits. The fifth section, 'The Way Forward', is the most ambitious. The need for 'bilateral and multilateral assistance' is repeatedly highlighted (paragraph 15). The charter also welcomes private initiatives such as the Global Digital Divide Initiative of the World Economic Forum (2003) and the Digital Opportunity Initiative (a partnership of Accenture, the Markle Foundation, the World Bank, and the United Nations Development Programme). International organisations, the private sector, and nongovernmental organisations (NGOs) should collaborate, because 'IT, in short, is global in dimension, and thus requires a global response' (paragraph 15).

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This is a significant statement, as it is highly unclear whether the alleged global dimension has implications demanding for global action. It well may be the case that an economic judgement differs considerably from a political one. The focus of this section, and probably of the Okinawa Charter as a whole, is on the establishment of the Dot Force. This task force has no mandate for political action, but does have an active consulting status. It had two objectives: first, to organise and facilitate the discussion among all relevant groups, namely the G8, developing countries, international organisations, NGOs, and the private sector (paragraph 18); second, to search for concrete policy recommendations for a number of priorities (paragraph 19). The Dot Force started work in late 1999 and ceased in June 2002; however, it did not end without creating a huge number of succeeding bodies to carry out the tasks and actions it set up (Tarjanne 2002). These bodies consist of governments, public agencies, NGOs, private enterprises, and international organisations (Digital Opportunity Task Force 2002b, 6). In May 2001, the G8 (2001) released the Dot Force's first report, 'Digital Opportunities for All: Meeting the Challenge', which contained a proposed plan of action and set up nine working groups. Interestingly, in that report there is less optimism about international policy co-ordination than there is in the Okinawa Charter: 'The main responsibility for relevant actions remains in the hands of developing country governments, enterprises and non-governmental organisations, working in tandem. However, the DOT Force can also play a critical and significant role by suggesting, initiating and/or supporting these actions' (G8 2001). The Genoa Plan of Action is also general and does not specify concrete actions and recommendations for international policy co-ordination. Nonetheless, at the 2001 Genoa Summit, the G8 leaders endorsed this plan. A second update was presented in February 2002, which presented the results of the nine working groups (Digital Opportunity Task Force 2002a). Those results suffer from two problems: first, they are very general in nature, which creates the impression that they imply very different policy conclusions, thereby satisfying all sorts of readers — one simply picks the policy conclusion one likes best. Second, the working groups covered almost all aspects of economic policy including health care and human capital development, resulting in a lack of focus that indicates insufficient knowledge about spillovers — exactly as economic analyses already suggest (Freytag and Mai 2001, section 3). In sum, the Okinawa Charter implicitly makes two very important claims. First, it claims that ICT contributes to development, and emphasises the importance of ICT in that regard. Nevertheless, it does not describe any the mechanism by which ICT reduces poverty in the least and less developed countries, a fact that is disturbing. One possible reason is that there is very little knowledge of such a mechanism, which makes policy recommendations very difficult. Second, the charter assumes that there is a need for global collaboration to foster ICT in general and electronic commerce in particular. The Okinawa Charter documents the willingness of the G8 countries to support the development process everywhere. Because it is the first official statement of the G8 on technology policy, detailed and concrete policy recommendations cannot be expected.

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Rather, the charter is general in nature. 14 It could therefore be argued that it will not have any consequences in the near future. Notwithstanding, ICT has become attractive for governments that want to demonstrate their modernity and their ability to address actual policy problems and to care for the future. Moreover, the Okinawa Charter allows much leeway for governments willing to intervene in information and communications markets. Furthermore, it may deflect public attention away from other potentially more important issues of economic policy. These aspects are discussed below.

The Political Economy of the Global Information Society Public choice analysis holds that policy makers are individually rational actors. This view would suggest that the Okinawa Charter in general is far from naive. Instead, it can be seen as the result of a process of utility maximisation under constraints, the most important constraint being to find a compromise. Unfortunately, the G8 has not been the focus of international political economy analysis. Razeen Sally (2001) offers one of the few recent critical accounts from a political economy perspective in a comparison of the G8 with other international organisations. He concludes that the increasing breadth of issues treated by the G8 will reduce the concentration on core issues of international economic relations. Economists normally discuss whether the G8's outcome is beneficial from a welfare point of view along the lines already mentioned. They tend to be sceptical that the G8's efforts to harmonise economic policy at the international level enhances welfare. The effectiveness of the G8 itself is doubted. Indeed, the G8 has been regarded as being neither very important nor very beneficial.15 There are at least two reasons to examine this political economy aspect a little more closely. On the one hand, the new focus on the digital divide can be interpreted as a sign that the G8 is currently thinking positively about globalisation. On the other hand, bringing together ICT and development bears the risk of neglecting other important development issues. Globalisation and ICT are closely related. The increase in the international division of labour and the surge in capital flows can be assigned to multilateral agreements on liberalisation of trade and capital flows in the last 50 years as well as to decreasing transaction costs, in particular communication costs due to technological progress and the increasing use of ICT, mainly in industrialised countries. The process of globalisation cannot be reversed. Therefore, it makes sense both politically and economically to search for ways to cope with and benefit from it. The Okinawa Charter can be interpreted as a first step toward a positive recognition of this intention, which is also important in light of the recent history of the G8's treatment of globalisation. In the last few years, the G8 focussed on what Nicholas Bayne (2001, 25) calls the 'evil spirits of globalisation'. These evils are mainly domestic import penetration, international fmancial distortion, development problems, and international crime. The

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negative perception of globalisation by the governments has surely had a negative effect on the general public perception of globalisation. Consequently, the efforts to set up the Millennium Round of WTO negotiations failed, not least because of enormous resistance from civil society as well as the timidity of both the U.S. and the EU to address relevant topics such as investment, competition policy, and further liberalisation of agriculture (Hindley 2000; Johnson 2002). In that respect, the Okinawa Charter marks a turn, albeit slight, toward the 'good spirit of globalisation' (Bayne 2001, 31). Following this line of reasoning, issues related to globalisation such as agriculture will likely be treated more enthusiastically in due course. Instead of quarrelling about the risks, governments in industrialised countries may begin to consider the opportunities associated with globalisation. The alternative view is less optimistic. Roland Vaubel (1991, 32-36) argues that the G8 summits and their outcomes mainly reflect collusive behaviour by the member governments. According to him, the G8 is useful for three reasons: • It gives governments a competitive advantage over domestic rivals due to prestige gained at the summit. • Domestic criticism can be blocked by international and mutual approval of national policies among the participating heads of state and government. • International co-ordination can shift responsibilities for unpopular policies (dirty work hypothesis). Applied to the Okinawa Charter and the first report of the Dot Force, the hypothesis of collusive behaviour of the G8 governments cannot be rejected. It can be assumed that the integration of ICT, the new economy, and e-commerce in the G8's agenda is perceived positively by the public, that is in the media as well as in academia (for example, Bayne 2001; Lawton 2001). It creates the impression that governments are modern and able to cope with new developments. Consequently, with a common charter on the digital divide, the G8 governments minimise the risk of being isolated. They are all aware of the important issues and share information. Furthermore, a common declaration of the virtues of a new technology protects them from the consequences of failure. Thus, in the case of a complete or partial crash of the ICT industry, governments can argue that the charter was written in light of existing knowledge and that such developments were not foreseen. 16 However, these arguments hold for the Okinawa Charter as well as for any other outcome of the G8. So why bother? There is another argument that supports scepticism and harmful collusive behaviour — albeit not necessarily on purpose. With its focus on developing countries, the Okinawa Charter deflects any public discussion of the truly relevant topics of the relations among industrialised and developing countries as well as on the domestic economic policies of those industrialised countries. To begin with, G8 governments can employ the new activity as a means to reduce their efforts in favour of developing countries in other policy areas, such as further trade liberalisation. A number of industries in industrialised countries are relatively well protected from imports from developing countries. Two examples illustrate the

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problem: as already mentioned, the EU is only peripherally interested in liberalising its agricultural markets. The same holds for the markets for textiles and apparel, where the U.S. takes a leading protectionist position. Because liberalising these markets is politically difficult in industrialised countries, it makes political sense for the G8 governments to collude and shift their focus in the development debate to a modern issue, even though in the long term it is rather irrelevant. 17 It may even be possible to promote this charter as a serious effort to enhance growth in developing countries and trade it against the further liberalisation measures. However, given the bad economic situation in, for example, sub-Saharan Africa, the initiative to bridge the global digital divide may even sound bizarre. Nevertheless, there is the danger that this development initiative will also deflect the efforts in the developing countries themselves. Peter Bauer (1982) contends that development aid frequently causes governments in these nations to become corrupt. Rather than use the aid for subsidiary development activities, they increase the army budget or start to build new capitals — often with the approval of the donor countries. A development initiative that concentrates on ICT may well induce governments in developing countries to spend scarce resources on the implementation of a network in cities instead of enhancing the economic situation in rural areas. By the same token, concentration on ICT may also be encouraged in order to deflect attention from other issues, such as exploitation of rural population and neglect of human rights. Moreover, initiatives to enhance the global use and world-wide dissemination of electronic commerce shift the focus of the public debate on domestic economic policy in the G8 countries. The G8 governments can claim that they commonly address the most fascinating topics in today's economic policy. Given the enormous attention the new economy and dot-com enterprises received from the public, this strategy seems to have paid off. It also can explain why the scepticism of the Dot Force has not been discussed widely in political terms. The amount of public attention received by the EU's Common Agricultural Policy and the Multi-Fibre Agreement is negligible. The Dot Force and its successors also encourage a wide array of firms and NGOs to lobby their cases. Both UNCTAD and G8 explicitly ask stakeholders to participate in the process of shaping the global information society. There can be no doubt that it makes sense to incorporate multinational corporations and NGOs in the process and to remind them to their responsibilities. However, this strategy is dangerous. Although it is difficult to prove in single instances, there is a strong incentive for such firms and NGOs to consider their interests very directly. First, there will be a bias to demands for public funding of ICT (either through domestic budgets or through international aid), as it pays off for firms. Second, the standard-setting process can be strongly influenced by the stakeholders, which might result in inferior standards. In a nutshell, international policy co-ordination with the inclusion of private agents bears the danger of serving the interests of those private agents. To sum up, there are two contradicting views regarding the Okinawa Charter from a political economy point of view. It is impossible to determine which is more realistic.

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It is also possible that both of them can be applied. An industrialised country's government can think increasingly positive of globalisation while at the same time tries to avoid facing the consequences of globalisation.

Conclusion It cannot be denied that ICT exhibits cross-border externalities to a certain extent, and therefore requires international policy co-ordination. However, the direction of any measures taken on the international scale reinains unclear. From a welfare economic perspective, these uncertainties should be eradicated before concrete action is taken. Nevertheless, governments and international organisations engage in solving the alleged problems and fostering international co-ordination of economic policy with respect to electronic commerce and other ICT applications. Whereas the activities to clarify legal issues such as liability in international trade, data security, and consumer protection are essential in spurring electronic commerce, other international activities are not. Put differently, a political economy explanation of the political focus on global information society reveals that there is obviously more smoke than the fire itself warrants. It may well be the case, for example, that the Okinawa Charter reflects a growing awareness of the virtues of globalisation among the G8. However, it must not be overlooked that the charter deflects the actual discussion on development and globalisation. The sinoke has been artificially created in order to drive attention away froin doinestic problems in both developed and developing countries. It will be interesting to see which direction the G8's policy toward developing countries will take.

Notes 1 This chapter is part of a research project entitled Der Ordnungsrahmen für den elektronischen Handel: Zur Notwendigkeit internationaler Koordination'. The author gratefully acknowledges financial support from the Volkswagen Foundation's Global Structures and Governance programme, as well as Michele Fratianni, John Kirton, Meelis Kitsing, and Stefan Mai for helpful comments on earlier drafts. 2 For the purposes of this chapter, ICT and e-commerce are closely intertwined, emphasising the prominent role that electronic commerce plays in development. 3 Indeed, data do not prove the widespread claim that the digital divide 'has significantly increased over the last few years' (Kolodko 2002, 9). 4 Michele Mastroeni (2001) suggests other, mainly political arguments against a tax moratorium on e-commerce. 5 Piatkowski's list seems so comprehensive that it might be difficult to distinguish the factors contributing to higher ICT penetration. However, it is based on the premise that the socalled new economy is in fact difficult to define (Freytag 2002; see also Chapter 2). 6 As already mentioned, financial assistance is not considered in this discussion. 7 For the purposes of this discussion, activities within the EU are not regarded as part of international policy co-ordination.

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8 The same holds with specialised agencies such as International Telecommunications Union and the World Intellectual Property Organization (see Mai 2002). 9 There are, however, suggestions to negotiate a specific trade agreement on e-commerce (Hauser and Wunsch-Vincent 2000). 10 However, it must be emphasised that UNCTAD publications on ICT and development are less anti-liberal than most of the conference's other publications. 11 The foundations were laid in a report by the G7 finance ministers (2000) for the heads of state and government, entitled 'The Impact of the IT Revolution on the Economy and Finance', published before the Okinawa Summit. The term IT — information technology — is synonymous with ICT in this chapter. 12 See the University of Toronto's G8 Information Centre for an archive of official documents and analysis. See also Peter Hajnal (1999). 13 See John Kirton, Joseph Daniels, and Andreas Freytag (2001). 14 This vagueness makes sense as a charter is at the lowest level in the hierarchy of international agreements. It can be interpreted as a expression of purpose rather than a concrete action plan. 15 Political scientists have a different point of view: they mostly argue that the G8 takes a leading role in shaping global economic policy. With reference to the issue of ICT, they argue that globalisation and the increasing use of ICT call for a new concept of global governance (for example, see Kirton and von Furstenberg 2001). 16 The dot-corn crash can be seen as an example of such a situation. G8 governments were not blamed for not anticipating such a development. 17 It is particularly irrelevant to the least developed countries.

References Bastos Tigre, Paulo and David O'Connor (2002). 'Policies and Institutions for E-commerce Readiness: What Can Developing Countries Learn from OECD Experience?' Technical Papers No. 189. Organisation for Economic Co-operation and Development, Paris. (January 2003). Bauer, Peter (1982). Entwicklungshilfe: W as steht aufdem Spiel. Kieler Vorträge No. 97. Mohr (Siebeck), Tübingen. Bayne, Nicholas (2001). 'Managing Globalisation and the New Economy: The Contribution of the G8 Summit'. In J. J. Kirton and G M. von Furstenberg, eds., New Directions in Global Economic Governance: Managing Globalisation in the Twenty-First Century, pp. 171-188. Ashgate, Aldershot. Digital Opportunity Task Force (2002a). '2nd Update on the Implementation of the DOT Force Genoa Plan of Action'. February. (January 2003). Digital Opportunity Task Force (2002b). 'Report Card: Digilal Opportunities for All'. June. (January 2003). Fredebeul-Krein, Markus and Andreas Freytag (1999). 'The Case for a More Binding WTO Agreement on Regulatory Principles in Telecommunication Markets'. Telecommunications Policy vol. 23, pp. 625-644. Freytag, Andreas (2002). 'The G7's Contribution to Global Economic Growth: An Agenda'. In M. Fratianni, P. Savona and J. J. Kirton, eds., Governing Global Finance: New Challenges, G7 and IMF Contributions, pp. 75-85. Ashgate, Aldershot. Freytag, Andreas and Stefan Mai (2001). 'Does E-commerce Demand International Policy Co-ordination? Some Reflections on the Okinawa Charter on the Global Information Society'. Paper presented at the Annual Public Choice Society Meeting, 9-11 March. San Antonio.

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G7 Finance Ministers (2000). 'Impact of the IT Revolution on the Economy and Finance'. Fukuoka, 8 July. (January 2003). G8 (2000). 'Okinawa Charter on Global Information Society'. Okinawa, 22 July. (January 2003). G8 (2001). 'Digital Opportunities for All: Meeting the Challenge. Report of the Digital Opportunity Task Force (DOT Force) Including a Proposal for a Genoa Plan of Action'. 11 May, Genoa. (January 2003). Goldstein, Andrea and David O'Connor (2000). 'E-commerce for Development: Prospects and Policy Issues'. Technical Paper No. 164. Organisation for Economic Co-operation and Development, Paris. (January 2003). Hajnal, Peter (1999). The G7/G8 System: Evolution, Role, and Documentation. Ashgate, Aldershot. Hauser, Heinz and Sascha Wunsch-Vincent (2000). 'A Call for a WTO-Ecommerce Initiative'. International Journal of Communications Law and Policy vol. 6 (Winter), pp. 1-35. Hiemenz, Ulrich (2001). 'Internet, E-Commerce, and Asian Development'. Mimeo. Organisation for Economic Co-operation and Development, Paris. Hindley, Brian (2000). 'Is the Millennium Round Worth Reviving?' Zeitschrift für W irtschaftspolitik vol. 49, pp. 52-58. International Telecommunications Union (2003). 'ICT: Free Statistics Home Page'. (January 2003). Johnson, Pierre Marc (2002). 'From Trade Liberalisation to Sustainable Development: The Challenges of Integrated Global Governance'. In J. J. Kirton and V. Maclaren, eds., Linking Trade, Environment, and Social Cohesion: NA FTA Experiences, Global Challenges, pp. 27-36. Ashgate, Aldershot. Jorgenson, Dale (2000). 'Raising the Speed Limit: U.S. Economic Growth in the Information Age'. Brooking Papers on Economic A ctivity no. 1, pp. 125-211. Kirton, John J., Joseph P. Daniels, and Andreas Freytag, eds. (2001). Guiding Global Order: G8 Governance in the Twenty-First Century. Ashgate, Aldershot. Kirton, John J. and George M. von Furstenberg (2001). 'The Challenges Ahead'. In J. J. Kirton and G. M. von Furstenberg, eds., New Directions in Global Economic Governance: Managing Globalization in the Twenty-First Century, pp. 243-253. Ashgate, Aldershot. Kitsing, Meelis (2002). 'Political Economy of Information and Communication Technology Diffusion in Estonia and Slovenia (1991-2001): Lessons for the Other Central Eastern European Countries'. Mimeo. Tallinn. Klodt, Henning (1999). 'Internationale Politikkoordination: Leitlinien für den globalen Wirtschaftspolitiker'. Kieler Diskussionspapier 343. Institut für Weltwirtschaft, Kiel. Kolodko, Grzegorz (2002). 'The "New Economy" and the Old Problem'. TIGER Working Paper Series No. 24, Warsaw. Lawton, Thomas (2001). 'The New Global Electronic Economy: The Contribution of the G8 Summit'. In J. J. Kirton and G. M. von Furstenberg, eds., New Directions in Global Economic Governance: Managing Globalisation in the Twenty-First Century, pp. 39-60. Ashgate, Aldershot. Mai, Stefan (2002). 'International Co-ordination of E-commerce'. IWP-Discussion Paper No. 2002/3. Institut für Wirtschaftspolitik, Cologne. Mastroeni, Michele (2001). 'Creating Rules for the Global Information Economy: The United States and G8 Leadership'. In J. J. Kirton and G. M. von Furstenberg, eds., New Directions in Global Economic Governance: Managing Globalisation in the Twenty-First Century, pp. 61-74. Ashgate, Aldershot. Piatkowski, Marcin (2002). 'The Institutional Infrastructure of the "New Economy" and CatchingUp Potential of Post-Socialist Countries'. TIGER Working Paper Series No. 24, Warsaw.

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Sally, Razeen (2001). 'Looking Askance at Global Governance'. In J. J. Kirton, J. P. Daniels and A. Freytag, eds., Guiding Global Order: G8 Governance in the Twenty-First Century, pp. 55-76. Ashgate, Aldershot. Tarjanne, Pekka (2002). 'The United Nations Information and Communication Technology Task Force'. Connect-W orld A frica (January 2003). United Nations Conference on Trade and Development (2001). 'E-commerce and Development Report 2001'. (January 2003). United Nations Conference on Trade and Development (2002). 'Expert Meeting on Electronic Commerce Strategies for Development: The Basic Elements of an Enabling Environment for E-Commerce. Draft Chairperson's Summary'. Geneva. Vaubel, Roland (1991). 'A Public Choice View of International Organizations'. In R. Vaubel and T. D. Willett, eds., The Political Economy of International Organizations, pp. 27-45. Westview Press, Boulder. World Economic Forum (2003). 'Global Digital Divide Initiative'. (January 2003). World Trade Organization (1998). Electronic Commerce and the Role of the W TO. World Trade Organization, Geneva.

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Chapter 5

The World Trade Organization, Multinational Enterprise, and Civil Society Alan M. Rugman and Alain Verbeke 1

The World Trade Organization (WTO) is in a crisis. Portrayed by many of the critics of globalisation as the driver of free trade, in reality it is primarily an understaffed and overworked technical bureaucracy with little political impact. The WTO is the secretariat of the General Agreement on Tariffs and Trade (GATT), which has succeeded in its 54 years of existence in serving as a facilitator for national governments to cut tariffs, inainly on manufactured goods (but not much on agricultural products and textiles). The history of the GATT/WTO is that of a well-intentioned but small technocratic group acting, often with an agenda oriented to the relatively short term, to broker concessions by national governments. These are viewed as a stepping stone toward achieving the broader and more long-term objectives of free trade and creating global wealth. But the WTO is not politically powerful. All of its successful eight rounds of tariff cuts had to be first negotiated and then implemented by sovereign governinents. The WTO has no military support structure or large cadre of administrators to enforce its will. It has only a staff of 200 professionals, mostly trade lawyers and economists. It is little inore than a conference organiser for governments, with an appellate body attached to it in order to inonitor the impleinentation of the negotiated rules. The rules themselves are not inuch more than government-level agreements, based on reciprocity and trust. The WTO performs the role of an impartial signalling device to guide nation states in the direction of trade liberalisation (in accordance with agreements signed), and it also acts as an arbitrator when rules have been broken. Unfortunately, these rules are sometimes unclear, reflecting 'constructive ainbiguity' introduced by trade negotiators from sovereign governinents to avoid a breakdown in talks. The most common way to infringe on the WTO's rules is by failing to adhere to the principle of granting most-favoured nation (MFN), nondiscriminatory treatment. If the United States allows one of its exporters to dump a product in Europe, then the European Commission can launch an antidumping action and, if successful, impose a tariff duty on the dumped imports. If the United Kingdom subsidises an export to the United States and a U.S. firm coinplains to the U.S. International Trade Cominission (ITC), the ITC may recommend that a countervailing duty be imposed to offset the margin of subsidy. Both the antidumping and countervailing duty actions are consistent with the WTO and the GATT's Uruguay Round Agreement of 1994.

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A country can engage in WTO-consistent 'retaliation', always in response to an infringement of its negotiated rights, by re-imposing tariffs or duties against the offending party's home country. Thus, all the interactions occur between governments. The WTO acts as an arbitrator, monitoring what are really domestic legal actions involving international players. Its only direct role is to hear appeals about failures to observe due process in the application of these trade laws. Yet, many antiglobal 'mobilisers' have been successful in demonising the WTO as the architect of globalisation. What they mean by globalisation is not always clear. It seems to involve the activities of multinational corporations (MNCs) and the alleged spread of U.S.-led economic capitalism. These are the alleged foundations of an unequal distribution of economic power and wealth, at the expense of poorer nations and weaker stakeholder groups in developed economies, such as organised labour and the green movement. However, correct institutional knowledge of the WTO leads to the conclusion that the main rationale for the WTO, and also its key outcome, is improved market access to previously protected markets, thereby increasing overall economic efficiency. In addition, its actual role is really that of an implementation mechanism of rules of fairness, agreed upon by sovereign states. All seriously grounded empirical and analytical evidence actually demonstrates a positioning of the WTO as enhancing market access, based on government policies (Bhagwati 2002; Sampson 2001; Deutsch and Speyer 2001). This is also the institutional reality experienced every day, both by the governments involved in negotiating and implementing agreements and by the MNCs engaged in international trade and investment. The technical perspective of nongovernmental organisations (NGOs) is based on a correct assessment of the efficiency outcome of improved market access. But it is often combined with a somewhat naive perspective on the power of the WTO to dictate actual fundamental policy choices that could favour the further redistribution of wealth. In contrast, the dominant picture suggested by the stakeholders hurt by free trade and investment is that the WTO increases inequality in power and wealth distribution. These stakeholders typically include labour, management, and owners of noncompetitive, incumbent firms in import-competing sectors, which lack exports or outward foreign direct investment (FDI). Their view is that the WTO may indeed be an implementation mechanism of sovereign governinents' choices, but its outcome is more rather than less inequality in the international distribution of economic power and wealth. It is also alleged that foreign nations exert excessive influence on the negotiation of international agreements, driven by their exporters and companies engaged in outward FDI. Examples include textiles, steel, resources, agricultural, and other mature sectors where there are few competitive advantages left. However, while the impact on the WTO of the staunchest defenders of free trade (especially the U.S. and the UK) is undoubtedly enormous and their agendas sometimes driven by short-term opportunistic considerations to gain foreign market access, the key building block for their participation in the WTO is the fundamental belief,

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grounded in past experiences of actual impacts of GATT tariff cuts, that in the long run all participants will benefit, not only a few. Furthermore, public perceptions in many countries have been influenced by mobiliser NGOs. They now reflect a view that the WTO both increases poverty in developing nations and is a dominant architect of the world trade and investment regime. Mobilisers compare the outcomes of WTO negotiations with the characteristics of a hypothetical 'better world', without adopting a reasonable analytical counterfactual position. From a comparative institutional perspective, a feasible WTO-negotiated result is evaluated in terms of a nonfeasible, and often internally inconsistent, set of performance standards that may include parameters as diverse as respect for local customs and traditions (irrespective of their impact on economic efficiency), contribution to sustainable development, redistribution of wealth to developing countries, protection of domestic industries and domestic employment in historically sheltered markets, free availability of MNC proprietary knowledge to all potential users or generic product manufacturers, and so on. All the above goals assume that globalisation implies a new form of economic imperialism, grounded in the increased 'commonality' (homogenisation) of products, manufacturing processes, consumption, and regulation, with control over the commonality process concentrated in the hands of (too) few actors, more specifically a limited number of wealthy countries and large MNCs (see Giddens 2000). In contrast, Alan Rugman (2000a) has explained the fallacy of this type of perceived globalisation process, which would allegedly lead to the development of a homogeneous world market. The economic reality is that even the largest MNCs in the world are faced with equally powerful foreign rivals and usually have weak positions in at least one leg of the triad of North America, the European Union, and Japan (Rugman 2000a, 2000b; Govindarajan and Gupta 2001). In addition, while the actual economic impact of the U.S., the EU, and Japan in multilateral negotiations and organisations is undoubtedly enormous, it is always more contestable by other countries than in the case of regional agreements. In the North American Free Trade Agreement (NAFTA), the U.S. agenda dominates that of Canada and of Mexico. In the EU, the old coalition between Germany and France is still dominant across the Brussels-based administrative structure. In Asia, Japan remains the country with the most MNCs. Unfortunately, in spite of the launch of a new WTO round, agreed to in Doha in November 2001, the tide of criticism by antiglobal mobilisers is continuing. In this chapter, the actual institutional structure and basic principles of the WTO are related to an analysis of the issues in the new Doha Round, the politics of the WTO, and the views of civil society on these matters. It focusses on the activities of MNCs and NGO criticism of the concept of the Multilateral Agreement on Investment (MAI). (For a discussion of the institutional structure of the WTO, see Rugman 2001.)

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The Politics of the World Trade Organization The reality of the WTO is that it is used as a bargaining forum by the 'triad' economies (North American countries, European Union countries, and Japan) and, furthermore, that the U.S. and the EU play the most active role in its activities. Japan, China, and other Asian nations have been less important in shaping the agenda of the WTO. Developing countries, while members of the WTO, have never been important leaders in shaping its policies, but they have undoubtedly benefited from free trade and enhanced access to the richer triad markets. For most of the 54 years of the GATT, the U.S. has provided leadership in setting an agenda of trade liberalisation, first by reducing tariffs on goods and then, in the Uruguay Round, by starting to address nontariff barriers to trade and services (Hoekman and Kostecki 1996). The major post-war supporters of the U.S.-led drive for world trade liberalisation have been the UK and rich, smaller, trading nations such as Canada, Australia, and New Zealand. A broader coalition of countries will be needed for future success. It is, however, difficult to see the WTO as a relevant forum for directly redressing perceived global income inequalities across the north-south divide, or for properly addressing the multitude of other distributional goals prescribed by the antiglobal mobilisers. The GATT/WTO's success has been in liberalising trade in goods among the major triad nations of North America, the EU, and Japan. But some of its components, such as the Multifibre Agreement on textiles, may have impeded the economic development of poorer southern countries, due to the protectionist nature of the rules of origin for textiles and apparel produced in Asia. To this extent, the WTO embodies several asymmetric elements: on the one hand, it is consistently moving toward trade liberalisation but, on the other, it is unable to eliminate the quasi-protectionist policies in some sectors put in place by many of its members. As the U.S. has provided leadership in the tariff-cutting measures of the GATT, so too has it yielded excessive power to its domestic protectionist lobbies in establishing its negotiating positions. The result is a mixed bag of policies at the WTO, where country negotiators make concessions in terms of reducing the shelterbenefiting specific sectoral markets in return for market access in their partners, but where producers and consumers usually benefit (on efficiency grounds) from such concessions. A variety of antiglobal mobilisers successfully undermined the WTO's Seattle meeting in December 1999 with violent street protests and enormous attention from the media. They thereby seriously hindered the formal launch of a new round of negotiations, which only took place in late November 2001 in Doha. This new round now includes China as a full member participating in the negotiations. Despite the delay, the new round's agenda is largely fixed and has been so for several years. For example, former leading U.S. trade policy bureaucrat Gaza Feketekuty organised a conference in October 1996 at the Monterey Institute of International Studies to help develop the new agenda for U.S. trade policy. This conference led to a set of 18 essays

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that covered all the topics for the Seattle meeting of the WTO in 1999, published by the Council on Foreign Relations (Feketekuty and Stokes 1998). This publication deserves credit for pushing the agenda beyond parochial American concerns toward the broader, longer term objectives to be pursued by the WTO. The general theme of almost all the essays is support for a multilateral, rules-based system at the WTO rather than a system based on triad or regional power. The current multi-track strategy of the U.S. seeks to use bilateral, regional, and multilateral trade negotiations simultaneously. With this strategy, much more attention is given to Japan and China, and even to NAFTA, than to U.S.-Europe trade relations. To redress this balance, Ernest Preeg (1998) and Bruce Stokes (1998), among others, advocate a transatlantic free trade agreement. Robert Lawrence (1998) represents the argument in favour of strong U.S. support during the new WTO round for a multilateral, rules-based system, extending into the areas of competition policy, investment, and, perhaps, environment and labour standards. Yet, during the second Clinton administration, the U.S. Congress persisted in denying fast-track negotiating authority to the President for any trade deals, including a new WTO round. Aggressive U.S. bilateral policy with respect to trade deficits with Japan, China, and other countries now appears to be the norm. It is necessary to turn the tide in Congress back toward support for the U.S. as a leader in multilateral trade and investment liberalisation. Most less developed countries are also in favour of the new WTO round. The trade ministers of four Caribbean economies endorsed the Seattle Round. Yet some academics still criticise the GATT/WTO. For example, Shahrukh Rafi Khan (2002) has published a set of technical economic papers dealing with aspects of structural adjustment in Pakistan, linked together by two rather thin introductory and concluding sections, which talk critically about policies of the World Bank and the International Monetary Fund (IMF) from the perspective of economic development in Pakistan. The author, a macroeconomist, criticises the neoliberalism of these institutions with little appreciation of political science considerations such as complex institutional responsiveness to changing environmental parameters and its links to the business decisions that drive inbound FDI. Development economists might benefit from conducting field research that would permit the identification of the real barriers to FDI in countries like Pakistan; these barriers are related to domestic, political, and bureaucratic problems, and certainly do not reflect a failure of neoliberalism. An understanding of the conditions to be fulfilled in order for various types of inward FDI (market seeking, resource seeking, efficiency seeking, and strategic asset seeking) to occur is required before a serious debate can be held on the distributional aspects of structural adjustment, including impacts on the poor and on policy issues related to, inter alia, gender equality, health improvement, environmental quality, and food security. Pakistan continues to experience huge development problems, not due to World Bank failures but due to poor internal government policies that have increased political risk and reduced the incentive for inward FDI.

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The major structural change at the new WTO, as compared to the GATT, is the increased use of trade law and litigation for dispute settlement. The small, overworked WTO secretariat now has to deal with more than a dozen dispute settlement cases a year, together with all of the lengthy appeal processes. Previously, the old GATT secretariat only dealt with two or three cases a year. Due to this complex judicial process, trade lawyers from North America and western Europe are now more important than politicians and business people in determining trade policy outcomes at the WTO. As an emerging stream of dispute settlement decisions develops, the WTO is taking on a different shape. Instead of devoting most of its resources to promoting multinational trade liberalisation and nondiscrimination, the WTO is forced to focus much energy and expertise on resolving bilateral trade disputes. Three major U.S.-EU disputes concern bananas, beef hormones, and export subsidies (see Rugman 2000a). In early 2002, a new U.S.-EU. steel dispute captured most of the policy and media attention.

The Civil Society and the World Trade Organization It is important to understand that globalisation, as understood by the antiglobal mobilisers, has never existed: there is no single integrated world market dominated by a few firms with a monopolistic position and a few rich country governments that conspire to keep wealth accumulation concentrated inside their borders. Instead, there are strong triad blocks in which nation-states still make the rules, imposing regulations such as environmental and health codes. As noted above, the different triad blocks regularly engage in trade wars with each other and then turn to the WTO for dispute resolution. Unfortunately, the views of the antiglobal mobilisers often prevail in shaping public opinion in many countries. Even before the street violence in Seattle in December 1999, a widely reported example of the organisational capabilities of the antiglobal mobilisers occurred on 18 June 1999, when a mass demonstration disrupted the City of London. It was organised via a website of a group known as J18, which co-ordinated the separate activities of various antiglobal mobilisers. The more radical of these received most of the media attention when the peaceful demonstration planned to coincide with the G7 Summit in Cologne turned into a full-scale riot. The major targets were two McDonald's restaurants, which were damaged, and the London International Financial Futures (and Options) Exchange (LIFE), which was invaded. According to press reports (analysed in Rugman 2000a), a handful of young radical extremists organised much of the demonstration, which attracted more than 2000 people. A group called Reclaim the Streets and the Cambridge chapter of People's Global Action (PGA) were prominent. These groups were able to promote the demonstration by using the interne to publish maps and details of London's financial institutions. On the day of the planned protest, they provided leaders who incited groups to attack property and led attacks on the police.

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Radical groups such as these do not appear to differ in any marked manner from the student activist groups of the late 1960s, who organised sit-ins and demonstrations at leading universities from the University of California at Berkeley to New York's Columbia University to the London School of Economics and Political Science. If anything, the number of core activists appears to be far fewer. But today they can use the internet to gain world-wide attention. Previous generations of individuals condemning mainstream institutions spread their ideas via the underground press, small circulation magazines, and broadsheets; the current generation can tap into a potentially broader stream of support by using new technology. One of the disadvantages of fast global communications via the internet is that small activist groups can disseminate propaganda quickly and easily. The internet has no quality control mechanism; junk sites and politically networked ones count equally with commercial and academic sites. There is no screening mechanism similar to the one provided by the mainstream media, where extremist views would find little space or airtime. This street theatre was repeated, on a massive scale, in Seattle in early December 1999. The protectionist U.S. labour unions were also present, wrongly seeing the WTO as an agent of free trade, which led to a coalition of labour and moderate and extreme antiglobal stakeholders. Unfortunately, the potentially legitimate concerns of labour and the moderate NGOs, such as Oxfam and the World Wildlife Fund (WWF) were largely dominated by the extreme views of some antiglobal mobilisers, which thrive on anarchy and civil disobedience. This promotes a backlash against the NGOs with valid concerns that should receive proper policy attention, and it discredits their agendas. Fortunately, the Seattle antiglobal coalition has not been able to repeat its 'success' in subsequent events, for example at demonstrations in London in May 2000 and in Washington DC in 2002 against the role of the IMF and World Bank. On both occasions, the more extreme mobiliser groups received primarily critical media coverage, which concentrated on the confrontations with police and the damage caused to public monuments, such as Churchill's statue at Westminster. As a result, there was less coverage of their simplistic message on the alleged costs of globalisation. The distinction made between 'mobilisers' and 'technical' NGOs has been clarified by Sylvia Ostry (2001). The former group criticises the global trade and investment regime, and believes that the major international institutions promoting free trade, such as the WTO, the IMF, and the World Bank should be eliminated or fundamentally overhauled. A number of mobilisers are relatively pacifist and, in general, pursue global equity goals, but they face serious difficulties in dissociating themselves from various anarchist groups attracted by this anti-mainstream philosophy. As a coalition, these groups mobilise for specific events, such as the Seattle WTO meetings, the annual meetings of the IMF and World Bank, and the G7/8 summits. They include the PGA, the International Civil Society, N30, and the J 18 group, which organised the June 1999 London protests.

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The latter group, the technical NGOs, consists of relative insiders, willing to work with the mainstream international institutions in an attempt to reduce perceived ineffectiveness or inequity in policy-making processes and to achieve essentially redistributive goals. Technical NGOs include Oxfam, the WWF, the Third World Network, and various environmental groups. Unfortunately, the WTO does not distinguish between these two groups. At Seattle, some 600 NGOs were accredited, including the first group that used anarchy. The technical NGOs, which participated in major protest actions organised by the mobilisers, are now unfortunately perceived by many national governments and business lobbies as having a common agenda with the mobilisers. This widespread perception has seriously affected the technical NGOs' capacity to achieve important objectives on their usually benevolent agendas. As an alternative, lessons can be learned from the successful NAFTA-generated co-operation of environmental NGOs with business and government in raising environmental standards and practices in Mexico (see Rugman 1999). The Power of A ntiglobal Mobilisers The antiglobal mobilisers constitute a new and potentially powerful set of actors on the stage of international business. From 1997 to 1998, they assumed a more effective role than before, which led to the defeat of the MAI proposed by the Organisation for Economic Co-operation and Development (OECD). The Council of Canadians, chaired by economic nationalist Maude Barlow, was prominent in orchestrating a common action agenda. In a clever campaign of misinformation and half-truths, published in a propaganda booklet (Clarke and Barlow 1997), the council filled the websites of NGOs with anti-MAI hysteria, which then influenced the media. With the U.S. and Canadian governments treating the MAI on a technical rather than political level, and ministers receiving little in-depth briefing from senior trade policy civil servants, there was insufficient political will to counter the substantive distortions of facts on the likely societal impact of the MAI, offered by unelected and unaccountable antiglobal mobilisers. Business leaders were unwilling to speak out on the MAI's advantages, leaving its defence to a handful of industry association spokespeople, who are mostly perceived as the public relations mouthpiece of narrow business agendas. Furthermore, the academic world — with a few exceptions — had not researched the issue. This was especially true of trade economists, who build mainly on modern trade theory, which is useful for studying trade liberalisation but fully inappropriate for analysing the impact of investment liberalisation. Consequently, almost none were available or willing to debate the substantive issues of the MAI in public. The absence of informed government, business, and academic commentary left the media open to the views of the antiglobal mobilisers. As already noted, technical NGOs have sometimes played a major positive role in shaping the outcome of international agreements, as exemplified by the notable success of environmental NGOs (entirely U.S. and Canadian) in NAFTA when the first Clinton administration

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in 1993 inserted two side agreements, after trade agreement had been successfully negotiated over the 1990-1992 period by the first Bush administration. These side agreements set up an environmental body, the Commission on Environmental Cooperation (in Montreal), and a labour standards body, the Commission for Labor Cooperation (in Dallas) (see Liebler 1994). In contrast, the United Nations Conference on the Environment and Development's Earth Summit at Rio in 1992 was dominated by environmental NGOs, including many mobilisers. Business was largely absent. This led to an unbalanced agreement, with commitments that would be almost impossible to meet by the governments concerned. Despite these lessons, the Kyoto Conference on Climate Change in December 1997 resulted in standards for reduction of greenhouse gas emissions that, again, most countries will not meet. Ratification of the Kyoto protocol is unlikely, since the U.S., Australia, and many other countries are unlikely to sign it — only the EU, Japan, and Canada had the political will to do so. The brief description above of recent events in the area of global trade and investment liberalisation reflects a wide gap in understanding of the significance of globalisation and the role of international institutions therein, between, on the one hand, national governments, business lobbies, and technical NGOs and, on the other, the antiglobal mobilisers. The divergence in perspectives is such that a constructive dialogue has become almost impossible. There are two explanations for this situation. First, the political system in most western countries, especially the U.S., Canada, and EU democracies, has traditionally taken on board the concerns of potential 'losers' of trade and investment liberalisation during international negotiations. This has often resulted in exempted sectors, long phase-in periods, transition measures to permit structural adjustment, and so on. The failure of the political establishment in many developed economies to restrict the impact of mobilisers on public opinion largely results, not from a so-called 'democratic deficit', but from insufficient or ineffective communication on the substance, process, and likely impacts of further trade and investment liberalisation agreements. Second, the intellectual failure of mainstream academic theory should be noted. The twin basic paradigms of economics and politics are found wanting as explanations of today's global economy, the behaviour of MNCs, and the nature of FDI. In economics, the traditional efficiency-based neoclassical paradigm (with its associated theory of comparative advantages and the overall country gains from free trade) is unsuitable for describing the goals and strategies of MNCs and the related FDI motivations and patterns. Despite the efforts of international business writers over the last 30 years to develop a modern theory of the MNC, most economists have been apparently unable to take on board this perspective, including a grounded analysis of MNC behaviour and the associated FDI (Rugman 1996). Consequently, many toplevel economists advise their national governments to use the GATT and WTO to achieve 'shallow' economic integration through tariff cuts, but in giving such advice, they have failed to address the 'deep' integration that could be achieved through FDI.

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Similarly, the mainstream political science focus on the nation-state is equally inappropriate to deal with the new reality of MNCs and FDI. Despite minor modifications to nation-state paradigms, such as incorporating sub-national units in decision making, there is only a limited buy-in to the alternative, non-mainstream international political economy viewpoint first popularised by Susan Strange (1988), which recognises the important role of MNCs in today's global economic and political system. As is the case with the economics profession, mainstream political science shows an important 'academic deficit' in the sense of being ill equipped to inform policy makers, the media, and the public at large properly on the significance of globalisation. Based on prejudice rather than evidence, the thinking of antiglobal mobilisers has therefore become more influential with governments in North America and Europe than the grounded work of academic scholars working on MNCs (see Ostry 1997). The issue here is one of process. There is an administrative heritage of ideas. Today's journalists and other professional communicators are poorly trained in economics, politics, and international business. Those few who have any training are usually victims of the paradigms of traditional economics and political science, which cannot accurately explain MNC behaviour and FDI. Business school graduates, who are now exposed to the new thinking on MNCs, usually have their professional occupation in business rather than the media. Professional intermediaries, such as management consultants, focus on their business or government clients rather than the media and the requirement of confidentiality of their work usually makes them poor advocates, as compared with the ill-informed, but ideologically driven mobilisers. Furthermore, the civil service in most cases cannot engage in a public debate with mobilisers, because the role of public servants is to support and inform ministers, not to enter the public forum. This joint institutional failure of politicians, academics, consultants, and civil servants to prepare a credible case in favour of globalisation and an MAI and to debate it publicly leaves the field open to mobilisers to shape public opinion. However, although the mobilisers can be credited partly with the delay of the Seattle Round of the WTO, the main substantive reason for its delay lies in the functioning of the U.S. institutions. More specifically, the U.S. Congress has the authority to pass trade laws, which explains the corresponding lack of presidential power to negotiate international trade and investment treaties. Bill Clinton's failure to obtain fast-track negotiating authority from Congress in his second term as president (for a free trade area of the Americas, but also for a future round of the WTO, and for the MAI) was likely the single most important reason for the WTO's delay. The mobilisers were then given the opportunity to step into the vacuum and capture the agenda. Multilateral trade and investment agreements are unlikely to succeed without the full commitment of the U.S. to champion them. This is demonstrated by the WTO process. All participating national governments face pressures from a variety of stakeholder groups, lobbying in favour of narrow interests. The full participation of the U.S. is vital to broker an international agreement, as it is still the only country powerful

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enough to pull along other countries rife with internal dissent and sectioned interests. Yet although Clinton pushed through NAFTA in 1993, he was subsequently unable to assemble a coalition to support any new free trade and investment liberalisation initiatives. The future of the WTO is undoubtedly linked to the success of President George W. Bush in November 2001 to obtain (fast track) trade negotiating authority for a new round, and for him to provide leadership in moving the trade liberalisation agenda forward once again.

The Multilateral Agreement on Investment Edward Graham (2000) has demonstrated the fallacy of the myth that antiglobal mobilisers defeated the MAI. Using careful analysis and insider information as a closely involved and well-informed expert on U.S. policy making on FDI, Graham concludes that the draft MAI was a very weak document. In fact, the investment liberalisation negotiated in the MAI was so weak that the U.S. business community stopped supporting it long before antiglobal stakeholders started to protest against it in Paris. There was also a lack of leadership by the U.S. government, as well as tepid support in the EU and eventually hostility to the MAI by the French government of Prime Minister Lionel Jospin, as he depended on left-wing green support in his political coalition (Rugman 1999; 2000a). Graham provides an objective discussion of environmental issues in trade and investment agreements. He has useful insights on the environmental provisions of NAFTA, especially the important initial Chapter 11 investor-state case on the gasoline additive methylcyclopentadienyl manganese tricarbonyl (MMT). It is important to note that Canada's Minister of the Environment, Sheila Copps, banned international trade and interprovincial trade in MMT, citing it as an environmental and health hazard. The producer of MMT, a U.S. company called Ethyl, used the Chapter 11 provisions to win a settlement from the Canadian government for denial of its business. The Canadian antiglobal mobilisers claimed that this case demonstrated the power of MNCs to overturn the environmental decisions of host country governments. The draft text of the MAI had a similar provision to NAFTA's Chapter 11, so the antiglobal mobilisers claimed that the MAI was a charter of rights for MNCs to overturn the sovereign domain of governments. They claimed that the MAI was a 'NAFTA on steroids'. In fact, far too much attention was given to the above case, which represented a purely technical application of Chapter 11 without any long-term policy relevance. Copps apparently ignored the advice of her senior civil servants in banning the trade in MMT. As soon as trade-related measures are introduced in Canada, NAFTA applies. Instead, she should have banned the production of MMT as an environmental hazard, an internal matter subject to Canadian laws. Several subsequent NAFTA Chapter 11 cases have been resolved on technical grounds with no loss of sovereignty to host nations in their environmental policies (see Soloway 2002).

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Perhaps the MMT case actually illustrates the absence of dialogue between genuine trade experts and antiglobal mobilisers. The latter used the MMT case as a lever to launch a broader attack on the MAI and on subsequent international trade and investment liberalisation initiatives at the WTO and G7 summits. Graham (2000) argues that, as a consequence, the technical NGOs specialised in environmental issues are now in an uncomfortable position. In his view, trade negotiators were open and willing to incorporate environmental concerns into the MAI, but the ideologically based opposition to it, orchestrated by mobilisers, has now closed the window for co-operation between technical NGOs and governments. It is therefore critical for technical NGOs to disassociate themselves formally from the mobilisers, in order to push forward a more sensible co-operative reformist agenda for the civil society.

The Future of the WTO The current, major triad-based trade disputes illustrate that the WTO is facing substantial problems. There are two underlying reasons for these problems. First, as already stated, the GATT/WTO is a technical body, lacking in political power and even political understanding. It has been successful for 54 years in dealing with the technical issues of a series of tariff cuts, but it is not equipped to deal with the new agenda of international trade and investment liberalisation. Tariff cuts have allowed shallow integration across many manufacturing sectors (but not in agriculture and textiles). Today's agenda, with major implications for MNCs engaged in FDI, is one of deep integration. Here, the issue is how to make domestic markets internationally contestable. This involves negotiating the role of government in society, a virtually impossible task to achieve for the WTO secretariat with its small staff of professionals in Geneva. The WTO is not designed to deal with nontrade and investment issues such as environmental regulations, labour standards, and human rights. These 'big issues' now only come onto its agenda as indirect, technical matters in trade disputes; they are better handled in different international forums, such as, for example, human rights at the United Nations, labour standards at the International Labour Organization, and environmental regulations at a new world environmental agency. These issues are well beyond the capacity of the WTO to address, let alone resolve. Second, the WTO faces problems resulting from its important mistake of giving standing to NGOs at the failed Seattle meeting of December 1999. For the WTO to succeed, it must work only with governments, as it was designed to do. This is what the GATT did. The members of the GATT/WTO are nations, not firms or NGOs. Each country's government negotiates on behalf of its businesses and NGOs. Throughout its existence, the GATT refused even to hear representatives from business groups, MNCs, or individuals.

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Giving a platform to technical NGOs as well as antiglobal mobilisers creates two problems. First, NGOs gain an unfair advantage of access to policy makers, compared to other stakeholders (such as MNCs), which are not given equivalent treatment. Second, given the presence of many antiglobal mobilisers among these NGOs, the legitimacy of the technical NGOs is undermined, and therefore also their capacity to influence negotiations and their outcomes. As the agent of multilateralism, the WTO has always been a small, technocratic body devoid of any real political power. It can obviously not address the agendas put forward by a wide variety of NGOs, especially the antiglobal agendas of mobilisers. Neither business groups nor NGOs should be present at meetings of the WTO. They should lobby their home governments and accept the results of government-to-government bargaining at the WTO. In the inward-looking U.S. presidential campaign of 2000, with major congressional elections also taking place, the U.S. was poised to turn its back on multilateralism and embrace economic isolation again, as it did in the 1930s with the Smoot-Hawley tariff. A trade war with the EU, over Domestic International Sales Corporation sanctions, coupled with the ongoing U.S. current account deficit with Japan (the other triad power) could have opened the doors for U.S. protectionism to emerge. The U.S. advocacy of free trade, and its advancement of national treatment for foreign investment, has always been fragile, with the executive branch office often at odds with the more protectionist Congress. The approval of NAFTA in October 1993 by the first Clinton administration was the last case of fast-track authority and, in retrospect, the end of U.S. leadership in trade liberalisation. The MAI failed at the OECD in Pans partly because of a lack of U.S. commitment. The Bush administration moved slowly in 2001 to obtain trade-negotiating authority and, two months after the terrorist attacks on 11 September 2001, asked Congress for fast-track authority. This was granted by a one-vote majority in the House of Representatives, a narrow margin, which may lead to future problems in the Congress for free trade measures. As the U.S. re-examines its place on the global stage, many antiglobal stakeholder groups, especially mobilisers, are attempting to take its place. Many of these groups, especially the environmental ones, are U.S. based and funded. Most of the others are from Canada and western Europe. They usually represent narrow interests in the rich countries. The antiglobal stakeholder groups' goals are fundamentally opposed to the economic interests of developing countries such as China. The mobilisers' attempts to slow down and even reverse achievements in multilateralism and free trade are hindering the economic development of emerging Asian, African, and eastern European countries. Their antiglobal activities, usually guided by simplistic equity considerations, ultimately do not serve the interests they purport to defend, namely the interests of poor or disadvantaged groups in society. Mobiliser activities, the latent lack of U.S. commitment to free trade, and the dissolution of the post-war consensus on the virtues of free trade may mean the end of globalisation. But globalisation, as portrayed by the mobilisers, was a myth anyway. The relative lack of deep integration at the multilateral level contributed substantially to the

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formation of regional trade and investment blocks, as has been demonstrated empirically (Rugman 2000a, ch. 6-8). The relevance of the above for small, open economies and developing countries is that market access to the large triad markets of the U.S., EU, and Japan is of paramount importance. But although the WTO can help with a new round, such access may need to be bargained for on a regional or bilateral basis, rather than multilaterally. This analysis suggests that two parameters critically determine the future options for further trade and investment liberalisation. The first is the choice between bilateral or regional and multilateral negotiations. The second is the choice between the pursuit of shallow or deeper integration. Here, it is clear that deep multilateral integration increases long-term wealth creation. Yet this option is at present not feasible because of various constraints mentioned above (structure of WTO, U.S. policy preferences, etc.). Another scenario is of shallow, regional integration. Fortunately, the history of the EU demonstrates that this may be just a stepping stone toward fuller integration. The EU started in 1958 and has been characterised by a continuous deepening (e.g., the 1992 Single Market Program and the more recent European Monetary Union, although not including all member states). The recent thinking about expanding NAFTA into the Free Trade Agreement of the Americas (FTAA) by 2005 would similarly constitute an important shift toward regional deepening. The FTAA would be seen as an intermediary situation between conventional regionalism with a limited geographic scope and full and deep multilateralism. These two examples suggest that both shallow regionalism and regionalism with a narrow geographic scope may be a step toward a situation of deep multilateral integration. However, these examples also demonstrate the perverse effects of mobilisers on the evolution of trade and investment liberalisation. Poor countries and groups always benefit more from multilateral agreements than from regional ones. They cannot be shut out from the former, while individual nations such as the U.S. always have less power in multilateral than in regional cases, because of the number of countries involved. The strengthening, not the weakening, of mainstream global institutions such as the WTO, so despised by the mobilisers, may well represent the fastest route for poorer countries to achieve fundamentally higher living standards for their population. In contrast, if NGOs are successful is derailing multilateralism, then poor countries will remain poor.

Multinationals and External Stakeholders How should MNC managers respond to the presence of external stakeholders in international trade and investment negotiations? Three suggestions can be offered. First, the activities of external stakeholders should be discussed at the level of the board of directors and top management, and an overall strategy should be developed to deal with those activities. It is important here to distiguish between technical NGOs

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and antiglobal mobilisers. Initiatives should be developed to work with the former. Clear arguments should be developed to counter the discourse of the mobilisers appropriately. This should be combined with an effective communication strategy to reach relevant audiences. Second, sustainable development and ethical stakeholder perspectives should be embedded within the organisation. More importance should be attached to social values and these should influence the inner workings of the organisation. Third, the firm should not engage in a debate with mobilisers (or even with technical NGOs) through a small set of public relations people; instead, all senior managers should be trained to articulate the concept of stakeholder capitalism, rather than shareholder capitalism, and the contribution of the organisation to the resulting wealth creation. In other words, all senior managers in the firm should engage with NGOs; then the debate would be more even handed. As a result of such initiatives, some firms will experience a dramatic improvement of their political strategy results and their economic performance. The firms that will do best in near future will likely be those that take leadership positions with respect to stakeholder management, capture the concept of values-driven capitalism rather than profit-driven capitalism, and respect their most important resource, namely their employees. These are likely to be the most effective tools that can be deployed at the microeconomic level to defend against the actions of ideologically driven mobilisers. There is an outdated perspective on MNCs, paradoxically adopted by most mobilisers. They view MNCs as profit maximisers that will systematically refuse a constructive dialogue with any stakeholder representing civil society. An equally outdated response now being rejected by most large MNCs is that management has a shareholder perspective and its differential response is usually a public relations exercise whereby an MNC pays lip service to the goals of 'friendly' stakeholders but in fact is not serious about stakeholder management. This behaviour is typical for Enron-type companies. In fact, many MNCs now pursue a stakeholder management model, perhaps driven by environmental considerations, by which they try to identify those salient stakeholders that can contribute to a win-win situation for the firm and society at large (see Rugman and Verbeke 1998). These firms face the challenge of distinguishing between destructive mobilisers and benevolent, technical NGOs. The main danger for these firms is to fall in a trap whereby their stakeholder management approach can be abused by mobilisers because the firm has not set up proper screening mechanisms to distinguish legitimate stakeholder demands from those that are not, as experienced by many companies operating in developing countries that are unfairly accused of unethical behaviour, such as Shell in Nigeria. Here, civil society should itself strongly react to the dishonest and unfair treatment given to MNCs by the most radical, ideologically driven mobilisers and should give a clear message that such groups reduce the credibility of civil society, as perceived by MNCs and mainstream government institutions.

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Conclusion The viewpoints of MNCs and NGOs toward globalisation and the WTO have been analysed in this chapter. There is no single viewpoint for business, nor is there one for civil society; there are different types of MNCs and NGOs. The analysis here shows that the basic business viewpoint of the WTO differs from that of civil society. Most large, triad-based MNCs know that trade and investment liberalisation will improve their microeconomic efficiency. However, the losers of free trade and investment — a variety of stakeholders related to inefficient incumbents facing increased foreign competition — are usually well informed about the process but view its outcomes as unfair. Civil society can largely be segmented into NGO mobilisers or technical NGOs. This type of analysis, which aims to identify the value judgements about process and outcomes underlying the different perspectives on the WTO, is intended to move the debate on globalisation forward. It is necessary to deepen understanding of the triad-based process of international business, the technical role of the WTO, and the divisions within civil society. Full free trade and investment liberalisation have not yet been achieved due to the vested interests and misperceptions of some components of civil society and affected stakeholders. These misperceptions must be recognised and corrected as a precondition to achieving an overarching increase in world welfare and incomes.

Note 1 Helpful comments have been received from Cecilia Brain and Karl Moore.

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Khan, Shahrukh Rafi (2002). Do W orld Bank and IMF Policies W ork? Macmillan, London. Lawrence, Robert Z. (1998). 'The Challenge of Deeper International Integration: U.S. Trade Policy Options'. In G. Feketekuty and B. Stokes, eds., Trade Strategies for a New Era: Ensuring U.S. Leadership in a Global Economy. Council on Foreign Relations, New York. Liebler, Susan (1994). 'The Politics of NAFTA'. In A. M. Rugman, ed., Foreign Investment and NA FTA , pp. 27-46. University of South Carolina Press, Columbia, SC. Ostry, Sylvia (1997). The Post–Cold W ar Trading System: W ho's on First? University of Chicago Press, Chicago. Ostry, Sylvia (2001). 'The Multilateral Trading System'. In A. M. Rugman and T. Brewer, eds., The Oxford Handbook of International Business, pp. 232-258. Oxford University Press, Oxford. Preeg, Ernest H. (1998). 'From Here to Free Trade: The Quest for a Multilateral/Regional Synthesis'. In G. Feketekuty and B. Stokes, eds., Trade Strategies fora New Era: Ensuring U.S. Leadership in a Global Economy. Council on Foreign Relations, New York. Rugman, Alan M. (1996). Multinational Enterprises and Trade Policy. Elgar, Cheltenham. Rugman, Alan M. (1999). 'Negotiating Mullilateral Rules to Promote Investment'. In M. Hodges, J. J. Kirton and J. P. Daniels, eds., The G8's Role in the New Millennium, pp. 143-158. Ashgate, Aldershot. Rugman, Alan M. (2000a). The End of Globalization. Random House, London. Rugman, Alan M. (2000b). 'From Globalization to Regionalism: The Foreign Direct Investment Dimension of International Finance'. In K. Kaiser, J. J. Kirton and J. P. Daniels, eds., Shaping a New International Financial System: Challenges of Governance in a Globalizing W orld, pp. 203-220. Ashgate, Aldershot. Rugman, Alan M. (2001). 'The World Trade Organization and the International Political Economy'. In A. M. Rugman and G. Boyd, eds., The W orld Trade Organization in the New Global Economy, pp. 1-22. Elgar, Cheltenham. Rugman, Alan M. and Alain Verbeke (1998). 'Corporate Strategies and Environmental Regulations: An Organizing Framework'. Strategic Management Journal vol. 19, no. 4, pp. 363-376. Rugman, Alan M., John J. Kirton, and Julie A. Soloway (1999). Environmental Regulations and Corporate Strategy: A NA FTA Perspective. Oxford University Press, Oxford. Sampson, Gary P., ed. (2001). The Role of the W orld Trade Organization in Global Governance. United Nations University Press, Tokyo. Soloway, Julie A. (2002). 'Expropriation under NAFTA Chapter 11: The Phantom Menace'. In J. J. Kirton and V. Maclaren, eds., Linking Trade, Environment, and Social Cohesion: NA FTA Experiences, Global Challenges, pp. 131-144. Ashgate, Aldershot. Stokes, Bruce (1998). 'A Geo-economic Strategy for the 21st Century'. In G. Feketekuty and B. Stokes, eds., Trade Strategies for a New Era: Ensuring U.S. Leadership in a Global Economy. Council on Foreign Relations, New York. Strange, Susan (1988). States and Markets: A n Introduction to International Political Economy. Pinter, London.

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Chapter 6

Globalisation , Growth , and Health: The Private Sector Perspective Paolo Savona and Chiara Oldani

The key words in this chapter are responsibility and co-operation, based on the main assumption of freedom. It is an assumption because economic and social freedom cannot be discussed, only implemented. At present, the world is seeing the third phase of capitalism, characterised by the creation of a system of responsibilities and co-operation. The other two phases were the creation of a system of individual freedom (mainly during the nineteenth century) and of a system of collective guarantees, usually called welfare (developed after the Great Depression of the twentieth century). Free-market economies defeated centrally planned systems by means of welfare. The main difference between the two economic systems is that welfare has been able to provide social protection without greatly limiting individual freedom. But welfare proved to have some major drawbacks: the lessening of individual responsibility, the crowding out of private initiative, moral hazard, and corruption. Friedrich von Hayek (1944) pointed out these drawbacks, calling welfare a 'road to serfdom'. This chapter focusses only on the first drawback, the lessening of individual responsibility, with less emphasis on corruption. During the nineteenth century, new economic initiatives led to entrepreneurial freedom. Scientific developments were tools of major importance in this process of growth for European countries and the United States. Keynesian policies and public foreign aid were the typical instruments of the welfare system during the twentieth century. The reaction of public opinion and politics against the distortion created by such policies in the last part of the century (without analysing what causes what) was to shift responsibility from the public to the private sector or — alternatively — from the state to the free market. The 'new era' started with Margaret Thatcher in Britain and was reinforced by Ronald Reagan in the United States. More market and less state encouraged an expansion of the dimensions of the market, thus widening national borders and sometimes breaking through them. The developments in information and communications technology (ICT) made possible the birth of a virtual global market, the dream of any economist who views the market as a network of information through which resources are allocated optimally. The combined result was the start of the globalisation process. This process operates so fast that the old rules of the game rapidly become obsolete. World-wide business is now developing mainly in a vacuum of fair rules. Examples of

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this vacuum can be found in the labour and financial markets, just to mention the most obvious. Many developing countries have no significant social protections in their labour markets, thus creating incentives for social dumping in international competition and pressures on developed countries to reduce their level of welfare to be able to compete globally. In financial markets the assets of weak countries are easily attacked by speculation, with severe consequences for real growth and savings. This political vacuum must be filled in order to protect freedom and welfare in global competition, and to prevent globalisation from weakening democracies, as has been happening in the very last years of the twentieth century and the beginning of the twenty-first century. The succession of crises, mainly financial, in many countries of the world, most recently having affected an entire area (Argentina, Brazil, and Venezuela), confirms the need for stronger international co-operation. This must necessarily come through strengthening the role of G7/8 summits — which started during the severe oil crisis of the 1970s, and which have moved from being a centre of consultation to a global decision centre.

The Environment Created by the New Economy and by Globalisation The most evident expression of ICT development is the new internet economy, characterised by a continuous flow of information available to everybody in industrialised countries. The new economy has given birth to a world-wide information network that steers economic behaviour. The market as 'physical space' (the agora or square) still plays an important role. But it is gradually losing ground and relevance for many types of choices. The new economy allows choices to be made on a global level. It leads to the intensification of trade among countries and the location of production in those countries that, for historical reasons, have had neither the strength nor occasion to implement strong welfare states. Even if globalisation and internet-economy processes began only in the last decade of the twentieth century, statistics now show that foreign trade in goods and services is growing everywhere (that is, not only in developed countries) at a faster rate than domestic production. Foreign direct investment (FDI) is growing more than six times faster than foreign trade (at a rate of 3.32 compared to 0.58 during the period 1992-2001 — see Table 6.1). The result is a widening of supply creating its own demand; this is a revaluation, at least in part, of what economists call Say's Law. The drop in foreign trade and direct investment in 2001 testifies to another characteristic of globalisation: the speed of diffusion of cyclical movements at the world level and the close, direct correlation between foreign trade and investments. The process of globalisation still takes place at the incentive of developed countries, leading to some reactions on a social level — and both at home where social groups

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accuse investors of acting to the detriment of the national labour force as well as in the countries that benefit from their investments — and that accuse the developed countries of economic 'imperialism' or 'neo-colonialism' (cf. Hardt and Negri 2000). The fact that the economy responds only to a hedonistic impulse, originating in this case from operators in developed countries, only confirms the famous principle that caused Adam Smith (1776) in his W ealth of Nations to declare that it is necessary to rely not on the shopkeeper's unselfishness to have daily access to needed goods but on the shopkeeper's selfishness. As early as the seventeenth century, the Dutch writer Bernard Mandeville (1714), and even before him, the Florentine Poggio Bracciolini (1429), like many others before and since, argued that capitalism transforms private vices, or selfishness, into public virtues, that is, into greater economic and social well-being).1 The alternative to the growth model of developed countries and to the benefits that it generates in developing countries on the basis of a global virtual market economy is, for the former, a return to Keynesian policies and, for the latter, the resumption of development aid. In fact, these two policies shaped the world's development model after World War II, leading to production successes as well as welfare waste and electoral abuses in the industrialised countries; these led in turn to inflation and a drop in the growth rate, in addition to resounding failures in the underdeveloped countries and, not infrequently, support for dictatorial regimes violating most civil rights. By this record, neither the utility of Keynesian policies, as recently carried out by the Bush administration in the U.S., nor the utility of foreign aid, as revived by the G8, need be denied. Keynesian policies represent a useful supplement to spontaneous market trends in the event of their failure, for whatever reason, to function perfectly. This was true in the last world recession caused by the joint effect of excessive expectations from the new economy (the 'irrational exuberance' of share prices) and the subsequent 'wealth effect' on consumption. Table 6.1 World-wide Trade Billions of US$ Year A. Goods B. Services C. Foreign direct investment [C/(A+B)]% Period 1992-2001 C. Rate of Growth A+B. Rate of Growth Sources:

1992 3.781 942 176 3.73%

1995 5.035 1.225 331 5.29%

2000 6.252 1.492 1.271 16.41%

2001 5.985 1.480 760 10.18%

3.32 0.58

International Monetary Fund for goods and services; United Nations Conference on Trade and Development for foreign direct investment.

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Foreign aid to poor countries does not seem to be the most suitable tool for directing production systems toward widespread stable growth models because those systems do not remove either the physical and cultural constraints to development or the political impediments typical of these countries. Globalisation is a new de facto institutional framework that seems to offer more profitable opportunities for countries that intend to respect civil rights and the rules of free trade, to reject (or to accept a modest degree) of state aid, and to base their choices on democratic consensus. Individual and entrepreneurial freedom can thus be a source of growth, together with national and international co-operation.

Reflections on Foreign (or Development) Aid Policy There is growing pressure on the G8 to reinforce the aid policy instrument of government intervention. Many aid policies of the past were presented as development aid, but were in fact a mix of Keynesian policies and pure assistance to poor countries with a very low level of supply effects on growth and a transitory impact on demand. Foreign aid is an instrument useful for dealing with specific serious problems that hinder raising the level of culture and material well-being of the peoples of this planet: famine, disease, natural disasters, illiteracy — the basis for any economic development process. The policies chosen by some international organisations such as the World Bank and the International Monetary Fund (IMF) were not originally intended to help lift the basic well-being of poor countries; the World Bank is charged with helping to finance basic infrastructure projects for economic development (water, energy, transport, and telecommunications), while the IMF is responsible for helping poor countries deal with founded or unfounded speculative financial attacks on their currencies. These two tasks are very important with respect to the growth process of developing countries, but have led to some major drawbacks, such as inducing moral hazard in financial markets and waste in public spending. The goal of these policies is correct, but sometimes the means of implementing them have been ineffective in the long run. Other institutions, such as the Food and Agriculture Organization (FAO), the World Trade Organization (WTO), and the United Nations, have some specific or general tasks. However, because responsibility for the status quo lies with the individual states, existing institutional constraints and bureaucratic resistance within the organisations themselves have meant that criticism — both from national authorities and from their own workers — of development aid programming has failed to stimulate the necessary changes being implemented in their policies. Institutional constraints together with short-run aid policies and related criticisms have created the need to change the way international institutions behave in the global market. Aid policies are no longer enough to induce growth.

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The problem posed by aid policies is clearly explained by the World Bank: 'Recent cross-country evidence has shown that foreign aid has a strong, positive effect on a country's econoinic performance if the country has undertaken certain policy and structural reforms. But the evidence also shows that countries with good policies receive less assistance than countries with poor or mediocre policies. The juxtaposition of these two findings has led to the assertion that "aid cannot buy reform"' (World Bank 2001). The only possible criticism of this diagnosis is that it is necessary to limit the goals of foreign aid to the creation of living conditions to reflect the advances made by modern society in line with the spontaneous impulses of the global market, and not with the ambitions and constraints laid down by local government groups. The two requirements often coincide: in some developing African and Asian countries the toll taken by disease has reduced the average working life to ten years, thus having a negative impact on productivity and economic growth. Human capital represents the base of the new economy. Without solving this problem (that is, a structural break), the growth impact of infrastructural development is quite inodest. International organisations and G8 countries should place this problem at the top of their agenda in the near future.2 The great epidemics of the new century from HIV/ AIDS to Severe Acute Respiratory Syndrome (SARS) could render aid policies to developing countries fruitless; the disappearance of an entire generation in African and Asian countries will result in a permanent break in the aid systein and increase international tensions (cf. 'Reason Prevails: South Africa and AIDS' 2002). The intergenerational growth models suggest the existence of overlapping generations, and the structural break caused by the AIDS epideinic could make these models inapplicable (Diamond 1965; Romer 1996).

A Unique Brand of Foreign Aid: Cancelling Foreign Indebtedness of Poor Countries In recent years, there has been increasing pressure on policy makers to cancel the debts of poor countries. The sustainability of foreign indebtedness of highly indebted poor countries (HIPCs) cannot be fulfilled if the population continues to decline. In formal terms, in order for indebtedness to be sustainable, the 'No Ponzi Game Condition' must take place. 3 That is: g>r+b

(1)

where g = growth rate of the gross domestic product (GDP), r = debt service rate, and b = debt growth rate, and all are nominal values. In other words, indebted countries have some chance of seeing their condition improved if their economies grow faster than the debt they incur in order to sustain growth.

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The results of the calculation of the No Ponzi Game Condition for sub-Saharan Africa and Southeast Asia using current data are far from encouraging. Even today these areas fail to comply with conditions of stability and reliability (see Table 6.2). The weight of debt of developing countries is incompatible with growth and impedes further relief for those populations. International aid does not suffice even to pay the debt service and short-term debt, meaning that there are few prospects for stopping debt growth. The HIPC debt relief proposal widely supported by nongovernmental organisations (NGOs) can be used to induce developing countries to introduce fair rules by linking debt relief to regulated improvements in market conditions within the eligible countries. This programme can only provide a solution if it spurs efficiency and local improvement; otherwise it merely assuages the guilt of developed countries. This is what could be called 'true' international co-operation. Table 6.2 No Ponzi Game Condition Calculation for Sub-Saharan Africa and Southeast Asia

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Real future growth is threatened by the AIDS epidemic. Although the World Bank and the IMF study the No Ponzi Game Condition and other formal requirements before granting financing, they do not seem to have fully considered the future impact of the generational break caused by this epidemic on the stability and growth of countries. The most recent data, available for 2001, show that 28.1 inillion individuals, equal to 70.25% of those sick world-wide, are located in sub-Saharan Africa, and that a further 6.1 million, or 15.25%, are located in Southeast Asia (World Bank 2002). The population growth condition in the inodels will be therefore borne by the next generation, which will be unable to guarantee either the debt service or the rollover. The estimated birth rate in sub-Saharan Africa is 15.6 million (between 1999 and 2000), of whom 800 000 (nearly 6%) contract HIV at birth; for Southeast Asia, the birth rate is estimated at 100 million (between 1999 and 2000), of whom 3.4 million (3.4%) contract the virus at birth. The epidemic growth rate is extremely high and still mainly affects newborns and the working-age population.4 The globalisation process could therefore come to a standstill in these two areas of the world. Capital accuinulation, both private and public, could slow due to the increase of current health expenditure and the reduction in the schooling rate of a part of the population (mainly women and the young) (UNAIDS 2001). According to World Bank research on globalisation, inany countries in these areas belong to the 'globalised' country category. In fact, the World Bank states that the degree of globalisation of a country is produced and measured by the increase in foreign trade and the reduction of import/export tariff rates (see Table 6.3). Although the increase in the degree of globalisation should lead to growth in the economy, this direct link does not always take place because of the debt constraint and cost slow down that is not considered in the 'official' indicators of globalisation. 5 The data show that since the beginning of the epideinics, especially in the Asian countries affected by the afterinath of the financial crisis after 1997, capital accuinulation has undergone a slowdown in real terms (see Table 6.4). Aid to developing countries fell from US$42 billion in 1999 to US$38 billion in 2001. This negative trend provides further confirmation of the limited effects of the application of an aid policy where the rules of the game are neither homogeneous nor fair. The decline in the amount of aid granted combines with the reduction in the GDP growth rate to slow down the accumulation of capital in real terms. The decision to modify aid policies must be analysed together with trade and industrial agreements, at the WTO, intended to increase the degree of globalisation and therefore to lead to growth using a different formula than the simple Keynesian one. The globalisation phenoinenon may have modified the transmission mechanism, rendering the trade-growth link less iminediate, given the impact on affluence of other variables such as debt, social and political stability, and the growth of the working population. However, any investigation of the mechanism responsible for growth requires a consideration of the endogenous and exogenous factors determining it.

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A Cause of Slow Growth Developing countries face protectionism from developed ones. 'Rich countries spend almost a billion dollars a day on domestic farm subsidies', says the Économist (' Of Celebrities, Charities, and Trade' 2002). This makes it impossible for developing countries to fight on equal terms in trade markets. International organisations pay attention to the domestic production of developing countries and how to improve it, but trade is a game with two players, the buyer and seller. If the (rich) buyer is not willing to face the free market, the (poor) seller has no way of winning or of even attempting to fight. The rich seller already has domestic market shares and can use marketing strategies and quality improvements to maintain or increase them, without any co-operation with developing countries. The poor seller Table 6.3 Post-1980 Globalisers Based on increases in trade volumes • Argentina • Bangladesh • Brazil • China • Colombia • Costa Rica • Dominican Republic • Haiti • Hungary • India • Ivory Coast • Jamaica • Jordan • Malaysia • Mali • Mexico • Nepal • Nicaragua • Paraguay • Philippines • Rwanda • Thailand • Uruguay • Zimbabwe

Source:

Dollar and Kraay 2002.

Based on reductions in tariff • Argentina • Bangladesh • Benin • Brazil • Burkina Faso • Cameroon • Central African Republic • China • Colombia • Dominican Republic • Ecuador • Egypt • Ethiopia • India • Indonesia • Kenya • Nicaragua • Pakistan • Peru • Thailand • Uganda • Uruguay • Venezuela • Zambia

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has, on the contrary, small domestic markets and fewer opportunities to gain foreign markets shares mainly because of tariffs. Today, international trade is thus characterised by low co-operation and high protectionism. The counter-argument used by rich countries is that protectionism buys social and economic order at home. Although this might have once held true both for Europe and the U.S., and for Japan, in particular, given its closeness to American and European imports, this argument is no longer sustainable.6 The failure of important industrial firms (such as Enron and Worldcom) and the consequences send a strong signal that even the most liberalised and protectionist Table 6.4 Capital Accumulation Aid per capita (U.S. dollars) Sub-Saharan Africa Southeast Asia

1996 27.8 4.1

2000 20.4 3.1

1999 20.6 3.2

Aid as % of Gross National Income 1999 4.1 0.7

1994 7.2 l.6

Sub-Saharan Africa Southeast Asia Gross Capital Formation (% of GDP) 1996 17.5 21.8

1999 17.4 23

2000 17.2 22.9

Export of Goods and Services (% GDP) 1995 Sub-Saharan Africa 28.5 Southeast Asia 12.4

1998 28.2 13.3

1999 28.5 15.1

Import of Goods and Services (% GDP) 1995 Sub-Saharan Africa 30.1 Southeast Asia 17.2

1998 31.7 17

1999 31.l 18.3

Sub-Saharan Africa Southeast Asia

Net Official Aid to Developing Countries (U.S. dollars in billions) 1998 1999 2000 40 42 40 Source:

World Development Indicators and OECD.

2001 38

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country needs certain rules that are not compatible with domestic oligopoly (in accounting, energy, telecommunications, or anywhere else).7 The same holds true for Europe, where farming protectionism is determined by the European Union, and in Japan, where banking and financial industries face no international competition. The third route to growth for developed and developing countries is to give up economic nationalism and introduce new homogeneous rules for all by means of co-operation. The military power of rich countries represents a major stumbling block (a new Berlin Wall) to such co-operation. It will probably make its implementation impossible, but economists, not being politicians, will always provide formulas.8 A very recent example of the new Berlin Wall is the U.S. refusal to lower trade tariffs on African countries' products, as stated by President George W. Bush at the 2002 G8 Kananaskis Summit. It adds weight to the traditional protection guarantees of the EU for agriculture and farming. The positive effects of lowering U.S., European, and Japanese import tariffs could be twofold: a reduction in expenditure for domestic households (lowering taxes and prices of goods) and the chance for developing countries to increase production at home. The farm industry in developed countries would not be destroyed by international competition because it has the means to improve quality and productivity, being a mature industry with all the necessary management skills and technologies. However, international improvement can come about only if homogeneous rules are established by means of co-operation. This is not the same as exporting regulations and rules from rich countries into poor countries. The private sector would become far wealthier overall by letting developing countries grow without a simple Keynesian recipe. The first step toward this process, which is a rather long one, is to create stability world-wide. Markets need regulation to be safe, liquid, and efficient. 9 The labour market has to be universally fair and equal, and trade should be fair in order to bring about growth. These three conditions go together with stability and regulated market conditions, but must be established by all market players (both strong and weak) — in other words, according to a new concept of co-operation. The history of the last two centuries has not been an example of co-operation, but of helping poor countries and imposing rules on them and giving them funds, without fully monitoring the use of those funds. This is a one-way process that has come to an end. The economic sovereignty of the private business sectors of developed countries must be made legitimate by compliance with a common set of 'supranational' rules and not simply by observance of the status quo. Here again, co-operation is the main channel through which the third phase of capitalism can occur and be a source of improvement.

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The Private Sector's Views on Globalisation There are two conflicting private sector views of globalisation. The first is the attempt to go back to 'old days', the days of laissez-faire. The second is the attempt to go beyond welfare, avoiding the undesirable outcomes. The attempt to go back to a laissez-faire political system means that the followers of this approach have not understood the lesson of history, that is, the history of Marxism-Leninism and the social reactions to it. The reform of welfare is the right approach to protect free markets, given the current global social and economic environment. Obviously, this means welfare with less state and more market, but born out of the old and new unresolved problems. Among those old problems are the lessening of individual responsibility and corruption (given that crowding out and moral hazard have already been addressed politically, although not yet in the way needed). Among the new problems, it is necessary to ask: • What are the rules of the game for the global market, and who is in charge of fixing them and making them work? • Who can take care of people (or countries) who are not capable of riding the train of global development for reasons of health and wealth, and how?

Who Fixes the Rules of the Global Market and Who Takes Care of Poverty The private sector is not responsible for solving the new problem of fixing the rules of the global economic and social game, even if it has to perform the important role of rationally managing the world's resources and avoiding corruption. Economists have thought that rational management of the world's resources require the proper functioning of production-factor markets (capital and labour) and markets of goods and services; this is possible if the various forms of corruption (from public and private monopolies to bribery) are absent. The fight against corruption is not only a moral requirement but also a precise need of the global market to guarantee the best use of resources and freedom. Most of the responsibility for covering the lack of regulations in the global market falls on the shoulders of public authorities. But they face severe consequences from globalisation — that is, from the weakening of their sovereignty. In today's world the direction of democratic causality has been reversed: governments are asking private firms (such as the credit-rating agencies of Moody's and Standard & Poor) to be judged on their policies and budgets instead of giving them a rating. The business of rating is not to be disregarded. But one must beware of the political vacuum in the global market that should also be the basis for the private rating businesses.

1 10

Sustaining Global Growth and Development

If countries have to accept, as they should, some limitations on their economic sovereignty in exchange for the opportunity offered by globalisation, a solution is needed to ensure against the loss of freedom. 10 One possible solution is extensive use of international organisations (such as the WTO, the IMF, the UN, the FAO, and the newly established African Union) and institutions (such as the G8 and other G-groups) to cover the gap with precise limits on their activities: they should help countries to prepare and negotiate international agreements, without being responsible for enforcing them or monitoring compliance with them. Many of these organisations add to market forces in diluting national sovereignty. The proper role of international organisations and institutions is not to plunder nations' residual sovereignty but to recover some shares of it from the market on behalf of national authorities. Among these institutions, only the WTO and the G8 perform in such a way. In the European Union, the member countries are being pressured to give more power and jurisdiction to the EU, under the assumption — which remains to be demonstrated — that the EU is capable of solving problems related to global market developments. The G8 remains the principal source of global governance without having any power to enforce the agreed rules beyond the normal pressures exercised by the foreign policies of the leading countries. This is, for better or worse, in the nature of international relations.

Possible Ways for the Authorities to Sustain Global Growth Let us return to the two instruments of welfare: Keynesian policies and foreign aid. Such tools can be used for sustaining global growth, but they should be implemented under certain conditions. First, they should be used for specific purposes: Keynesian policies to stabilise economic performance and not to trend up employment (despite the expectations of a large group of economists in the post-war period), and official foreign aid to deal with environmental, social, and health disasters, such as drought, famine, and HIV/AIDS. Second, Keynesian policies should be formulated after consultation with the appropriate international organisations (for example, the IMF for monetary matters, the WTO for trade, the UN for social affairs). Official aid should never be given to national governments, even if they are serious and credible, but to supranational authorities, such as the Red Cross, which should demonstrate the capability to manage it independently and rationally. But, above all, the real and most powerful instrument for sustaining world growth appears to be co-operation among countries. Economists are divided on the best approach to international economic relations, between complete free initiative and strong co-operative competition. One must

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remember that the word 'competition' coines from the Latin cum petere, which means to collaborate for a common goal. The common goal is to sustain growth. Consider the choice between co-operation and non-cooperation in the prisoner's dilemma. In the global context, co-operation is the open-market regime and non-cooperation is protected markets. The co-operative solution offers the best payoff for all players in the game and the probability of success should be higher than that of pure competition (meaning non-cooperation). The co-operative solution does not emerge because governments protect domestic industries and rely on official aid as a substitute for it. Keeping domestic barriers (and hence international tariffs) and inducing growth in developing countries by means of aid programmes is the result of an 'old' strategy for development. It is not compatible with globalisation, that is, the process of opening markets that implies co-operative policies. It is easy to argue that global co-operation is better than going it alone and fighting against all other players not competing fairly but through any form of open or shadow protectionism. However, in economics there is still a suspicion that co-operation means that the biggest eat the smallest, or that one must accept the leadership of one or a few countries, and predetermine the division of the 'world pie'. This view is based on the hypothesis that the pie cannot be enlarged, whereas co-operation has the opposite goal: to make the pie bigger and let everybody come to the party.

Summary and Conclusion A new capitalism is emerging, one in which co-operation may be more feasible than in the past. To reach this goal, new rules for global governance are needed to cover the political vacuum of globalisation, which hinders the necessary consensus on the new economic system and creates some problems for the functioning of democracies. Financial markets are the most exposed to serious crises, and labour markets to unpopularity. The public sector's contribution toward sustaining global growth is not limited to establishing new rules for global competition; it should implement economic policies to counter the cycle of business and poverty. Keynesian policies and foreign aid are still useful to reach specific goals: stabilising global market behaviour and helping less developed countries to face specific problems, such as environmental and health disasters, and not enforcing growth and employment from the outside, leaving things as they are and protecting the status quo without looking for an improvement. The process of increasing trade and growth rates is influenced by other important variables, namely epidemics and the social and economic order, which could modify the transmission mechanism of the development process; co-operation can help in making this process work better over time. Co-operation means opening up frontiers and lowering

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tariffs, as well as inducing efficiency and control in developing countries by means of new forms of foreign aid, and not simply cancelling foreign debts and funding local governments. The private sector's contribution toward sustaining global growth is instead limited to two tasks: to use world resources rationally and to avoid corruption — that is, to guarantee the best performance of the global market and to obtain and give the best contribution to growth. With globalisation, all should fight under the same flag toward more freedom, more responsibility, and more co-operation. Freedom does not mean no rules, but better rules. In such a task, the goal of intellectuals is to find a more balanced solution between the welfare content of globalisation and its drawbacks. The task of intellectuals is not to carry the train of the king's cloak, but to keep the lantern in front of him to light the way.

Notes 1 These events have been narrated by many authors, but one of the most apt descriptions was given by Lionel Robbins in his lectures published posthumously (Medema and Samuels 1998). 2 The Doha development agenda addresses the direct influence of intellectual property rights on healthcare spending of developing countries. 3 This transversality condition is explained in detail by David Romer (1996) and Olivier Blanchard and Stanley Fischer (1992). 4 UNAIDS (2001) provides a wider analysis of this phenomenon. 5 In fact, Asian and African countries that have lowered tariffs and increased foreign trade have experienced extremely low growth rates and declining trends in the last five-year period. 6 An example of the effects of agricultural protectionism is the increase in prices of fresh vegetables experienced by European countries during the winter of 2001 and the spring of 2002, which increased inflation — which can be considered an unfair tax for consumers; another example is the decision of President George W. Bush to sustain U.S. farmers and producers by increasing tariffs. 7 The heaviest consequences of the Enron failure have been paid by its 27 000 employees, who have been left with no pension fund, as it was invested in Enron shares, and by the stock market investors in the United States. Worldcom, Tyco, and others are similar examples that create doubts about U.S. accounting and monitoring systems. 8 For example, the WTO agreements, influenced by the U.S., do not avoid international protectionism, so that it is possible to reply to local dumping with increased international tariffs; it would be more efficient for the WTO to impose no local dumping instead. 9 See Paolo Savona, Aurelio Maccario, and Chiara Oldani (2000) and Paolo Savona (2002) on the need for world financial stability and on the treatment of financial innovations in monetary analysis and policy. 10 See Carlo Pelanda and Paolo Savona (2001) for an analysis of the power vacuum that has a negative impact on growth.

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References Blanchard, Olivier and Stanley Fischer (1992). Lectures on Macroeconomics. MIT Press, Cambridge, MA. Bracciolini, Poggio (1429). De A varicia. Florence. Diamond, Peter A. (1965). 'National Debt in a Neoclassical Growth Model' . A merican Economic Review vol. 55 (December), pp. 1126-1150. Dollar, David and Aart Kraay (2002). 'Trade, Growth, and Poverty'. World Bank. (January 2003). Hardt, Michael and Antonio Negri (2000). Empire. Harvard University Press, Cambridge, MA. Hayek, Friedrich A. von (1944). The Road to Serfdom. University of Chicago Press, Chicago. Mandeville, Bernard (1714). The Fable of the Bees; or, Private Vices, Publick Benefits. J. Tonson, London. Medema, Steven and Warren Samuels (1998). A History of Economic Thought. Princeton University Press, Princeton. 'Of Celebrities, Charities, and Trade'. (2002). Economist, 1 June, p. 74. Pelanda, Carlo and Paolo Savona (2001). Sovranita e ricchezza — come riempire it vuoto della globalizzazione. Sperling and Kupfer, Milan. 'Reason Prevails: South Africa and AIDS'. (2002). Economist, 27 April. Romer, David (1996). A dvanced Macroeconomics. McGraw Hill, New York. Savona, Paolo (2002). 'On Some Unresolved Problems of Monetary Theory and Policy'. In M. Fratianni, P. Savona and J. J. Kirton, eds., Governing Global Finance: New Challenges, G7 and IMF Contributions, pp. 177-183. Ashgate, Aldershot. Savona, Paolo, Aurelio Maccario, and Chiara Oldani (2000). 'On Monetary Analysis of Derivatives'. In P. Savona, ed., The New A rchitecture of the International Monetary System, pp. 149-175. Kluwer Academic Publishers, Boston. Smith, Adam (1776). A n Enquiry into the Nature and Causes of the W ealth of Nations. Strahan and Cadell, Edinburgh. UNAIDS (2001). 'AIDS Epidemic Update — December 2001'. (January 2003). World Bank (2001). 'Aid and Reform in Africa: Lessons from Ten Case Studies'. Released 27 March. (January 2003). World Bank (2002). 'World Development Indicators 2002'. (January 2003).

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PART II: DESIGNING AFRICAN DEVELOPMENT THROUGH NEPAD

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Chapter 7

The New Partnership for Africa's Development and the G8's Africa Action Plan: A Marshall Plan for Africa? Nicholas Bayne

The Marshall Plan ... gave birth to the modern Europe we still know today. Robert Marjolin A id will only be successful where the possibility of self-help exists. Helmut Schmidt The Marshall Plan, initiated in 1947 to promote the economic recovery of Europe from the destruction caused by World War II, is the outstanding example of an external assistance programme that produced durable, self-sustaining results. Robert Marjolin, one of its European pioneers, called it 'the most dazzling political and economic success in the history of the western world since 1914').1 The term 'Marshall Plan' has passed into the language to designate any ambitious and generous programme of international help for countries in need, leading to frequent calls for a Marshall Plan of one kind or another. But the lasting success of the original Marshall Plan did not just depend on the generosity of the Americans. It was also due to the response by the European recipients. Among them, they transformed the political attitudes and structures of governance in Europe. These factors had an influence that long outlasted the flow of Marshall funds and far exceeded anything that General George Marshall and his advisors could have foreseen. But most of those who call for contemporary Marshall plans show little awareness of them. This chapter argues that, for the first time since the 1940s, there is a movement to create political attitudes and structures of governance that are close to the original Marshall Plan and contain many of its distinctive features. This is the combination of the New Partnership for Africa's Development (NEPAD) with the G8's Africa Action Plan, called for at the Genoa Summit in 2001 and agreed to at the Kananaskis Summit on 26-27 June 2002. Both NEPAD and the Africa Action Plan are in their early stages. But their shape is clear enough to permit a general comparison with the post-war Marshall Plan. The chapter has three main sections. The first offers an analysis of the features of the Marshall Plan that contributed to its outstanding success. The second examines to

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what extent those features have parallels in the current proposals for Africa. The third looks at the key differences between Europe of the1940s and Africa at the beginning of the twenty-first century. The Marshall Plan succeeded because of a transatlantic bargain. The Americans provided generous financing, encouraged economic liberalisation and integration, and accepted some economic loss as the price of their political objectives. The Europeans had ownership of the programme, which taught them to co-operate and accept peer review, to remove barriers to trade and finance, and to move toward closer integration. Many of these features appear in the combination of NEPAD and the G8 Africa Action Plan and provide hope that this may succeed also. The Africans have ownership of their programme, which provides for peer review and encourages regional integration. The G8 will engage in 'enhanced partnerships' with African countries and engage in programmes to improve peace and security and political governance. In this way, their economic help can serve the political aim of fighting the causes of terrorism. There are differences with the Marshall Plan, however: financial support for Africa is not assured, domestic political pressures may deter the G8 from removing barriers to African products, and Africa is far worse off than Europe was in the 1940s,with AIDS a grievous burden. So there are many reasons why NEPAD and the Africa Action Plan may not achieve their aims. But there were similar doubts at the start of the Marshall Plan, the true merits of which only appeared after many years.

How and Why the Marshall Plan Succeeded The Marshall Plan was launched by General George Marshall, as U.S. Secretary of State, in his speech at the Harvard University degree ceremony on 5 June 1947.2 World War II had been over in Europe for just over two years, but the economic and political situation there was ominous. The United States had provided substantial loans — as had Canada — but this aid seemed to have no effect. 3 Instead of recovering, the European economies were going backward. Industrial and agricultural production and especially the volume of exports were well below the levels of 1939,when the war began, and those levels had been themselves depressed. The external balances of the European countries were deteriorating; they had nothing to export and no dollars with which to buy imports. Economic hardship was generating political unrest. With a civil war raging in Greece and unstable government systems in France and Italy, the Americans worried that more European countries would fall under communist control. So the Marshall Plan was launched as an economic instrument to serve a political aim. The political aim was to stop the spread of Soviet power; the chosen instrument was the economic revival of Europe.4 This vital combination of politics and economics emerges clearly from this extract from Marshall's speech at Harvard:

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Europe's requirements ... of foreign food and other essential products — principally from America— are so much greater than her present ability to pay that she must have substantial additional help, or face economic, social and political deterioration of a very grave character. The remedy lies in breaking the vicious circle and restoring the confidence of the European people in the economic future ... It is logical that the United States should do whatever it is able to do to assist in the return of normal economic health in the world, without which there can be no political stability and no assured peace (Marshall 1997, 161).

The first key to the Marshall Plan's success lies in the nature of American financial support. Between 1948 and 1951, the U.S. transferred US$12.5 billion to Europe, amounting to 1.2 percent of American gross national product for those years. 5 In volume terms, this was not an exceptional figure. The United States had already made loans of up to US$20 billion to European countries between 1945 and 1947. 6 But in contrast to these earlier piecemeal loans, the Marshall Plan funds were offered to Europe collectively, they were sustained over several years, and they were supplied as grants. The beneficiaries were 16 West European countries, including West Germany, but no East European ones, as Stalin prevented them froin joining in. Thanks to these funds, the European economies started to recover fast. By 1952, industrial production was 40 percent above pre-war levels, growth was being sustained, and the U.S. official support was no longer required. But the Marshall Plan was not just about the transfer of funds. It was also about the organisation of Europe. That was the second key to its success, as this further extract from Marshall's speech shows: [To] start the European world on its way to recovery, there must be some agreement among the countries of Europe as to the requirements of the situation and the part those countries themselves will take in order to give proper effect to whatever action might be undertaken by this [U.S.] Government. It would be neither fîtting nor efficacious for this Government to undertake to draw up unilaterally a program designed to place Europe on its feet economically. This is the business of Europeans. The initiative ... must come from Europe (Marshall 1997, 161).

By this means, the Americans gave the Europeans ownership of the recovery programme. It was not being imposed upon them from outside. They had to take responsibility for it themselves. The Europeans thus had a strong incentive to co-operate among themselves, in a way that that they had never done before. For at least three centuries until then, Europe had been marked by shifting political alliances, with more rivalry than co-operation. Since 1914, European countries had increasingly adopted protectionist, 'beggar-my-neighbou r' economic policies that had contributed to the outbreak of World War II. Now the Europeans had to learn to work together. For this purpose, they created the new Organisation for European Economic Co-operation

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(OEEC), of which the European states were full members; the United States and Canada were only observers. Although the U.S. administration was not obliged to accept the OEEC's recommendations, in practice it always did so, working behind the scenes to ensure that the OEEC framed its requests in ways that would appeal to Congress. The impulse for closer economic co-operation in Europe long outlasted the Marshall Plan itself. The preparation of a collective European request to the United States, which reconciled all the national economic proposals, obliged the Europeans to develop techniques that were quite unfamiliar at the time. First, they had to assemble reliable economic data, information that was scarce in war-torn Europe (Marjolin 1989, 185; Reynolds 1997, 177-178). Then, each country had to draw up its own proposals in terms that could be understood by the others and converted into a single consistent plan. In the process, the OEEC developed methods of policy co-ordination and peer review, which required each country to explain its proposals and respond to criticism by the others. These methods also outlived the Marshall Plan. They not only became a feature of the Organisation for Economic Co-operation and Development (OECD), which succeeded the OEEC, but they were also adopted by a range of other international institutions. While the Americans were careful never to dictate to the Europeans, they made clear to them privately their conviction that economic growth required the removal of barriers to trade and payments, which stifled enterprise and prevented the development of a healthy private sector.7 The Europeans, in response, set in place a process of internal liberalisation, which again persisted longer than the flow of Marshall funds. They phased out all the quota restrictions that had discouraged intra-European trade. By the mechanism of the European Payments Union, they built up confidence in their currencies, so that the currencies became first convertible against one another and then, finally, in 1958, fully convertible against the U.S. dollar. In this process, the Americans departed from their insistence on nondiscrimination in trade and payments. They allowed the Europeans to give one another more favourable treatment than they gave to the United States. Thus the Americans accepted economic disadvantage as an acceptable price for the political goal of a dynamic Europe able to resist the threat of communism. The Marshall Plan also was at the root of the movement toward European economic integration, with a supranational element going beyond voluntary co-operation. Many different forces were at work here. The Americans, from their own experience as `united states', were strongly in favour of integration from the start. But they did not press it upon the Europeans. Within Europe there were deep divisions, with the British especially resistant to any supranational obligations. In due course, the integrationist impulse led to the creation of the European Economic Community (EEC), founded in 1958 by six members of the OEEC as a customs union with strong central institutions.8 Marjolin (1989, 220) has no doubt that 'the European Economic Community was the direct descendant of the Marshall Plan'. 9 But this was too much for the British, who proposed that the EEC should be set in a wider free trade area incorporating all the members of the OEEC. When the EEC rejected this, the UK created the European

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Free Trade Area (EFTA), embracing seven other OEEC countries. 10 Over time, the UK and nearly all the other EFTA members were absorbed into the EEC (now the European Union), but for many years the two groupings continued side by side. So the Marshall Plan, in the event, proved the source of a variety of forms of integration. In short, there was a transatlantic bargain. The Americans: • extended economic help in support of a political objective; • provided substantial funds over several years, in grant form; • privately encouraged internal liberalisation and economic integration; and • accepted economic disadvantage as the price of their political goal. For their part, the Europeans: • had ownership of the programme; • learned to co-operate together; • developed techniques of policy co-ordination and peer review; • removed internal barriers that held back their growth; and • laid the foundations for later regional integration. The benefits endured long past the end of the transfer of U.S. funds.

How NEPAD and the G8 Africa Action Plan Resemble the Marshall Plan By the end of the 1990s, Africa showed many similarities with post-war Europe. A few African countries had achieved impressive growth performance, but for most of them growth had either failed to keep up with their population or had been going backward absolutely. Many years of external aid programmes had failed to produce results. There was no model of indigenous development, based on intra-African co-operation. Most countries still looked to their former colonial powers, to the European Union, or to the international financial institutions (IFIs), holding them responsible when they failed to prosper. Many African states were crippled by civil war or undermined by decades of autocratic government and systematic corruption. Such countries, especially 'failed states' such as Sudan or Somalia, could easily become the breeding grounds for terrorist movements. Africa was becoming marginalised in the international system and reaping few or none of the benefits of globalisation. In 2000, President Thabo Mbeki of South Africa and President Olusegun Obasanjo of Nigeria launched their Millennium Africa Plan (MAP), aimed at reversing this downward trend. Over the next year, they discussed it widely with fellow African leaders, who made their own contributions. The MAP was combined with the OMEGA Plan drawn up by President Abdoulaye Wade of Senegal and ideas originating with the United Nations Economic Commission for Africa and its Ghanaian Secretary General, K.Y. Amoako. This combination of ideas mutated into the New African Initiative and reached its fmal form in October 2001 as the New Partnership for Africa's Development.11 The NEPAD proposals differ from all previous African approaches to reviving the continent. Up to now, Africans have tried to put the blame for their troubles onto

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others: on the legacy of colonialism, on the inequity of the international system, or on the inadequacies of aid flows and international development institutions. This time, Mbeki, Obasanjo, Wade, and their colleagues have accepted that Africans are themselves to blame for their problems and that they must take responsibility for their own recovery. This means correcting their own failures, not only in domestic economic policy but also in political governance, by strengthening democracy and respect for the law. They recognize that unless they do that, they cannot expect richer countries or international institutions to provide the aid, investment, trade access, debt relief, and other forms of external help that they need. In this way, the Africans have taken ownership of their own political and economic revival. This is the first and most important parallel with the Marshall Plan. They are no longer seeking to excuse failure by attributing it to policies imposed from outside. They have set standards for themselves, in both economic and political behaviour, and have undertaken to hold each other accountable for their programme's implementation. These standards were tested in the reaction to the elections in Zimbabwe in March 2002, in which President Robert Mugabe was re-elected amid widespread abuses. A lapse from democracy in Zimbabwe would not in itself undermine NEPAD. But if other Africans condoned what Mugabe had done, then the NEPAD's new political standards would have failed their first test. The matter was in doubt for a time, but then Mbeki and Obasanjo, as members of a three-person Commonwealth mission, made it clear to Mugabe that they could not accept the result (see Wallis, Hawkins, and Lamont 2002). NEPAD provides for a system of peer review among African countries, to allow each to compare and criticize each other's policy programmes. This African peer review mechanism, which is a major innovation for the countries of the continent, is a second parallel with the Marshall Plan. It originates with the Economic Commission for Africa (ECA).12 The ECA has in turn established contact with the OECD, the institution that, as the heir to the OEEC, has the longest and most extensive experience of peer review in policy co-ordination. The OECD can advise the Africans on the demands of peer review and on what works and what does not. A rigorous system of peer review, as advocated by the ECA, would inevitably mean comparing African countries with one another and grading them in relation to their economic and political performance. This is seen as a necessary part of attracting outside aid and investment. But this would be a departure from the traditional approach of the Organization of African Unity (OAU), which had resisted such differentiation and insisted that all African countries should be treated alike. The sponsors of NEPAD have sought to counter this by ensuring their approach has the full support of all 53 OAU members. The NEPAD Steering Committee of South Africa, Nigeria, Senegal, Algeria, and Egypt contains only one least developed country and is not regionally balanced. So it has been underpinned by a 15-state Implementing Committee, with three countries from each African sub-region, including many poor ones.13 A third parallel with the Marshall Plan is the encouragement of regional and subregional integration in Africa. There are already a number of regional economic

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groupings in Africa, some overlapping with one another and none very effective. NEPAD provides an opportunity both to rationalize this patchwork and to scale down excessive ambition. By giving African countries a stake in their own development, it should make them take regional integration more seriously. NEPAD does not begin by seeking to integrate Africa as a single region; instead, it aims to build on subregional groupings, much as Europe started with the EEC and EFTA. In this context, NEPAD should be seen as distinct from the newly formed African Union, even though Mbeki is its first president.14 The success of the Marshall Plan was not based on just what the Americans or the Europeans did, but also on how they worked together. In 1947, General Marshall promised help to the Europeans provided they organised themselves so as to co-operate and take ownership of the programme. This time the Africans launched the opening initiative and directly sought a response from the G8, even before the NEPAD reached its definitive form. In July 2001, Mbeki, Obasanjo, and Wade, with their colleagues from Algeria and Mali, brought the New African Initiative to Genoa, where they met with the G8 heads of government and sought their support.15 The G8 leaders were so impressed that — without any advance preparation — they gave a general pledge to underwrite the New African Initiative. The G8 welcomed the African commitments as 'the basis for a new intensive partnership between Africa and the developed world'. They promised to help the Africans provided they honoured their own undertakings and took ownership of their own renewal. The Genoa Summit set up a special group of personal representatives for Africa and this group worked closely with African countries during the following year to produce the G8 Africa Action Plan, for adoption at the Kananaskis Summit of 2002. 16 Four of the African leaders on the NEPAD Steering Committee — Mbeki, Obasanjo, Wade, and Algeria's Abdelaziz Bouteflika — joined the G8 heads at Kananaskis. This was the first time the G8 had ever integrated its work so closely with another group of countries, going well beyond the relationship with Russia in the early 1990s. This interaction of the G8 and African leaders, linking NEPAD and the G8's plan, provides another clear parallel with the U.S.-Europe interaction of the Marshall Plan. The Africa Action Plan welcomed NEPAD and sought to respond to it, while leaving its ownership clearly with the Africans. The G8 picked up from NEPAD the concept of 'enhanced partnerships'.17 G8 countries would set up enhanced partnerships with African countries that were seeking to meet NEPAD's standards. The NEPAD peer review would influence the G8 in their choice of enhanced partners, although each G8 country would make its own assessment. This idea again has parallels with what happened in the Marshall Plan. At the beginning, the Americans reserved the right to override the joint recommendations of the OEEC, although in practice they never did so. The G8-NEPAD combination will match the Marshall Plan most closely if the African peer review mechanism comes to provide standards that G8 countries can accept and follow themselves. The Africa Action Plan brought together G8 commitments in two political areas (peace and security, and strengthening governance) and six economic ones (trade and

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investment, debt relief, expanding knowledge, improving health, agriculture, and water resources). The section on peace and security, which is distinct from the others, sets deadlines for enabling Africa to deal with its own conflict prevention and promises action on named trouble spots such as the Congo and Sudan. The other sections of the plan broadly correspond to the detailed provisions of the NEPAD on governance and economic development. In this, the G8-NEPAD combination shows an interaction between economics and politics similar to the Marshall Plan. While the Marshall Plan was part of the political fight against communism, the Africa Action Plan can be seen as a weapon in the fight against terrorism launched since 11 September 2001. In the post-war period, the Marshall Plan relied wholly on economic instruments to achieve its political aims. The parallel process on the political side, to counter the external threat from the Soviet Union, was embodied in North Atlantic Treaty Organization (NATO), in which both Europeans and North Americans take part as full members. But the problem in Africa is less an external threat and more the lack of strong political institutions and the persistence of civil conflict. This has influenced the construction of NEPAD and the Africa Action Plan, so that the two approaches combine economic development with elements dedicated to peace and security and to improved governance, which both sides recognise as necessary.

How NEPAD and the Africa Action Plan Differ from the Marshall Plan

For all these parallels, there are fundamental differences. The first is that Africa in 2002 is in a far worse state than Europe was in 1947. For example: • European countries had been going backward economically for ten years or so. But many African countries have seen no real improvement for 20 or 30 years. • Europe had endured six years of war. But some African countries, such as Angola, Ethiopia, and Mozambique have suffered civil wars for far longer. One person in five in Africa today is affected by conflict. • The Americans were frustrated in 1947 that their post-war loans to Europe were so ineffective. But disillusion about aid to Africa is based on nearly 50 years of failed programmes. • Europe, despite its lapses, had solid foundations of government machinery and law. Africa has neither. • Europe needed to restore its plant and infrastructure, but then had plenty of welleducated people to operate them. Africa's greatest lack is in educated people at every level. • Parts of Europe faced starvation in 1947 after the harshest winter for decades. But this does not compare with Africa's chronic vulnerability to drought, flood, and famine. Worst of all, many countries in Africa are crippled by the scourge of AIDS, which is cutting back production and life expectancy, overwhelming health and education

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programmes, and threatening the whole fabric of society. Both NEPAD and the Africa Action Plan have been criticised for downplaying the damage done by AIDS and for not committing adequate resources to fight against it.18 Those originally involved in the Marshall Plan as well as later students of it have been cautious about the possibility of applying it in other contexts (Kunz 1997, 169; Marjolin 1989, 228-229; Rostow 1997, 210; Schmidt 1997, 218). They have argued that Europe's rapid economic recovery was possible in four years because of the existence of a well-educated, well-organized, and entrepreneurial population. These arguments, on their own, do not invalidate the parallels drawn in this chapter. But they lead to the conclusion that bringing Africa up from its depths will require much greater efforts and resources, from both the Africans and the G8, sustained over a period that may be nearer to 40 years than the four needed by the Marshall Plan.19 A second important difference is that the G8 has not given the same financial guarantees to the Africans that General Marshall gave to the Europeans. The members of the OEEC knew that, if their collective plans and peer review satisfied the Americans, finance in grant form would be forthcoming. The African members of NEPAD have constructed their plan in a form that is calculated to attract outside support, but they have no such assurance of funding from any single source. The financing formula in the Africa Action Plan is complex. G8 countries had already promised at the United Nations meeting on financing for development, at Monterrey in March 2002, to increase their total aid spending by US$12 billion per year over five years. 20 Under the action plan, half or more of this new aid money 'could be directed to African nations that govern justly, invest in their own people and promote economic freedom' .21 In addition to this uncertainty about the total funds available, the Africa Action Plan involves a group of donor countries, each with its own programmes and priorities, not a single donor like the Marshall Plan. The Kananaskis Summit was the occasion for announcements of increased aid and trade access for Africa (sometimes shared with other countries) by the United States, Britain, and Canada. But these were all national initiatives, not co-ordinated, and often difficult to compare one with another. There was no decision at Kananaskis to create co-ordination machinery, either among the G8 members themselves or between the G8 and the Africans. 22 However, the G8's group of personal representatives for Africa was kept in being, with a mandate to make recommendations to the 2003 Evian Summit to be chaired by French president Jacques Chirac. This offered an opportunity, over the intervening months, to provide machinery for co-ordination that can operate at lower levels than the heads of government. A third difference is that the Americans were prepared to endure some economic disadvantage during the Marshall Plan to ensure their political objectives. It is not clear how well the G8 members are prepared for this in relation to the poor countries of Africa. Although the Africa Action Plan follows NEPAD fairly closely, there are some significant differences, where the Africans do not get all they hoped for. The action plan does not endorse the NEPAD proposals for infrastructure projects or for more generous debt relief. It is weaker than NEPAD on trade access and on

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environmental issues, while the limits on both documents on AIDS have already been noted. The Africans present at Kananaskis welcomed the action plan as whole. But they were disappointed not to be offered improved trade access for their agricultural products. Recent U.S. policy actions, notably the 2002 farm bill, had drawn strong criticism from Africans for making it harder for them to gain access to American markets.23 The latest proposals by the European Commission for reforming the Common Agricultural Policy to make it less trade-distorting met strong resistance from EU member states, especially from France (Mann 2002; Mann and Williamson 2002). At the 2002 Summit itself, the French insisted that, on agricultural trade, the G8 could go no further than had been agreed at the World Trade Organization meeting at Doha in November 2001. Canada announced new measures after the Summit to liberalise access for the exports of least developed countries, comparable to measures already introduced by the U.S. and EU. 24 But these still exempted certain food products. In this area, the G8 countries still seemed inclined to give way to domestic pressures, when these clash with the objective of helping Africa.

Conclusion There are massive obstacles facing the NEPAD and the Africa Action Plan, so there are plenty of reasons why they could fail. Within Africa, NEPAD has so far been pursued very largely as the personal initiative of heads of government, without wider consultation.25 This has already led to widespread criticism by nongovernmental organisations, which could translate into a general lack of public acceptance. The pressure of peer review to raise political and economic standards may not prevail against the old tradition of treating all countries alike and avoiding criticism. Too few countries may submit themselves to peer review or meet the standards, so that enhanced partnerships remain limited to the existing high performers in Africa and do not motivate the rest. The programme may prove too ambitious for Africa's slender resources in trained people. Among the G8, Africa enjoyed high priority at the Genoa and Kananaskis summits and this was assured for a further year. But after the 2003 Evian Summit, the G8 could easily get distracted. If the G8 should fall back into a recession or a period of sluggish growth, the heads would be obliged to turn their attention to their own economies. Even without this, the resources mobilised may be inadequate or poorly directed, too many trade and other barriers may persist, the anticipated flows of private investment may be slow to appear, and there may be insufficient stamina to maintain a programme over many years. For these reasons, it may seem presumptuous to compare these African efforts with the Marshall Plan. But the comparison suggests that the closer the G8 Africa Action Plan and the NEPAD can match the Marshall Plan, the greater the chances of

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success. African ownership of the process, the concepts of peer review and enhanced partnerships, and the interaction of politics and economics are all positive signs. The dangers lie in uncertain fmancial commitments, in the reluctance of the G8 to overcome domestic political pressures, and in failing to stay the course over what will be a very long enterprise, with many setbacks. The progress so far is encouraging. Having entered into this partnership with the Africans, the G8 will find it hard to withdraw. The African countries, having secured the G8's support, will likewise want to show that they deserve it. The greatest benefits of the Marshall Plan did not emerge for many years and persisted long after the funds had ceased to flow. At the beginning of the Marshall Plan, too, there were plenty of reasons for thinking it would fail. In his memoirs, Marjolin (1989, 202) says: My testimony is designed to dispel the belief that from the outset we were possessed of a fine certitude, an indomitable faith in the future, an unshakeable optimism. On the contrary, what remains branded on my memory is the doubts, the dread of the morrow, the fear of failing.

Despite these fears, the Marshall Plan for Europe worked then. There are grounds for thinking now that when British prime minister Tony Blair spoke in Genoa of a Marshall Plan for Africa, it was more than a figure of speech.

Notes 1 Robert Marjolin (1989) was the first Secretary General of the Organisation for European Economic Co-operation (OEEC), which organised the European response to the Marshall Plan. His vivid memoirs are a major source for this chapter. Two other major sources are the group of articles on 'The Marshall Plan and Its Legacy' published in Foreign A ffairs, vol. 76, no. 3 (1997) and the special issue on Africa of International A ffairs, vol. 78, no. 3 (2002). 2 The text of General Marshall's (slightly edited) speech is reproduced in Foreign A ffairs (Marshall 1997). 3 Canada gave very substantial help to Europe, especially Britain, during the war and immediate post-war years. These were larger, as a share of gross domestic product, than the American loans. Because of financial difficulties, Canada could not continue this effort during the Marshall Plan period from 1948 to 1952. But Canada was included as an associate member of the OEEC, alongside the United States. 4 This combination of political and economic objectives was also found in the post-war Bretton Woods institutions — intended to prevent a recurrence of war — as well as in the foundation of the G7 summits in the 1970s. In that later period, the intervention of the heads of government was intended to restore political unity to the industrial democracies, which would permit effective economic co-operation (see Putnam and Bayne 1987, ch. 2). 5 In fact, President Harry Truman originally asked Congress for US$17 billion over four years for the Marshall Plan, but Congress only agreed to appropriate funds year by year (Marjolin 1989, 188; Reynolds 1997, 178). 6 Diane Kunz (1997, 163 ) estimates a total of US$20 billion. Marjolin (1989, 177) gives a lower figure of US$14 billion, but even that exceeds the Marshall Plan.

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7 'In private, U.S. intervention was frequent, often insistent. But public appearances had to be preserved ... [U.S. intervention was] prodding and cajoling, while also allowing the Europeans to save themselves' (Reynolds 1997, 183). 8 The original six were France, West Germany, Italy, the Netherlands, Belgium, and Luxembourg. 9 Marjolin (1989, 189) says that France was strongly integrationist from the outset. In contrast, David Reynolds (1997, 175-177) has France resisting integration at first, fearing it would mean domination by the U.S. But by the early 1950s, France had clearly become one of the driving forces for closer integration. 10 The EFTA 'seven' were the United Kingdom, Norway, Sweden, Denmark, Austria, Switzerland, and Portugal. 11 The full text of the NEPAD document is accessible at . For a fuller account of its origins, see Alex De Waal (2002, 466-467). 12 The ideas for peer review and 'enhanced partnership' are spelled out in the ECA's 'Compact for African Recovery' of April 2001 (see De Waal, 2002, and ). 13 The original membership of the NEPAD Implementing Committee comprised the presidents of Southern Africa (Botswana, Mozambique, South Africa*), West (Mali, Nigeria*, Senegal*), Northern (Algeria*, Egypt*, Tunisia), East (Ethiopia, Mauritius, Rwanda), and Central (Cameroon, Congo [Brazzaville], Gabon). Asterisks indicate members of the Steering Committee. In July 2002, Libya replaced Tunisia — see note 14. 14 The African Union was formally created on 9 July 2002, replacing the old OAU, and has set up a number of pan-African institutions modelled on the European Union (see Hoyos and Degli Innocenti 2002). It incorporates a number of ideas promoted by President Mu'ammer Gaddafi of Libya. It looks as if acceptance of these ideas, plus a seat on the Implementating Committee, was the price of getting Gaddafi's acceptance of NEPAD (De Waal 2002, 467-469). 15 Mbeki and Obasanjo, with Abdelaziz Bouteflika of Algeria, were also at the dinner of G8 and non-G8 leaders before the 2000 Okinawa Summit. This gave them the idea of seeking the G8's help for their African initiative. 16 See the G8's Africa Action Plan (G8 2002), as well as the earlier Genoa Plan for Africa (G8 2001). For accounts of the treatment of Africa at the Genoa and Kananaskis summits, see also Nicholas Bayne (2001; 2002) and Appendix A. 17 For the origin of this concept, see Alex De Waal (2002, 465-467). 18 On the damage done by AIDS and the vulnerability of poor communities, see Nana Poku (2002). 19 Alex De Waal (2002, 464) estimates that Africa is a generation away from the economic and development goals set out in NEPAD. 20 The total of US$12 billion, in fact, includes extra money from all EU member states, while Japan's aid is contracting. 21 This awkward phrasing reflected a difference within the G8. The Europeans, with Canada, were eager to commit 50 percent to deserving African countries. The United States was reluctant, as George W. Bush did not want to provide grounds for Congress to attach conditions to the Millennium Challenge Accounts, the channel for the new aid announced at Monterrey. 22 The need for such machinery, and suggestions for it, are discussed by Simon Maxwell and Karin Christiansen (2002). 23 The South African finance minister strongly criticised Paul O'Neill for this when the U.S. Treasury Secretary visited Africa in 2002 (Beattie and Lamont 2002). 24 For the United States, access is provided under the A frica Growth and Opportunity A ct of 2000. In March 2001, the European Union undertook to admit all products from least developed countries free of duties and quotas — except arms. There are transitional

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arrangements for bananas, rice, and sugar. The Canadian measures match those of the EU, except that eggs, poultry, and dairy produce are not covered. 25 Patrick Chabal (2002) suggests that NEPAD still shows signs of the 'neo-patrimonial' politics that undermined moves to greater democracy in Africa over the last decade.

References Bayne, Nicholas (2001). 'G8 Decision-making and the Genoa Summit'. International Spectator vol. 36, no. July-September, pp. 69-75. Bayne, Nicholas (2002). 'Impressions of the Genoa Summit, 20-22 July, 2001'. In M. Fratianni, P. Savona and J. J. Kirton, eds., Governing Global Finance: New Challenges, G7 and IMF Contributions, pp. 199-210. Ashgate, Aldershot. Beattie, Alan and James Lamont (2002). 'U.S. Farm Bill Arouses African Fury'. Financial Times, 24 May. Chabal, Patrick (2002). 'The Quest for Good Govemment and Development in Africa: Is NEPAD the Answer'. International A ffairs vol. 78, no. 3, pp. 447-462. De Waal, Alex (2002). 'What's New in the "New Partnership for Africa's Development"?' International A ffairs vol. 78, no. 3, pp. 463-476. G8 (2001). 'Genoa Plan for Africa'. Genoa, 21 July. (January 2003). G8 (2002). 'G8's Africa Action Plan'. Kananaskis, 27 June. (January 2003). Hoyos, Carola and Nicol Degli Innocenti (2002). 'Africa Launches a Union to Fight War and Poverty'. Financial Times, 10 July. Kunz, Diane B. (1997). 'The Marshall Plan Reconsidered: A Complex of Motives'. Foreign A ffairs vol. 76, no. 3, pp. 162-170. Mann, Michael (2002). 'Milk and Money'. Financial Times, 4 July. Mann, Michael and H. Williamson (2002). 'Fischler's Reform Plan Faces Tough Opposition'. Financial Times, 11 July. Marjolin, Robert (1989). A rchitect of European Unity: Memoirs 1911-1986. W. Hall, trans. Weidenfeld and Nicolson, London. Marshall, George C. (1997). 'Against Hunger, Poverty, Desperation, and Chaos'. Harvard address, 5 June 1947. Foreign A ffairs vol. 76, no. 3, pp. 160-161. Maxwell, Simon and Karin Christiansen (2002). —Negotiation as Simultaneous Equation": Building a New Partnership with Africa'. International A ffairs vol. 78, no. 3, pp. 477-491. Poku, Nana K. (2002). 'Poverty, Debt, and Africa's HIV/AIDS Crisis'. International A ffairs vol. 78, no. 3, pp. 531-546. Putnam, Robert and Nicholas Bayne (1987). Hanging Together: Co-operation and Conflict in the Seven-Power Summit. 2nd ed. Sage Publications, London. Reynolds, David (1997). 'The European Response: Primacy of Politics'. Foreign A ffairs vol. 76, no. 3, pp. 171-185. Rostow, Walt W. (1997). 'Lessons of the Plan: Looking Forward to the Next Century'. Foreign A ffairs vol. 76, no. 3, pp. 205-302. Schmidt, Helmut (1997). 'Miles to Go: From American Plan to European Union'. Foreign A ffairs vol. 76, no. 3, pp. 213-220. Wallis, W., T. Hawkins, and J. Lamont (2002). 'Commonwealth Suspends Zimbabwe'. Financial Times, 20 March.

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Chapter 8

Designing for Development in Africa: The Role of International Institutions Ivan Mbirimi1

Despite years of implementing market-oriented reforms aimed at improving both the macroeconomic and microeconomic environments, there continue to be depressing levels of deprivation across Africa. This is easily demonstrated by statistics on key measures of economic well-being. Economic growth, which is supposed to generate the resources for investments in education and health, fell by 1 percent between 1975 and 1999. Adult literacy in sub-Saharan Africa, at 60 percent, stands well below the 73 percent average for developing countries (United Nations Development Programme 2001). Life expectancy at birth is still only 48 years, compared with more than 60 years for other developing countries. It is set to go down further due to the HIV/AIDS pandemic. The number of people living on less than US$1 a day is as high as 46 percent. Why has Africa's economic performance been so low? With attention now focussed on the 'home-grown' initiative of the New Partnership for Africa's Development (NEPAD), it is appropriate to ask whether anything has changed in terms of the perspectives and approaches of the main players. It is also an opportunity to explore the likely prospects of success for NEPAD and other current and proposed frameworks for African development. This chapter argues that perspectives and approaches to development in Africa have changed, especially when looked at in terms of the economic policies that governments are prepared to embrace. Most African governments now accept the important role played by markets as well as the need to address issues of poverty alleviation. But there remains a great deal of uncertainty regarding both the direction of policy and the environment within which policy is made. Overcoming this uncertainty, and the policy instability it creates, requires action at different levels. At the national level, governments must adopt a more inclusive approach to policy making, taking in the views and interests of different segments of society and ensuring that resources available to them are used efficiently. They also need to articulate their goals clearly and strive for consistency of policies. At the international level, donors and international financial institutions (IFIs) must pay more attention to the specific circumstances of individual countries and encourage African governments to take a long-term view of development so that the risk of policy reversals is reduced.

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Context and Assumptions At the policy level, the conventional wisdom is that there is a broad measure of agreement on what needs to be done about economic growth and development in Africa. The core message emphasises higher economic growth, fiscal and monetary discipline, trade openness, and deeper integration into the world economy. In recent years, other issues have been added to this list, in particular good governance, sustainable development, and poverty alleviation. The old debate on 'markets versus states' is no longer a major issue, in part because the emphasis has shifted to capacity and institution building. This has led some observers to note that current development thinking restricts its meaning to the practice of development. The policy context is therefore clearly that of neoliberal economics, with most critics of current development thinking working within that mould rather than outside as in the past. But why, given the poor record of Africa, are so few people looking at alternatives to current development thinking and practices? One explanation, as already indicated, is that development has become that which development agencies are doing. In other words, less attention is given to vision, processes, and alternatives. The second reason contradicts this position. In their analyses of the World Development Report 2000, Ravi Kanbur (2001) and Robert Wade (2001) both point to implicit disagreements among the key players regarding perspectives and frameworks. One way of understanding these disagreements is to look at the assumptions of the key players. An obvious assumption underlying the approaches of IFIs and donor countries is that there is currently no alternative to market-friendly development or neoliberal economics. This assumption seems to have been accepted by African governments, although they are uncomfortable with some aspects of this position, in particular the variety of conditionalities that must be satisfied. On their part, the IFIs and donor governments have tried to respond to some of the criticisms of this basic approach, for example by incorporating poverty alleviation and good governance into their African development programmes. Even though African governments have also been persuaded that there is no alternative to the current approach to development, they are nevertheless increasingly concerned that they are being left out of the globalisation process, and finding it more difficult to be drawn into it. This negative perception has been reinforced by actions taken by the G7 and other industrialised countries. Trade preferences are being progressively phased out. Commitments undertaken by industrialised countries in the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) have fallen short of implementation. The limited gains by those countries that have undertaken market-opening reforms also mean that African governments are desperate for quick results. One unfortunate consequence of this is that there are not many signposts to the future. It is as if African leaders have given up on the visioning process. This clearly is one reason why NEPAD has attracted so much attention.

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Civil society has sought to promote a broader concept of development incorporating empowerment of the people, poverty alleviation, sustainable development, and good governance at both the national and multilateral levels. Unlike IFIs and donors, which tend to pick and choose who, apart from governments, they interact with, civil society has been promoting the greater involvement of people, networks, co-operatives, and trade unions. The assumption is that if these groups of people are given a voice in policy making, then their concerns cannot be ignored and development will be facilitated. Empowerment will translate into security and opportunity. It is through the efforts of civil society that the World Bank adopted poverty alleviation strategies. However, the basic assumptions of the two groups could not be more different. There is also no doubt that civil society has raised the quality of debate at the national level. At the multilateral level, it has sometimes been more effective in articulating the problems of development. Growth is essential for poverty reduction and income inequality may not be bad for growth.

Issues and Actors A frican Governments The central issues for African governments could be summarised in terms of the vision, the management, and the practice of development. First, the 'vision thing': very few African leaders have articulated a vision of where they would like to take their countries, in the same way that governments in countries such as Singapore and Malaysia have. The absence of a clear sense of direction is one reason why African countries feel so threatened by globalisation. Beyond concerns about marginalisation under globalisation, the absence of a strong sense of direction also means those countries do not have the plans and the means to harness the benefits of globalisation. It also means that corruption and rent-seeking behaviour, once they have taken root, have a far more corrosive effect than they would in a country with a strong sense of direction. There is a great deal that African governments could learn from Southeast Asia on this issue. It is generally agreed that rent-seeking behaviour is a feature of Southeast Asian as well as African economies. However, Southeast Asian leaders have understood that growing rents require growing economies, so that when rent seeking threatens sound economics, the rents are curbed (Lindauer and Roemer 1994). This is why development economists such as Wade (2001) have described these countries as 'developmental states'. In other words, their governments so value economic development that they are willing to risk political capital to achieve economic growth. This difference in perspective and approach between the two regions is corroborated by anecdotal evidence. The project cycle for investments in Africa tends to be longer than in Southeast Asia. A major reason for this is that the project approval process in Africa involves numerous government agencies and individuals, each of whom may

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ask for a small kickback. In Southeast Asia, the size of the kickback demanded may be many times larger; however, the government still strives to ensure that the project approval process delivers the project in good time, reflecting the overriding importance of development. The management of economic development is a second major issue for Africa. It is mainly in the hands of political apparatchiks rather than economic professionals. In fact, political ministries, most notably the ministry of foreign affairs, often take precedence over the ministry of finance or economic affairs. Yet these are countries with little or no influence in international affairs. This has two unfortunate consequences. First, political apparatchiks tend to operate within a short time horizon, while business people and other professionals take account of both the short and long term. The problem is accentuated by the severity of economic problems in Africa, which often means that considerations of survival from year to year and even day to day crowd out the longer view. In economic diplomacy, this has sometimes been reflected in negotiating positions heavily influenced by political rather than economic considerations. This failure to identify priorities and develop strategies in terms of the short- and long-term will carry today's constraints forward to tomorrow. A third problem is that African countries often find themselves having to adopt economic programmes developed elsewhere because they do not have their own well thought-out programmes. As already indicated, the hidden assumptions of outside advisors may not reflect the reality in African economies. The leading outside institutions and experts tend to reduce development to technical ratios and parameters. While these are important in identifying short-term constraints and degrees of freedom, they do not always provide policy makers with the most relevant and practicable solutions to problems. Heavy reliance on outside expertise also limits opportunities for learning from one's own mistakes, a vital element in all learning. Again, Southeast Asia's reliance on a well-trained, well-paid economic bureaucracy has important lessons for Africa. A fourth issue concerns the actual practice of development in Africa as distinct from the visioning and management of development. African countries have obviously failed in this sphere in large part for reasons already discussed in preceding paragraphs. A key issue here is that Africa does not fully use all the resources available to it. A key resource being wasted is labour, either because the labour force is inadequately trained or because, when it is trained, the remuneration offered is so low that most of the trained labour force leaves the country. Another problem is that even when a vision has been articulated, the links between vision and practice are very weak. Policies also lack consistency, with instances of policy reversal too frequent. A particularly serious weakness in the age of globalisation is that there is a tenuous connection between domestic and international policies. African trade illustrates the problem well. Some observers have noted that there are still more trade restrictions among neighbouring African countries than exist between those countries and Europe.

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New Partnership for A frica's Development NEPAD is an attempt to pursue Africa-wide development strategies that are situated in the context of globalisation. It is founded on a few key principles: African ownership and leadership; promotion of investment through the creation of an attractive investment climate; efficient and effective mobilisation, allocation, and management of Africa's own resources for self-development; acceleration of economic integration; and negotiation of partnerships with industrialised countries that address anomalies in trade, investment, and capital flows. None of this is unexceptionable because African governments have committed themselves to the same principles at various stages in the past. What is different is the explicit recognition of the context of globalisation. Equally important is the implicit recognition of the fact that Africa needs to make every effort to manage well those things over which it has control, principally the quality of its economic, political, and legal institutions and the vibrancy of its civil society organisations. In part, this reflects the convergence in thinking regarding the main elements of development. But it also reflects the impact of globalisation on African governments. They are worried about marginalisation because globalisation has created 'hierarchies of production', with a great deal of international production organised on a regional basis. They have realised that most discourses on globalisation are punctuated by discussions on Asia-Pacific Economic Cooperation (APEC), the European Union, the Free Trade Agreement of the Americas (FTAA), Mercosur, and the North American Free Trade Agreement (NAFTA). The implication is that each region comes to the global table having set its house in order. This leads one to ask the question of how likely it is that NEPAD will accomplish this task or meet its objectives. NEPAD marks a break with the past in at least two respects: it articulates a clear vision of Africa's position in the world, and recognises the importance of effective mobilisation, allocation, and management of Africa's own resources, rather than just looking outside for assistance. However, it raises questions about whether NEPAD's objectives can be met. Its design and approach may mean that the continent will remain unable to break from past constraints. One problem is its complex structure and broad coverage of issues, which must inevitably mean co-ordination problems. Given the poor quality of Africa's bureaucracies and institutions, a simpler structure focussing on a few key priorities might have been preferable. It could also be argued that NEPAD's top-down approach cannot be expected to deliver. To see why, it might help to place the initiative in its historical context. The idea of an African union is not new. In fact, the Lagos Plan of Action of 1980 had the same goals. It was felt that the best route to economic integration was through regional economic blocs. Thus, African economic groupings such as the Common Market for Eastern and Southern Africa (COMESA), the Economic Community of West African States (ECOWAS), and the West African Economic and Monetary Union (UMEOA) were seen as the building blocks for an African economic community. The record of

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these organisations has generally been poor. Although NEPAD commits governments to an acceleration of economic integration, there is no indication that the pace of regional economic integration will be accelerated. A top-down approach is unlikely to enhance this process. Furthermore, there are ambiguities in the approach to regional integration by some of the leading players in NEPAD. For example, there are those who would like to see South Africa play a far more decisive role in the integration efforts of the Southern African Development Community. South Africa, which has negotiated a free trade agreement with the EU, has been criticised by some of its partners in the Southern African Customs Union as lacking in transparency and consultations. If the main promoters of NEPAD are ambivalent about the process of integration in their regions, it may be unrealistic to expect NEPAD to achieve its goals. The purpose of challenging the general perception that NEPAD represents some kind of new dawn of home-grown policies in Africa situated in the global context, however, is not to diminish this important initiative. Rather, it is to inject a note of realism into the debate. Of course, the architects of NEPAD assume that the launch of the initiative will be followed by the development of strategies that are specific to the context of each country. Yet this assumption is unrealistic: there simply is not the capacity to co-ordinate actions under NEPAD and those that may be required by programmes of the World Bank and the International Monetary Fund (IMF), such as poverty reduction strategy papers (PRSPs), or required by the World Trade Organization (WTO). This holds true as well for relations between the EU and the African, Caribbean, and Pacific Group of States (ACP) as well as regional integration programmes, despite the fact that NEPAD promoters have worked hard to bring all these various institutions on board. Furthermore, some countries are likely to view NEPAD through its political dimension only, which might lead them to conclude that what they have to do is to ensure that they are not excluded from aid flows channelled through that framework, thereby undermining the initiative. Given this sceptical note, it is perhaps appropriate to identify a few priority actions that African governments might take in the context of NEPAD. • Regional economic integration remains vital to Africa's integration in the world economy. The leading economies in Africa must therefore make every effort to promote integration in their regions. • Priority should be given to an exhaustive mobilisation of all domestic resources so that external assistance has a strong foundation on which to build. • A strong sense of direction (a vision) is required, as it is the only way that governments can move to own their development strategies. Some of these requirements could be met through scenario planning and focussing on the different development strategies and the financial and human requirements entailed. Consideration could be given to alternatives to the current consensus. Some observers have warned that globalisation might increase human-made capital as well as human capital at the expense of social and environmental capital (Pearce

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2002) 2 A more fruitful approach would be to increase the whole asset base without any one asset declining. Given Africa's abundant natural resources, this is an approach that is worth considering. • A broad-based approach to development is essential. A country's assets include not only all the physical and financial resources but also the human and social capital. These must be all developed and valued. Africa has been very wasteful of its human capital, particularly that which is skilled. Its attitude toward social capital, defined as the positive relationships among individuals and between individuals and institutions — relationships that generate social cohesion and reduce discord and distrust — has been parochial. To a large extent, the quality of governance in Africa will be determined by the success achieved in rebuilding social capital or trust. • African governments should draw the right lessons from other parts of the world. One such lesson is that an unmistakable commitment to development can send the right signals to investors, society, and other important partners in development. Civil Society

Civil society plays an increasingly important role in development. This largely reflects the current consensus regarding development among world elites, international donors, government leaders, and opinion formers — a consensus that acknowledges the importance of civil society. For its part, civil society has worked hard to raise the profile on issues such as debt relief, poverty alleviation, and the injustices of the international trading system. However, in discussing the role of civil society, it is important not to restrict the definition to nongovernment organisations (NGOs). This is important because the high profile of northern NGOs and the issues they choose to highlight have in some cases reduced the effectiveness of civil society as a whole at the national level. Many African governments view NGOs and other civil society groups with suspicion. Local co-operative groups, clubs, and communal societies must be given space within which to operate, rather than be crowded out by northern NGOs, for it is up to these local groups to build the social capital that African countries so desperately need. Ultimately, transparency and good governance can only be guaranteed by the rebuilding of trust among the African people and their governments. International Institutions

International institutions have had a pervasive influence in African development thinking.3 They have been central players in the numerous reconfigurations of policy that have taken place in Africa in the last 40 years. A great deal of that influence has been criticised (Helleiner 2002). Critics have had two major concerns. One criticism is the uniformity of policy prescription, the 'one size fits all' approach traditionally

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associated with IMF and World Bank programmes. Although these organisations have tried to respond to this criticism, critics point out that this approach has made serious inroads into the trade area, where the Agreement on Trade-Related Aspects of Intellectual Property (TRIPs) is cited as the leading example. A second related criticism is what Ravi Kanbur (2001, 1092) has described as 'policy messaging', which is the practice of putting out a 'sharp and hard' message in support of one's own agenda for fear that acknowledgement of qualifications would be taken as a sign of weakness by the other side. This leads to a 'line in the sand' mentality in negotiations. Both approaches have been evident in the areas of debt, finance, trade, and the environment. As Kanbur points out, prior to 1995, the IMF and World Bank as well as donor governments were firinly opposed to debt relief for the poorest countries (although some developed countries, notably the United Kingdom, had begun to push for change). Mainly because they feared that any opening would be the 'thin end of a wedge' through which large-scale write-downs would break open the IFIs. The fact that they have shifted their position is in part a tribute to the campaigning power of civil society. The Jubilee 2000 campaign to cancel the debts of the poorest countries, was acknowledged by World Bank spokesman Anthony Gaeta as 'one of the most effective global lobbying campaigns I have ever seen' (quoted in Hanlon 2000, 878). However, the hard policy messaging before 1995 sowed the seeds of mutual suspicion that still affect the current dialogue on debt. Another good example of policy messaging and a one-size-fits-all approach is the IMF's reaction to the Asian financial crisis. It continued to argue that capital market liberalisation was not the issue and that problems occurred in countries that maintained unnecessary controls. According to Joseph Stiglitz (2000, 1076), this position was maintained either 'as a matter of ideology or of special interests, and not on the basis of careful analysis of theory, historical experience or a wealth of econometric studies'. In the trade area, pressure by industrialised countries to negotiate agreements on issues such as investment and competition policy is seen by some as an attempt to impose the uniform rules or standards across the world to the detriment of poor countries. Nonetheless, policy messaging has meant that industrialised countries have been unwilling to engage seriously on issues of implementation raised by developing countries. Doubts about the future work of the WTO, which surface from time to time, should be seen against this background, whereby industrialised countries seem keen to push one model of agreement on new issues, while resisting changes in areas that developing countries have some comparative advantage. Part of the problem in all three cases is that policy messaging is a negotiating tactic. Because countries are engaged in negotiations almost on a continuing basis, they remain in a negotiating mode even when dealing with the poorest countries with little or no negotiating clout. At a general level, it is a form of conditionality. This policy message coupled with the variety of policy advice that has been given to Africa has created a kind of policy fatigue among African bureaucrats. Some of them do not even pretend that they have some responsibility in making development policy for

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their countries. However, there is increased recognition of the particular problems of African countries, most notably the absence of markets or weak functioning of existing ones. This explains the adoption of poverty reduction strategies. This discussion leads to the following suggestions about how international institutions should help African countries. First, the need for policy messaging in dealings with African countries should be re-examined. These countries very rarely offer counter-arguments to the programmes presented to them. This means hard and sharp messages could easily make their situation worse. An article in the Économist noted that Zambia had privatised well over 250 public enterprises out of a total of about 280 public enterprises ('Zambian Copper: Tragically Undermined' 2002), yet this does not seem to have improved Zambia's prospects. Instead, because the privatisation included agricultural marketing boards, collection of grains from remote parts of the country has become difficult. Private traders have been reluctant to move into these remote areas because of the costs involved. Second, while helping countries deal with the short-run effects of globalisation, donors and international institutions must encourage African to take a long view of development. Frequent policy changes by donors and international institutions have only served to confuse the policy debate even further in Africa. Third, international institutions must work with the grain of globalisation. In international trade, that means substantial reductions in industrial and agricultural protection by developed countries, which harms developing country exports. Such protection for agriculture is estimated to cost the developing world at least US$100 billion per year, twice the flow of gross official aid.

Conclusion Development encompasses vision, strategies, processes, and practice. None of these elements should be seen as more important than the others. The apparent consensus on what constitutes development may have tilted the balance toward practice and processes, which is why NEPAD has been welcomed. But this important initiative may run into some of the problems experienced in the past, such as complications with co-ordination, a lack of political will, and the demands of external partners. Moreover, balancing the interests of different participants in development is unlikely to be easy in the presence of social fragmentation. Thus, governments must appreciate the important role of social capital. Managing globalisation will become easier if this is done in the context of an inclusive approach, because it is the different sections of society that interact with it. Starting by making much better use of available resources in Africa will help. Perhaps the greatest precondition for success is honesty on all sides. African governments must genuinely believe in social cohesion and the development of their countries. International institutions must resist the teinptation of creating more

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conditionalities as these give confused messages. And civil society, particularly NGOs from the North, should promote a deeper involvement of ordinary people in development.

Notes 1 The views expressed in this chapter are the author's and do not necessarily reflect those of the Commonwealth Secretariat. 2 In a paper on making globalisation a positive force for sustainable development, David Pearce (2002) proposes a framework that focusses on the assets needed by current and future generations for human development. They comprise human-made capital (machines, roads, factories), human capital (the skills and education embodied in human beings), natural capital (the stock of natural resources and waste-handling capacities of natural environments), and social capital (the glue that binds communities together and destruction of which shows up in increased crime, wars, and social breakdown). He then argues that only by raising the per capita income of these capital assets and improving the efficiency with which they are used (technological change) can the poor and future generations be better off. 3 This section includes donors.

References Hanlon, Joseph (2000). 'How Much Debt Must Be Cancelled?' Journal of International Development vol. 12, no. 6, pp. 877-901. Helleiner, Gerald (2002). 'Reflections on Global Economic Governance'. Paper prepared for `From Doha to Kananaskis: The Future of the World Trading System and the Crisis of Govemance'. Robarts Centre for Canadian Studies, York University. (January 2003). Kanbur, Ravi (2001). 'Economic Policy, Distribution, and Poverty: The Nature of Disagreements'. W orld Development vol. 29, no. 8, pp. 1083-1094. Lindauer, David L. and Michael Roemer (1994). A sia and A frica: Legacies and Opportunities in Development. ICS Press, San Francisco. Pearce, David (2002). 'Making Globalisation a Positive Force for Sustainable Development'. Background Paper for Commonwealth Consultative Group on Environment. Stiglitz, Joseph (2000). 'Capital Market Liberalization, Economic Growth, and Instability'. W orld Development vol. 28, no. 6, pp. 1075-1086. United Nations Development Programme (2001). Human Development Report 2001: Making New Technologies W ork for Human Development. United Nations Development Programme, New York. (January 2003). Wade, Robert (2001). 'Making the World Development Report 2000: Attacking Poverty'. (January 2003). 'Zambian Copper: Tragically Undermined' (2002). Economist, 1 June, pp. 65-66.

Chapter 9

Is African Development through the New Partnership for Africa's Development Synonymous with Sustainable Development? Stéphan Doumbé-Billé

Everyone is now familiar with the concept of sustainable development. Since the Rio Conference on Environment and Development in June 1992, which was officially dedicated to this theme, sustainable development has become the main thrust of the international community in establishing and implementing strategies and measures to combat environmental degradation, poverty, and underdevelopment. These three components, which constitute the basis of sustainable development, are often referred to as its pillars. However, the concept is not limited to these aspects. Although not mentioned specifically in the 1992 Rio Declaration, cultural diversity as set out in Agenda 21, the comprehensive plan of action to be taken by the organisations of the United Nations system, governments, and major groups, is also seen as one of its dimensions, and one that is indispensable in ensuring a harmonious balance between environmental protection and economic development. Accordingly, sustainable development has evoked the interest of the developing countries. This is especially true for the French-speaking African countries, which have long been confronted with almost endemic poverty and overexploitation of natural resources. They hope that the conditions imposed by the concept of sustainable development will make it possible to attain a level of development that allows for socioeconomic progress without the degradation of environmental resources. This concept would seem to be the focus of the New Partnership for Africa's Development (NEPAD). Created on 2 July 2001 as the New African Initiative formed out of Senegalese president Abdoulaye Wade's OMEGA Plan and the Millennium Partnership's African Recovery Programme, NEPAD was officially approved in its definitive form by the member states of the Organization of Africa Unity (OAU) at the Lusaka Summit in July 2001. It was presented shortly thereafter to the G8 at the 2001 Genoa Summit and permanently incorporated a year later into the objectives and administrative machinery of the new African Union (AU) at the Durban Summit. NEPAD's promoters define it as an 'African strategy for achieving sustainable development in the 21st century'. Its importance lies in the fact that, for the first time,

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African leaders (and especially heads of state), united in a common vision, decided to equip themselves with a long-term development plan for the entire continent. In appearance at least, NEPAD thus constitutes a radical change in a heretofore permanent mindset of failure. After the recent disappointing findings of the UN's Millennium Summit in September 2000, the Brussels Conference on less developed countries (LDCs), and other UN gatherings such as those organized as part of the preparatory process for the August 2002 Johannesburg World Summit or the March 2002 Monterrey Conference on Financing for Development, NEPAD is slowly but surely making a name for itself as the international community's new and sole agenda — an agenda that has been established by Africans themselves, for the development of Africa. This enviable situation is rare enough to be noteworthy. However, it does raise a number of questions. First, how likely is this new initiative (in the general sense of the term) to be accepted, when the fight against poverty and for development seems in many ways a quest for the Holy Grail, or, to use another image, a truly Herculean task? In other words, how can this new idea be spread when the development of Africa has, for a large number of Africans, become a sort of 'lost horizon'? Second, how much credence should be given to such an initiative, given the fact that it has not been the subject of an open, transparent, and participatory social debate, but rather launched as the personal project of various high-placed individuals? Third, even considering NEPAD for what it is — that is, a strategy — does this mean the organisation behind it is capable of ensuring sustainable development in Africa? There is nothing obvious about the answers to these questions. Although NEPAD's objectives demonstrate a real will to reduce the economic discrepancies that exist between Africa and the other continents, there are still doubts whether these objectives can be reached. These doubts can be divided into three main categories. The first is the heuristic value of the economic-liberalisation paradigm that is the cornerstone of the African initiative. The second is the domestic and foreign constraints that have long and constantly dragged down the African countries and ruined all development efforts. The third is the efficiency of the concept of sustainable development, which can be regarded as a Trojan horse for liberalisation with respect to future control over environmental resources that have until now basically remained commercially unexploited. This dilemma — the desire for development on the one hand, and persistent doubts on the other — makes for a discussion centred on two fundamental questions that form the framework for this chapter's analysis: Is NEPAD truly an indispensable choice? If so, might not its implementation be problematic?

An Indispensable Choice? The need to question the sustainable nature of development in Africa via a new action strategy seems self-evident. First, with respect to the new policies of the international

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community, as they were reaffirmed at Johannesburg in 2002, any type of economic development not based on sustainability would appear to be a non-starter. The prominent position occupied by corporations and the private sector in general at the World Summit on Sustainable Development made this obvious. A new sense of responsibility has been born, a need to see that each development project incorporates, as harmoniously as possible, the three pillars of sustainable development: the environmental dimension, the social dimension, and the economic dimension.1 Next, and more importantly, what seems to be guiding African leaders in their choice is need. There is the need for a clearly affirmed political will to eliminate the existing gap between the African nations and the developed countries by making the fight against poverty a top priority. Furthermore, there is the need to establish long-term programs and specific measures — that is, to plan for the welfare of all, including future generations — based on the theme of sustainable development. A Choice Dictated by Économic Priorities This choice is driven mainly by economic priorities — a fact that has not been without controversy. Nevertheless, such priorities constitute the nucleus of the initiative, a fact attributable to past development policies that are the source of Africa's current dismal economic situation. Recent reports from the United Nations Economic Commission for Africa (UNECA) and the United Nations Environment Programme (UNEP), which show growth of less than 3 percent for 2000-2001, provide ample justification for such an approach (UNEP 2001). For NEPAD, the result of Africa's disastrous economic situation is the marginalisation of the entire continent, which is barely noticeable as a player on the international scene. However, the paradox is that, while Africa is at the heart of globalisation, it is also affected by prevailing economic and trade liberalisation, leading some to question the neoliberal model as a basic paradigm for the new programme. It is incontestable that NEPAD's choice of a neoliberal type development for Africa is highly controversial. Although a number of academic studies, reports, and meetings have come out in favour of this paradigm, it is still too soon to reach any in-depth conclusions about its ability to accomplish NEPAD's objectives effectively. The general trend of current criticism is to ask what would happen if a disastrous solution were applied to a disastrous situation. This is not the appropriate opportunity for discussing the intrinsic validity of the neoliberal paradigm. Suffice it to say that doubts about its validity are based primarily on its applicability to the economic, political, and social structure of the African countries — something to which, for the moment, it is not suited. With regard to the values underlying the existing development of international environmental protection in the context of sustainable development, there is enormous ambiguity inherent in a fundamentally ambivalent choice — insofar as, on one hand, that choice was made by the Agenda 21 action plan on sustainable development and, on the other, in Africa —

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which constitutes the widespread manifestation of the domination of neoliberalism, and also marks the famous 'end of history' on the continent (Faure and Pâques 2002). Nonetheless, everything about the concept of sustainable development tends to belie any kind of supremacy of the economic dimension, precisely because of the integrated perspective that underlies this concept and requires, in the name of ethics, that the social, environmental, and cultural dimensions be placed on the same level. Accordingly, NEPAD's choice of the option of sustainable development is, if one considers the holistic vision in question, that of a new and historical development paradigm. The Choice of a New Development Paradigm? At least, the choice of a new development paradigm might be possible, given the insistence the new strategy places on the basis for its options. Because this choice rests primarily on the heuristic dimension of sustainable development, therein lies its interest. The philosophy of sustainable development cannot be understood unless one accepts that it is based on the primarily commercial exploitation of natural resources, with a view to enabling mainly rural populations to benefit from the process. Only the sustainable character of that exploitation and the use of environmental assets can ensure the sustainable development of the populations concerned. This was the central axiom of Agenda 21, the ultimate aim of which was to put an end to the appalling cycle of poverty and destruction of natural resources affecting much of the world. Accordingly, the paradigm of sustainable development as an action strategy makes little sense unless the emphasis is placed on the sustainable use of environmental assets to fight poverty effectively. Ten years after its official sanctioning at Rio, the concept of sustainable development is experiencing certain problems, because of excessive importance placed on the economic dimension, to the detriment of the other aspects. The entire issue, then, becomes one of deciding how to modify nonviable production and consumption patterns, for example, if the basic 'open international system' model considered by Agenda 21 cannot be changed. This question remains at the core of NEPAD's strategy. It remains unclear whether choosing sustainable development may, in the final analysis, mean indirectly opting for the dominant economic model. Regardless of the answer to this question, it would seem that the paradigm of sustainable development has at least superficially influenced the content of the African strategy, as reflected in section V of the NEPAD document, which is titled 'Programme of Action: The Strategy for Achieving Sustainable Development in the 21st Century' ( ' NEPAD' 2001). The sub-sections stipulate the 'conditions for sustainable development' and the 'sectoral priorities' advanced by its originators. The former lies at the heart of the crucial problem of how the objectives established are to be implemented. The latter asks to what extent sectoral priorities constitute the expression of the new paradigm.

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If one goes beyond merely listing the priorities, the answer to the second question is not obvious. The issues in question, for which NEPAD sets objectives and stipulates action to be implemented, are divided into six broad categories: all infrastructure sectors,2 human resource development,3 agriculture, the environment, 4 culture, and science and technology. Each category in itself would seem mandatory for the continent's economic development. Although this sentiment is reinforced by the choice of the region and even the continent as the level for implementation, the lack of a truly integrated approach that would testify to a global, holistic perspective for development is surprising. In this regard, NEPAD certainly sins by omission, seemingly the victim of a piecemeal approach that may very quickly weaken it in a context where globalisation definitely calls for globalised action. The lack of an open social debate that characterised NEPAD's development no doubt lies at the origin of this state of affairs. This problem must definitely be rectified, if only to facilitate the appropriation of the above objectives by all stakeholders concerned. However, the absence of any reference to the principles of the Rio Declaration is noteworthy, despite the fact that the declaration, even after Johannesburg, remains the charter for sustainable development. Can it really be said that Africans are at the centre of the new development strategy? Does the strategy truly incorporate concerns about development and the environment? Where is the affirmation of a precautionary approach? To what extent can the principle for assessing the impacts of economic development projects be considered vital to future action? These questions are by no means exhaustive, but they all reflect the need to establish a paradigm for sustainable development by adapting NEPAD's objectives and commitments to the principles of sustainable development as restated by the Millennium Declaration and the Johannesburg Summit action plan. There is another question, moreover, that contains all the others: Can NEPAD's objectives and action actually be implemented, or will they remain just wishful thinking?

A Difficult-to-Implement Plan? With respect to its ultimate intentions, NEPAD aims at concrete implementation. Its observations on the existing position of a poverty-stricken Africa in an extremely wealthy world cannot help but act as a call to arms. The new political will of African leaders on which it relies is based firmly on an 'appeal to the peoples of Africa' to bring its plan to fruition. The possibility of an institutional implementation mechanism was examined at the Lusaka Summit in 2001, and the programme review conducted at the 2002 G8 Summit in Kananaskis also attests to NEPAD's determination to translate the initiatives in question into action. However, things are never as simple as they seem. It is very likely that, in addition to the doubts it has already raised, NEPAD will experience other difficulties when attempting to implement such specifics. These difficulties may be of two orders. The first involve what the programme lists in a

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sub-section titled 'Conditions for Sustainable Development' ('NEPAD' 2001, para. 71-95). As the Kananaskis discussions among the four African leaders and the G8 heads have shown, these conditions may constitute actual conditionalities for financial support. As for the second type, in spite of a mobilisation of funds, these may stem from the physical conditions of implementation, which are still extremely unclear despite initial efforts to the contrary made at the 2002 Durban Summit (which marked the beginning of the AU). The Issue of Conditionalities Conditionality could be one of the major challenges to implementing the specifics of NEPAD. While the term certainly figures nowhere in the document — it mentions only the 'conditions' — the latter are not even presented as such, but rather as two series of initiatives, one aimed at 'peace, security, democracy and political governance', the other at 'economic and corporate governance'. It is obvious from the outset that the division between these two broad categories is not very clear, notably because of the ambiguity of the concept of governance, which is given several meanings in the programme, including good governance, economic governance, and corporate governance.5 Imposing conditionalities for the achievement of sustainable development in Africa effectively means establishing an appropriate framework for the activities in question. The brief introduction to NEPAD casts a harsh light on the problems Africa is experiencing, problems that can obviously be solved if the conditions in question are inet. According to principle 25 of the Rio Declaration, 'peace, development and environmental protection are interdependent and indivisible' (United Nations Conference on Environment and Development [UNCED] 1992). This means, first, that ensuring the maintenance of peace and security, especially by preventing conflicts or by settling inter-ethnic and regional differences, is a powerful factor for sustainable development. Various examples, in particular in Africa's Great Lakes region, demonstrate the devastating effect of armed conflict on the environment. At the same time, the balanced, shared management of natural resources, especially those that are cross-border in nature, is undoubtedly also a factor for peace (Prieur 1991). The purpose of the initiative for peace, security, democracy, and good governance is precisely to introduce these factors in order to create conditions favourable to the achievement of sustainable development. With respect to peace and security, NEPAD does not contribute anything particularly novel, merely insisting on the need to put an end to the conflicts that are undermining the continent and exhausting its ability to focus on socioeconomic development policies. Existing sub-regional, regional, and global mechanisms are therefore encouraged to find 'a lasting solution to existing conflicts' more actively through prevention or resolution ( 'NEPAD' 2001, para. 74). The NEPAD Heads of State Forum pledged to provide support measures to be funded and maintained by partners on the basis of `recommendations' made in the six months following programme implementation.

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The same activist approach is applied to democracy and good governance. Until François Mitterrand's 'La Baule speech' in 1990, there was no question of democratising African regimes considered by their leaders as founded on the democratic principles proclaimed in their national constitutions. However, there was still a gap between formal or 'démocratie programmatoire', as Maurice Duverger (1990) so eloquently put it, and the 'true democracy' advocated by NEPAD. For a number of reasons, including historical circumstances, the transition to democracy has been completed gradually, and political and constitutional changes have introduced, with varying degrees of will and success, a 6 powerful democratisation movement almost everywhere. NEPAD has noted this irreversible movement and pledged to ensure its success by promoting the rule of law, respect for human rights, and the spirit of integrity and responsibility of all citizens in a context of transparency.7 Initiative Al focusses on administrative and civil services, strengthening parliamentary oversight, promoting participatory decision making, adopting effective measures to combat corruption and embezzlement, and undertaking judicial reform ('NEPAD' 2001, para. 82). A mechanism for monitoring and evaluating progress will be implemented as part of the NEPAD Heads of State Forum. Ensuring economic and corporate governance obviously constitutes official recognition of the limits on public action and the need (long insisted upon by the Bretton Woods institutions, but now reworked and better appreciated) to have the private sector participate more actively in achieving sustainable development goals. The corrections made to old doctrines highlight two major avenues of intervention: strengthening the private sector's ability to participate in NEPAD's implementation, taking into account its particular structure and the weight of the international economy, and selecting the geographic level for implementation, which, again because of the particular structure of the African nations and the logical of globalisation, must be sub-regional or continental. For each of these points, NEPAD intends to 'promote throughout the participating countries a set of concrete and timebound programmes aimed at enhancing the quality of economic and public financial management, as well as corporate governance' ('NEPAD' 2001, para. 88) by pooling resources in order to 'enhance regional development and economic integration on the continent, in order to improve international competitiveness' ('NEPAD' 2001, para. 91). In this regard, the five sub-regional groups established as part of the regionalisation process set out in the 2000 Cotonou Agreement between the European Union and the African, Caribbean, and Pacific Group of States (ACP) have been the object of much commented-on political support.8 However, any examination of these conditionalities must be accurate. What appears obvious today has rarely proven so in the past. Of the various points currently put forward by NEPAD as internal requirements for programme implementation, the first is the pressing and often unsuccessful stipulation of the international community for democratisation (today espoused in a more activist style by African leaders) as a condition for economic aid and bilateral or multilateral aid in general. Accordingly, the notion of 'legal conditionality for assistance' has been proposed.9

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Regardless of what term is used, these remain nonetheless conditionalities. NEPAD was introduced accordingly at the G8 Summit in Genoa in July 2001. The goal of the 2002 Kananaskis Summit was to elicit an initial reaction. Upon an analysis of the programme, which was presented by the four members of the NEPAD Implementing Committee, a positive response in principle was given supporting implementation via the G8 Africa Action Plan. The plan was centred on two main ideas essential to an understanding of conditionalities: the idea of supporting the development of African countries that respect the conditions in question, and, at the 2003 G8 Evian Summit, the idea of examining the progress made in implementing the G8 plan based on the report of the G8's personal representatives for Africa. 10 The action plan adopted at Kananaskis does, of course, test NEPAD's operational viability. While the plan was based on the organisation's options, and African leaders are in charge of monitoring and evaluating its implementation via the Heads of State Forum, the design and content of the G8 action plan might become the actual 'project document' and be substituted for NEPAD itself, which will then serve merely as a reference. Indeed, the action plan would seem more specific than NEPAD, as it has established eight series of specific initiatives with their own implementation mechanisms. 11 The real issue of conditionalities is less to control the African countries than to provide NEPAD with hard and fast content. If these conditionalities are met, will this be enough to reverse existing trends? When posed in this fashion, the question emphasises the limits that could affect NEPAD implementation. Obstacles to Implementation It is still too soon to discuss the obstacles liable to affect NEPAD's success. Yet certain brief general considerations are relevant. First, it would seem obvious that the particularly short deadlines specified in the G8 Africa Action Plan make the proper implementation of scheduled activities problematic. A NEPAD summit was held 16 September 2002 in New York as part of the 57th session of the General Assembly of the United Nations, at which Resolution A/57/2 was adopted without vote. Nonetheless, progress will likely be very slow. Furthermore, the establishment of the AU, which took over from the OAU at the Durban Summit in July 2002, will also complicate initial implementation schedules to some degree. This is not a major problem, given that, since the Lusaka Summit, there has been a connection between NEPAD and the OAU/AU. Since the creation of the AU, NEPAD has officially been the agenda for long-term development for countries of the African regional organization. This integration, however, has not solved all difficulties. After the 1980 Lagos Plan, another framework for economic development was put in place at the continental level a decade later, in June 1991, by an uncertain African economic community. 12 Will these diverse initiatives be harmonious?

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Conclusion Only time will reveal whether these initiatives will be harmonious. With NEPAD, the leaders of the African continent have taken up a formidable challenge. The programme undisputedly suffers from a marked social deficit, given that corporations and the private sector, at which it is primarily aimed, cannot alone represent all of African civil society. The result would be a new unequal form of development. The public dialogue begun in Dakar in 2001 should be maintained and opened up to all segments of society in each country, as the first principle of the Rio Declaration states — 'human beings are at the centre of concerns for sustainable development' (UNCED 1992). Accordingly, major emphasis should be placed on the social dimension of the development project in question. Firmly based on the three pillars of the environment dimension, the social dimension, and the economic dimension, Africa's development via NEPAD has some chance of being a true expression of sustainable development. It is not necessarily the type of development that, in the name of 'playing catch-up', seeks to take the same paths that are hurting the planet today, and are still defended by the developed countries (especially the United States). Rather, it is development as defined in the Brundtland Report — which, even after the Johannesburg World Summit, retains all its value — 'development that meets the needs of the present without compromising the ability of future generations to meet their own needs' (World Commission on Environment and Development 1987). In any event, one must hope that NEPAD does not become yet another graveyard for broken dreams, in a world permanently marked by vertical integration in which the continent would be forever marginalised.

Notes 1 It would also be useful to reinforce these three components with a fourth — that of cultural diversity, for which there has been a strong demand both from indigenous populations and from organisations representing language regions other than those dominated by Englishlanguage speakers. 2 On the one hand, physical infrastructure such as roads, highways, airports, seaports, railways, etc.; on the other, new information and communications technologies (ICT), energy, transport, and water and sanitation. 3 Included here are objectives to reduce poverty, provide training and education, and reverse the brain drain, as well as to improve health by combating pandemics such as HIV/AIDS. 4 Eight priority measures are set out, pertaining to combating desertification, wetland conservation, controlling invasive exotic species, coastal management, global warming, crossborder conservation areas, environmental governance, and financing. 5 Thus, 'Al: The Peace, Security, Democracy and Political Govemance' already mentions 'sound economic management' ('NEPAD' 2001, para. 71), which, logically enough, is covered by 'A2: The Economic and Corporate Governance Initiative'. 6 See Henri Roussillon (1995); on Cameroon, see, in the same work, Stéphane Doumbé-Billé (1995).

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7 'With the New Partnership for A frica's Development, Africa undertakes to respect the global standards of democracy, the core components of which include political pluralism, allowing for the existence of several political parties and workers' unions, and fair, open and democratic elections periodically organised to enable people to choose their leaders freely' ('NEPAD' 2001, para. 79). 8 Those five groups are West Africa, North Africa, Central Africa, East Africa, and Southern Africa. 9 See the September 2001 issue of A frilex on the subject of legal conditionality in Africa, in particular L. Grard (2001), Stéphane Bolle (2001), Alain Vandervorst (2001); and Jean Louis Atangana-Amougou (2001). 10 According to the conclusions of Canada's prime minister Jean Chrêtien, chair of the Kananaskis Summit, 'half or more of our new development assistance ... could be directed to African nations that govern justly, invest in their own people and promote economic freedom' (G8 2002b). As to the Africa Action Plan itself, he stated: 'Our partners will be selected on the basis of measured results. This will lead us to focus our efforts on countries that demonstrate a political and financial commitment to good governance and the rule of law, investing in their people, and pursuing policies that spur economic growth and alleviate poverty' (G8 2002a). 11 The eight specific initiatives of the G8 Africa Action Plan are promoting peace and security (seven commitments); strengthening institutions and governance (six commitments); fostering trade, investment, economic growth, and sustainable development (six commitments); implementing debt relief (two commitments); expanding knowledge by improving and promoting education and expanding digital opportunities (five commitments); improving health and confronting HIV/AIDS (three commitments); increasing agricultural productivity (three commitments); and improving water-resource management (one commitments). The implementation mechanisms are founded, in accordance with current concepts, on enhanced partnerships: each G8 country will implement partnership-oriented measures with eligible nations in accordance with established conditionalities. However, group partnerships may also be established without prejudice to classical multilateral co-operation via the international institutions to which the G8 countries belong. This is illustrated, in particular (according the Kananaskis Summit chair), by the pledge to work with African partners to deliver a joint plan, by 2003, for the development of African capability to undertake peace support operations. This partnership-based action is itself based on a dual principle: the full and complete responsibility of the African countries implement and assess follow-up on such action, which is to be the subject of a mechanism established by NEPAD through its Heads of State Forum, and an assessment of the progress made in implementing the action plan as early as the next G8 summit. It should be noted that, in order to provide a tight framework for action implementation, on 11 June 2002 the NEPAD Implementating Committee adopted the Declaration on Democracy, Political, Economic, and Corporate Governance, and the African Peer Review Mechanism. 12 After the Abuja Treaty took effect in May 1994, the OAU acted as an operating structure for the African Economic Community, especially in implementing a six-step process designed to lead to the complete integration of five sub-regional communities, the establishment of the Central African Bank, and a single African currency.

References Atangana-Amougou, Jean Louis (2001). 'Conditionnalité juridique des aides et respect des droits fondamentaux'. A frilex vol. 2, September. (January 2003).

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Bolle, Stéphane (2001). 'La conditionnalité démocratique dans la politique africaine de la France'. A frilex vol. 2, September. (January 2003). Doumbé-Billé, Stêphane (1995). 'Les transformations politiques au Cameroun: Un processus d'élargisssement prudent'. In H. Roussillon, ed., Les nouvelles constitutions africaines: La transition démocratique, pp. 69-81. Presse de l'Institut d' études politiques de Toulouse, Toulouse. Duverger, Maurice (1990). Institutions politiques et droit contitutionnel. 20th ed. Presses universitaires de France, Paris. Faure, M. and M. Pâques , eds. (2002). La protection de l'environnement au coeur du système juridique international et du droit interne: A cteurs, valeurs, et efficacité. Bruylants, Louvainla-Neuve. G8 (2002a). 'G8's Africa Action Plan'. Kananaskis, 27 June. (January 2003). G8 (2002b). 'The Kananaskis Summit Chair's Summary'. Kananaskis, 27 June. (January 2003). Grard, L (2001). 1' oeuvre des instances intemationales en faveur de l' allègement de la dette publique des Etats d'Afrique Subsaharienne'. A frilex vol. 2, September. (January 2003). 'New Partnership for Africa's Development' (2001). NEPAD, October. (January 2003). Prieur, Michel (1991). 'La protection de I ' environnement'. In M. Bedjaoui, ed., Droit international: bilan et perspectives, pp. 879. UNESCO, A. Pedone, Paris. Roussillon, Henri, ed. (1995). Les nouvelles constitutions africaines: La transition démocratique. 2nd ed. Presse de l'Institut d'études politiques de Toulouse, Toulouse. United Nations Conference on Environment and Development (1992). 'Rio Declaration on Environment and Development'. Rio, 14 June. (January 2003). United Nations Environmental Programme (2001). 'Assessment of Progress on Sustainable Development in Africa since Rio (1992)'. Report prepared by the Expanded Joint Secretariat for the preparation of the 2002 WSSD (UNEP/(ROA)WSSD/1/4). (January 2003). Vandervorst, Alain (2001). 'Contenu et port& du concept de conditionnalitó environnementale: vers un nouvel instrument au service du droit de la protection de l'environnement en Afrique?' A frilex vol. 2, September (January 2003). World Commission on Environment and Development (1987). Our Common Future. Oxford University Press, Oxford; New York.

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PART III: CRITICAL CHALLENGES IN INTERNATIONAL FINANCE

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Chapter 10

The International Monetary Fund and Its Critics Michele Fratianni

When the Bretton Woods par value system collapsed in 1973, the International Monetary Fund (IMF) appeared to be a character in search of a play. But events proved that this institution was resilient and its role actually grew. Was it a bureaucratic response to a crisis or the fact that a new play was being written for the IMF by its major shareholders? While there remains a need for self-preservation, the main reason for the new role of the IMF lies with its principal shareholders, who had an interest in delegating new parts for it to play. The IMF was most willing to oblige. Clearly, the new economic environment helped to restructure and amplify the IMF's mission. To begin with, there was the rapid and somewhat unpredicted rise of global finance accompanied by a widespread acceptance of market-based principles (Boughton 2001). The liberal economic philosophy made it possible to set aside decades of mistrust toward private capital flows, a distrust that had been codified in the Bretton Woods charter. Economic liberalism was practised not only by the industrial countries, but also by countries that were either emerging or freeing themselves from the yoke of the Soviet regime. This change is reflected in an IMF membership that went from 44 members at the time of the Bretton Woods conference in 1944 to today's 183. Today's IMF is a far different institution than the IMF envisioned by its initial designers, John Maynard Keynes and Harry Dexter White. It advises countries, assesses their economic policies, co-ordinates lenders in a debt crisis, provides information about member countries, gives emergency loans with conditions to economies in financial distress, promulgates standards, acts as a crisis manager, lends to poor countries at subsidised interest rates, and provides technical assistance. The currency and banking crises of the 1990s have tarnished the brand name of the IMF. Many critics claim that the IMF is doing too much; others opine that it is not doing enough. Proposals to reform the institution abound, ranging from one extreme solution of abolishing it altogether to the other extreme solution of transforming into a super fund with the power to create monetary base, set financial regulations, and enforce them world-wide. This chapter examines these issues in some detail. The next section discusses the evolution that has taken place in the IMF since the demise of the par value system in 1973. The section following evaluates the most significant reform proposals. A critical assessment of the reform plans, including those of the authors, is given in the final section.

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The New International Monetary Fund Bretton Woods was the 1944 brainchild of John Maynard Keynes and Harry Dexter White, who shared the view that the new international monetary system would have to solve the deflation bias of the gold standard while retaining its essential mechanism of co-ordination. Critical in this view was the lending by surplus to deficit countries to meet temporary external imbalances (Meltzer 1999). In this scheme, the IMF was to occupy a central place, not only as a financial intermediary between surplus and deficit countries but also by permitting member countries to change their par value (with respect to the U.S. dollar) when external imbalances were chronic rather than temporary. The IMF, in essence, was the arbiter of the Bretton Woods system. The IMF of today, the new fund, is a drastically different institution from the original version envisioned by Keynes and White. The current roles of the IMF can be summarised as follows (Bordo and James 2000, 18): • provider of a seal of approval to member countries through so-called surveillance and conditionality lending; • co-ordinator of lenders in a debt crisis; • disseminator of data about member countries' policies and essential macroeconomic and financial performance and establishment of standards; • crisis manager through emergency lending to countries in distress; • concessional lender to countries that are either poor or have no access to private credit markets; and • provider of advice and technical assistance. It is useful to review each in turn. Surveillance and Seal of A pproval

The IMF carries out a periodic 'audit' of macroeconomic policies for each of its member countries. The first re-engineering of the IMF, after the demise of the Bretton Woods system, was to re-fashion itself as a watchdog of exchange rate policies. It is not clear what surveillance actually meant in practice, given that the IMF had accepted the co-existence of unlimited exchange rate regimes. Surveillance can be best thought of as a consistency check between the country's macroeconomic fundamentals and the sustainability of the chosen exchange rate regime. For countries with a flexible exchange rate, the consistency check requires the identification of a long-run equilibrium exchange rate and its temporal stability. The IMF never managed to design and implement a global exchange rate strategy, which was the ultimate objective of surveillance. Undoubtedly, this is a daunting task but one that goes to the institution's core competency. The advantage of designing a global exchange rate strategy is not so much to dictate exchange rate regimes to member countries (which would violate political sovereignty) but to delineate criteria under which the IMF would not lend to member countries in distress (Willett 1999). Currency

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crises have one element in common: pegged exchange rates. Recognising this fact, Bill Clinton's administration in 1999 took the position that the IMF had to restrict its lending to those countries that had adopted suitable exchange rate regimes (Rubin 1999). Since retreating from its original mission and core competency of exchange rate strategies, the IMF has expanded its advice agenda to include subjects that were traditionally part of domestic politics. The most outspoken critic in this regard is Martin Feldstein (1998), for whom mission creep reduces the comparative advantage of the IMF and ultimately tarnishes its seal of approval (Willett 1999). Who is responsible for mission creep? Is it IMF management, which seeks to expand power, or the IMF's critical shareholders — the G7 countries — that use the IMF as an extension of their national foreign policy and aid programmes? The position taken is that mission creep has more to do with the preferences of the G7 countries than with the opportunistic behaviour of IMF management. Paul Blustein (2001, 101-102) illustrates the point in his discussion of the IMF's mission to Indonesia during the 1997 currency crisis: The reason for the turnaround was pressure from members of the IMF board representing Western industrial countries. Karin Lissakers, the U.S. representative, was particularly assertive. In addition to hearing from pro reform Indonesian technocrats, the Clinton administration was getting an earful from nongovernmental organizations — primarily religious and labour groups, both Indonesian and Western — who wanted to see the IMF's leverage used to attack KKK.1 Administration officials began to educate themselves on matters such as how BULOG, the state agency responsible for the distribution of many key foodstuffs and raw materials, helped enrich certain Suharto cronies, and they realized that a bailout of Indonesia would be criticized if it appeared to tread too lightly on the problem. Thus they wanted reforms to extend well beyond the typical Fund program... 'The mission went out [to Jakarta] with the usual recipe — tweak a little on monetary policy here and fiscal policy there,' Lissakers recalled. 'We stepped up the heat, the more we found out about the issues, hearing about these massive subsidies to cronies and family members... This was clearly pushing the outside of the envelope.'

The IMF's critical shareholders hold the key to the role and evolution of the institution. Individual staff members, especially at country desks, may well be 'captured' by borrowing countries, but decisions must be approved by the Executive Board. Voting in the Board is not democratic (i.e., one country, one vote) but is based on voting weights. At present, the United States has 17.11% of the total votes, Japan 6.14%, Germany 6%, France and the United Kingdom 4.95% each, Italy 3.26%, and Canada 2.94%. The G7 countries, as a group, hold 45.35% of the votes in the IMF. Power is very asymmetrically distributed. Nothing of substance in the IMF can take place without the approval of the G7 countries, or, for that matter, of the United States. The U.S. has enough votes to block a quota increase.2 Furthermore, surveillance suffers from the basic conflict between individual interests and collective interests. Each member of the IMF, but especially the large ones, has an

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incentive to structure surveillance to retain maximum flexibility in the conduct of macroeconomic policies. As a group, however, member countries would benefit from co-ordination of macroeconomic policies. This is the type of conflict highlighted in the prisoners' dilemma aptly summarised by James Boughton (2001, 42), who wrote that 'wielding a club was not always compatible with being part of a club'. Here the IMF can only do what club members allow; the asymmetric distribution of voting power suggests that the IMF responds to the interests and incentives of its principal shareholders rather than to the membership at large. Conditionality Lending

Typically, a member country applies for IMF financial assistance when it is in a balanceof-payments crisis. If the country in question has no access to private capital markets, the IMF in fact acts as a lender of last resort. Borrowing from the IMF is cheaper than borrowing from the market, because the IMF basically charges a weighted average of money-market interest rates in industrial countries plus an adjustment factor.3 The subsidy justifies the imposition of conditions on the borrowing country. In a frictionless world and with perfect information, the equilibrium cost of the conditions to the borrowing country would be exactly equal to the subsidy, thus leaving the member country perfectly indifferent to borrowing from the market and borrowing from the IMF. With imperfect information about the structure of the economy and the preferences of the government, such an outcome is not likely to hold. The IMF could actually set restrictions that are too high or too low. A great deal of criticism of IMF conditionality has to do with the implied cost of conditionality. Critics from the left blame the IMF for prescribing medicine that is too harsh and disproportionately affects the poor: the cost of conditionality lending is too high. Critics from the right blame the IMF for being too soft on conditions and their implementation. These critics point to the fact that many debtor countries suffer from systematic policy failures and are repeated IMF borrowers. Both the left and the right agree that IMF conditions are not likely to be met, although for different reasons. For the left, IMF conditions are not met because they are too costly for the borrowing countries. For the right, conditions are not met because the availability of IMF programmes encourages moral hazard and because the IMF staff has a vested interest in maintaining them. There is a third group that believes that the IMF acts in the longrun interest of the borrower, who, in turn, uses IMF conditions as leverage for implementing policies that could not be feasible without external pressure. Conditionality lending has three different phases: prior actions, quantifiable performance criteria, and qualitative aspects of policy reforms (Bird 1999). Prior actions refer to corrective measures that a member country must adopt before a stand-by arrangement can be approved.4 A devaluation of the home currency may be the suitable corrective measure in many cases. Quantifiable performance criteria define conditionality in a strict sense: the borrowing country agrees to achieve specific targets

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on specific macroeconomic and structural variables, and the IMF monitors progress toward the target in the disbursement of funds. As noted, these performance criteria have proliferated. In the early days, the criteria related to domestic credit expansion and government budget deficits. By 1990, the average number of criteria had more than quintupled with respect to the early 1980s (Boughton 2001, figure 13.5). More criteria were added in 1990s, as Blustein attests above. Recently, the G7 countries have encouraged IMF management to narrow the list of conditions (see below). The final stage of conditionality lending includes a so-called letter of intent, in which the debtor country promises to implement policy reforms. The design and effectiveness of conditionality are the subject of great debate in the IMF and the literature. The available evidence suggests that conditionality has had at best modest success. A 1987 study conducted by the Research Department of the IMF concluded that much of conditionality lending had failed in the most basic objective of obtaining sustainable external balance with long-term economic growth (Boughton 2001, 569). Mohsin Khan's (1990) detailed study of IMF-supported adjustment programmes shows that they had a statistically positive impact on the borrowers' current account balance, a negative impact on economic growth, and no impact on the rate of inflation. Nadeem Haque and Mohsin Khan (1999), after surveying the literature, essentially confirmed Khan's earlier conclusions. The positive evidence on the current account is consistent with the view that the IMF has been successful in containing the borrowing countries' domestic absorption. The negative evidence on economic growth is consistent with the view that the borrowing countries have reduced domestic absorption also by cutting investment and future growth. The neutral evidence on inflation supports the view that IMF conditionality has neither altered the inflation preferences of monetary authorities in the borrowing countries nor the constraints placed upon them. One reason why conditionality has achieved little stems from the high failure rate of programme completion: Most commonly, countries had been unable to implement either the large cuts in government spending or the large increases in tax revenues that so many of them needed. In addition, in several cases both the countries and the IMF had under-estimated the amount of adjustment that was ultimately needed (Boughton 2001, 617).

High failure rates of programme completion have been accompanied by more frequent borrowings by the same countries. For example, in 1990, the number of countries that had borrowed five or more times in the preceding ten years and with outstanding credit of at least 100 percent of their quota had quadrupled from 1980 (Boughton 2001, figure 13.6, 619). This evidence is inconsistent with the hypothesis that borrowing countries are willing to adopt the conditions imposed by the IMF and need an external push to do it, but it corresponds to the alternative hypotheses that the cost of conditionality is too high or too low. If the cost of conditionality is too high,

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borrowing countries will accept the IMF performance criteria to obtain the loan but will ignore them or fail to meet them in the implementation phase. If the cost of conditionality is too low, member countries will be taking higher risk by putting in place policies that generate external deficits and, consequently, raise the demand for IMF resources. A thorough understanding of the interaction between the IMF and its borrowers requires a consideration of the motivation of the relevant players. For the IMF, the primary objective of conditionality is to restore external balance while preserving long-term internal balance in a liberal environment of international trade and finance. Governments of borrowing countries have a variety of macroeconomic objectives — such as output growth, the unemployment rate, and inflation rate — subject to the constraint of balance of payments; but governments also want to remain in power or win the next election. Thus, it may pay off politically for a government to ignore temporarily the balance-of-payments constraint and start a dash-for-growth policy, which implies above-average output growth rates, balance-of-payments deficits, and a rising inflation rate. An unsustainable external deficit will put an end to the expansionary policy and will start an adjustment programme financed by the IMF. 5 The IMF, with its longer planning horizon, sets conditions that require costs, in terms of output and employment, to be incurred before benefits unfold. The borrowing government is aware of the intertemporal cost-benefit tradeoff but finds it politically unpalatable.6 It may accept those conditions to obtain the loan, but will not implement them. This supports the view of the left. Alternatively, the government feels it can improve the intertemporal tradeoff by softening the IMF's position, by claiming extenuating circumstances. This corresponds to the view of the right. It is possible that both paradigms co-exist because the IMF discriminates between rich and poor, large and small, geopolitically important and irrelevant members. To a large extent, this discrimination is driven by the preferences of the critical shareholders who use the IMF as a multilateral agency of foreign policy and foreign aid. Lenders' Co-ordinator Debt crises have been an integral part of modern capitalism. When the gold standard was in effect, bonds were the preferred medium of sovereign debt and bondholders' committees the key institution to resolve debt crises. In the words of Barry Eichengreen (1999, 76): At first, ad hoc bondholders' committees were formed in response to each interruption in debt service payments. Predictably, these committees had trouble establishing contact with the bondholders and opening lines of communication with foreign debtors. In Great Britain, the leading national creditor of the era, the situation was regularized in 1868 by the creation of the Corporation of Foreign Bondholders... The same evolution occurred elsewhere with the establishment of standing bondholders committees in Paris, Amsterdam,

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and Berlin before World War I and in the United States in the 1930s. These committees fell into disuse after World War II because the international capital market was slow to recover from the debt crisis of the 1930s and then because bond finance was superseded by syndicated bank loans.

The IMF became the catalyst of collective action during the debt crisis of the 1980s. Up to that time, the IMF had been a club funded by rich countries for their own benefit. After that, the developing world became the club's main clientele. The reason for the change was not altogether altruistic on the part of the industrial countries: default on foreign debt would have bankrupted quite a few of their banks and disrupted their financial systems. The IMF stepped into the drama as a deus ex machina, co-ordinating the collective interests of the creditors and the debtors. The international debt crisis of the 1980s was grounded in the oil shock of the 1970s and the heavy accumulation of foreign reserves by oil-producing countries. These reserves were kept largely in the form of deposits with large international banks, which recycled them in bank loans to oil-importing developing countries; these countries maintained expansive economic policies. The international debt crisis exploded in the midst of high dollar interest rates. The system cried for a conductor of the collective interest and the IMF responded to the call. The IMF, however, would have not been allowed to play the new role without the assent of its critical shareholders, whose banks had massive foreign exposure. In fact, the debt crisis came to an end only when the U.S. government took the lead and launched the Brady plan in 1989. The Brady plan was a combination of debt relief and debt securitisation. Affected countries, among them Mexico, were permitted to buy back bank debt at a discount and to replace that debt with long-term fully collateralised bonds (so-called Brady bonds) issued either at a discount or with a below-market coupon. All of this would not have happened without a resolution of the collective action issue: bank syndicates had to agree to forego the clause that enables individual creditors, no matter how small, to block agreement. The collective action problem showed up again in the Asian financial crisis of 1997. Although the ultimate causes of the South Korea financial crisis might have resided with the corporate culture of the chaebols and their obsession with size, the intermediate cause was a large foreign-currency exposure of Korean banks, and the immediate cause was the action of foreign creditors — in particular, Japanese banks — to cut their exposure. The crisis was resolved at the eleventh hour by a massive creditors' standstill and with the help of William Rhodes, vice-chairman of Citicorp and a veteran of the debt crisis negotiations of the 1980s. Here is his account of the events: The pulling [of credit lines from Korea] was still going on at $1 billion a day. I called [Japanese Vice Finance Minister] Sakakibara, and he said that he alone could not get Japanese banks to hold. So the first step was to get the major banks to stop pulling. Over the weekend of the twenty-seventh and twenty-eight, I got all of them — either the president, chairman,

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or vice chairman of major Japanese banks. Some I knew, some I didn't. I had to promise that I would get the European and the U.S. banks to hold ... I really had to put my name on the line. I finally got everyone to agree not to pull (Blustein 2001, 201).

Despite the success, the South Korean incident underscores the fact that the resolution of the collective action problem was far from being institutionalised. For Eichengreen (1999, 75), 'the existence of a committee infrastructure would have considerably eased the process'. Information Disclosure and Standard Setting

The IMF is one among several international standard-setting bodies (see Table 10.1). It has issued standards on the quality and timeliness of macroeconomic data through its General Data Dissemination System and the Special Data Dissemination Standards Table 10.1 Standards and Standard-Setting Institutions Standard

Content

Core Principles for Effective Banking Supervision

25 basic principles of banking Basle Committee on Banking Supervision, 1975, by the G10 supervision central banks after Herstatt Bankaus failure

Core Principles for Systematically Important Payment Systems

Principles for the design and operation of systemically important payment systems

Transparency practices for Code of Good Practices on Transparency in Monetary and central banks and monetary Financial Policies policy

Issuing Institution

Committee on Payment and Settlement Systems, 1990, by G10 central banks to deal with payment and settlement issues International Monetary Fund

Code of Good Practices in Fiscal Transparency

Transparency practices for government finances and fiscal policy

International Monetary Fund

Special Data Dissemination Standards/General Data Dissemination System

Statistical practices for coverage, International Monetary Fund data, public access, and integrity of economic, financial, sociodemographic data

Principles of Corporate Governance

Shareholder rights, equitable treatment of shareholders, stakeholders' role, disclosure and transparency rules, board responsibilities

Organisation for Economic Co-operation and Development

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(SDDS). Furthermore, it has codes of good practice in the areas of monetary and fiscal policies. The underlying assumption is that better information disclosure not only improves the functioning of the markets but also facilitates the diagnosis of impending financial crises as well as sets in motion pre-emptive corrective measures. Countries that subscribe to the SDDS agree to follow best practices in data accessibility, coverage, integrity, periodicity, quality, and timeliness. The production and distribution of data are done by the member countries. Financial Crises and Crisis Management

A fixed exchange rate regime is a necessary condition for a currency crisis. Up to the early 1990s, the consensus was that poor fundamentals were responsible in determining what candidates were prone to speculative attack.7 The Mexican financial crisis of 1994 and the Asian financial crisis of 1997 brought the link between financial fragility

Standard

Content

Issuing Institution

Principles on Cross-Border Insolvency

In progress

World Bank

40 Recommendations of the Financial Action Task Force

Guidelines for anti–money laundering

Financial Action Task Force on Money Laundering, 1989, by the Paris G7 Summit

Objectives and Principles of Securities Regulation

30 principles for regulating securities markets

International Organization of Securities Commission, 1983, to promote standards of securities regulation

Insurance Core Principles

Basic principles for insurance supervision

International Association of Insurance Supervisors, 1994, for co-operation among insurance regulators and supervisors

International Accounting Standards

Principles for preparing financial statements

International Accounting Standards Board, 1973; private sector body to harmonise accounting principles

International Standards on Auditing

Principles for auditing

International Federation of Accountants: private sector body established in 1977 to harmonise auditing standards

Source:

Adapted from Fratianni and Pattison (2002).

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and currency crisis to centre stage (IMF 1999, 33-66). Aggressive, incompetent, and corrupt bank lending practices, fuelled by inflows of short-term foreign bank borrowing, were at the core of the Thai financial crisis. Crony capitalism was rampant in Indonesia, when the rupiah began feeling the pressure of the floating Thai baht. As was true in Thailand, Indonesian businesses and banks had borrowed heavily in foreign currencies without hedging. In South Korea, the proximate cause of the financial crisis was the large foreign currency exposure of the banks. The origins of the Russian financial crisis of 1998 were government deficits and an explosion of short-tem debt denominated both in dollars and rubles. The crisis was fed by widespread expectation that this nuclear weapons–rich country would be bailed out. But Russia defaulted on its debt and devalued its ruble. Exploding debt dynamics also engulfed Brazil in 1998, which faced the added difficulty of a world financial market being stung by the Russian crisis. The Brazilian real devalued in January 1999. The IMF was an emergency lender to all of the above countries, except Russia, where it had been involved up to the time of the debt default. The IMF, the World Bank, the Asian Development Bank, and individual governments lent to Thailand, Korea, Indonesia, and the Philippines — the East Asian countries affected by the 1997 crisis —US$119.5 billion (Kane 2000, table l), a sum that is essentially identical to the outflow of short-term capital and official assistance that took place between June 1997 and the end of 1998 (Kane 2000, 4 and table 2). As with Mexico in 1995, the international community came to the rescue with a big wallop of cash. The alternative of letting the countries fend for themselves was never seriously considered because policy makers feared a domino effect. Critics of the rescue claimed that the international community, particularly the IMF, was setting the stage for increasingly larger emergency packages in the future. To echo this concern, the assistance package for Brazil in November 1998 was US$41 billion (IMF 1998, 113), 8 the package for Argentina in January 2001 for US$40 billion9 and the IMF loan to Brazil in August 2002 was US$30 billion, the largest ever by the institution to an individual country. Should the IMF be bound by the stark alternatives of either answering all calls for help unconditionally or answering no calls? These issues are explained later in this chapter. Concessional Lender

In the 1980s, the IMF created first the Structural Adjustment Facility and then the more ambitious Enhanced Structural Adjustment Facility aimed at poor countries. Lending, under these two facilities, carried a 0.5 percent interest rate and had a repayment schedule of five to ten years with a grace period of five years. In 1999, there was a further expansion of concessional lending with the creation of the Poverty Reduction and Growth Facility (PRGF) that had replaced the Enhanced Structural Adjustment Facility. As of March 2001, 77 members were eligible for PRGF assistance;

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eligible countries could borrow up to 140 percent of their quota, but exceptions beyond this limit were contemplated. On 30 April 2001, PRGF was the most active IMF facility with 43 outstanding programmes.10 In essence, the IMF has moved into the aid business, encroaching on the World Bank territory. As in other new areas, the IMF has responded to the wishes of critical shareholders who were looking to parcel foreign aid through a multilateral agency (Bordo and James 2000, 27). How much thought did IMF management give to the prospect of reputational losses that inevitably accompany a disorderly expansion of the institution's agenda? The new objective of poverty reduction will require that the IMF be involved in the details of government spending and taxation, the traditional turf of politicians. The obvious prediction is that these politicians will have an additional reason to blame the IMF when economic conditions deteriorate at home. A dvice and Technical A ssistance

The IMF gives advice on policies to member countries; it also provides technical assistance on many fields ranging from exchange rate systems to tax policies. This service is not aimed at the critical shareholders, who abound in both advice and technical expertise. The question, then, is whether advice giving and IMF lending are in conflict. The analogy is between investment banking and security analysts: security analysts have an incentive to render optimistic valuation of those corporations that do business with their investment branches. Similarly, IMF staff may have an incentive to advise along the lines of the conditions set in a current IMF programme, for fear of exposing differences in thinking within the IMF. The IMF, however, may represent the general interest as opposed to the interest of the government in power. Private providers of advice are more likely to be 'captured' by governments than the IMF (Bordo and James 2000, 25). It is not a foregone conclusion that the IMF is immune from government capture: the nature and asymmetry of power in the club suggest that the probability of IMF capture is proportional to the size and importance of the member country. So the argument for privatising the advice mechanism reflects two conflicts: the internal conflict and the representational conflict.

Reform Proposals Considering the topic of IMF reform is a cottage industry. Proposals are numerous and diverse and occupy a long continuum from outright abolition of the IMF to a global central bank. Eichengreen (1999, appendix A) discusses 16 reform proposals. The Hoover Institution hosts a fairly comprehensive website on the same topic.11 What follows is a discussion of some of the most significant reform plans published on that site.

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A bolitionists and Supranationalists

It is best to start with the extremes: those who want to abolish the IMF and those who want to transform it into a supranational organisation. The abolitionists are led by George Schultz, William Simon, and Walter Wriston (1998) who find that the IMF interferes with [the international] fundamental market mechanism by encouraging investors to seek out risky markets on the assumption that if their investments turn out sour, they still stand a good chance of getting their money back through IMF bailouts.

In other words, IMF activities raise to an unacceptable level moral hazard among borrowers. Similar concerns are expressed by Anna Schwarlz (1998), another abolitionist. The supranationalists, on the other hand, would like to transform the IMF into a global organisation with big monopolist teeth. There are several variants of the superfund. The first is to make the IMF into a world central bank, with the power to create a monetary base and act as a true global lender of last resort. The original idea belongs to Keynes, but it was resurrected after the Asian currency crisis (e.g., Krugman 1998). The second variant is to consolidate the IMF, the World Bank, and the Basle Committee on Banking Supervision into one global financial regulator with the power to promulgate and implement best standards (Brown 1998). Adherence to those standards would be an essential condition for countries to receive IMF or World Bank support. The third is to create a global credit insurance agency that would guarantee international loans up to a prescribed ceiling (Soros 1997). The final variant involves the establishment of a supranational bankruptcy court that would have the power to seize government-owned assets and impose creditors' standstill (see Eichengreen 1999, 90). The abolitionists and the supranationalists have one problem in common: their ideas are not aligned with the interests and objectives of the IMF's critical shareholders. Governments dislike financial crises because of their disruptive effects on the rest of the economy. When these crises happen at home, governments are willing to dig deep in their pockets to resolve them. When they happen abroad, they fear negative spillovers or outright contagion. The IMF fights financial fires because this is what its shareholders want, particularly its critical shareholders. They may complain that the fire trucks are slow to arrive at the scene and that the firefighting method is imperfect, but that does not mean that they are willing to dismantle the fire brigade. Yet governments have no interest in delegating the responsibility of financial regulation to an unaccountable and unresponsive supranational entity. The reason is straightforward: the resolution of a financial crisis often involves tax money, which policy makers want to retain control over. It is wishful thinking to propose that national authorities sign a blank cheque to a global institution. But there are other reasons to believe that the extreme proposals have no chance of survival. Much of the case of the abolitionists rests on the fact that IMF-supported programmes fuel moral hazard risk. But how big is this risk? The claim that moral

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hazard risk is rising too rapidly is based mostly on the evidence that IMF-led rescue packages are becoming larger. But this fact is also consistent with a riskier global environment and more virulent forms of contagion. If moral hazard were pervasive, one would observe small yield spreads with little or no variation across countries (Dell' Ariccia, Grodde, and Zettelmeyer 2000). 12 Instead, yield spreads in the 1990s have been high, variable, and different across emerging markets. Table 10.2 shows that spreads in the second half of the 1990s, on average, were twice as large as those during the gold standard, a period of high capital mobility and with an active market for emerging country bonds. This may well be the result of the debt crisis of the 1980s, which raised awareness among investors of the risk of default on bonds issued by emerging countries, despite IMF-led emergency loans. Another implication of moral hazard is that spreads become less responsive to credit ratings. In fact, as Steven Kamin (2001) observes, differences in spreads for different rating categories actually increased after the 1995 Mexican bail-out, a result inconsistent with the hypothesis of rising moral hazard. Ultimately, one would want to know what yield spreads and capital flows would be in the absence of the IMF. This counterfactual experiment is difficult to execute properly. Timothy Lane and Steven Phillips (2000) attempt it by tracing the response of yield spreads to news that could influence moral hazard, such as the announcement of an IMF-supported programme or a quota increase. The null hypothesis is that if news has a moral hazard content, then yield spreads fall. The test is weak because it cannot identify other effects that combine with the moral hazard content; for example, the news that strong conditionality lending would have salutary effects and thus lower spreads. At any rate, the authors find little systematic effect, with spreads in approximately half of the cases responding negatively to news. In sum, analysts have yet to find the smoking gun connecting the IMF to moral hazard. For Stanley Fischer (1998), 'all the evidence is [that] many countries do their best to avoid going to the Fund. Nor have individual policymakers whose countries end in trouble generally survived politically.' But even granting that IMF lending contributes to moral hazard does not clinch the argument of the abolitionists. For the IMF's critical shareholders, as Eichengreen (1999, 98) puts it, 'moral hazard risk must be balanced against meltdown risk'. Table 10.2 Yield Spreads in the 1990s and During the Gold Standard in Basis Points

Country Argentina Brazil Mexico All emerging markets Source:

1994:11 to 2000:5 Mean Max./Min. 811 4.96 835 4.39 740 4.87 839 5.56

Mauro, Sussman, and Yafeh (2002).

Country Argentina Brazil Mexico All emerging markets

1877:5 to 1913:12 Mean Max./Min. 309 5.58 245 5.22 720 15.0 14.6 369

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The Middle Road

The IMF's critical shareholders have refused extreme solutions. Their declarations at the G7 summits — an expression of their preferences — show that they seek changes without either eliminating the IMF or making it into a super world agency (Bayne 2002). For example, the 'Report of G7 Finance Ministers to the Köln Economic Summit', which, with the international financial architecture, does not call for a new international organisation but for the strengthening of the existing ones (G7 Finance Ministers 1999). It also calls for enhancing transparency and promoting best practices, strengthening financial regulation in industrialised countries, strengthening macroeconomic policies and financial systems in emerging markets, improving crisis prevention and management and the involvement of the private sector, and promoting social policies to protect the poor and most vulnerable. This is middle-of-the-road reform that is closer to hoine improvement than to building a new home. The significant improvements concern the promulgation of financial standards and the principle that public bail-outs must be balanced with private bail-ins. The latter translates into a prescription that the IMF must scale back on the size and frequency of bail-outs. As to actual operations, G7 members want more transparency and lending with more focussed conditions. 13 None was more eager to see a slimmer IMF than President-elect George W. Bush. Once in power, however, the President made a U-turn and pushed for bailing out countries that were important to U.S. foreign policy: Indonesia and Turkey in 2000, Pakistan and Argentina in 2001, Turkey, Uruguay, and Brazil in 2002. Rhetoric and facts have been moving in opposite directions. The Brazilian rescue package came one week after U.S. treasury secretary Paul O'Neill had made a politically incorrect statement that a bail-out would enlarge Swiss bank accounts. Reflecting on this reality, Allan Meltzer (2002) shouted on the pages of the W all Street Journal that the world was back to bail-outs and that 'any hope of rescuing the IMF from its bureaucracy is disappearing'. Sebastian Edwards (2002), a long-time critic of the IMF, justifies the bail-out because Brazil has been a star pupil in adhering to IMF targets and in adopting a credible inflation targeting policy. Perhaps, but apart from politics, Brazil has succeeded where Argentina has failed because it has a large economy and can create a great deal of collateral damage in Latin America. Nonetheless, this was enough to put aside the principle of a balance between official bail-out and private bail-in. In sum, drastic reforms of the IMF are not in the interests of the governments that hold the power in the IMF. Changes are likely to be small and gradual. The IMF cannot be better than its shareholders. Time-inconsistent decisions by the IMF have more to do with time-inconsistent decisions by its shareholders than with a sinister design or entrenched organisational culture of the IMF's bureaucracy.

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Bail-outs versus Bail-ins

A debtor defaults on debt when that individual encounters a bad state of nature (e.g., a collapse in the demand for the product). Default can also occur when the creditors become nervous and demand quick repayment of their claims. A debtor who does not have enough liquidity to pay the short-term obligations will default even though the project that was financed by such obligations is sound. In a fractional reserve bank, depositors hold liquid claims valued as a multiple of the bank's reserves. If those creditors panic, the bank goes under, even if it is solvent. The lender of last resort (LOLR) attempts to correct this market failure, but in so doing creates an incentive on the part of borrowers to take additional risk, or moral hazard. In his classic study on the subject, Walter Bagehot (1873) recommended that the LOLR provider tackle a liquidity crisis by lending abundantly but at penalty rates. The application of a penalty rate would enable it to distinguish illiquidity from insolvency and deal with moral hazard. To reduce ex ante the extent of moral hazard, banks have been subject to deposit insurance, minimum capital requirements, and other forms of regulation. The international context presents three additional complications (Fratianni and Pattison 2001). The first is that the borrower enjoys sovereign immunity, which puts the borrower outside the national bankruptcy court's jurisdiction. The second is that international financial institutions and central banks grant sovereign loans also on the basis of political factors. The third is that these lenders have a strong preference against default. These considerations tend to raise moral hazard. The evidence on moral hazard, based on a coinparison of yield spreads, is indeed inconclusive. Yet it does not contradict the possibility that the availability of IMF resources may encourage the undertaking of imprudent policies and the adoption of unsustainable fixed exchange rate regimes. Many proposals to reform the IMF have aimed at reducing moral hazard and have focussed on altering either the behaviour of borrowers or the behaviour of creditors. The Meltzer Commission wants to alter borrowers' behaviour by having the IMF lend only short term, at penalty rates, and conditional on ex ante standards of financial soundness, 'except in unusual circumstances, where the crisis poses a threat to the global economy' (Meltzer 2000, 8). The commission essentially extends Bagehot's LOLR rules to the international domain and uses prequalification to overcome moral hazard. Other authors believe that traditional IMF conditionality lending is superior to prequalification. Mammohan Kumar, Paul Masson, and Marcus Miller (2000), for example, put a great deal of reliance on effort monitoring by the IMF. A country caught in a liquidity crisis can either be a current recipient of IMF resources or not. If it is a current recipient, it will qualify for additional loans, provided it has implemented an adjustment policy; otherwise, it will not. If it is not a current recipient, it will qualify for conditionality lending. These authors criticise the Meltzer Commission for excluding too many countries from IMF assistance. Neither prequalification nor conditionality lending is a panacea. Under prequalification, there is the risk that the LOLR agency may either lend too much or

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too little to the nonqualifiers, instigating either moral hazard or welfare losses. Under conditionality lending, the IMF has a conflict of interest between setting conditions and monitoring them. There would be an incentive, given the political motivation of the critical shareholders, to validate a 'good' effort when in fact the effort is feeble. Furthermore, the interpretation of the quality of the effort can be made extremely difficult by the borrowing countries adopting nontransparent practices. An alternative way to rein in moral hazard is to let creditors and debtors agree on debt restructuring. This alternative, too, has two options: the private approach and the international agreement on restructuring (Roubini 2002). The solution to international loans under risk of default requires a legal mechanism so that contractual provisions can speed the resolution of these difficulties. Eichengreen (1999, chapter 7) advocates the private approach, that is, the re-establishment of creditors' committees and the use of collective action clauses in loan contracts. The legal and financial position of a country is in limbo while debt renegotiations take place with hundreds of creditors. Moreover, small investors and creditors cannot afford to commence litigation against sovereign borrowers. Large lenders, such as banks, will not litigate in most cases, as they want an orderly workout that will allow for future business. Anne Krueger (2001), the First Deputy Managing Director of the IMF, is the most recent advocate of an international agreement on debt restructuring (for earlier references, see Eichengreen 1999, 90). Both proposals aim to reduce the cost of debt restructuring. However, if the cost is lowered significantly, debtor countries may use restructuring more frequently and, in equilibrium, emerging market economies would attract less foreign private capital (Roubini 2002). These are the horns of the dilemma: debt restructuring are too costly at the moment and hence are underused; if they were to be made less costly, they would encourage opportunistic behaviour on the part of debtor countries and ultimately curtail their capital inflows. Are public bail-outs and private bail-ins incompatible with each other, or can they be combined? According to their declarations, the G7 would prefer to have fewer public bail-outs and more private bail-ins. Yet the massive IMF bail-out of Brazil in 2002 made no provision for private bail-ins. Was this a deliberate oversight to bail-out G7 creditors of Brazilian debt or is there a difficulty in mixing the two? Nouriel Roubini (2002, 19-20) reviews some theoretical models where mixed solutions fail and gives the following assessment of that literature: a partial bail-in would not work because, as long as the economy is in the multiple equilibria region, locking in some creditors and assets (but not all) would lead all the others to run to avoid being locked in next. Conversely, a partial bail-out would not work either because, as long as the financing gap is not eliminated, the multiple equilibria problem is not solved and agents will rush to the exits and trigger a default by claiming all the limited foreign reserves including those provided by the partial official support.

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However, IMF conditionality lending aims at altering the country's fundamentals and reorienting investors' expectations. For Brazil, the IMF had deliberately structured the bail-out to tie the hands of Luiz Inázio Lula da Silva and Ciro Gomez, the two leftwing candidates vying for the presidency in September 2002. 14 Continued access to IMF resources requires adherence to fiscal austerity regardless of who won. By so doing, the IMF was trying to reduce the risk of populist policies and allay the fears of foreign investors.

General Assessment and Conclusions The IMF was created to function as the arbiter of the Bretton Woods regime: intermediating short-term funds from surplus to deficit countries and permitting member countries to change their par value when external imbalances were unsustainable. All this changed in 1973, when the regime collapsed. Today's IMF is a much more expansive international organisation than it had been under the old regime: membership, resources, and objectives have all become much larger. John Maynard Keynes and Harry Dexter White would strain to recognise their creation. Today's IMF provides a seal of approval to member countries, co-ordinates lenders in a debt crisis, disseminates information about member countries, gives emergency loans to members in financial distress, promulgates standards, acts as a crisis manager, overlaps with the World Bank in lending to poor countries at low interest rates, and is a provider of advice and technical assistance. Mission creep has not spared conditionality lending, the most visible and controversial activity of the IMF. The proliferation of conditions has not improved the quality of the outcome. The failure rate of programme completion remains high and more countries have become repeat IMF borrowers. This evidence suggests that these countries ignore conditions because the cost to them is either too high or too low. If the cost is too high, borrowing countries accept performance criteria to obtain the loan but ignore or fail to meet them in the implementation phase. If the cost is too low, member countries take higher risk by putting in place policies that generate external deficits and, consequently, raise the demand for IMF resources — in essence, creating moral hazard. Either way, IMF credibility is tarnished. Mission creep has more to do with the preferences of the IMF's biggest shareholders — the G7 countries — than with opportunistic behaviour on the part of IMF management. The G7 is a small group of fairly homogeneous countries that form a critical mass in the IMF. The G7's voting power is 45.35 percent of the IMF's total votes. Nothing of substance in the IMF can take place without the approval of the G7 countries or, for that matter, the United States. The United States, primus inter pares, has enough votes to block a quota increase. This is not to deny the existence of agency cost. But how big is this cost? Can IMF management impose its own agenda on the

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Executive Board? Is the Executive Board captured by IMF management? The creation of the Independent Evaluation Office in 2001 was motivated by a desire to reduce agency costs to the IMF's shareholders. The office is independent of IMF's management and reports directly to the Executive Board on the various activities of the IMF. To insulate the office from political pressure, its work programme is not subject to board approval. Nonetheless, the board approves the budget of the office and its director. It is too early to tell whether the Independent Evaluation Office will act as it is intended to on paper. The currency and banking crises of the 1990s have spurred a lively debate on the role of the IMF and have produced a plethora of ideas to reform it. The extreme proposals — abolition of the IMF and the creation of a supranational central bank or regulator — have very little chance of materialising, because they do not serve the interests of the IMF's critical shareholders. The historical record shows that governments are willing to dig deeply in their pockets to resolve a financial crisis. Governments also fear that financial crises in one country may spill over onto other countries; global finance has heightened this fear. Abolishing the IMF would be equivalent to eliminating the fire brigade. However, financial bail-outs may be expensive and controversial. National politicians want to retain control over the process and expenditures associated with the bail-outs. A supranational agency would run the risk of being unaccountable and unresponsive to national interests. The IMF and its shareholders are caught in a dilemma: meltdown risk on the one hand, and moral hazard on the other. Moral hazard is the inevitable consequence of having a lender of last resort. Sovereign immunity and the preference against default of international financial institutions raise the issue of moral hazard in the international context. To mitigate this risk, the IMF could be restricted to lend only at penalty rates, for short maturities, and conditional on ex ante standards of financial soundness (Meltzer 2000). The IMF, instead, lends at nonpenalty rates, for longer maturities, and with the imposition of conditions. Proponents of conditionality lending argue that the IMF can be more effective and less discriminatory by controlling the adjustment effort exerted by borrowing countries rather than by prequalifying countries. But conditionality lending has a very poor record, and a significant number of countries either ignore the conditions deliberately or fail to meet them. Yet previous failures do not impede future access to IMF resources. The ability of the IMF to act as an official bail-out agency is limited by two fundamental weaknesses (Fratianni and Pattison 2002). The first is that it can neither create a monetary base in any key currency nor can it use special drawing rights (SDRs), the institution's own 'currency', to buy and sell national currencies. The second is that there is no deep pocket backing the liabilities of the IMF. The logic of national monetary sovereignty and tax revenues works against any prospective transformation of the IMF into a true international LOLR. The alternative to official bail-outs is to let creditors and debtors agree on debt restructuring. An impediment to restructuring is the high cost of co-ordination. Several

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ideas circulate on ways to reduce these costs, either by suitably modifying private loan contracts or through an international agreement. Here as well there is a tradeoff. Lower costs of debt restructuring facilitate the resolution of current debt crises but give an incentive to borrow excessively; in anticipation of this behaviour, capital flows to emerging market economies will diminish. The IMF's critical shareholders have taken a middle-of-the-road approach, by endorsing the promulgation of financial standards and a mix between public bail-outs and private bail-ins in handling currency and banking crises. So far, there has not been any meaningful implementation of these principles. Some economists doubt that such mixing would actually work. Conflicts of interest abound in the IMF. First, there is a conflict of interest between giving advice and lending, which is analogous to the conflict between security analysis and investment banking housed within the same financial intermediary. The potential bias of security analysts is to be optimistic about the equity valuation of a business that is either a current or prospective client of the investment side of the firm. The potential bias of IMF staff is to advise countries in line with the conditions set in a current IMF programme. The counter argument is that the IMF is more likely to represent the general interest of the population than a private consulting firm, because private advice is captured by those who pay the bill, namely governments. This argument has some validity for small shareholders (such as Costa Rica) but not for countries that are economically or strategically significant (such as Brazil and Turkey). But it is exactly with respect to significant countries that independent advice is most needed. A second conflict of interest arises between setting conditions on a loan and monitoring their implementation. Here both IMF's management and Executive Board are involved. The bureaucracy is naturally reluctant to acknowledge failure and the Executive Board may reflect the political motivation of the critical shareholders to see pink when it is actually black. The recently established Independent Evaluation Office may reduce the first conflict, but not the second. Furthermore, the interpretation of the quality of the effort can be made extremely difficult by the borrowing countries adopting nontransparent practices. The third conflict of interest arises between the promulgation and the assessment of international standards (Fratianni and Pattison 2002). The reasons for this conflict are the same as those outlined in the previous paragraph. Proper institutional design should avoid a situation where the same organisation acts as economic advisor, standard setter, credit analyst, lender, auditor, and crisis manager. The critical shareholders of the IMF would be well advised to spin off some of these functions to different organisations.

Notes 1 KKK stands for korupsi, kolusi, clan nepotisme (corruption, collusion, and nepotism).

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2 Decisions to raise quotas in the IMF require an 85% super majority. 3 The reference interest rate in the IMF is the 'basic rate' or the interest rate on special drawing rights (SDR). Creditor countries receive on their balances the basic rate minus an adjustment factor; the debtor countries pay the basic rate plus an adjustment factor, which changes according to the programme (e.g., the Supplemental Reserve Facility has a higher adjustment factor than the Stand-By Arrangement). 4 See Guideline 7 of 'Uses of Fund's General Resources and Stand-by Arrangements' (Boughton 2001, 617). 5 A case in point of the dash-for-growth policy is Peru from 1986 to 1987 (Boughton 2001, 612). 6 This assumes that the IMF and the borrowing government agree on the model. If there is disagreement on the theoretical framework, more possibilities exist for IMF failure. 7 For a survey of speculative attacks, see Olivier Jeanne (2000). 8 Of the total amount, the IMF committed US$18.1 billion and the World Bank and the InterAmerican Development Bank committed US$4 billion each; the remainder came from 20 governments, through the auspices of the Bank for International Settlements. 9 Half of this amount was committed by private sector lenders. 10 The Stand-By Arrangement had 25 programmes and the Extended Fund Facility had 12 programmes (IMF 2001, 108). 11 See . 12 These spreads are measured by the difference between dollar-denominated bond yields issued by emerging market economies and the yield on a long-dated U.S. government bond; compare, for example, the Emerging Markets Bond Index (EMBI) and the EMBI+ published by J.P. Morgan. 13 See the 'Statement of G7 Finance Ministers and Central Banks', at their 2000 meeting in Prague (G7 Finance Ministers 2000). 14 Lula was elected President; 80 percent of the loan was to be disbursed after the election.

References Bagehot, Walter (1873). Lombard Street: A Description of the Money Market. Paternoster Library, London. Bayne, Nicholas (2002). 'Reforming the International Financial Architecture: The G7 Summit's Successes and Shortcomings'. In M. Fratianni, P. Savona and J. J. Kirton, eds., Governing Global Finance: New Challenges, G7 and IMF Contribution, pp. 27-43. Ashgate, Aldershot. Bird, Graham (1999). 'IMF Programs: Is There a Conditionality Laffer Curve?' Paper prepared for the Claremont-Georgetown Conference on 'Improving the Credibility of IMF Programs', January. Washington DC. Blustein, Paul (2001). The Chastening: Inside the Crisis That Rocked the Global Financial System and Humbled the IMF. Public Affairs, New York. Bordo, Michael D. and Harold James (2000). 'The International Monetary Fund: Its Present Role in Historical Perspective'. In A. H. Meltzer, ed., Expert Papers. International Financial Institution Advisory Commission, Washington DC. Boughton, James (2001). Silent Revolution: The International Monetary Fund, 979-1989. International Monetary Fund, Washington DC. Brown, Gordon (1998). 'Great Britain: Steering a Course for Stability'. Statement by the Governor of the Fund and Alternative Govemor of the Bank for the United Kingdom. (January 2003).

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Dell'Ariccia, Giovanni, Isabel Grodde, and Jeromin Zettelmeyer (2000). 'Moral Hazard and International Crisis Lending: A Test'. International Monetary Fund. (January 2003). Edwards, Sebastian (2002). 'Brazil's Only Hope of Avoiding Collapse'. Financial Times, 5 August. Eichengreen, Barry J. (1999). Toward a New International Financial A rchitecture: A Practical Post-A sia A genda. Institute for International Economics, Washington DC. Feldstein, Martin (1998). 'Refocusing the IMF'. Foreign A ffairs vol. 77, no. 2, pp. 20-33. Fischer, Stanley (1998). 'The IMF and the East Asian Crisis'. Paper prepared for the Forum Funds Lecture at UCLA, 20 March, Los Angeles. (January 2003). Fratianni, Michele and John C. Pattison (2001). 'International Organisations in a World of Regional Trade Agreements: Lessons from Club Theory'. W orld Economy vol. 24, no. 3 (March), pp. 333-358. Fratianni, Michele and John C. Pattison (2002). 'International Standards, Crisis Management, and Lenders of Last Resort in the International Financial Architecture'. In M. Fratianni, P. Savona and J. J. Kirton, eds., Governing Global Finance: New Challenges, G7 and IMF Contributions, pp. 143-163. Ashgate, Aldershot. G7 Finance Ministers (1999). 'Report of the G7 Finance Ministers to the Koln Economic Summit'. 18 June, Cologne. (January 2003). G7 Finance Ministers (2000). 'Statement of G7 Finance Ministers and Central Bank Governors'. Prague, 23 September. (January 2003). Haque, Nadeem and Mohsin S. Khan (1999). 'Do IMF-Supported Programs Work? A Survey of the Cross-Country Empirical Evidence'. Paper prepared for the Claremont-Georgetown Conference on 'Improving the Credibility of IMF Programs', January. Washington DC. International Monetary Fund (1998). 'World Economic Outlook and International Capital Markets'. (January 2003). Intemational Monetary Fund (1999). 'Annual Report of the Executive Board, Financial Year 1999'. Washington DC. (2003 January). International Monetary Fund (2001). 'Annual Report of the Executive Board for the Financial Year Ended April 30, 2001'. Washington DC. (January 2003). Jeanne, Olivier (2000). Currency Crises: A Perspectives on Recent Theoretical Developments. Special Papers in International Economics. Vol. 20, International Finance Section. Princeton University Press, Princeton. Kamin, Steven B. (2001). 'Identifying the Role of Moral Hazard in International Financial Markets'. Board of Govemors of the Federal Reserve System, December, Washington DC. Kane, Edward J. (2000). 'Silent Runs and Insolvency-Generated Capital Movements in a Regulation-Induced Financial Crisis'. In A. H. Meltzer, ed., Expert Papers. International Financial Institution Advisory Commission, Washington DC. Khan, Mohsin S. (1990). 'The Macroeconomic Effects of Fund-Supported Adjustment Programs'. International Monetary Fund Staff Papers vol. 37 (June), pp. 195-231. Krueger, Anne 0. (2001). 'A New Approach to Sovereign Debt Reslructuring'. Address given at the Indian Council for Research on International Economic Relations, 20 December. Delhi. (January 2003). Krugman, Paul R. (1998). 'Start Taking the Prozac'. World Economy Columns Archive, May. (January 2003). Kumar, Manmohan S., Paul R. Masson, and Marcus Miller (2000). 'Global Financial Crises: Institutions and Incentives'. IMF Working Paper No. 00/105. Washington DC. (January 2003).

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Lane, Timothy and Steven Phillips (2000). 'IMF Financing and Moral Hazard'. International Monetary Fund WP/00/168. (January 2003). Mauro, Paolo, Nathan Sussman, and Yishay Yafeh (2002). 'Emerging Market Spreads: Then versus Now'. Quarterly Journal of Economics vol. 117 (May), pp. 695-733. Meltzer, Allan H. (1999). 'What's Wrong with the IMF? What Would Be Better?' In W. C. Hunter, G. G. Kaufman and T. H. Krueger, eds., The A sian Financial Crisis: Origins, Implications, and Solutions. Kluwer Academic Publishers, Norwell, MA. Meltzer, Allan H. (2000). Report of the International Financial Institutions A dvisory Commission. United States Congress, Washington DC. (January 2003). Meltzer, Allan H. (2002). 'Back to Bailouts'. W all Street Journal, 7 August. Roubini, Nouriel (2002). 'Private Sector Involvement in Crisis Resolution and Mechanism for Dealing with Sovereign Debt Problems'. Paper presented at the conference on 'The Role of the Official and Private Sector in Resolving International Financial Crises', 23-24 July. Bank of England, London. (January 2003). Rubin, Robert (1999). 'Remarks on Reform of the International Financial Architecture'. U.S. Treasury News, 21 April. Schultz, George P., William E. Simon, and Walter B. Wriston (1998). 'Who Needs the IMF?' W all Street Journal, 3 February. Schwartz, Anna J. (1998). 'Time to Terminate the ESF and the IMF'. Cato Commentaries, Washington DC. (2003 January). Soros, George (1997). 'Avoiding a Breakdown: Asia's Crisis Demands a Rethink of Intemational Regulation'. Financial limes, 31 December. (January 2003). Willett, Thomas D. (1999). 'Saving the IMF's Seal of Approval'. Paper presented at the conference titled 'Lessons from Recent Global Financial Crises'. Federal Reserve Bank of Chicago, Chicago.

Chapter 11

Evaluating Koizumi's Reforms and the Implications for the Global Economy Takashi Kiuchi

More than two years have passed since Junichiro Koizumi assumed leadership after his surprise victory of Japan's presidential election in April 2001. At the outset, he successfully portrayed himself as a fearless reformer who would pursue the restructuring of the economy. The public cheered when he argued that, in order to regain the nation's economic dynamism in the past, Japan should downsize its public sector and secure a larger economic space for its private sector. He enjoyed an unprecedented high degree of support, greater than 80 percent, which indicated that the public shared his view and, more important, believed that here was a leader capable of pushing through the necessary reforms, irrespective of opposition within his own party, the Liberal Democratic Party (LDP). Today, it is fair to say that Koizumi has lost much, if not all, of his charisma. His approval rate dropped considerably from an unprecedented 80 percent, which he enjoyed when he assumed office. His approval rate fluctuates erratically between 40 percent and 60 percent, according to how events unfold. Although this rate remains considerably higher than most of the ill-fated cabinets in Japan's past, it is alarming to find that disappointment and anxiety are creeping in. Critics point out that he is not living up to public expectations for his programme of structural reform.1 He seems to be retreating bit by bit on many fronts in the face of obstinate resistance from old politicians and bureaucrats who try to preserve status quo at any cost. Koizumi is undeniably struggling to recapture the momentum in his reform initiative. With regard to Japan's international policy, it is somewhat difficult to tell where Koizumi stands. He was very much clearly chosen to lead the nation based on his domestic agenda. Be that as it may, Japan's foreign policy seems to have been drifting. As Minister of Foreign Affairs, maverick Makiko Tanaka engaged in an irreconcilable feud with the career diplomats in the foreign service. In the resulting confusion, Koizumi asked her to resign. Her replacement, Yoriko Kawaguchi, remains frustrated by a series of mishaps in her efforts to rebuild confidence in the ministry. It can be said that Koizumi demonstrated his resolve to side with the United States when terrorists attacked on 11 September 2001 and when the U.S. subsequently sent troops into Taliban Afghanistan. More recently, he made a surprise visit to Pyongyang to see Kim Jong-il personally in order to restart the process of diplomatic normalisation

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with North Korea. This move was applauded at first by the Japanese general public, but the success of this trip was later questioned as North Korea's diplomatic relations with the U.S. became strained. In any event, on other fronts, it is difficult to identify Koizumi's personal initiatives, especially with regard to international economic policy. Furthermore, there have been several incidents that indicate that Japan is failing to find its rightful place in the international financial market. Hakuo Yanagisawa, Minister of the Financial Services Agency, declared that all the major banks fulfilled the capital requirements set by the Bank for International Settlements when he published the outcome of the agency's special inspection of major banks in April 2002. However, international scepticism did not dissipate. The yen continues to be the object of currency speculation. Moreover, the Ministry of Finance found itself in a dispute, to no avail, with major international rating agencies over their downgrading of Japanese government bonds. This thus leads to many questions. Why has Koizumi lost his credibility as reformer? Is there still a chance he can accomplish what he promised? Can he reclaim his leadership or has he exhausted his political assets? What should happen next? Is there any change in the nature of policy debates with regard to restructuring and stimulating the economy? Must Japan resign itself to more years of muddling through? Can one expect any initiatives from Japan to shape the international economic order, when the country's leadership appears overwhelmed by domestic problems? There are no obvious answers to these questions. In a parliamentary cabinet system, no cabinet can survive many serious blunders. There is some truth in the notion that governing a nation is the art of endless crisis management. Moreover, each issue that arises is a matter of feverish controversy among opinion leaders. This chapter attempts, against this background, to clarify the magnitude and nature of the issues confronting Japan's efforts to reinvigorate its economy and to sort out the current state of policy disputes.

The Nature of Japan's Systemic Failure The problems facing Japan today are systemic and deeply rooted in its institutional fabric. These shortcomings cannot be overcome overnight — if they could, they would not be structural problems. Consequently, one must reconsider the fundamentals of the institutional organisation of Japan's economic entities. Moreover, there is no doubt that each economist describes the nature of problems somewhat differently from his or her colleagues. Hence every view is subjective. Nonetheless, it is still useful to begin with one particular economist, as this chapter will reveal. There are two aspects to the diagnosis of Japan's problems. The first is the overbureaucratisation of its major institutions. The second is a concurrent overgrowth of its government. Both have historical roots, for the national task at the end of World War II was unanimously declared to be economic reconstruction. In order to accomplish

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this objective, it was imperative to rebuild strong institutions. Strong government was considered to function as an anchor of stability and continuity when business institutions remained weak. Japanese institutions worked well during the country's period of high growth in the 1950s, 1960s, and most of the 1970s. That era nourished a good system of teamwork with the practice of lifetime employment. It enabled the rapid acquisition of western technology. It successfully absorbed baby boomers and avoided acute capital labour confrontations. Together with banks, the government channelled scarce capital into strategically important manufacturing businesses that did not have adequate creditworthiness to attract funds in capital markets. However, all these institutional assets were transformed into liabilities when the period of catching up came to an end in late 1970s and early 1980s. The economy matured and growth slowed down visibly. The practice of lifetime employment made downsizing difficult, yet salaries became unbearably high as baby boomers entered middle age. A blind pursuit of expansion often resulted in meaningless diversification, while genuine entrepreneurship was lost. There is one notable point here: the picture differs strikingly among industries. Indeed, the Japanese manufacturing sector still appears fairly healthy and competitive, as exemplified by the continued success of Toyota and Sony. However, the service sector remains miserably inefficient. What does this marked contrast in productivity performance mean? Performance depends on whether industries participate in the global marketplace. Unmistakably, it has forced incessant restructuring on manufacturers, while many service industries are inherently domestic and thus face little rivalry from abroad. Moreover, when one asks which sector is most shielded from international competition, the answer seems clear: the government. It is often alleged that the size of Japan's budget and civil service suggests that the country has a small government. This is grossly inisleading. Hone considers the wide range of public enterprises and banks in Japan, one can see that the public sector has grown into a gigantic player in the country's economy. For instance, the largest deposit-taking institution is the Postal Savings, which has assets in excess of those of the largest seven private banks combined. To complicate the situation further, small businesses in service industries have developed a kind of questionable alliance of mutual dependence with the government. As these small institutions have strong franchises in respective local communities, they tend to have strong political power collectively. They often capitalise on this political power to seek protection, typically by arguing that the government should extend assistance to small businesses, which could otherwise be exploited by big businesses. Consequently, the inefficiency of the service industry sector was preserved by a variety of subsidies, regulation, public works projects, and even quasi-cartel arrangements, thus reinforcing the arbitrary executive power of the ministries in charge. As a result, Japan has become an exceptionally high-service-cost economy.

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The Purpose of Koizumi's Reform Initiative and Its Constraints In light of these observations, it is not difficult to conclude that Koizumi put his reform initiative forward appropriately. He does not seem to be just another fiscal conservative. His efforts could more aptly be described as public sector reforms, aimed at dismantling a political alliance between the government and service sector. That alliance is vehemently defended by Japan's old guard of veteran politicians and government bureaucrats. Koizumi's reforms are intended to open up new business opportunities for progressive private sector entrepreneurs and to restore economic dynamism. In fact, the general public as well as private sector economists appear united in their endorsement of the necessity of such reforms. It can thus be stated that all policy and political debates are about means and tactics rather than about ends and goals. Certainly, the task of restructuring the economy is not an easy one, because individuals are hostages to existing institutions that are inherently designed to preserve their own turf. It is widely understood that the LDP and the government's bureaucracy are the two outstanding defenders of status quo. Yet they themselves no longer argue against structural reform, albeit with two reservations: firstly, hasty actions could create very painful situations for those unable to cope with the changes and, second, wholesale reform could weaken the safety net too much. Koizumi nonetheless faces a host of burdensome constraints. He is not blessed with loyal comrades at the political level or at the bureaucratic level. In the first place, he represents the wrong party, the LDP, which is seen as being at the core of paternalistic guardianship for inefficient service industries. It is not surprising that his campaign slogan was 'Change the LDP and change the nation'. He meant that a voluntary transformation would be the only remaining practical step to securing the party's survival as a ruling party. Many observers point out that the largest opposition party, the Democratic Party of Japan (DPJ), could be Koizumi's natural ally. In fact, a considerable portion of DPJ members are those who deserted the LDP because they could not tolerate the slow progress made by its reform initiative. Nonetheless, in practice it is impossible for Koizumi to team up with the DPJ unless he gives up on his own party and is prepared to break it up. Incidentally, some political commentators speculate that this could happen in the next episode of political realignment, which is unlikely to take place soon while LDP holds the majority in the Lower House and its term as a House member expires only in 2004. In addition, it is extremely difficult for any prime minister to control government bureaucrats at will. It is commonly held that in Japan, unlike in the U.S., each ministry is run by its career bureaucrats, who appear united against any attempt to downsize their particular ministry. Their strength lies in their expertise knowledge about the nuts and bolts of the legislation under their jurisdiction. Japanese politicians cannot consult other resources such as lawyers, accountants, consultants, and independent

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think tanks. Inevitably, in order to take any legislative initiative, Japanese politicians must rely upon the advice from bureaucrats whose loyalties to their masters are seemingly imperfect. Koizumi is no exception.

Koizumi's Leadership Assets Koizumi enjoys three advantages in his quest for structural reform. The first is a widely felt desire for changes, which runs deep within the public. It is often alleged that people are indifferent to how a country's politics are run as long as the economy is in good shape. However, many public opinion polls suggest that the Japanese are coming to recognise that the economy would not be able to resume its past vigour without some fundamental restructuring. Several scandals and wrongdoings among politicians and bureaucrats have intensified public distrust of the current state of governance of the nation. Undoubtedly, this helps any reform initiative proposed by political leadership. The second is a reorganisation of the government, which took effect in January 2002. This reorganisation has four stated objectives: the establishment of strong political leadership over policy making and implementation processes; the reduction of failures in co-ordination among ministries that have jurisdictions that appear too fragmented; the enhanced accountability of ministries, agencies, and other public sector institutions; and the engineering of a lean government through outsourcing and other measures. In order to accomplish these goals, 22 ministries were consolidated into 12. In addition, the Prime Minister's Office is being transformed into the Cabinet Office with enhanced co-ordinating power. This reorganisation was a political response to persistent criticism in the past that made the case that the Japanese parliamentary Cabinet system lacks a mechanism for forceful political leadership that could push through bold reforms by overriding the institutional inertia of bureaucracy. The reorganisation has strengthened the vehicles available to Koizumi for the launch of his own policy initiative. Currently, in the Cabinet Office, the Council on Economic Financial Policies, led by state minister Heizo Takenaka, is instrumental in translating Koizumi's ideas into policy proposals. Koizumi's third advantage is his own resolve and policy expertise, even though there is always a natural limitation on what any individual's heroic determination can accomplish. Uncharacteristically among Japanese politicians, he appears to be a reform believer who neither compromises without reason nor fears confrontation. He is known as a seasoned fiscal policy expert. Unusual among his LDP peers, he has consistently advocated the downsizing of the government, the privatisation of public banks and enterprises, and the scrapping of the Fiscal Investment and Loan Programme, which finances public institutions on an off-budget basis. However, this particular combination of advantages and disadvantages inevitably requires Koizumi to be crafty and tactical in pursuing his policy agenda. In other

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words, from time to time he must give up on small gains in order to achieve big gains. He needs to set the sequence of his agenda skilfully. This makes it extremely difficult to make a fair overall assessment of his accomplishments and failures to date. To be more precise, every accomplishment is not an entirely 100 percent victory and contains some element of defeat.

Koizumi's Reform Accomplishments to Date and Prospects for Further Progress In any event, what are Koizumi's accomplishments so far? Many observers cite several major developments. Each comes with praise and rebuke. The first tangible instalment on his promise was public institution reform. It was decided to abolish 17 of the existing 118 institutions, to privatise 45, and to consolidate 38 institutions into 36 independent administrative entities. This was intended to create a more accountable form of institution. The surviving institutions would also have to go through the process of reorganisation and regular reviews in the coming years. Moreover, a detailed directive for privatisation was set out for seven large public institutions, including the Japan Highway Public Corporation, the Honshu-Shikoku Bridge Authority, the Government Housing Loan Corporation, the Urban Development Corporation, and the Japan National Oil Corporation. This appears to be a great step forward in the privatisation of excessive industrial activities long awaited by public sector. Nonetheless, there is quite a lot of criticism among reform advocates that the activities of these institutions seem likely to be transferred to other public institutions rather than to private sector businesses. The second achievement was a re-establishment of fiscal discipline by the placement of a ceiling on deficit financing of 30 trillion yen. This is widely understood to be Koizumi's effort to break up alliances among politicians, bureaucrats, and special interest groups by slashing public works projects. It is entirely possible for the Prime Minister to downsize and redefine an appropriate role for the public sector in the economy in the coming years to come. At the same time, reform advocates are apprehensive that Koizumi does not sufficiently emphasise the reallocation of fmancial resources. However, seasoned politicians complain that deficit reduction can be too dangerous for the economy, still in a very early and fragile process of recovery. In addition to these accomplishments, Koizumi is trying to put forward another round of reform initiatives. Japan's Diet has been deliberating on more reform legislation. One bill would restructure the postal savings system into an independent administrative institution and would enable private sector businesses to enter into some aspects of postal service. Another bill is aimed at controlling the growth of healthcare costs. Koizumi has more reforms planned, beginning with tax reform aimed at eliminating the many tax breaks for special interest groups and reducing basic tax rates. In addition, in 2002 the Economic Revitalisation Strategy Panel of the Economic and Fiscal Policy

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Council announced a plan to create a structural reform zone (Japan 2002). This promising idea would create a regulation-free area under the leadership of municipalities to attract a specific group of new industries. Such zones are expected to have a powerful effect on further deregulation efforts in broader areas. It remains difficult, however, to pronounce a final verdict on Koizumi's restructuring efforts. He has unquestionably made some progress but that progress has been slow in coming and has encountered many pitfalls. The current process of muddling through is likely to continue for some time. It is not clear if Koizumi will be remembered in the history books as a pioneer who was the architect of a new chapter in the post-war economic history of Japan or just as the destroyer of the old system. His political assets are indisputably waning and he needs some political gains against veteran politicians and bureaucrats in order to reconsolidate his leadership. One encouraging sign, although not widely noticed, is that the corporate sector has begun to respond to his reform initiatives. Corporate restructuring and consolidation are accelerating. In the old system, private sector businesses hesitated to demand aggressive deregulation, reluctant to give up their old privileges. Now they have begun to recognise that their vested rights would be taken away sooner or later, and they are starting to identify new business frontiers and lobby for necessary deregulation. If Japan's political leadership can continue to sustain the reform momentum, then a return of confidence in economic dynamism can be expected some time in the future.

Ongoing Economic Policy Disputes Japan is keenly aware that the rest of the world is attentively watching its restructuring efforts, because its success or failure will affect profoundly a sustainability of growth of the Asian region, and even of the global economy. The external pressures on the Japanese government brought by dialogue among the G7/8 summits and finance ministers meetings, together with a variety of proposals from western economists as well as the market pressure exerted by the international investment community, feed the sense of urgency for policy actions. Three specific policy disputes deserve attention. The first is between what could be termed the 'reflation-first school' and the 'reform-first school'. Koizumi is, of course, a champion of the latter, arguing for no growth without reform. Seasoned LDP politicians argue that hasty reform could wreck any chance of steady recovery and thus make further reform impossible. To be more specific, the debate has focussed on whether Japan should cut taxes first even if doing so aggravates fiscal drain for the time being. Cutting taxes is always an effective tool in crisis management. This dispute especially intensified when the prospect for recovery became shaken by a forecast for diminished exports toward the end of 2002. Although Koizumi fmally agreed to draw up a supplementary budget to stimulate the economy, his adherence to reform principles could not have been possible without tacit support from other G7

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countries, particularly the United States. In other words, reflation-first politicians could not overlook Koizumi's high popularity among Japanese general public as well as strong external pressure in favour of reform. The second area of policy debates is over a policy on non-performing loans that major banks had extended to their big borrowers. The Financial Services Agency was successful in preventing a financial crisis from developing in March 2002 by way of bank inspections and by strengthening of the regulations on the short selling of stocks. However, this relief turned out to be temporary. When the process of a recovery began to stumble in the second half of 2002, anxiety in the financial market deepened again and the stock prices fell sharply. Subsequently, Koizumi resorted to a surprise move of replacing Yanagisawa by Heizo Takenaka as minister of the Financial Services Agency, who has long been known to advocate drastic reform policy. He was quick to launch Takenaka's plan to streamline the problems of nonperforming loans. In a nutshell, the plan is to apply strict global accounting standards for measuring equity capital and nonperforming loans and to recapitalise banks without hesitation when necessary. In fact, Takenaka's plan caused an uproar among bankers, LDP politicians, and others, who feared that it would result in a sharp rise in business failures and unemployment and would drive the nation into a full-fledged recession. Takenaka began to work out the details of the necessary legislation. Reform advocates criticised this process, saying it would detract from the original intention. It remains to be seen if Takanaka's plan will eventually be able to restore confidence in the financial market. It appears certain, however, that the restructuring of banking sector and heavily indebted industrial sector would accelerate in the future. It is also apparent that the external pressure contributes to accelerating the restructuring process. The third area of dispute is over monetary policy. The fiscal authority, finance ministers, as well as some academic economists on the domestic front and some renowned economists abroad — especially those from the United States — argue that the Bank of Japan can do more (see, for example, 'Minutes of Forum #1: Effectiveness and Possibility of Further Monetary Relaxation' 2001 and Posen 2002). With strong support from some private sector economists, the bank argues that it cannot supply more liquidity when interest rates stand at nil. Interest rates at that level indicate that a slow expansion in monetary supply reflects insufficient demand for funds in a serious recession. Consequently, the Bank of Japan recommends that the government pursue structural reforms in order to enhance Japan's growth potential and overcome deflation. It appears possible, at least theoretically, to increase the money supply further. This could be achieved by setting negative interest rates. Another tactic would be for the central bank to purchase domestic securities in the market irrespective of their creditworthiness beyond long Japanese government bonds. Yet another tactic would be for the Bank of Japan to sell yen and buy dollar securities, which would let the yen depreciate, import inflation from abroad, and reduce real interest rates; this, in turn, would simulate domestic investment. Practitioners tend to think that the last two tactics

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are at the discretion of the fiscal authority, which does not appear prepared to resort to these means, rather than at the discretion of the central bank. The debates among academics seem to remain unresolved over the question of whether current wisdom of macroeconomic management can ever arrest such a serious deflation as the Japanese economy finds itself saddled with. 2 Moreover, these debates over monetary policy seem to raise two interesting associated questions. One is how the mounting fiscal deficits will affect the future of the Japanese economy, provided that the central bank continues to increase its government bond holding. Indeed, outstanding national debt is approaching 130 percent as a proportion of gross domestic product. Overseas investors and policy makers often cite a potential danger of a collapse of the bond markets or a sharp rise in the longterm interest rates, which could threaten any chance of sustainable recovery. So far, this has not happened, probably because Japan does not have any significant amount of external debt and domestic savers appear to be captive subscribers to government bonds. It remains to be seen if and when capital flight by Japanese savers will begin to take place and rewrite the whole financial market equation for policy makers. There are some voices among industrialists and opinion leaders who urge a weak yen policy, which has pros and cons. The government has so far refused to endorse it, claiming that it cannot be engineered as such and that it could invoke a number of destructive trade disputes as exemplified by the dispute over steel with the United States and over automobiles with China. It is also true that a possibility of any dramatic currency realignment has been shielded by benign strong dollar policy of the U.S. administration. In any event, the topic is likely to continue to haunt policy makers and rattle the foreign exchange market from time to time.

Koizumi's Position on Foreign Policy Japan's domestic agenda consumes so much energy at the level of the political leadership that it is difficult to identify conspicuous initiatives on international economy policy. In other words, the leadership acknowledges the fact that its greatest contribution would be to secure the country's economic recovery. Fortunately, a recovery seems to be happening, albeit grudgingly, as the U.S. and other regions of the world are experiencing growth and there is an increase in net foreign demands for Japan's products and services. However, Japan cannot serve as an independent locomotive for the world recovery. Nonetheless, Koizumi is well aware of his responsibility to make sure that Japan's nonperforming loans do not disrupt the process of the world economic recovery. The events of 11 September 2001 altered the international policy agenda for most countries. Consequently, Koizumi vigorously pursued policy co-ordination with the U.S. and others in the fight against terrorism as well as in implementing necessary legislative changes. He did remarkably well in this regard and volunteered to host a

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conference in Tokyo on the reconstruction of Afghanistan. However, the time available to him to deliberate upon other issues on the policy agenda was considerably squeezed. All these constraints contribute to Japan assuming a reactive posture rather than a proactive one, at least at this time, in areas of rebuilding global governance, such as international financial architecture and the trade and investment system. Certainly, there are some exceptions, such as the Kyoto Protocol on Climate Change, which Japan chose to join with Europe in ratifying and in so doing broke with the U.S. Yet there are not many other cases of Koizumi putting much weight on formulating policies in these areas. This does not mean, however, that the Japanese government is dormant. Japan participates diligently in G8 meetings on rebuilding the international financial architecture and other governance-enhancing mechanisms. Moreover, the Japanese government is known to implement consensus decisions, as exemplified by the recent strengthening of measures against money laundering (Financial Action Task Force on Money Laundering 2002). In practice, the government cannot help but explain any progress it makes in its efforts to restore its economic house back in order. In short, most of Japan's efforts have concentrated on presenting the Asian case and incorporating specific concerns into the consensus. This is reflected, for instance, in the Japanese position on the advantages and disadvantages of private sector involvement. Japan may appear to lack distinct viewpoints on stand-still power and collective action clauses. This position is not accidental: Samurai bonds, which were issued by Asian governments and held by Japanese investors, were an extremely marginal factor in the Asian financial crisis of 1997-99, while bond financing played a major part in external debt financing for Latin American and East European governments. In fact, the Japanese government continues to try to foster the healthy development of regional bond markets in Asia, in order to attract long-term capital and reduce dependence on short-term money from abroad. The outcome of ongoing private sector involvement will contribute to the process of designing the region's bond markets.

The New Asian Initiative In any event, a new Asian initiative is currently one of the most notable efforts made by Japan in the area of international economic policies. This does not imply that the Japanese government's enthusiasm is waning about multilateral or global efforts and embarking upon regional route to pursue its national interests. On the contrary, the Japanese government is taking extra care to prevent any regional arrangement from becoming an obstacle for further multinational arrangements. Certainly, the Japanese govemment has recently altered its policy position considerably. Previously, it had always placed the highest priority on multinational approaches such as World Trade Organization (WTO). Now the Japanese government has decided to pursue

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accomplishments at any conceivable level, namely bilateral, regional, and global. This change stems from the recognition of a changing policy environment. To begin with, it appears that many things are achievable at the bilateral and regional levels as represented by the recent free trade agreement between Japan and Singapore, while the next round of trade liberalisation at the WTO may not produce quick results. The Japanese government has come to realise that it is possible for bilateral and regional arrangements to support a further thrust toward a global approach. Japan could be most effective in forging appropriate adaptive applications of a new global governance architecture in Asia. There is a growing awareness among Asian countries that they have a common stake in enhancing their standing in the global marketplace. Most of the region's countries are far keener than before to participate in a variety of consultative mechanisms, collective arrangements for mutual actions toward strengthening safety nets, the collective infrastructure, and the harmonisation of the regulatory systems. There is no doubt that extensive mutual economic dependence through trade and investment has convinced countries not to waste time in seeking benefits for themselves alone at the expense of others. Moreover, China has dramatically changed its position and participates aggressively in the process of deepening economic relations within the region. This has subtly changed the political equation in Asia, but has been cautiously welcomed by other nations.

Koizumi's Active Engagement in Asia In light of these changes in the environment, Koizumi is committed to a new Asia initiative, in which the Ministry of Economy, Trade, and Industry, led by Takeo Hiranuma, functions as the effective engineer of the details. Koizumi has already taken the trouble to visit the rest of Asia several times. Speeches he made during these tours are revealing: he proposed a novel idea of a 'comprehensive economic partnership' (Koizumi 2002). This partnership is intended to include not only further bilateral or regional trade and investment liberalisation but also a wider spectrum of mutual efforts in the areas of environment, currency, and collective infrastructure building. This last emphasises co-operation in policy making related to science and technology, the enhancement of educational exchanges, the harmonisation of industrial regulations, and the promotion of tourism among participating countries. It is based upon a conviction that incompatibility of regulations and infrastructure could be nothing but a fatal hindrance to further economic growth of the region. Along these lines, some progress can be seen in the area of strengthening of the region's financial system, although individual countries still struggle to reduce the debt overhang of their financial institutions and industrial corporations. Japan has entered into currency swap and dollar repurchase arrangement with several countries, following

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up on the Chiang Mai Initiative. Consultation on macroeconomic management among Asia's fiscal and monetary authorities has become far more frequent and intensive. Some peer pressure for reform is beginning to grow, even if it has not yet evolved into a binding force. The rebuilding of the financial market and institutions is no exception. The dialogue to identify the appropriate sequencing of financial market deregulation is flourishing. It is probably fair to say that Japan, through its Asian initiative, could well contribute most to rebuilding of global governance as well as international financial architecture by keeping Asian nations actively committed to the whole process of policy deliberation as well as implementation. Finally, it should be remembered that the emphasis on Asia in Japanese economic diplomacy does not necessarily mean that Japan does not have any interest in Africa, one of the topics featured at the 2002 G8 Kananaskis Summit and slated for Evian in 2003. In fact, Japan has been one of the principal sources of aid to many African countries and is acutely aware of the crucial role played by that aid in African fiscal budgets. In this respect, the New Partnership for Africa's Development (NEPAD) has been welcomed by the Japanese government, since its own aid programme to Africa — the Tokyo International Conference on African Development — emphasised African ownership. Therefore, it can be said that the Japanese government is resolved to continue its engagement with Africa as NEPAD progresses.

Notes 1 David Powers (2002) referred to a 'NATO (No Action Talk Only)' cabinet, an eloquent expression of criticism against Koizumi in the BBC reporter's reflection of one year of Koizumi reform. 2 See, for example, John Makin (1999), who advocates aggressive monetary easing and even a weak yen policy, Paul Krugman's (1998) early thinking on Japan, Bennett McCallum (2001), who offers a good overview of western economists' debate on Japanese monetary policy, and Kunio Okina (1999), who argues against single-minded targeting.

References Financial Action Task Force on Money Laundering (2002). 'FATF Annual Report for 2001-2002 Released'. Paris, 21 June. (January 2003). Japan (2002). 'Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002 (Summary)'. 21 June. (January 2003). Koizumi, Junichiro (2002). 'Statement by Prime Minister Junichiro Koizumi Following the Summit Meeting with Prime Minister Goh Chok Tong of the Republic of Singapore'. 13 January. (January 2003).

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Krugman, Paul R. (1998). 'Japan's Trap'. May. (January 2003). Makin, John H. (1999). 'Exchange Rate Stability in International Finance'. American Enterprise Institute. (January 2003). McCallum, Bennett T. (2001). 'Japanese Monetary Policy Again'. Shadow Open Market Committee position papers. (January 2003). ' Minutes of Forum #1: Effectiveness and Possibility of Further Monetary Relaxation' (2001). ESRI Economic Policy Forum, 1 March. (January 2003). Okina, Kunio (1999). 'The Risks of Single-Minded Targeting'. 10 November. (January 2003). Posen, Adam (2002). 'Macroeconomic Policy Options and Prospects for Japan'. Remarks at the Institute for Intemational Economics, 15 January. (January 2003). Powers, David (2002). 'Koizumi, One Year On'. BBC News, 23 April. (January 2003).

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Chapter 12

The Chinese Crux of Monetary Union in East Asia George M. von Furstenberg and Jianjun Wei

The latest Country Report on the People's Republic of China — Special Administrative Region (SAR) published by the International Monetary Fund (IMF, 2002b, 3) describes the growing ties between Hong Kong and mainland China since Hong Kong's return to China's sovereignty this way: Integration between the two economies has deepened, notwithstanding the Asian crisis: Mainland-related entrepôt trade has continued to increase; a large share of China's foreign currency financing is raised in the Hong Kong SAR fînancial market; a growing range of economic activities are integrating across the border; and Hong Kong SAR business has become increasingly centered around China-related activities. Such a situation would seem to cry out for a common currency because separate currencies act like a strong barrier to trade (see Andrew Rose, in press, for an appraisal of the central estimates of the monetary union effect on trade). This chapter discusses how best to achieve the monetary unification of China with the purpose not only to strengthen internal trade and hence economic growth (see Frankel and Romer 1999; Chou and Wong 2001), but also to banish currency crises between Hong Kong and China and at the same time for the whole of China and its single currency with the outside world. Achieving monetary unification of China without continuing to peg to the U.S. dollar would also meet one of the essential prerequisites for a wider monetary union on the continent of East Asia down the road. In a short chapter it is not possible to justify all the premises and judgements on which it is based. Yet they must at least be stated at the outset to help explain the broader contextual view underlying the limited areas considered in detail. First, Kenneth Rogoff's (2001) considered conclusion — namely that in 'the foreseeable future, it would not be desirable to aim for a single world currency, and that from an econoinic point of view, it would be preferable to retain at least, say, three to four if not n [major independently floating] currencies' — is accepted. 'The optimum currency area is not the world,' according to Robert Mundell's (1961, 659) original judgement as well. A new continental East Asian currency, born of Chinese monetary union, that floats permanently against the U.S. dollar and euro, and at least temporarily against the yen, is ultimately essential for a region that is integrating internally.

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Second, on account of a latent banking and debt crisis in Japan (see Fukao 2002), the yen is becoming progressively less suitable for providing the standard of monetary integration for continental East Asia. With partial exceptions such as Singapore (see Borensztein, Zettelmeyer, and Philippon 2001), that region has looked to the U.S. dollar as the common external anchor and not to the yen. The dollar anchor is likely to become unsustainable once capital account convertibility in the main countries of the region, in particular mainland China, has progressed. Instead, an internal anchor must arise from the monetary unification of China. Thus, a fourth major international currency, in addition to the U.S. dollar, euro, and yen, will have to crystallise in continental East Asia before its monetary emancipation can progress. Third, as in Europe, where the United Kingdom has kept aloof from the European Monetary Union (EMU), Japan will stand aside from any China-based monetary union. Such a union will involve the monetary unification of just a single country before unilateral accessions or multilateral transformation can occur. If and when China's currency, after monetary unification, develops into a major international denomination rivalling the yen, it could become one of the two pillars of a multilateral monetary union with most other East Asian (and some Southeast Asian) countries. Assuming political compatibility, that union eventually could include Japan should the economic and financial integration of China and Japan continue to grow and their banking and financial systems be reformed to the point of reaching internationally accepted standards of soundness, provisioning, and transparency. This chapter will consider only the modalities that could lead to a major international Chinese currency, initially though monetary union between Hong Kong and mainland China. In other words, it deals mostly with the second point in the scenario outlined above. To provide some guidance, the second section reflects on the salient features of monetary unification processes observed in Britain's American colonies and later in Italian history. From this history, the third section draws inferences about how best to accommodate pressures for currency consolidation that arise inside a country such as China. The next section analyses the extent to which different plans for achieving Chinese monetary union apply these lessons and hold the promise of evolving a major international currency for all of China that would float against the USD. The final section of the chapter reviews the broader context in which this development is set.

Lessons from Monetary Disunity in American Colonial and Italian History Monetary history holds some interesting lessons about how monetary disunity arises in a country or region and how it tends to be resolved. In colonial northeastern America and its 13 separate British colonies, the colonies referred the value of their money to two external silver currencies, sterling and the Spanish peso (peso de ocho reales), known in the colonies as a piece of eight and then a dollar. The piece of eight, having 422.9 grains (less than one troy ounce of 480 grains) of 0.935 fine silver, was valued at

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4s6d, or a little under a quarter pound sterling based on its silver content. It served as the decisive monetary standard in that 'intercolonial exchange was effected at par based on the comparative values of the piece of eight of the two colonies involved rather than on the comparative commercial rates of exchange in London at the time of the transaction' (McCusker 1978, 159). Obviously, when neither arbitrage nor price information could be instantaneous, what constituted the monetary standard ,— on which all cross rates were calculated for transactions in Northeast America — mattered in practice. Just as the piece of eight, that is, the silver dollar, was the standard in England's North American colonies, the U.S. dollar is that standard in Southeast Asia at present, as it has been, with minor interruptions, for more than three decades (McKinnon 2001). Hence it plays a special role in the discussion of alternative routes to the monetary unification of China. Another striking lesson comes from the obvious striving of colonial moneys to be accepted as substitutes for each other at a fixed rate, so that payment in the currency of one colony could be readily accepted in a neighbouring colony. The network externalities afforded by currencies determined whether they were used inside their native colony only or also outside it, as happened in the case of New Jersey. According to a 1740 account, 'New York bills, not being current in Pennsylvania, and Pennsylvania bills not current in New York, but Jersey bills current in both, all payments between New York and Pennsylvania are made in Jersey bills' (McCusker 1978, 169-170). Because the Hong Kong dollar and the U.S. dollar are viewed as close substitutes in mainland China, it would not be correct to draw an analogy to the above quotation by claiming that most payments between Hong Kong and mainland China are made in U.S. dollars because they are current in both places, while the renminbi is not current in Hong Kong and the Hong Kong dollar is not very current in mainland China. However, there is nonetheless more than a grain of truth in this analogy. Colonial moneys strove to be accepted as substitutes for each other at precisely fixed levels that became customary rates of colonial interchange. Without first achieving internal monetary union, calls to float the renminbi against the U.S. dollar and hence against the Hong Kong dollar, or to establish an appreciable band around its central rate, ignore the compelling expedient of a fixed rate of equivalence in internal exchange. As indicated in the quote below, in the American colonies, fixed cross rates could be taken for granted and required no particular vigilance or market checking of the conversion rate with pound sterling in London. Hence different colonial moneys had to compete with characteristics of usefulness, including designation as legal tender for public and private debts, other than the stability of value relative to each other. The evidence comes, again, mostly from the period after 1750, but it clearly shows the existence of customary rates of intercolonial exchange... The accepted ratio between New York currency and the Lawful Money of New England was £133.33 to £100. £100 Maryland or Pennsylvania currency cost 106.67 New York currency, at least from 1762 on. Earlier it seems to have varied somewhat, but in 1768 the Chamber of Commerce officially adopted the £106.67 rate (McCusker 1978, 159).

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Not sharing the Anglo-Saxon fondness for numbers ending in odd fractions like 'A and 'As, the integration of various coinage systems in Germany and Austria during the period from 1834 to 1857 involved simpler, but equally precise, equivalences fixed by treaty, such as 1:1.5 and 1:1.75 (Bordo and Jonung 2000, 20-21). Moneys anchored in perfect substitutes, such as silver content, can co-exist confidently inside and outside their original jurisdiction at a perfectly fixed exchange rate because they have the law of arbitrage on their side. There are several historical instances of formal arrangements for mutual acceptance based on coins of equal precious-metal content in which coins issued by one country were legal tender in other countries and vice versa. By contrast, exchange rates fixed by statute between gold and silver quantities, such as 1:15.5 under bimetallism, as well as a fixed exchange rate between commodity money and unbacked paper money, invariably trigger the operation of Gresham's Law. As the relative price of the two types begins to deviate from the officially decreed price relation, the less costly of the two legal means of settlement is chosen, and the higher-valued form of money is driven from circulation. Obviously, therefore, if underlying market values are not maintaining a fixed relation, the only way to keep different moneys in joint circulation is to allow the exchange rate between them to vary also. Then those moneys that are weakest commonly, and hence conveniently, would be used for payment services, while stronger moneys would be used as stores of value. Hence, different moneys would be preferred for different services that could all be provided more efficiently by a single, superior money. These differences are well illustrated in the quote that follows. When a country goes from a gold standard to a system of inconvertible paper money, metal currency will not necessarily disappear. In general, a dual price system develops in the market: higher prices for payments effected with paper money and lower ones for those made with metal money. A clear example is given by the so-called greenback period in the United States. ... In such a situation, metal money was not melted down or transferred abroad, because the authorities did not impose a single level of prices which would have indirectly devalued the coins. In the case of Italy, however, article 3 of the decree passed on 1 May 1866 'provided' that one gold lira should have the same purchasing power as one paper lira. This legislation therefore forced the metal out of the market (Fratianni and Spinelli 1997, 76-77).

The last part of this quote already indicates that there is an important final issue about changing monetary arrangements relative to an outside standard, be it gold, sterling, or a Hong Kong dollar fixed to the U.S. dollar. It is bound up with respect for property rights, the sanctity of intertemporal contracts, and time consistency. In the American colonies, it expressed itself this way: Debts due in sterling could sometimes be lawfully paid in the colonies with a sum notionally equivalent to but really less than what was owed. While such abuses were infrequent, they pandered to the fears of the merchants of London (McCusker 1978, 125-126).

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Violating property rights jeopardized the reputation of a currency with 'the merchants of London' then as surely as it would with global financial centres now.

History's Principal Lessons for Internal Monetary Unification The history of internal monetary unification in Colonial America and Italy in the eighteenth and nineteenth centuries suggests that it is not ultimately sustainable for a single country to have two or more currencies, each of which has legal tender status in one part alone. Monetary integration is a gradual process that starts with mutual convertibility and getting used to each other's money in an ever denser web of transactions. It becomes eventually possible to deal confidently and at low transaction costs with the moneys issued by separate jurisdictions of economically integrating units that later become a single country. An essential prerequisite is that the differences in value between the bills and coins of various denominations circulating side by side are fixed precisely and permanently to a standard of value not subject to the jurisdiction of the issuers. Hence, as long as the Hong Kong dollar (HKD) is credibly fixed to the U.S. dollar (USD), for example at 7.8 HKD per USD, the renminbi (RMB) must be fixed just as precisely — at 8.28 yuan per USD — and not in a band with an appreciable spread that would disturb the application of a fixed and customary exchangeequivalence rule, such as 7.80 HKD = 8.28 yuan = 1 USD, for retail transactions. To maintain Chinese monetary integration prior to having a common currency, any change in the RMB/USD exchange rate would have to be mirrored simultaneously and equi-proportionately in the HKD/USD currency board parity, and vice versa, so that the first of the two equalities above would be maintained. However, preserving the monetary integration of China in this way would violate the promise of the Hong Kong currency board arrangement that 7.8 HKD can always be turned into 1 USD. Since many intertemporal economic and financial arrangements and contracts have been predicated on that firm pledge, not honouring it would involve a breach of the implicit contract between the authorities and the public. There would also be partial expropriation of investors and creditors for the benefit of debtors, including a selfserving government, to the extent that depreciation against the USD would ensue. The IMF (2002a, 12-16) supports, or cites with approval, 'Hong Kong SAR's commitment to the linked exchange rate system' while at the same time recommending a policy — a wider renminbi trading band — that would tend to undermine it. In making this recommendation, the IMF remains oblivious to the fact that following its advice would destroy what has been de facto an almost completely fixed exchange rate between the Hong Kong dollar and the renminbi. Four consecutive years of deflation since 1999 and low investment, falling asset prices, and no or low growth since 2000 indicate the vulnerability of Hong Kong's currency board peg to the U.S dollar. The market's perception of the likelihood that the current level of that rate will be maintained will surely be adversely affected once the RMB/USD rate is allowed to move, up or down,

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in a wide range. Hence, the dollarization of the Hong Kong economy is the appropriate fulfillment and exit strategy from its currency board commitments. The government of Argentina's reckless trampling of property rights in the deep financial and economic crisis of 2002 has cast a long shadow over the prospects of that country and of any national currency it may seek to sustain. Forced pesification of USD-denominated deposits in Argentine banks devalued them greatly. To avoid any lasting loss of reputation due to a lack of contract fidelity, the monetary unification of China thus cannot prudently be achieved by simply hitching the Hong Kong dollar to the renminbi by requiring conversion and then letting the surviving currency rise or sink when it is left to float. Appreciation of the unified currency against the U.S. dollar would mean that debtors (or those with short positions) who had contracted in Hong Kong dollars lose as the U.S. dollar cost of their debts would rise, while depreciation would hurt Hong Kong dollar creditors (and those with long positions) relative to what they originally had negotiated. Instead of initiating partial expropriation of one side or the other in this way, the Hong Kong dollar's currency board must be given an exit that preserves property rights. Argentina's currency board arrangement could have been safely converted in 1999 by quickly gearing it to a similar endpoint, formal dollarization. Once trouble with Argentina's exchange relations with its neighbours had started while fiscal disorder continued, the currency board peg needed to be hardened to formal dollarization in order to withstand the added financial and economic pressure coming from escalating default and currency risk. Hence, although internal monetary union is imperative if complete integration of the economic and financial markets of mainland China and Hong Kong SAR is intended, it can be achieved safely only by a circuitous route. That route involves temporarily strengthening the role of the U.S. dollar in the Chinese monetary system before cutting the exchange-rate tie with the dollar, as explained in greater detail below. Changes in monetary arrangements often involve selective elements of expropriation, for instance, by allowing debts incurred in one currency to be discharged in a debased or devalued currency that is declared to be its legal successor or equivalent. Any selective expropriation on the way to monetary unification would mar the reputation of the new currency and keep it from acquiring a major international role. Once formal Chinese monetary unification has been achieved, the new common currency, introduced at the rate of 1:1 with 'the people's money' — the renminbi — having shed its socialist image and nomenclature, should not be legal tender for claims and obligations incurred originally in Hong Kong dollars. Instead, the currency and all claims in Hong Kong dollars should be converted into U.S. dollars at currency board parity to avoid selective expropriation unless alternative currency arrangements are made privately and voluntarily by the contracting parties involved. Decoupling the Hong Kong dollar from the U.S. dollar under a speculative attack that appears too costly to resist and then letting it depreciate against the U.S. dollar would constitute an implicit breach of promise to those who contracted in Hong Kong dollars with official assurances that the currency board arrangement was sacrosanct

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and secure. Quickly floating the renminbi prior to formal conversion of all outstanding claims in Hong Kong dollars and obligations to U.S. dollars would doom Hong Kong's currency board arrangement as well, and would cause the Hong Kong dollar to be pegged to the renminbi as a prelude to monetary union on mainland China's terms. In any case, requiring Hong Kong dollars to be turned in for renminbi at a fixed rate without insuring the dollar value of the renminbi counterpart would either risk or seal partial expropriation by lowering the value in U.S. dollars of claims in Hong Kong dollars. By contrast, replacing the Hong Kong dollar (and the Taiwanese dollar, not discussed here) by the U.S. dollar would achieve monetary unification of China — in the sense of leaving only one Chinese currency when one ignores the Taiwan dollar and assumes that the pataca goes the way of the Hong Kong dollar — without selective expropriation. These are the two approaches to monetary unification given further consideration in this chapter.

A Market-Based Transition to Chinese Monetary Unification Currently the renminbi is still far from having achieved full capital account convertibility. Yet liberalisation of financial markets in the Mainland has progressed. Steps in that direction have been encouraged in part by China's 2001 accession to the World Trade Organization (WTO), with a transition period of only five years, and in part by China's ambitious plans to develop a financial services industry beyond the confines of Hong Kong, particularly in Shanghai. The ongoing liberalisation makes it highly unlikely that fixed exchange rates with U.S. dollar are fundamentally compatible with the monetary unification of China and with the eventual emergence of the unified Chinese currency as an international currency widely used in international trade and finance. Hence, while the achievement of monetary unification of China will benefit greatly from the maintenance of a tight dollar peg and fixed equivalence between the Hong Kong dollar and renminbi, trying to maintain an explicit hard U.S. dollar peg, or any other external peg, after unification is unnecessary — even dangerous. Such pegging is bound to invite a major currency crisis eventually that may result in a sharp movement of the exchange rate with U.S. dollar, either up or down. Instead, monetary unification should be followed either immediately, or within a period of months rather than years, by public abandonment of a dollar peg even though a modest amount of managed floating, official market-making for foreign exchange, and attempts at short-run smoothing of the exchange rate with U.S. dollar may, of course, continue. The first step needed for Chinese inonetary unification without confiscation, formally dollarizing the Hong Kong dollar, has also been recommended by Robert Mundell (2000). However, he envisions the dollar as an excellent permanent anchor for the Asian currencies and looks forward to the formalization of a dollar-based currency area in East Asia, including China and Hong Kong, in the long run. As a sop to national monetary identity, formal dollarization could be combined with intramarginal amounts of

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dollar-equivalent stand-in currencies being issued by the dependent members of the currency union, analogous to the Scottish pound for pound sterling. Ronald McKinnon (2001), on the other hand, advocates the U.S. dollar as the common monetary standard and not as the common currency for the region. He emphasises the benefits of introducing official dollar parities that are treated as longterm obligations to which the government is committed after any crisis. 'Then, with regressive exchange rate expectations and the future price level more secure in the face of any mishap forcing the (temporary) suspension of the fixed exchange rate commitment, the authorities could seriously encourage lengthening the term structure of domestic and foreign finance in the bond market' (237). In other words, if the anchor chain ever snaps, it must be reattached after the storm without lifting or dragging the anchor from its place. Local financial structures are opening up and will eventually strengthen in mainland China, and the relative importance of the U.S. market to mainland China and Hong Kong has started to shrink. That market took about 25 percent of its exports and supplied 10 percent of its imports in 1999 (IMF 2000, 163, 166). In the near-universal economic slowdown of 2001-2002, China has proven itself to be an engine of regional economic growth accounting for a growing share of East Asia's trade. This argument thus does not share the view that maintaining a U.S. dollar peg, particularly with the yen-dollar rate on the loose, would continue to bring the blessings of stability to a continental East Asian monetary area far into the future. Permanent U.S. dollar dependence and a permanent lack of financial and political emancipation by a fastgrowing and increasingly confident region, although still far too rigged, intransparent, and statist, that contains more than a third of the world's population, would be a historical anomaly. East Asia's combined real gross domestic product soon may come to exceed that of the United States if capital formation, productivity growth, and technology catch-up continue at a rapid pace. It will be politically difficult to defend the maintenance of fixed nominal exchange rates with the U.S. dollar in open capital markets, which should command repeated sacrifices from the region once it is well on its way to building an internationally fit noninflationary monetary and financial order of its own. Regarding any region-wide hard peg to the U.S. dollar as a way to achieve stable cross rates internally, it is questionable that equally reliable dollar fixes could be delivered by all the countries in the region. There is uncertainty about how a successful speculative attack on one might affect the security of the peg of others, and why a politically and economically costly defence against any such attack would necessarily be successful and hence credible. As Charles Wyplosz (2002, 143) has noted, if pegging comes without any institutional backup, it solely relies on the separate decisions by individual countries. There would be little else to defeat speculative attacks since regional swap arrangements based on the U.S. dollar, such as the Chiang Mai Initiative of May 2000 between the ASEAN countries plus China, Korea, and Japan, not including the United States, have inherent limitations. Graham Bird and Ramkishen Rajan (2002,

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42-48) see some development potential in this regional system of providing loans of foreign exchange reserves to each other. However, such an exchange intervention financing system may be used to support an ultimately not credible cause such as defending the wrong set of parities. McKinnon (2001) also does not attempt to demonstrate that scrambling back to the old parity, if it were ever lost, would be a politically credible proposition in all countries that had to deviate from that dollar parity. In fact, he envisions committing East Asia to an arrangement stronger than that imposed in many countries under Bretton Woods: fixed exchange rates with the U.S. dollar for each of them and hence fixed exchange rates with each other, with the former condition — but not the latter — suspendable. This means that all countries in the region, and hence the region as a whole, may devalue or revalue by a uniform percentage against the U.S. dollar, but only temporarily and in an emergency. How a uniform exchange rate realignment, on and off, might be negotiated en bloc within the group of East Asian countries or by that group with the United States is not explained either. Barry Eichengreen (1997, 2) predicts that 'schemes to peg the dollar, the yen, and the Deutschmark [now euro] against one another, as had been the practice until the Bretton Woods international monetary system collapsed in the early 1970s, will prove unavailing ' ; this could apply to a unified international Chinese currency of tomorrow as well. Schemes to peg such a currency of the future to a basket of currencies consisting of the full set, or a subset (Tsang 2001, 7-15), of the four currencies currently included in the IMF's special drawing rights (SDR) — USD, euro, yen, and pound sterling — will be equally unavailing and spurned in open financial markets. Although direct interbank clearing in the first three major currencies is being introduced in Hong Kong (IMF 2002a, 14), basket pegging would be ill advised from the beginning, as it would introduce cumbersome hedging requirements for the prevailing claims in U.S dollars. These are obligations that, in Hong Kong at least, do not currently need to be hedged against the local currency. Without the pressure from basket pegging, other countries in East Asia in general would have no compelling reason to hedge claims in U.S. dollars against exchange risk with euro, pound, and yen because the greatest risk comes from the breakdown of their own currency arrangements however their respective parity is expressed. As long as financial instruments for hedging exchange rate exposure in their own currency have not fully developed, continental East Asian countries are obliged to rely on balance sheet hedging and direct currency matching of prospective flows of payables and receivables. Hong Kong's derivatives market is the fifth largest in the Asia-Pacific region, but basket pegging would only complicate that task. Reaction to the announcement of Argentina's former finance minister Domingo Cavallo's 2001 contingency plan to change the peso's currency board parity from 1 USD to 0.50 USD and 0.50 euro is instructive in this regard: it instantly weakened confidence in Argentina's scheme of currency board pegging. Once firm exchange rate commitments are made, the political temptation is to try to keep them as long as possible for reputational reasons, even when they are seen to

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be wrong in retrospect. It would be better, of course, to avoid post-unification fixed exchange-rate commitments with the U.S. dollar, or with a combination of the U.S. dollar, yen, and euro, supported by indefinite retention of capital controls, in the first place. McKinnon (2001) considers that, in the long run, the formation of a dollarbased currency area in Asia, including China, Hong Kong, and most Asian countries, could be used as a platform for an independent Asian currency. However, in the end he repeats his earlier judgement that 'because no region-wide "Asian euro" exists or is in prospect, the dollar is the only plausible anchor for creating an East Asian zone of monetary stability in price levels and exchange rates' (McKinnon 2002, 50). If the message is that a dollar-based currency area with fixed exchange rates and rationally regressive (that is, fixed) exchange rate expectations will have to be maintained successfully for quite some time before that area can serve as a platform for an independently floating currency, then McKinnon's condition should be cut short: China should move toward independent floating, like the euro, right after achieving monetary unification. Discovery of the appropriate scope and timing of monetary union in East Asia over an extended period thereafter would be based on learning how well the actual and prospective behaviour of the Chinese and Japanese exchange rates with other major currencies, and of any common monetary standard they might develop between them, might suit the East Asian countries. Chinese monetary union and managed floating that is free of long-term commitments to a fixed external exchange rate would have to be achieved before regional monetary union could possibly be considered seriously. Hence there needs to be four major international currencies, including two in Asia, before there can ever be as few as three in the world. The preferred approach to Chinese monetary unification is first to dollarize the Hong Kong economy by making the U.S. dollar the legal successor currency to the Hong Kong dollar, and then to declare the U.S. dollar nonexclusive tender in Hong Kong, together with the renamed renminbi so as to permit currency competition. In practice, this would mean that the Hong Kong Monetary Authority and its management of the payment and settlement system and of clearing balances with eligible banks would be conducted in U.S. dollars for some time, during which the development of renminbi-denominated business at Hong Kong banks would be phased in. At the end of 2000, two dozen branches of banks in mainland China were already operating in Hong Kong (IMF 2002b, 6); this might facilitate the eventual introduction of banking business denominated in renininbi. In the first half of 2002, there were hints from both the Governor of the People's Bank of China and from the Hong Kong Monetary Authority that licensed banks in Hong Kong could begin to accept renminbi deposits that would initially have to be hedged by renminbi-denominated loans made to clients on the mainland. Once the Hong Kong dollar has disappeared through dollarization, loans denominated in the sole surviving Chinese currency are likely to be demanded by Hong Kong applicants as well. The growth in renminbi-denominated assets and liabilities of Hong Kong banks would then occur at a market-determined pace to take advantage

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of any growing network externalities with mainland China in which the yuan, and not U.S. dollar, is the dominant transaction currency. Hong Kong's nonfinancial businesses that account for most production and consumption activities thus might eventually choose to settle predominantly in the unified Chinese currency. This would be done for the convenience of customers and as a way to reduce currency risk given the close economic integration of Hong Kong with the Chinese mainland noted by Henry Wan and Jason Weisman (1999). International financial business done in Hong Kong would continue to be conducted mainly in U.S. dollars, as elsewhere in the world. As estimated by Shu-ki Tsang (2001, 9), even without legal tender status, almost 40 percent of the total Hong Kong dollar issue appears to be held and used in mainland China, mainly in the Pearl River Basin in the proximity of Hong Kong. Replacing Hong Kong dollar claims with U.S. dollar claims would not require making the latter legal tender in mainland China. However, the stipulation of any settlement currency, including a foreign currency, in private contracts would be free. The renamed unified Chinese currency would be legal tender in both mainland China and Hong Kong, but only for claims contracted earlier in renminbi or contracted since unification in the new currency unit introduced at par with it. Use of the U.S. dollar in business and finance should be subject to few, if any, restrictions not only in Hong Kong as now, but also in mainland China. The eventual achievement of full (or total) convertibility would allow open currency competition. This would pressure the renamed Chinese unified currency to develop its reputation and usefulness so as to defend and expand its hold and to capitalize on the network externalities available to it in China's vast internal market. Successful inflation targeting would be an essential complement to letting the sole surviving Chinese currency float against other major international currencies whose ranks it would have joined. This approach is likely to leave Hong Kong's world-class international financial business, which is now conducted mostly in U.S. dollars, less disturbed than a forced exchange of Hong Kong dollars for renminbi that could be accomplished, for instance, by making the renminbi legal tender for discharge of HKD-denominated obligations at a fixed rate. In the latter event, the renminbi would become the exclusive legal tender in all of China but with a dubious international reputation. If the withdrawal rate for the Hong Kong dollar were set at 1:1 with renminbi, it would imply an immediate devaluation of the SAR currency. In addition, a further effective devaluation of Hong Kong dollar claims in terms of U.S. dollar might be involved if the renminbi subsequently is depreciated against the U.S. dollar. The net effect would be to betray the trust engendered by the currency board arrangement to the detriment of the international reputation of the renminbi and of the governance of its fmancial system.

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Conclusion Chinese monetary unification and the way it is done will determine whether there will be an international Chinese currency in the not too distant future. Decades later, such a currency could come to serve as one of the pillars of an East Asia monetary union including Japan, or it could continue to exist on its own with perhaps some unilateral accessions from the region. Although there may be political imponderables, Taiwan, Singapore, and Malaysia could perhaps become interested in such a unilateral monetary union with China on economic grounds, but other subgroups may also be envisaged (see Ling 2001; Bayoumi and Mauro 2001). Most important, however, if Chinese monetary unification is achieved without selective expropriation and without preventing currency competition, particularly from the U.S. dollar, it may lay the foundation for an international currency that will float safely against all the other major currencies. A second major international currency, and not an East Asian dollar standard, thus needs to crystallise in East Asia before there ever can be just one such currency through monetary union in the region. The main obstacle in the path of such a development is the unresolved state of bankruptcy of much of the mainland Chinese banking and financial system (for a description of some of its pathology, see Jun Zhu 1999), where nonperforming loans remain near 40 percent. In this regard, it may be unrealistic to wait until all the conditions are right for Chinese monetary union. Rather, such a union could be precipitated at almost any time by a financial crisis, such as the collapse of Hong Kong's currency board arrangement, or an appreciable change in the U.S. dollar value of renminbi. With no time to complete the loan workout for the mostly still government-owned financial system of mainland China, its monetary union with Hong Kong would then precede the emergence of an international money, rather than give birth to it. Even then the most important principle to be followed is this: Before the currency board arrangement is destroyed or the RMB/USD near-fix is abandoned, Hong Kong dollar claims and obligations must be converted to U.S. dollars. Waiting until pressures on the 7.8 HKD/USD and or the 8.28 RMB/USD rate have become intolerable will not permit this. Consequently, moving toward Chinese monetary union, even if imperfect, may not safely be deferred, lest its terms become confiscatory for Hong Kong residents, and other users of the Hong Kong dollar, under pressure of events.

References Bayoumi, Tamin and Paolo Mauro (2001). 'ASEAN Regional Currency Arrangements' A SEA N Economic Bulletin vol. 24, no. 7 (July), pp. 933-954.

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Bird, Graham and Ramkishen S. Rajan (2002). 'The Evolving Asian Financial Architecture'. Essays in International Economics, No. 26. International Economics Section, Princeton University. Bordo, Michael D. and Lars Jonung (2000). Lessons for EMU from the History of Monetary Unions. Institute of Economic Affairs, London. Borensztein, Eduardo R., Jeromin Zettelmeyer, and Thomas Philippon (2001). 'Monetary Independence in Emerging Markets: Does the Exchange Rate Regime Make a Difference?' IMF Working Paper No. 01/1. Washington DC. (January 2003). Chou, Win-Lin and Kar-Yiu Wong (2001). 'Economic Growth and International Trade: The Case of Hong Kong'. Pacific Economic Review vol. 6, no. 3 (October), pp. 313-329. Eichengreen, Barry J. (1997). 'International Monetary Arrangements: Is There a Monetary Union in Asia's Future?' Draft. University of California at Berkeley, 24 January. Frankel, Jeffrey A. and David Romer (1999). 'Does Trade Cause Growth?' A merican Economic Review vol. 89, no. 3 (June), pp. 379-399. Fratianni, Michele and Franco Spinelli (1997). A Monetary History of Italy. Cambridge University Press, Cambridge. Fukao, Mitsuhiro (2002). 'Barriers to Financial Restructuring: Japanese Banking and Life Insurance Industries'. Draft, Keio University, 25 February. Internalional Monetary Fund (2000). Direction of Trade Statistics Y earbook 2000. International Monetary Fund, Washington DC. International Monetary Fund (2002a). 'People's Republic of China - Hong Kong Special Administrative Region: 2002 Article IV Consultation Discussions, Staff Report'. Country Report No. 02/100. Washington DC. (January 2003). International Monetary Fund (2002b). 'People's Republic of China - Hong Kong Special Administrative Region: Selected Issues'. Country Report No. 02/99. Washington DC. (January 2003). Ling, Hazel Yuen Phui (2001). 'Optimum Currency Areas in East Asia'. A SEA N Economic Bulletin vol. 18, no. 2 (August), pp. 206-217. McCusker, John J. (1978). Money and Exchange in Europe and A merica, 1600-1775: A Handbook. University of North Carolina Press, Chapel Hill, NC. McKinnon, Ronald (2001). 'After the Crisis, the East Asian Dollar Standard Resurrected: An Interpretation of High-Frequency Exchange-Rate Pegging'. In J. E. Stiglitz and S. Yusuf, eds., Rethinking the East A sia Miracle, pp. 197-246. Oxford University Press, New York. McKinnon, Ronald I. (2002). 'Mundell, the Euro, and Optimum Currency Areas'. In T. J. Courchene, ed., Money, Markets, and Mobility, pp. 41-58. McGill-Queen's University Press, Montreal. Mundell, Robert A. (1961). 'A Theory of Optimum Currency Area'. A merican Economic Review vol. 51, no. 4 (September), pp. 657-665. Mundell, Robert A. (2000). 'Does Asia Need a Common Currency?' Speech delivered at the first biennial meeting of the Hong Kong Exports Association, December. Hong Kong. Rogoff, Kenneth (2001). 'Why Not a Global Currency?' A merican Economic Review vol. 91, no. 2, pp. 243-247. Rose, Andrew K. (in press). 'The Effects of Common Currencies on International Trade: A Meta-Analysis'. In A. Volbert, J. Matz and G. M. von Furstenberg, eds., Monetary Unions: W hy, How, and W hat Follows? Oxford University Press, New York. Tsang, Shu-ki (2001). 'One Country, Two Monetary Systems'. Paper presented at the International Conference on the Monetary Outlook on East Asia in an Integrating World Economy, Chulalongkorn University, 5-6 September. Bangkok.

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Wan, Henry Y and Jason Weisman (1999). 'Hong Kong: The Fragile Economy of Middlemen'. Review of International Economics vol. 7, no. 3 (August), pp. 410-430. Wyplosz, Charles (2002). 'A Monetary Union in Asia? Some European Lessons'. In D. Gruen and J. Simon, eds., Future Directions for Monetary Policies in East A sia, pp. 124-155. Reserve Bank of Australia. Zhu, Jun (1999). 'Closure of Financial Institutions in China'. Policy Papers No. 7 — Strengthening the Banking System in China: Issues and Experience. Bank for International Settlements. (January 2003).

PART IV: CONCLUSION

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Chapter 13

The G7/8 Contribution at Kananaskis and Beyond John J. Kirton and Ella Kokotsis 1

The G7/8 Summit, held at Kananaskis, Alberta, on 26-27 June 2002, marked the culmination of the fourth seven-year cycle of G7/8 summitry and the 28th annual regular summit encounter since the start at Rambouillet in 1975. During its first 27 years, the summit had exhibited a wide range of performance, from an impressively high grade of A awarded for the 1978 Bonn Summit to a disappointingly low of E when Germany next hosted, at Bonn again, in 1985 (Bayne 2000, 195; Appendix B). During the fourth summit cycle, starting in 1996, annual performance had ranged from A– at Cologne in 1999 to only C for Genoa in 2001 (see Appendix E). From 1975 to 2001, the summit had produced a high of 169 specific communiqué-encoded commitments at Okinawa in 2000, but a low of only seven at San Juan in 1976 (Kirton, Kokotsis, and Juricevic 2002). Member countries had complied with these commitments only 30 percent of the time during the first 15 years (von Furstenberg and Daniels 1992), but 80 percent of the time by the 2000 Okinawa Summit. With such wide variability in past performance, there was much uncertainty about what the 2002 Kananaskis Summit would achieve. This general uncertainty was compounded by particular factors of the Kananaskis Summit's timing and design. As the first G8 summit following the terrorist assaults on the United States on 11 September 2001, it was called upon to define the meaning of the event, guide the ongoing war against terrorism, and work with a traumatised and preoccupied America-under-attack to address the larger array of challenges in global governance. Kananaskis also faced the task of transcending the tragic legacy of protest, violence, and death of the previous year's summit at Genoa, and the ensuing doubts in the minds of some leaders and many citizens about whether the annual summits were still worth the cost. Kananaskis also had to set the direction for the next cycle of summitry, including on the central architectural issue of whether Russia would finally chair and host an annual summit of its own. Moreover, for Kananaskis, the 2002 summiteers chose to risk focussing on a single centrepiece theme, in addition to the pressing issues of growth and terrorism and other such geopolitical crises as might arise on the summit's eve. As this centrepiece they had selected — and stayed with — poverty reduction in Africa, one of the most formidable challenges faced by the international community over the past half century and one of the most ambitious tasks remaining after the successful end of the European-centred cold war. To give life to their African agenda, G8 leaders included the leaders of Africa's four major

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powers and United Nations Secretary General Kofi Annan as full partners on the second day of their summit. Their inclusion demanded that a consensus be forged not only within the G8, but also within Africa, and between the G8 and Africa itself. As Kananaskis, with the leaders together for a total of 30 hours, was one of the shortest summits in G7/8 history, there was little time to reach such consensus in the right way at the right moment. Furthermore, those 30 hours were likely to be the last chance in a long time for the G8 to deal with this development agenda and thus for Africa itself. Despite these formidable challenges, Kananaskis proved to be a strikingly successful summit. Indeed, it was one of the best performing summits in the 28-year life of the G7/8 forum. Moreover, Kananaskis could well prove to be a summit of singular historic significance, should its far-reaching but consciously conditional commitments be complied with by its members and by its new African partners as well (see Appendix A). Institutionally, Kananaskis succeeded in producing a much-lauded, small, intimate, informal, leader-driven, peacefully civil summit as a model for an institution that leaders decided to continue for a further eight years — and decided that Russia would host in 2006. Substantively, after an all-too-brief treatment of a recovering but riskfilled global economy, the summit delivered a major 'global partnership' to eliminate weapons of mass destruction safely, mobilised US$20 billion over ten years for this purpose, and pioneered a new approach to global security as a guide. Despite fears that leaders would be distracted by a newly unveiled U.S. peace plan for the Middle East, Kananaskis also delivered for Africa, the one continent largely left out of the benefits of globalisation, but afflicted by the costs. To this continent long lost in political terms, Kananaskis brought a new, democratically based philosophy and partnership for development, a detailed 19-page G8 Africa Action Plan, and a new US$6 billion in official development assistance (ODA), US$1 billion in debt relief, and greater access to G8 markets for African exports. If the African partners could live up to their part of this grand bargain, the G8 would thus do for Africa over the next decade what it had already done for the former Soviet Union during the past decade — bring enduring development based on the democratic governance that the G8 was created to generate on a global scale. The success of Kananaskis flowed in part from its fidelity to the work programme that G8 leaders had adopted at their protest-plagued Genoa Summit in 2001 (Bayne 1999). It was grounded more deeply in four favourable conditions that enabled the Kananaskis Summit to unfold as the concert of equals that the G7/8 was designed to be (Kirton 1989, 1999, 2002b). First, in approaching its institution-building Russian and African agendas, the Kananaskis Summit directly mobilised the G8's core mission and common democratic convictions shared by the assembled G7 leaders, their new Russian partner, most attending Africans, and the citizens outside. Second, G8 leaders came to Kananaskis knowing that only the G8 could deliver the required leadership and resources to accomplish the now urgent task of dismantling Russian and others' weapons of mass destruction in ways that would keep them out of terrorists' hands, and to democratise and thus develop Africa, so it would, inter alia, not be a haven for

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terrorists and other threats to come. Third, G8 leaders brought the domestic political capital required to exercise such far-reaching, forward-looking global leadership, even though their citizens were preoccupied with very different, domestic concerns. Fourth, the summit format, under Canadian prime minister Jean Chrétien's determined and experienced chairmanship, allowed the 16 very diverse individuals crafting a future of disarmament for Russia and democratic development for Africa to come to the right consensus in the very short time the summit allowed. Common democratic purpose, a shared sense of predominant and equal capabilities, vulnerabilities and responsibilities, political control by popular leaders, and constricted participation at a skilfully designed and chaired summit proved to be the winning formula for success.

A Summit with Continuity, Commitment, and Credibility: The Genoa Foundation The first factor propelling the leaders toward success at Kananaskis was the combined continuity and credibility they brought from Genoa the previous year (Bayne 2002, 2001). It was there that they had agreed to focus again on development in Africa and deliver a detailed action plan at their next summit in 2002. To 'bind' themselves for the future, they did not produce the cumbersome hard law instruments of formal legal agreements or delegated organisational mechanisms (Ikenberry 2001; Goldstein et al. 2000). Instead, they introduced two informal, flexible, political innovations — appointing personal representatives for Africa to produce the plan and inviting the African leaders at Genoa to come to a second summit to help ensure that the plan met their needs. Despite the deadly distractions of Genoa, from European anarchists and Al Qaeda terrorists, the G7/8 leaders there made 58 commitments in their G7 and G8 communiqués (Kirton, Kokotsis, and Juricevic 2002). Ten came in the G7 statement, 43 in the G8 communiqué, 2 in the statement on regional issues, 2 in the Genoa Plan for Africa, and 1 in the statement released on the death of a protestor (G7 2001; G8 2001a, 2001b, 2001c, 2001d). While this number was less than the norm for summits of the fourth cycle, it exceeded the totals produced by those in most previous years. The Genoa commitments covered 15 different issue areas, a slightly greater range than Okinawa in 2000 and wider than summits in previous years. Moreover, what Genoa lacked in volume it made up for in concentration: Genoa was a development summit, where 59 percent of its commitments came from its 'Strategic Approach to Poverty Reduction' (G8 2001a). The remaining nine commitments devoted to global environmental protection made Genoa a sustainable development summit as well. Despite the surrounding scepticism and the complexity of the task in a difficult world, so soon after 11 September, the promises made at Genoa were largely kept. The nine priority commitments were complied with on average 50 percent of the time (see Appendix E). This score compares favourably with the average 45 percent score of the previous five summits, with the 43 percent score of the United States and

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Canada on sustainable development commitments from 1988 to 1995, and with the 32 percent from all countries on all economic and energy commitments from 1975 to 1989 (Kirton and Daniels 1999; Kokotsis 1999). Compliance with the Genoa commitments was particularly high in the subjects chosen as a focus for Kananaskis. Inspired by the shock of the 2001 terrorist attacks, G8 leaders issued a special statement on terrorism on 19 September (G8 2001e), and complied with it completely in the following year. Genoa's development-related commitments were also complied with to a high degree, with the trade component at 88 percent, infectious disease and bridging the digital divide at 75 percent each, universal primary education at 58 percent, and the environment at 17 percent. Standing in sharp contrast, as the one great compliance failure, was the strengthening of the international fmancial system at –100 percent. The specific Genoa commitment to develop for Africa 'a concrete Action Plan to be approved at the G8 Summit next year under the leadership of Canada' received a score of 0 (G8 2001c), as a work in progress, largely because full compliance could come only once the Kananaskis Summit took place. Canada came to its responsibilities as host of the Kananaskis Summit with a reputation as a high complying G8 member. At 82 percent, Canada came first in compliance with Genoa's nine priority commitments. Here Canada secured strong support from its Commonwealth and Francophonie partners of Britain and France, at 69 percent each. Then followed Germany at 59 percent, Italy at 57 percent, Japan at 44 percent, the U.S. at 35 percent, and Russia at only 11 percent. The lower compliance scores of the U.S. and Japan highlighted the challenge Kananaskis faced in mobilising the political will of the G8's two most powerful members to deliver for Africa and other difficult agenda items as well.

A Summit with Clear Democratic Convictions In addition to this Genoa inheritance, four favourable conditions moved the Kananaskis Summit toward success. The first was an agenda and assembled cast that built directly on the shared, social purpose at G7/8's institutional core — the mission of protecting and promoting 'open democracy', 'individual liberty', and 'social advancement' on a global scale (Kirton 1999; Ruggie 1983). Kananaskis's centrepiece of poverty reduction in Africa put democratisation at its heart. African countries themselves, in their own voluntary peer review process, would assess one another according to their performance on the central democratic preconditions of development, where the principles of good governance and the rule of law held first place. The estimated US$64 billion in new money required each year for such democratic development would flow from five sources. The first, once Africans had regained faith in their own governments, was the retention of the estimated 40 percent of African domestic savings sent in flight capital out of Africa to the already rich north. The second, once foreigners saw Africans' faith in their own future, was foreign direct investment

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(FDI) potentially on a scale similar to that already enjoyed by other emerging economies. The third was access to northern markets for textiles, agriculture, and other products, to fuel the export-led growth critical to success in so many other developing regions. The fourth was further debt relief for the poorest, a process the G7 had started at its Toronto Summit in 1988. The fifth and last was ODA, an area where the G8 sought to move beyond the traditional approach that had so manifestly failed. The second Kananaskis theme of combating terrorism also had a clear democratic connection. The 11 September terrorists, in targeting the Pentagon and the U.S. Capitol Building as well as the World Trade Center, mounted a direct attack not just on capitalism and the market but on democratic governance itself. Each of the Kananaskis G8 leaders felt the threat personally, having been targeted by the Al Qaeda network at the Genoa G8 Summit (as had their successors at G8 summits since Lyon in 1996). Kananaskis was the first time since 11 September that these leaders had gathered. They wanted to answer the terrorists' assault with a single clear voice. Moreover, past terrorist attacks on U.S. embassies in Africa and U.S. attacks on terrorist facilities in Sudan underscored the need to deprive terrorists who were being flushed out of Afghanistan and the Middle East of the safe havens and new training camps in Africa stirred up by the volatile cocktail of poverty, resentment, civil war, and failed states. The third Kananaskis theme of sustaining global growth was also vital to finding the resources to sustain the development and security missions over the long term. This focussed, mutually reinforcing agenda was a promising feature, because a G7/8 summit succeeds best when it has an interlinked political-economic agenda aimed at a large package deal (Putnam and Bayne 1987). Fourth, each of the leaders at Kananaskis arrived with strong democratic credentials. Vladimir Putin was the first leader to have come to power in Russia in a transfer of leadership by democratic, constitutional means. Romano Prodi, representing the European Commission, had been a democratically elected leader of major power Italy in the past. Most of the four African leaders at Kananaskis could credibly claim to be democratically elected as well. Moreover, the most prominent African leaders of the Steering Committee of the New Partnership for Africa's Development (NEPAD), Thabo Mbeki of South Africa and Olusegun Obasanjo of Nigeria, had recently stood by their democratic principles rather than regional solidarity to declare that Robert Mugabe's brutally rigged election in Zimbabwe warranted his suspension from the Commonwealth. The G8 leaders too had proven they were serious on the road to Kananaskis. New ODA money had first been committed in the additional CA$500 million earmarked for Africa, amid an overall aid increase, from host Canada in its budget released on 10 December 2001. There followed US$5 billion from Washington on 15 March 2002, a similar sum from the European Union, an additional promise of an 8 percent annual increase from Canada, all announced around the time of the United Nations Conference on Financing for Development in Monterrey. The G7 finance ministers meeting in Halifax on 15 June 2002 produced a US$22 billion three-year replenishment of the

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World Bank's International Development Association, with about 20 percent of the total to flow in grant form (see Appendix H). More debt relief flowed from each individual G8 country. At Halifax, the finance ministers agreed to ask their leaders to top up the trust fund for heavily indebted poor countries (HIPCs). A start was also made on market access, as Canada signalled it would follow the United States and the European Union in opening its long-closed textile markets to African goods.

A Summit with Common Vulnerabilities and Equal Capabilities A second favourable condition was the Kananaskis leaders' judgement that they alone could and should collectively act against acute common global enemies, and play an equal part in producing an effective collective response. On the African agenda, the G8 members beyond the U.S. possessed the capabilities, interest, and thus incentive to lead and succeed as summiteers. Impoverished Africa was of most concern to bilingual Canada and formerly imperial Britain, France, Italy, and Germany. In the critical area of ODA capabilities, Japan and France along with the U.S. held the global lead. Here as well as in debt relief, market access, and FDI, the G8 had the global predominance and internal equality that it sometimes lacked in other fields. Similarly, in the fight against terrorism, the United States was among the last in the G8 to experience major terrorist acts on its own soil. The shock of 11 September 2001 brutally exploded the earlier, at times triumphalist, self-definition of 'America the victorious' in the long cold war against communism. Replacing it was a new sense of 'America the vulnerable' that promised to endure well into the twenty-first century new 'cold war' against terrorism. As all G8 members had citizens killed in the 11 September attacks, had terrorist networks and their fmanciers operating in their own countries, and knew that the Al Qaeda and Taliban leadership were still on the loose, the 11 September imperative created a common aversion in the face of a common enemy, an enemy that threatened their basic interests and identity as sovereign territorial states. Thus, a sense of common vulnerability to outside enemies attacking absolute, essential interests ultimately overwhelmed any concern with competitive advantage, position, or relative capabilities among the individual countries in the G8 club (Grieco 1998; Grieco and Ikenberry 2003, 103-105). Trends in overall economic capabilities on the road to Kananaskis reinforced this mood. Within the G8, those capabilities were becoming more equal, as the U.S. dollar decline accelerated, Japan appeared to move from recession to recovery, Canada emerged as the G7's global growth leader, and Russia continued its vibrant growth. In the wider world, the G8 was ever more predominant, as a decade of acute, contagious international financial crises had ended any thought that the 'big ten' emerging economies were destined to dominate the global economy. Indeed, the new fear was that even countries enjoying strong growth, such as China, could trigger yet another crisis that a vulnerable G7, as crisis manager, would have to 'hang together' to contain. The contagious global

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financial crises that had erupted after Mexico in 1994-95 had also taught the United States and its G8 colleagues that they were all vulnerable, and that they must all provide resources when such systemic threats arose (Kaiser, Kirton, and Daniels 2000). The new crises in Turkey, Argentina, Brazil, and smaller countries kept this lesson alive in 2002. It also shifted the attention of private investors from the once attractive regions of the Americas and Asia to the new African frontier. The emerging G7 consensus on the need for a sovereign debt restructuring mechanism (SDRM) backed by the International Monetary Fund (IMF) — a 'standstill' mechanism with inandatory private sector participation in reaction to Argentina-like meltdowns — confirmed that all G7 members had now come to feel a national vulnerability to systemic crisis that had first been felt only by the smallest member (Dodge 2002).

A Summit with Political Capital A third favourable condition was the fact that Kananaskis was designed and delivered directly by politically secure, popular, energetic, experienced leaders with the personal determination and domestic political capital to deliver their chosen agenda, and to bring their otherwise uninterested voters along. All G8 leaders save Germany's Gerhard Schroeder were in the early or mid stages of their electoral mandates, with recently re-elected Jacques Chirac in France the most electorally empowered of all. All were in relatively solid control of their legislatures. In the potentially problematic presidential systems, as the Kananaskis Summit opened, Chirac's coalition had just secured a majority in the recent French legislative elections. Russia's Vladimir Putin had just purged the crumbling Communist Party from his legislative coalition. America's George W. Bush, looking ahead to mid-term elections for his evenly divided congressional elections in November 2002, still commanded legislative influence superior to that of his predecessor Bill Clinton during most of his two terms. Moreover, Bush and most other G8 leaders were relatively popular, even if Japanese prime minister Junichiro Koizumi had just plunged from historic highs in the polls and Canada's Jean Chrétien had just lost his popular finance minister Paul Martin. Indeed, the only G8 leader with a real domestic rival was Gerinany's Schroeder, who was running behind his dominant political rival as his September 2002 national elections approached. With such political capital, all G8 leaders could bring along their voters, few of whom were focussed on Africa or even terrorism, and even fewer put economic growth at the top of their concerns. Yet underneath the differing priorities, there was a deeper commonality among citizens of the emerging G8 community. The polls showed that the citizens of all G8 countries supported a forceful response to the 11 September attacks, even as most outside the group did not, starting with Mexico, a member of the North American Free Trade Agreement (NAFTA). Moreover, despite the public image of the G8 at Genoa, citizens of all G8 countries, starting in host Canada, felt that G8 summits

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were a valuable institution, even in a protest and terrorist filled world (Kirton 2002a; Standing Committee on Foreign Affairs and International Trade 2002).

A Summit with Complex Participation The fourth favourable condition — constricted participation — was the most difficult to translate into concrete results. The Kananaskis Suminit assembled an unusually diffuse and diverse group of individuals: the G8 and European Commission leaders, the Spanish Prime Minister representing the European Council, four leaders from across Africa, and UN Secretary General Kofi Annan. This group of 15 leaders of 11 countries, one democratic regional organisation, and one nondemocratically dominated multilateral organisation came, for the first time in history, as full participants for virtually all of the summit's final day. Yet there were some favourable factors promoting summit success. Previous summits had proven that the G7/8 leaders could work well with outside visitors, especially visitors from developing countries, and especially when summits repeated the formula for participation employed the previous year. Kananaskis's formula of full partnership for the Africans on the last day was one used by the G7/8 to good effect with the USSR and Russia before. Moreover, the African leaders, UN Secretary General, and the G8 leaders coming to Kananaskis were for the most part all the same individuals, from the same countries, assembling to discuss the same subject they had at Genoa the previous year. The on-site presence of African leaders, while risky, also helped ensure that the decisions reached at Kananaskis would be declared a success by those most affected and be actually delivered after the summit. The centrepiece achievement of a new paradigm and action plan for African development would only work if the G8 leaders understood African thinking and challenges at first hand, if Africans were treated as full partners, if African leaders felt ownership, and if their citizens back home were made aware of the plan and were available to help implement it. Visibility in Africa from the media coverage of the attending African leaders would help secure the civil society engagement required to give NEPAD deep, durable, and democratic African roots.

A Summit with a Skilful Host Converting these four favourable conditions into summit success was ultimately the task of the host, Canadian prime minister Jean Chrétien. He was exceptionally well equipped to meet the challenge. Chrétien had made the G7/8 the central element of his government's overall foreign policy, as expressed in its formal foreign policy statement on 7 February 1995 (Department of Foreign Affairs and International Trade

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[Canada] 1995). He had attended G7 summits since Bonn 1978, where he had gone as finance minister. He had participated as leader every year since Naples in 1994. As host of the 1995 Halifax Summit, Chrétien had proven his ability to work with the themes agreed to at the Italian summit the previous year, to stick with this agenda despite subsequent distractions, and to absorb the sudden domestic and geopolitical needs of other leaders as they arrived. In designing the Kananaskis Summit, Chrétien and his team had been inspired by the first G7 Summit hosted by Canada, at Montebello, Quebec, in 1981. There, with most of the media kept 100 kilometres away in Ottawa — a medium-sized city — the leaders had gathered informally in 'the largest log cabin in the world' in an effort to induce a reluctant, right-wing, rookie Republican President of the United States from a southern state to engage in global negotiations leading to a new north-south deal. In 1981, they succeeded at the summit site in securing Ronald Reagan's agreement to attend the multilateral conference on global negotiations in Cancun, where the new north-south deal was to be done. But this second stage fell prey to the usual political divisions brought to the fore by the divisive United Nations nest that contained it. In 2002, the Canadians followed most of this Montebello model, but sought to do the deal in a single step at the G8 Summit itself. They thus brought the leaders of the 'south' into the G8 Summit of the 'north', to have the G8 institution exert its special influence on the most formidable north-south challenge of the day. To prepare for Kananaskis, Chrétien appointed as his personal representative Robert Fowler, a veteran of Montebello and a successful practitioner of north-south diplomacy as Canada's ambassador to the United Nations. Unique among G8 members, Fowler served as Chrétien's personal representative for both the G8 and for Africa, to help bring the three separate processes of consensus formation together on behalf of his leader. On the road to Kananaskis, Fowler set a new G8 record for pre-summit consultations with civil society, even as his prime minister set one for the intensity and extent of consultations within the G8, within Africa and around the world. As the Kananaskis Summit approached, the major risk factors to its successful conclusion were ones Chrétien had confronted and coped with before. One was that the summit's carefully constructed and concentrated agenda would be hijacked by a last-minute geopolitical crisis or a new terrorist attack. While Kananaskis was spared such a genuine crisis, as it opened much of the attending media became transfixed by the belief that the agenda could well be diverted, if not by Bush's passion for the 'terrorism agenda', then by the Middle East peace plan he had announced in Washington a few days before. Yet Chrétien had inoculated Kananaskis against such diversion by carefully having his colleagues reaffirm in advance their agreement on the Africanfocussed agenda, and by inviting the African leaders to join the G8 to deal with it on the Summit's second day. It was thus left to a late-breaking terrorism-related issue to place an added strain on the leaders' crowded schedule — the need to negotiate on site a major plan for a global partnership on the safe dismantling of weapons of mass destruction so they would not fall into terrorist hands.

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A second risk factor was the threat that spiralling trade protectionism could poison the atmosphere within the G8. It could also lead Africans to conclude, in the face of the recent U.S. proliferation of agricultural subsidies and steel quotas and ongoing protectionist policies from Europe and Japan, that they could not trust the G8 to grant the market access needed to make NEPAD work (Cohn 2002; Moyer and Josling 2002). Yet America's G8 colleagues refrained from taking retaliatory action prior to Kananaskis and from the temptation, succumbed to at Genoa the year before, to spend scarce suminit time lecturing Bush on his protectionist and unilateralist sins. A third risk factor was that publicity-prone leaders, with a limited personal connection to mainstream civil society on the road to the Summit, could become preoccupied with responding to the last-minute demands of the loudest voices the media chose to highlight. Many well-ineaning northern nongovernmental organisations (NGOs) and skilled UN publicists were proclaiming that Kananaskis would fail if it did not produce massive new money to buy low-cost or no-cost medicines to combat the single problem of HIV/AIDS. From Africa the charge was that NEPAD had been constructed through a top-down process without genuine grassroots consultation and that, implicitly, the G8 should leave Africa for later when Africa had already reached the democratic standards that prevailed in the north. As it turned out, the prospect of reaching major agreement on several critical issues removed any need for the fully engaged leaders to seek last-minute 'announceables' to please the outside critics and crowds. Moreover, on the HIV/AIDS issue, the G8 leaders had felt they had gone out of their way at Genoa in 2001 to rescue the UN system from its failures on the issue, by devising a new approach and raising significant new money for the cause. Their political reward was to be condemned by civil society and UN spokespersons for not having done nearly enough. They had no desire to repeat the experience at Kananaskis this time. A fourth risk was whether France could be encouraged to share fully in the emerging consensus and to carry on the legacy of Kananaskis when it hosted the G8 the following year. In the lead-up to the Suinmit, Chirac's traditional instinct had been to devote the G8-mustered resources not only to Africa's new democracies but also to France's closest partners of whatever political stripe. Just before coming to Kananaskis, Chirac had also mused publicly whether such suinmits were worth the time and trouble, and suggested that the G8 leaders could do their work by videoconference instead. Yet Chirac also shared with Chrétien extensive summit experience, a deep concern with development and Africa, and a passionate if unpublicised commitment to making the G8 summit work. A final risk was whether Bush's officials, mobilising at the last minute for the Summit, would make the necessary adjustments to allow for a collective success. With a single-minded focus on counter-terrorism and only a secondary interest in Africa, U.S. officials were by no means in an accommodating mood. Indeed, three weeks before the Summit started, the divisions seemed so entrenched that those at the centre feared that the elaborately constructed edifice could all fall apart and a

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spectacular failure ensue. But in the final moments, leaders went for the larger package deal with greater payoffs for all. They aimed at producing both an ambitious and expensive African programme and a counter-terrorism package with the global partnership as an integral part.

The Kananaskis Achievements At Kananaskis, Chrétien, Chirac, and their colleagues surmounted the risks to deliver impressive results. At the conclusion of the Summit, analytically oriented observers were quick to call Kananaskis a clear success. Nicholas Bayne labelled its performance 'well above average', and awarded it a grade of B+, the third highest he had given over 28 years (see Appendix B). A careful count of the collective commitments made by the leaders yielded a total of 188 — the highest ever (see Appendix C). Kananaskis produced these outstanding achievements in three of the four major areas it addressed, representing a range and ambition of summit accomplishment seldom seen before. G8 Institution Building

The first area of accomplishment was in institution building. Kananaskis produced a much-lauded, small, intimate, informal, leader-driven, peacefully civil summit, a model for an institution that leaders decided to continue for a further eight years, and to have Russia host in 2006. Against the gloom of Genoa's violence, the security fears bred by the 11 September terrorist attacks, and the mounting antiglobalisation street protests that had disrupted most international major meetings since the World Trade Organization's Seattle ministerial in 1999, Kananaskis demonstrated that summits could be held — successfully — with no violence at all, and with a limited security presence as well. At the Summit's conclusion, Chirac and other leaders gushed about the intimate, informal encounter in the sun-drenched splendour of Kananaskis, amid the peaceful, polite Albertan political atmosphere. Chirac declared he would follow the Canadian model next year. The new 'crisis of governability' had been conquered, and G8-guided global democratic governance was back on course. The G8 also decided at Kananaskis that it wished to be, in an expanded version, the centre of global governance for many years to come (Kirton 2002d). At the start of the Summit, the leaders spontaneously decided that Russia would finally become a full member, by serving as chair and hosting a main summit of its own in 2006. By then, as Britain's Tony Blair inade clear, the G7 summit usually held on-site immediately prior without Russia would end, although the G7 finance ministers forum (and the trade ministers quadrilateral) might continue to operate without Russia as a full member. The decision to admit Russia was an initiative of German chancellor Gerhard Schroeder, who yielded Germany's traditional place in the hosting sequence to allow Russia to come in soon as a 'middle' member, rather than at the bottom of the

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sequence in a distant eight years time. This formula had all of the UN Security Council Permanent Five members hosting in an unbroken sequence at the start of each summit cycle. Schroeder's initiative received a strong second from George Bush, who felt a special bond with his new partner Vladimir Putin after their recent historic arms reduction agreement and their close co-operation against terrorism in the wake of the 2001 terrorist attacks. With Bush so enthusiastic, there was no opposition from Japan's Junichiro Koizumi, who also had clear signals from Moscow that it would at long last move to resolve the longstanding Russian-Japanese territorial dispute and thus ultimately sign a peace treaty between them, finally ending World War II. In this historic action, there was little sign of 'relative gains' rivalry among unrepentant 'defensive positionalists' (Grieco 1998; Grieco and Ikenberry 2003). There was much more of a redefinition of interests and even identities as a consequence of the new confidence created by a decade of G8 institutional participation. In expanding to embrace Russia as a full partner, the G8 self-confidently defined its own future as a centre of global governance for a very long time to come. Past summits had only identified the host, and at times the work to be completed, for the subsequent summit. They thus implicitly judged the institution to be worth continuing for only one more year. Kananaskis for the first time went much further, defining the hosting order and thus declaring the institution's continuing existence for the next eight years. In doing so, it implicitly stated that no one during this time would join Russia as a full 'chairing and hosting' member of the still exclusive, all-democratic major power club. Combating Terrorism

The Kananaskis combination of institutionally bred personal confidence and an acute sense of common vulnerability created by the 11 September shock was even more directly potent in producing the Summit's first substantive achievement — on combating terrorism. As had been planned in the preparatory process, the G8 leaders at Kananaskis unveiled, on 26 June, the Cooperative G8 Action on Transport Security (G8 2002a). But their major energies were consumed in the additional, surprising, onthe-spot production on 27 June of the G8 Global Partnership against the Spread of Weapons and Materials of Mass Destruction (G8 2002b). This partnership aimed at dismantling and disarming Russia's and others' nuclear, chemical, biological, and radiological weapons and materials of mass destruction, in a way that ensured that they did not fall into terrorist hands. It mobilised up to US$20 billion over ten years for this purpose. And it pioneered a new approach to global security as a guide. The G7/8 summit has a long and distinguished history of dealing with the proliferation of weapons of mass destruction (Rasmussen and Stein 2001). Yet the G8 leaders' accomplishment at Kananaskis was particularly noteworthy on several counts. It transformed Russia from a nuclear-laden rival into a full partner against the common enemies that threatened all governments and their peoples. The committed

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money represented the third largest funding package for Russia produced by G7 countries in the summit's history. The guidelines and procedures for implementing the plan required an unprecedented degree of foreign intrusiveness into the internal affairs of a long suspicious and secretive Russian state — on the most sensitive, highsecurity, cold war–enshrouded subject of all. Moreover, the guidelines and programme, while applying to Russia in the first instance, and to post-Soviet states in the second, were deliberately constructed to apply world-wide. They offered a potentially farreaching new philosophy of security for the future, and one in which the need for preventive deterrents or reactive actions, as well as defensive actions, was foreshadowed. It had long been an established U.S. objective at G8 summits to produce a plan for dismantling Russia's nuclear weapons, to prepare for the day when a new round of deep cuts to the existing U.S.-Russian arsenals overwhelmed the ability of existing bilateral programmes to cope. U.S. proposals dated at least as far back as the 2000 Okinawa Summit, when the U.S. sought G8 co-operation for its Extended Threat Reduction Initiative. But the G8 took it up as a major issue only with the historic Bush-Putin deep cuts agreement they concluded in the weeks immediately prior to Kananaskis. At the time, the U.S. offered US$10 billion to finance the safe dismantling of Russia's weapons if its G7 partners would provide the other half. The cadence was thus of a joint U.S.Russian initiative seeking necessary help from their G8 partners to protect against a common enemy, rather than the initiative of the U.S., as the world's sole superpower, with the support of a strong Russia, seeking to coerce or impose on other junior partners a financial burden that the U.S. could hegemonically afford on its own. In the weeks leading up to Kananaskis, it proved difficult to agree both on the plan and on its financing. The Russians were wary of the degree of intrusiveness into their sovereignty sought by the G7 in order, as the latter argued, to ensure the plan's effectiveness. Japan — the G8's and the world's second largest economic power — was reluctant to provide its share of the money until Russia offered the guarantees needed to solve 'operational problems' with previous bilateral dismantling programmes and hold out some hope of movement on the bilateral Northern Territories/Kurile Islands dispute. Other G7 partners hestitated to commit their funds until the Japanese were prepared to move and until they knew their contribution would work on the ground. The negotiations were conducted, not bilaterally between the U.S. and Russia, but between Russia and the G7 through an 'experts group' led by the Canadian chair. At the Kananaskis Summit, the formidable task of reconciling a Russian draft plan with a G7 draft plan was assigned to Putin and to Chrétien on the G8's behalf. The difficult negotiations continued throughout the Summit, with the final agreement revealed only on the last day, after the G8's Africa Action Plan had been unveiled. Some G7 participants were frustrated by continuing Russian resistance to this G7 desire to give them US$20 billion to ensure their own safety. They concluded that Putin, as a nostalgic defensive positionalist seeking to restore his country's long lost superpower status, wanted to wait until he could meet Bush directly before he would make the concessions

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required to seal the deal. Once this was done, Japan's Koizumi would not stand in the way of his very determined friend Bush. But the G8 host, rather than the U.S. alone, served as Russia's negotiating partner. The deal was done in a plurilateral context rather than a bilateral one. Side payments (on the Northern Territories and the plan's future extension to North Korea) were needed to secure Japan's acquiescence. And America's G8's partners produced half the money at a time when the U.S. alone would have been hard pressed to produce the full sum. Thus, the independent institutional effect of the G8 was clear. Moreover, the intended collective result of safe dismantling and disposal (as distinct from straight disarmament) was arguably of greatest benefit to Russia first, its European and Japanese neighbours second, and the North American G8 members last. Democracy and Development in A frica

The third great achievement at Kananaskis was its simultaneous production of the three components of consensus required on its centrepiece subject, encoded in a mutually responsive and reinforcing NEPAD and G8 Africa Action Plan (Kirton 2002d). Across the old north-south divide, in the poorest region of Africa, the Kananaskis G8 leaders and their new African partners kept their agenda and the world's attention focussed on Africa, a region that had dropped off the rich world's radar screen and been largely bypassed by the benefits of globalisation. Kananaskis brought a new, democratically based philosophy and partnership for development, the detailed 19-page Africa Action Plan (see Appendix I), and US$6 billion in new ODA, US$1 billion in debt relief, and greater access to G8 markets for African exports. If the G8 and its African partners complied with their respective commitments in this grand bargain, the G7/8 would do for Africa what it had done for the former Soviet Union — bring the democratic governance that the G8 intended to generate on a global scale and build on this foundation the sustained socioeconomic development wanted by all. To be sure, well-meaning pundits in the wealthy, largely white 'north' were predictably quick to dismiss the G8 Africa Action Plan as lacking action, woefully inadequate, and offering only 'warmed-over money' ('G8 Africa Plan Fails to Impress Irish Agencies' 2002; McQuaig 2002; Nickerson 2002). However, the Africans themselves, led by Nigerian president Obasanjo, declared themselves 'satisfied'. Annan, on behalf of the global community, pronounced the package 'good'. Analytically oriented observers largely agreed (Maxwell and Christiansen 2002). In its design, the Africa Action Plan was carefully constructed to meet the African challenge. It started with the call to stop the wars that killed many millions and extinguished any chance for democracy and development to emerge. It then backed good governance as the essential foundation for development. Only after peace, order, and good government came the trade and investment liberalisation that the Africans sought, and needed, with the North and, above all, among themselves, if they were to mobilise the market to help meet their development needs. The plan went well beyond

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the Africans' own and the G8's past enthusiasm, to put gender equality and empowering women in a prominent place. In its delivery, the G8 's Africa Action Plan built in some promising processes to ensure it took hold. To have principles reliably translated into practice, it pledged support for peer review in which Africans would assess their fellow Africans to identify the countries and programmes that worked and thus determine where the new money should flow. It promised that at least half of the US$12 billion of the newly committed ODA would be sent to those African countries that lived up to their democratic principles. The G8 leaders thereby gave their African partners a powerful weapon with which to convince reluctant countries on the continent to get on board. The G8 added another US$1 billion to relieve the debt of the HIPCs, mostly in Africa, so they could keep their money at home to spend on health, clean water, and the education of young girls. Chrétien came with an all-Canadian contribution that opened Canada's market to the exports of these countries. In producing this ambitious and innovative Africa Action Plan, the G8 leaders relied heavily on careful advance preparation. As Kananaskis approached, the G8 had already mustered more than US$2 billion to combat infectious disease, US$12 billion in pledges of new ODA, and billions of dollars' worth of bilateral debt write-off and relief. At their pre-summit meeting in Halifax on 14-15 June, the G7 finance ministers fmally agreed to a U.S. initiative, supported by the Canadians, to offer 20 percent of the International Development Association's funds in grants rather than in loan form (see Appendix H). Together, these represented an 18 percent increase in the U.S. contribution and a multibillion dollar addition to the available ODA funds. Led first by Paul Martin and British chancellor of the Exchequer Gordon Brown, and then by Martin's successor, John Manley, and his G7 colleagues, the finance ministers moved closer to adding the US$1 billion needed to top up the HIPC Trust Fund. There were important disagreements over how much money to devote to debt relief as opposed to ODA, and how far debt relief should go. But the G8 leaders at Kananaskis nonetheless found it relatively easy to resolve the remaining differences and agree on the US$1 billion addition. With more than US$12 billion in new ODA alone already committed, the major issue at Kananaskis was what share of the new moneys was guaranteed to go to Africa. In the end, Canada secured its objective of a firm collective pledge that Africa would get at least half of the new money. But the chair's statement at the end of the Summit used the phrase 'could be directed' (see Appendix K), in recognition of two important concerns. The first was a desire on the part of the U.S. administration to respect the prerogatives of its Congress, which ultimately had to authorise the funds and approve the president's decision on where they went. The second was the determination on the part of the Africans, as well as the G8, to keep with their new philosophy, namely that the money not be given as a guaranteed blank cheque but be reserved as a reward for good behaviour to those leading Africa on its new democratic development path. In this bargain, the U.S. adjusted more to its G8 partners' preferences for specifying the share destined for Africa than its partners adjusted to the U.S. in accepting the use of

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'could' in the fmal statement. The use of the conditional tense was fully preferred by both the G8 and the Africans, and reflects the substantive core of the new approach. As U.S. treasury secretary Paul O'Neill had emphasised on his pre-summit tour of Africa with Bono, the U.S. wanted to do a great deal for Africa, but only in ways that would effectively give Africa the democratic development it wanted. The outcome represented not only a resolution of intra-G8 rivalry over competing causes and regions but also a recognition of a common sense of responsibility for making the benefits of globalisation work for everyone, including poor Africans, as reinforced by the post–1 1 September imperative of combating terrorism globally. Yet in a G8 summit that, as a unique intemational institution, links issues across otherwise separated areas, there was symmetry between the terrorist-related global partnership driven by the U.S. and Russia and the Africa Action Plan led in the first instance by Canada, Britain, and France. In their African achievement, the G8 leaders were well aware of the long shadow of the future, and put in place processes designed to ensure that their historic decision would be implemented as intended after Kananaskis was done. The G8 leaders gave their personal representatives for Africa a new mandate to work for another year. The leaders promised to review progress on the Africa Action Plan at their summit next year in France. Its host, Jacques Chirac, declared he would focus that summit on African development as its central theme, with the African leaders invited back. He subsequently stated he would welcome African and other leaders to the Evian Summit, in an effort to create a new 'economic and social council' that would render permanent the new north-south dialogue. And in the months following Kananaskis, host Canada called the first-ever meeting of G8 development ministers, at Windsor, Ontario, on 27 September 2002, to discuss aid effectiveness, development, and the implementation of the Africa Action Plan (Ben-Ishai 2002). Sustaining Global Growth

The fourth and final major challenge at Kananaskis was generating sustained global growth. It was here that the Summit registered a disappointing performance that could at best be deemed adequate. In the 30 hours of the G8 Summit, the leaders had little time to address economic and financial issues in any depth. Even when they met 'at seven' for an hour immediately before the G8 Summit opened, their available time was devoted substantially to north-south economic issues such as debt relief, rather than issues among or within the G7 economies or in the international fmancial system as a whole. With all G8 economies back on the growth track by mid 2002 and the global economy recovering, this seemed at the time to be an acceptable choice. Larger issues such as enhancing productivity to sustain and broaden growth over the medium and long term had been deliberately left to the G7 finance ministers at Halifax, with the leaders choosing to add almost nothing of their own. However, even as the G7 meeting opened, there were several clear and compounding risks in the G7 and global economy that, based on past summit performance, warranted

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leaders' attention and action. One was the spread of financial crisis in the Americas, previously confined to profligate Argentina, but now affecting neighbouring countries starting with Brazil, even as Venezuela and distant Turkey added to investor anxiety about emerging markets. A second was the sliding stock market in the U.S. and elsewhere, and the possible impact on consumer confidence and thus short-term growth. A third was the major decline in the value of the U.S. dollar, driven by an outflow of investment from the United States, a burgeoning U.S. current account deficit, and a growing federal fiscal deficit. The emergence of new accounting scandals at major U.S. corporations deepened the concern. Beyond lay the need to continue crafting and creating a new international financial architecture, most immediately by giving guidance to the IMF in its desire to build a new SDRM (Kaiser, Kirton, and Daniels 2000; Dodge 2002). As the Kananaskis Summit concluded, the G7 's faith in the market economy, based in large part on the American model of market-oriented corporate governance (Brean 2001), left it satisfied with its easy decision to move on quickly to other subjects after giving the global economy a light touch. Yet in the weeks following the Summit, the emergence of new difficulties in Brazil and Turkey, the continuing slide in U.S. and global stock markets to lows last seen during the 1997-99 financial crisis, and the outbreak of new, larger U.S. corporate accounting scandals and bankruptcies, brought the G7's market-based optimism into increasing doubt (Scoffield 2002). Indeed, memories arose of the last G7/8 summit held in the Rocky Mountains — Denver 1997 — when the emphasis on welcoming Russia as a full member left no time in a truncated G7 meeting for the leaders to recognise and respond to the already brewing Asian financial crisis that erupted three weeks later.

Conclusion Beyond these three major achievements and one disappointment, those with high hopes for the G7/8 summit as the centre of global governance could point to a series of missed opportunities at Kananaskis. These began with the lack of collective promises by the G8 leaders to attend the forthcoming World Summit on Sustainable Development in South Africa, to invite their new African partners back to the G8 Summit in France next year, and to find better ways to engage citizens and civil society organisations in the proliferating processes of G7/8 global governance (Kirton 2001, 2002c; Graham 2002). Yet by the standards of past summits and current global challenges, Kananaskis had already been an impressive success (Kirton 2002c). It was so because the momentum of Genoa, the favourable background conditions, and the new summit format and its chairmanship had allowed the leaders to be leaders, to respond to their common democratic values, global responsibilities, and national vulnerabilities, and to produce mutually reinforcing, ambitious achievements across an unusually broad front. As Canada's year as G7/8 host in 2002 drew to a close, the legacy of Kananaskis was still very much alive. The growth of the summit as an institution continued, with the

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first ever meeting of the G8 ministers of development co-operation held in September 2002 (see Appendix N), in Jacques Chirac's plans for a European Union–G8 Summit in Saint Petersburg just prior to his 1-3 June 2003 summit in Evian-les-Bains, and for his ambitious plans to build new institutions of global governance on a G8 base. The global partnership on weapons of mass destruction moved ahead strongly, with specific funding commitments by G8 members to the US$20 billion fund, with pre-emptive raids by G8 members on dangerous nuclear materials sites, and with a consensus among all G8 members, except for election-afflicted Germany, on Iraq, expressed in UN Security Council Resolution 1441. The African agenda also moved ahead, with peace agreements coming to countries long ridden by conflict such as the Congo, with the creation of the NEPAD peer review mechanism, and with greater access for African goods in G8 markets being offered. The autumn also saw a clear commitment to move ahead on the SDRM as a central element of a new international financial structure, even as solid growth continued in the United States and Canada. But as the 2003 summit season opened, there remained more than enough concern for the G7 as it confronted its core task of sustaining global growth in the year ahead. Political risks over Iraq, North Korea with its nuclear weapons programme, Venezuela with its oil strike, and the ever-unsettled Middle East joined the ongoing economic crisis in Argentina and a beleaguered Brazil with a new leftist government now in charge. Within the G7, Europe and Japan remained close to recession, while the U.S. put in place a new economic team, led by treasury secretary John Snow, to produce a stimulus package amid its increasing fiscal and trade deficits, rising unemployment, declining dollar, and emerging deflationary concerns. The challenge for the G7/8, as it began its twenty-first century cycle, was to design and operate an institution that could maintain its far-reaching Kananaskis accomplishments on Russia, terrorism, and Africa, while more effectively addressing the critical issues needed to sustain global growth and development as a whole.

Note 1 The authors are grateful for the research assistance of Melanie Martin and Matt Griem and the financial support of the Social Sciences and Humanities Research Council of Canada through its Strategic Research Grant to the 'EnviReform' project and its Standard Research Grant to the 'After Anarchy' project.

References Bayne, Nicholas (1999). 'Continuity and Leadership in an Age of Globalisation'. In M. R. Hodges, J. J. Kirton and J. P. Daniels, eds., The G8's Role in the New Millennium, pp. 21-44. Ashgate,

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Bayne, Nicholas (2000). Hanging In There: The G7 and G8 Summit in Maturity and Renewal. Ashgate, Aldershot. Bayne, Nicholas (2001). 'G8 Decision-making and the Genoa Summit'. International Spectator vol. 36, no. July-September, pp. 69-75. Bayne, Nicholas (2002). 'Impressions of the Genoa Summit, 20-22 July, 2001'. In M. Fratianni, P. Savona and J. J. Kirton, eds., Governing Global Finance: New Challenges, G7 and IMF Contributions, pp. 199-210. Ashgate, Aldershot. Ben-Ishai, Elizabeth (2002). 'G8 Development Cooperation Ministers Meeting, Windsor, Ontario'. (January 2003). Brean, Donald (2001). 'Corporate Governance: International Perspectives'. In J. J. Kirton, J. P. Daniels and A. Freytag, eds., Guiding Global Order: G7 Governance in the Twenty-First Century, pp. 223-244. Ashgate, Aldershot. Cohn, Theodore H. (2002). Governing Global Trade: International Institutions in Conflict and Convergence. Ashgate, Aldershot. Department of Foreign Affairs and International Trade (Canada) (1995). 'Canada in the World: Canadian Foreign Policy Review'. (January 2003). Dodge, David (2002). 'International Financial Architecture and the Resolution of Financial Crises'. International Journal vol. 57 (Autumn), pp. 624-630. G7 (2001). 'G7 Statement'. 20 July, Genoa. (January 2002). G8 (2001a). 'Communiqué'. Genoa, 22 July. (January 2003). G8 (2001b). 'G8 Statement on Regional Issues'. Genoa, 21 July. (January 2003). G8 (2001c). 'Genoa Plan for Africa'. Genoa, 21 July. (January 2003). G8 (2001d). `Statement by the G8 Leaders (Death in Genoa)'. Genoa, 21 July. (January 2003). G8 (2001e). 'Statement by the Leaders of the G8 over Last Week's Terrorist Attacks in New York and Washington'. (January 2002). G8 (2002a). 'Cooperative G8 Action on Transport Security'. Kananaskis, 26 June. (January 2003). G8 (2002b). 'Statement by the Leaders: The G8 Global Partnership against the Spread of Weapons and Materials of Mass Destruction'. Kananaskis, 27 June. (January 2003). 'G8 Africa Plan Fails to Impress Irish Agencies'. (2002). Irish Times, 29 June. Goldstein, Judith, Miles Kahler, Robert 0. Keohane, et al. (2000). 'Legalization and World Politics'. International Organization vol. 54 (Summer). Graham, Bill (2002). 'Civil Society and Institutions of Global Governance'. Kenyote address to the EnviReform conference on 'Sustainability, Civil Society, and International Govemance: Local, North American, and Global Perspectives', Toronto, 8 November. (January 2003). Grieco, Joseph (1998). 'Anarchy and the Limits of Cooperation: A Realist Critique of the Newest Liberal Institutionalism'. International Organization vol. 42 (Summer), pp. 485-508. Grieco, Joseph and John Ikenberry (2003). State Power and W orld Markets: The International Political Economy. W.W. Norton, New York. Ikenberry, John (2001). A fter V ictory: Institutions, Strategic Restraint, and the Rebuilding of Order after Major W ars. Princeton University Press, Princeton.

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Kaiser, Karl, John J. Kirton, and Joseph P. Daniels, eds. (2000). Shaping a New International Financial System: Challenges of Governance in a Globalizing W orld. Ashgate, Aldershot. Kirton, John J. (1989). 'Contemporary Concert Diplomacy: The Seven-Power Summit and the Management of International Order'. Paper prepared for the annual meeting of the International Studies Association. London. Kirton, John J. (1999). 'Explaining G8 Effectiveness'. In M. Hodges, J. J. Kirton and J. P. Daniels, eds., The G8's Role in the New Millennium, pp. 45-68. Ashgate, Aldershot. Kirton, John J. (2001). 'Guess Who Is Coming to Kananaskis? Civil Society and the G8 in Canada's Year as Host'. International Journal vol. 57, no. 1 (Winter), pp. 101-122. (January 2003). Kirton, John J. (2002a). 'Canada as a Principal Summit Power: G7/8 Concert Diplomacy from Halifax 1995 to Kananaskis 2002'. In N. Hillmer and M. A. Molot, eds., Canada A mong Nations 2002: A Fading Power, pp. 209-232. Oxford University Press, Toronto. Kirton, John J. (2002b). 'Consensus and Coherence in G7 Financial Governance'. In M. Fratianni, P. Savona and J. J. Kirton, eds., Governing Global Finance: New Challenges, G7 and IMF Contributions, pp. 45-73. Ashgate, Aldershot. Kirton, John J. (2002c). 'Delivering Democratic Development for Africa'. Calgary Herald, 30 June. (January 2002). Kirton, John J. (2002d). 'A Summit of Historic Significance: A Gold Medal for the Kananaskis G8'. Calgary Herald, 27 June. (January 2003). Kirton, John J. and Joseph P. Daniels (1999). 'The Role of the G8 in the New Millennium'. In M. Hodges, J. J. Kirton and J. P. Daniels, eds., The G8's Role in the New Millennium, pp. 3-17. Ashgate, Aldershot. Kirton, John J., Ella Kokotsis, and Diana Juricevic (2002). 'G7/8 Commitments and Their Significance, 1975-2001'. In M. Fratianni, P. Savona and J. J. Kirton, eds., Governing Global Finance: New Challenges, G7 and IMF Contributions, pp. 227-228. Ashgate, Aldershot. Kokotsis, Eleanore (1999). Keeping International Commitments: Compliance, Credibility, and the G7, 1988-1995. Garland, New York. Maxwell, Simon and Karin Christiansen (2002). -Negotiation as Simultaneous Equation": Building a New Partnership with Africa'. International A ffairs vol. 78, no. 3, pp. 477-491. McQuaig, Linda (2002). 'Africa Suffers, West Changes Mantra of Trade, Not Aid'. Toronto Star, 30 June. Moyer, Wayne and Tim Josling (2002). A gricultural Policy Reform: Politics and Process in the EU and US in the 1990s. Ashgate, Aldershot. Nickerson, Colin (2002). 'G8 Nations Pledge Aid to Africa Plan Hinges on Effort by African Leaders for Democracy Reform'. Boston Globe, 28 June. Putnam, Robert and Nicholas Bayne (1987). Hanging Together: Co-operation and Conflict in the Seven-Power Summit. 2nd ed. Sage Publications, London. Rasmussen, Greg and Arthur Stein (2001). 'Non-proliferation Regimes'. In R. Rosencrance, ed., The New Great Power Coalition, pp. 181-202. Rowman and Littlefield, London. Ruggie, John G. (1983). 'International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order'. In S. D. Krasner, ed., International Regimes. Cornell University Press, Ithaca. Scoffield, Heather (2002). 'The G8: Too Conservative to Keep Up with Globalization'. Literary Review of Canada vol. 10, no. 10, pp. 26-27. Standing Committee on Foreign Affairs and International Trade (2002). 'Securing Progress for Africa and the World: A Report on Canadian Priorities for the 2002 G8 Summit'. (January 2003). von Furstenberg, George M. and Joseph P. Daniels (1992). 'Economic Summit Declarations, 1975-1989: Examining the Written Record of International Cooperation'. Princeton Studies in International Finance no. 72.

ANALYTICAL APPENDICES

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Appendix A

Impressions of the Kananaskis Summit, 26-27 June 2002 Nicholas Bayne

The Kananaskis Summit was secluded and intimate, with none of the violent demonstrations that upset Genoa. It was productive, in that it reached agreements that were not attainable at lower levels. It was also innovative in several aspects of the summit format.

Format The Canadian hosts introduced various distinctive features into the summit format in 2002: • They held the Summit in the remote mountain resort of Kananaskis, within a tight security cordon. This was necessary protection against both violent demonstrations, as at Genoa, and terrorist attack. The security operations, however, were costly (figures of C$300–$500 million are quoted). The leaders were cut off from the world at large. In particular, civil society and most of the media were kept in Calgary, 100 kilometres away — only France's Jacques Chirac, Japan's Junichiro Koizumi, and Spain's José Maria Aznar among the leaders visited the media centre (Spain held the presidency of the European Commission). • Kananaskis was a small resort, with limited accommodation. The size of delegations had to be kept down and everyone was lodged close together. This encouraged an informal and spontaneous atmosphere, with Britain's Tony Blair and the United States' George W. Bush meeting by chance in the gym at 6.30 a.m. • The duration of the Summit was cut back to a day and a half. • Host Jean Chrétien chose a three-part agenda — terrorism, Africa, and economic growth — at an early stage and stuck to it, resisting additions. • There was no G7 statement and no agreed-upon G8 communiqué. Instead, Chrétien issued a 'Chair's Summary' of just over two pages, covering only points raised by the heads themselves. A number of other, more substantial, documents, however, issued from the Summit. These covered the Africa Action Plan (see Appendix I), the spread of weapons of mass destruction, co-operative action on transport security, and Russia's role in the G8. The heads also endorsed the report of the G8 Task Force on Primary Education

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and put their names to a statement on the heavily indebted poor countries (HIPC) initiative clearly prepared by their finance ministers. There were two innovations in participation: • A frica. Four African leaders — Thabo Mbeki of South Africa, Olusegun Obasanjo of Nigeria, Abdoulaye Wade of Senegal, and Abdelaziz Bouteflika of Algeria — together with United Nations secretary general Kofi Annan, joined the G8 heads for a joint meeting on the Africa Action Plan. The Africans were more than guests, as they had been at Tokyo in 2000 and Genoa in 2001; they were participants in the Summit itself. • Russia. The G8 agreed that Russia could host a G8 summit for the first time in 2006, fitting into the cycle between Britain and Germany. This decision was taken by the heads themselves, without any advance preparation. It was expected that G7 meetings at the heads' level would cease in 2005, since by then Russia should be in the World Trade Organization (WTO) and capable of taking part in all economic meetings. The G8 heads also laid out the cycle of summit hosts up to 2010, making clear they expected the summit to persist in its present form and membership until then.

From Genoa to Kananaskis A review of the follow-up to the major decisions taken at the 2001 Genoa Summit shows a reasonable record of success: • The WTO meeting at Doha in November 2001 successfully launched a new round of trade negotiations. The G7 members worked well together there and responded to the aspirations of the developing countries. • The Global Fund to Fight AIDS, Tuberculosis, and Malaria became operational early in 2002, with resources of about US$2 billion. At its first board meeting, it allocated up to US$616 million to projects over the next two years. • The Dot Force applied the principles agreed at Genoa to a range of specific projects and prepared to hand over its responsibilities to the United Nations. In addition, the G8 Africa group and the Task Force on Primary Education completed their work in time for the Kananaskis Summit. As usual, a number of G8 ministerial groups met in the run-up to the Summit: environment ministers, labour and employment ministers, energy ministers (in Detroit rather than Canada), and justice and interior ministers (with special emphasis on terrorism). These groups have now developed a life of their own and their work had little impact on the Summit itself. The meetings of the G8 foreign ministers and G7 finance ministers in mid June were more clearly linked to the Summit. The foreign ministers focussed on terrorism, conflict prevention, and selected regional issues — Afghanistan, India/Pakistan, the Middle East, and the Balkans. The finance ministers declared their confidence in

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the economic recovery. They agreed on an allocation between grants and loans for International Development Association (IDA) financing and discussed the problem of replenishing the HIPC Trust Fund in the World Bank.

The Players The Heads of Government

There was unusual continuity with the Genoa Summit, with Aznar as the only newcomer. Chirac (freshly re-elected), Bush, Blair, Italy's Silvio Berlusconi, and Russia's Vladimir Putin were all electorally secure and could also expect to be at the 2003 Summit. Germany's Gerhard Schroeder (who faced elections in October, which he won), Koizumi, and Chrétien were less certain of reappearing. The seclusion of the Summit made it harder than usual to judge the personal performance of the heads. Blair and Chirac were active and effective players, as usual. Bush was an energetic participant, although his style (as Chirac commented) was rather different from the others. Putin held his own on the issues of concern to him and the Bush-Putin chemistry seemed good. Koizumi had skilfully disarmed in advance any criticism of the Japanese economy. Schroeder clearly had a hand in the decision on Russia hosting the summit, as Germany had to delay its turn. Aznar spoke up for Latin America. It was less easy to discern where Berlusconi or Romano Prodi (President of the European Union) contributed to the outcome. As chair, Chrétien had the satisfaction of seeing the Summit work as he planned it, but he seemed ill at ease in his public appearances. Among the Africans, Mbeki and Obasanjo were articulate and assured. Annan made clear that his interest in the Summit went beyond Africa. Civil Society

Mercifully, the Kananaskis Summit attracted no violent protests. No windows were broken, only two demonstrators were arrested, and the security forces were never put under pressure. Marches and rallies in Calgary attracted no more than 2000 people at a time; the police handled them gently and they passed off peacefully. This contrast with Genoa was due partly to the inaccessibility of the summit site but partly also to the reaction against antiglobalisation rioting since 11 September 2001. An 'alternative summit', the G6Billion, was held in Calgary in the run-up to the Kananaskis Summit. Canada's foreign minister, Bill Graham, attended its fmal session and transmitted its conclusions to the G8 heads, as had been promised. This event, however, took a wholly negative attitude to the G8. The Canadian government had put a lot of effort into outreach to civil society, but was frustrated that this only seemed to generate more strident criticism, especially on Africa (see below). Leading charities

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such as Oxfam and Médecins Sans Frontières followed the actual Summit proceedings closely. Their comments were also critical, but usually from a more constructive basis, and influenced the media because the heads themselves were less accessible.

Summit Programme The first day, Thursday 26 June, began with a G7 meeting. After Putin joined them, the G8 started their discussion of terrorism, including cleaning up nuclear material in Russia, which took up a lot of time. Economic growth was discussed later in the afternoon and regional political issues over dinner. The second day was wholly devoted to Africa. The G8 heads first met on their own and were then joined by the African leaders and Annan. The analysis that follows looks at political issues first — terrorism and regional problems — followed by economic issues, starting with Africa. Political Issues: Terrorism

The heads used the Summit to take stock of existing measures against terrorism, including terrorist financing, and added two new instruments to the existing armoury. The first was an agreement on transport security, including travel documents, containers, ports, and aviation security. It envisaged joint G8 action in international bodies such as the International Civil Aviation Organization and the International Marine Organisation. The Summit provided useful pressure to complete the agreement, but the heads themselves did not have to intervene. The second instrument embodied 'The G8 Global Partnership against the Spread of Weapons and Materials of Mass Destruction' (G8 2002b). Its aim was to prevent nuclear, chemical, or biological weapons falling into the hands of terrorists. The most important provision was a commitment by the G8 to raise up to US$20 billion over ten years to fmance the destruction or clean-up of nuclear and chemical weapons and other material, initially in Russia but also in the other countries of the former Soviet Union. After the Africa Action Plan, this agreement is the most important achievement of Kananaskis. The initiative has been driven by the United States, which launched a national programme in the 1990s to clean up plutonium and other fissile material in the former Soviet Union. (This was discussed at the Okinawa Summit of 2000.) The U.S. has already committed US$10 billion to this activity and it has become a major aspect of U.S./Russian relations since the recent Bush-Putin meetings. The increased concern with terrorism since 11 September 2001 helped to persuade the rest of the G7 to commit a matching US$10 billion. But in return they insisted that the Russians give proper local support to their assistance projects in Russia. Funds that they had earmarked earlier could not be spent because of Russian reluctance to provide adequate access or legal and insurance cover.

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The negotiation of the agreement at Kananaskis took up a great deal of time, between expert officials, the sherpas, and the heads themselves. Under pressure, the Russians reverted to cold war reflexes and resisted giving the necessary assurances until the last moment. Exchanges among the heads themselves were needed to ensure that the Russians were fully committed to facilitating this programme on the ground and the matter was only resolved at a bilateral between Putin and Bush. Regional Issues: The Middle East

One day before the Kananaskis Summit opened, Bush made a major speech outlining a new basis for a democratically based Palestinian state and its relations with Israel. This speech had been delayed by a spate of suicide bombings and it looked as though it might distract attention from the main Summit agenda. But in fact the Middle East was discussed with other items over dinner, as planned. The most striking aspect of the speech was a refusal by Bush to deal with Yassar Arafat as Palestinian leader (although he did not name him) because he was tainted with terrorism. The other G8 heads welcomed the U.S. proposals on how Palestine should become a viable state, which reflected in part European ideas. They took the position that the Palestinians had the democratic right to choose their own leaders, although Blair, Berlusconi, and Chrétien, in different ways, showed some sympathy with Bush's frustration with Arafat. There was thus no open disagreement at the Summit, but no great advance either. Other Regional Issues

The heads discussed Afghanistan (including the destruction of the opium crop), India and Pakistan, and Korea over dinner. It was widely expected that Bush would raise Iraq, but there is no evidence that he did so. Apart from Korea, all the regional issues that the heads chose to discuss had strong links with terrorism.

Economic Issues: Africa At Genoa, the G8 heads had launched the Genoa Plan for Africa, as an immediate and spontaneous initial response to the New African Initiative presented to them there by presidents Mbeki, Obasanjo, and Wade (G8 2001). The G8 set up an Africa group to prepare their definitive response, to be agreed to at Kananaskis. Over the next year the New African Initiative mutated into the New Partnership for Africa's Development (NEPAD). The key concepts underlying the NEPAD are as follows: • African countries must take responsibility for their own development. They must not blame their problems on others or rely on programmes imposed from outside.

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• African countries must set and attain better standards of political governance and economic management. They should hold each other accountable for meeting these standards and set up a system of peer review for this purpose. • Regional and sub-regional economic integration in Africa should be encouraged and the flight of African capital should be reversed. • Better domestic performance on these lines should encourage western countries to offer aid and market access and make Africa better able to attract private foreign investment. This would enable Africa to end its marginalisation in the international economic system. The G8 Africa Action Plan, adopted at Kananaskis, welcomes NEPAD and seeks to respond to it while leaving its ownership clearly with the Africans. The key concepts of the plan are: • G8 countries will set up 'enhanced partnerships' with African countries seeking to meet the NEPAD standards. • The NEPAD peer review will influence the G8 in their choice of 'enhanced partners', although each G8 country will make its own assessment. • The G8 countries already promised at the Monterrey meeting in March 2002 to increase their total aid spending by US$12 billion per year over five years. (In fact, this total includes extra money from all EU member states, while Japan's aid is contracting.) Half or more of this new aid money 'could be directed to African nations that govern justly, invest in their own people and promote economic freedom'. This awkward phrasing, which attracted criticism from development nongovernmental organisations (NGOs), reflected a difference within the G8. The Europeans, with Canada, were eager to commit 50 percent to deserving African countries. The U.S. was reluctant. Bush did not want to provide grounds for Congress to attach conditions to the Millennium Challenge Accounts, the channel for the new aid announced at Monterrey. This issue was discussed up to the last moment and had to be settled at the level of the heads of government. The Africa Action Plan brings together G8 commitments in two political areas (peace and security, and strengthening governance) and six economic ones (trade and investment, debt relief, expanding knowledge, improving health, agriculture, and water resources). In the mass of detail, it is difficult to distinguish ongoing commitments and new ones. Several areas, such as trade, health, and education, overlap with the 'economic growth' item on the Summit agenda and will be treated further below. In addition, it is worth noting: • The peace and security section is distinct from the others. It deals mainly with countries that would not meet NEPAD standards; it sets deadlines (rare in the rest of the plan) for enabling Africa to deal with its own conflict prevention; and it promises action on named trouble spots such as the Congo and Sudan. • The other chapters broadly correspond to the detailed provisions of the NEPAD, but the match is not perfect. The plan notes the Africans' interest in infrastructure,

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but does not endorse it, nor does it react to NEPAD ideas on debt relief. It is weaker than NEPAD on trade access and environmental issues, but gives more attention to women and civil society. The African leaders at Kananaskis reacted positively to the Africa Action Plan. Obasanjo said it was not perfect, but it was a good beginning. The G8's support for NEPAD provided enough impetus for it to be adopted by the leaders of all African countries at the meeting chaired by Mbeki on 9 July, a meeting that converted the old Organisation for African Unity into the African Union. Yet it is clear that both sides have a great deal more to do. On the African side, one major weakness of NEPAD is that, although it calls for more participatory democracy, it has been handled so far entirely at head-of-state level. This has provoked widespread criticism from NGOs of all kinds that it is being imposed from on top without consulting those who will be most affected by it. It is not clear how the actions envisaged by NEPAD can be put into effect at the grassroots. Another uncertainty is whether the peer review process (which is voluntary) will succeed in overcoming the traditional African reluctance to criticise one another or in changing the behaviour of noncooperative states such as Zimbabwe. On the G8 side, the promise of US$6 billion of additional aid per year has been attacked by NGOs as imprecise and inadequate in relation to the figure of US$64 billion quoted as the total financing needs of NEPAD. In fact, this amounts to a very large supplement to existing aid levels. If African countries really improved their standards of governance, additional aid and private finance should be forthcoming. A more serious weakness is the apparent lack of consistency in the follow-up to the action plan. Several G8 countries, including the U.S., UK, and Canada have taken advantage of the Kananaskis Summit to announce additional aid for Africa. But each announcement has been unco-ordinated and they are difficult to compare with each other. The implication of the plan is that G8 members will each act on their own to set up enhanced partnerships, without this being a joint activity. Although there will be follow-up in the G8 context (see below), there is no co-ordination of the Africa Action Plan elsewhere.

Strengthening Economic Growth There was a brief but lively discussion among the heads of developments in their own economies. Like their finance ministers, they expressed confidence in the economic recovery, although there was some anxiety about accounting standards in the light of the latest scandal at Worldcom. The heads expressed support for Latin American countries, naming Brazil but not Argentina. But most of their discussion concerned developing countries, especially poor ones, and therefore overlapped with the Africa Africa Plan. The results were mixed.

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Debt Relief and the HIPC Trust Fund

At the G7 meeting, the heads agreed to fund the shortfall emerging in the World Bank trust fund to finance debt relief under the HIPC Trust Fund, up to US$1 billion. Although the finance ministers had discussed this issue at Halifax, they had not been able to agree on a figure, because of U.S. hesitation. Under persuasion from Blair and others, Bush agreed to the total of US$1 billion, thus usefully producing a figure for new spending agreed to at the summit. U.S. readiness to accept a precise figure here helped to induce the rest of the G7 to make the commitments sought by the U.S. in cleaning up Russian nuclear material. This was an example of the cross-issue deals that are possible at summits but seldom in fact happen. Trade and the W orld Trade Organization

The heads committed themselves to resist protectionist pressures and to complete the Doha Round on time by 2005. In the Africa Action Plan, they amplified this by reaffirming the negotiating mandate on agriculture and promising more capacity building and market access for poor countries. Canada, in fact, announced measures to admit the products of least-developed countries duty-free (except for eggs, poultry, and dairy produce), thus matching the existing EU and U.S. measures. But otherwise these G8 commitments were no advance on the status quo; they did not correct the unfavourable impact of recent U.S. trade measures or promise action to accelerate the negotiations. This was a disappointment to the Africans. They had hoped for precise G8 commitments to improve access for their agricultural exports, but France was reluctant to go beyond what was agreed to at Doha. Education

The G8 Education Task Force produced a clear report, stressing the importance not only of getting children into school but also of keeping them there and doing more for girls (G8 2002a). The report accepted the argument of the World Bank that countries that organise themselves effectively to make good use of aid should receive the aid they need. The G8 heads endorsed the report and 'agreed to increase significantly our bilateral assistance' for primary education. A similar commitment is contained in the Africa Action Plan. Both the U.S. and Canada announced more aid for education. But it is clear that this response will consist of piecemeal national contributions rather than a joint effort. The G8 did not commit itself to help the 18 countries identified by the World Bank as deserving 'fast-track treatment', eleven of which are in Africa; nor did it commit to increase their aid to education on the scale the World Bank has recommended, as urged by a group of NGOs.

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Health, Including A IDS

The G8 promised in the Africa Action Plan enough resources to eradicate polio. But the leaders ignored the funding pressures on the Global Fund to Fight AIDS, Tuberculosis, and Malaria, which they had launched only the year before. The fund had got under way very fast in committing funds for projects, although it had already received far more bids than it could meet. In March 2002, it committed US$616 million to be spent over the next two years on 58 projects, more than half in Africa. But if these projects were extended over five years, they would exhaust almost all the fund's resources, which stood at US$2 billion. So the fund already needed replenishment, but the G8 made no move to do this. While the U.S. committed another US$500 million to fight AIDS, this was outside the fund. When the G8 were reluctant to sustain this instrument that they launched only a year ago, it cast doubt on the durability of their other pledges. Sustainable Development

The G8 accepted Annan's concept that the meetings at Doha (for trade), Monterrey (for finance), and Johannesburg (the World Summit on Sustainable Development, or WSSD) form an ascending sequence and wrote that into the Africa Action Plan. But after the failed meeting in Bali in May 2002, preparations for the WSSD were in trouble, partly because of differences among the G8 members. Despite the presence of Mbeki and Annan at Kananaskis, the G8 leaders showed no sign of intervening to make the Johannesburg meeting a success, especially by making a joint commitment to take part themselves. Chirac spoke at great length about sustainable development and said publicly that he had urged all his G8 colleagues to attend. But he and Blair were the only heads to indicate they would be there. In the event, the other Europeans and Chrétien also went to Johannesburg, but Bush did not.

Assessment The organisation of the Kananaskis Summit was handled skilfully by the Canadians. They worked to ensure good continuity in the summit process, so that issues launched at Genoa were properly followed up. They focussed on their chosen agenda, delegating other issues to subsidiary ministerial groups. They simplified the process at the Summit itself, so that the heads could concentrate on the key issues and strike deals where needed. Chirac said that he intended to follow the Canadian model in 2003. Kananaskis did what summits are intended to do: the heads acted to resolve issues that had not been settled at lower levels, in addition to giving their authority to work prepared by their officials. The intervention of the heads can be seen in: • the decision on Russia hosting a summit in 2006 and on the summit sequence; • the figure of US$1 billion to replenish the HIPC Trust Fund;

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• the negotiation of the programme to clean up nuclear and chemical material in the former USSR; and • the fmancial commitment to underpin the Africa Action Plan. The attacks of 11 September 2001 inevitably brought terrorism onto the agenda, so that the political content of Kananaskis was much greater than Okinawa 2000 or Genoa 2001. But terrorism was accommodated without undermining the economic objectives of the Summit and these were not even upset by the last-minute attention to the Middle East. Kananaskis produced two agreements in this area, the one on weapons of mass destruction being of great importance and the other demonstrating the benefits of having the Russians in this forum. Kananaskis completes an entire summit cycle, starting in Lyon 1996, in which the G8 has constantly returned to problems of development. Little attention was given this year to other economic issues, such as the financial system. The G8 summit must not lose its capacity to intervene in these subjects or neglect danger signals, as happened at Denver in 1997 before the outbreak of the Asian financial crisis. However, the summits are concerned with managing the advance of globalisation. The most intractable problem here is that poor countries can miss all the potential benefits of globalisation and thus fall further behind. Precisely because it is so intractable, this problem of enabling poor countries to benefit from globalisation has become lodged with the G8. Despite a series of initiatives in debt relief, information technology, infectious diseases, and trade access, the G8 have found this a Sisyphean task. Much of the economic agenda at Kananaskis, apart from Africa, covered areas where G8 initiatives, after initial progress, showed signs of running out of steam, either because of inadequate resources (as in education and health) or because they met domestic resistance (as in trade access). The combination of the Africa Action Plan with the NEPAD was the latest initiative in this field. Having launched the process at Genoa on their own personal initiative, without advance preparation, the G8 heads now had to make good their promises. The work on Africa revealed some of the strengths of the G8 process: its ability to launch innovative initiatives, to embrace a wide range of different issues, and to combine political and econoinic actions. But both in Africa and the G8 the process only came together at the Summit, not at lower levels. There was no clear mechanism for co-ordination of G8 action that would be robust enough to survive the inevitable setbacks on the African side. The G8 and NEPAD combination may have achieved lift-off at Kananaskis, but it was not securely in orbit. It was therefore welcome when Chirac, as the next summit host, said Africa would be the top priority at Evian in June 2003 as it had in 2002. The G8 Africa group would remain in being, with Michel Camdessus (former Managing Director of the IMF) taking over the chair. It would serve as a tracking mechanism in following up the Africa Action Plan. Continued G8 summit attention to Africa should help to provide impetus to NEPAD and its peer review mechanism. But the coming year should also be used to improve the

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239

co-ordination of G8 and wider western policy toward Africa at levels below the summit. One of the original purposes of the summit, which remains valid, was to create a system of collective management involving North America, Europe, and Japan. Kananaskis therefore provided a test of how far Bush was prepared to participate in multilateral arrangements and how far he was driven by a unilateralist agenda determined by domestic political interests. In the international economic field, the message until then had been mixed. On the credit side the U.S. showed enough flexibility to ensure the Doha Round was started and launched a surprising new commitment on increasing aid at Monterrey. But domestic pressures prompted unhelpful unilateral actions on the Kyoto protocol, steel tariffs, and the new farm bill. The Kananaskis Summit provided useful guidance on how Bush operates. Although others took the first initiative on Africa, he clearly endorsed the high priority given to Africa and did not try to sidetrack it. He was committed to the general approach of the Africa Action Plan and NEPAD and ready to allocate new funds to African programmes. But his Africa policy was his own, looking forward to his visit there (originally planned for January 2003 but later postponed), and he was reluctant to co-ordinate with others. In the discussion of other economic issues, Bush showed no sign of flexibility on trade or sustainable development, but it is not clear that he was put under pressure. Over weapons of mass destruction, an issue that is now driven by the terrorism agenda, he was looking to his G8 colleagues to support something the U.S. was doing already, but he formed an alliance with Putin for the purpose. So the conclusion is that Bush will promote collective action, not only as part of the terrorism agenda but also in other areas. But within that collective action he will decide what the U.S. does without much reference to what others do. Kananaskis should be remembered as a well-prepared and well-organised summit that escaped the tensions of Genoa the year before. The heads exerted themselves to conclude two far-reaching agreements associated with substantial spending commitments over many years ahead. The G8 Africa Action Plan, in its link with NEPAD, could be the instrument of historic change — but only, as Annan said, if both the G8 and the Africans do all that they have promised to do.

References G8 (2001). 'Genoa Plan for Africa'. Genoa, 21 July. (January 2003). G8 (2002a). 'A New Focus on Education for All'. Kananaskis, 26 June. (January 2003). G8 (2002b). 'Statement by the Leaders: The G8 Global Partnership against the Spread of Weapons and Materials of Mass Destruction'. Kananaskis, 27 June. (January 2003).

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Appendix B

Summit Achievement Grades, 1975-2002 John J. Kirton

Summit Host France United States United Kingdom Germany Japan Italy Canada Average

Cycle 1 1975-81 A– D B– A B+ C+ C B–

Cycle 2 1982-88 C B C– E B+ D C– C–

Cycle 3 1989-95 B+ D B– D C+ C B+ C+

Cycle 4 1996-02

Average

B

B

C– B+ B+

C B

B

B

B+ B+ B

C C+ C+

The success of each annual summit can be measured by the overall achievement

grade awarded by the master grader of the G7/8 summits, Sir Nicholas Bayne, following a formula first developed by Robert Putnam (Bayne 2000, 2002; Putnam and Bayne 1987). The table above lists Bayne's revised and updated scores, as averaged by each seven-year summit hosting cycle, and for each country's record as host. Note: These grades are awarded for the overall importance of the co-operative agreements reached at the annual summit, including both policy co-ordination and institutional development.

References Bayne, Nicholas (2000). Hanging In There: The G7 and G8 Summit in Maturity and Renewal. Ashgate, Aldershot. Bayne, Nicholas (2002). 'Impressions of the Genoa Summit, 20-22 July, 2001'. In M. Fratianni, P. Savona and J. J. Kirton, eds., Governing Global Finance: New Challenges, G7 and IMF Contributions, pp. 199-210. Ashgate, Aldershot. Putnam, Robert and Nicholas Bayne (1987). Hanging Together: Co-operation and Conflict in the Seven-Power Summit. 2nd ed. Sage Publications, London.

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Appendix D

Summit Performance Assessment by Issue and Country, 2002 G8 Research Group

Performance by Issue

Performance by Country

Africa Terrorism

A—

France

B+

A—

Trade Official development assistance

B—

United States United Kingdom

B+ B

B

Germany

B+

Heavily indebted poor countries

A

Japan

B+

International fînancial system

C

Italy

A

Universal primary education

D+ A B—

Canada

B+ B+ B+

Dot Force Health

Russia European Union

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Appendix E

Keeping Genoa's Commitments: The 2001-02 Compliance Report Ella Kokotsis, John J. Kirton, and the G8 Research Group

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DOCUMENTARY APPENDICES

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Appendix F

Statement of G7 Finance Ministers and Central Bank Governors Ottawa, 8 February 2002

We met last night and today to discuss the global economy, the importance of fostering development and our ongoing efforts to combat the financing of terrorism. In October 2001, we released an Action Plan to Combat the Financing of Terrorism. Our commitment to this objective remains resolute and the international community has demonstrated its strong support. While we have made significant progress, further action is required, as set out in the attached annex. Since we last met, prospects have generally strengthened for resumed expansion in our economies, although risks remain. We remain vigilant and will each continue to take appropriate steps to promote a strong and sustained recovery. We will continue to monitor exchange markets closely and cooperate as appropriate. We welcome the successful introduction of euro notes and coins. Emerging market economies currently face mixed economic and financial market conditions. They should continue to implement policies conducive to investment and economic growth. We welcome as steps in the right direction recent announcements by Argentine authorities. We encourage them to continue to work closely with the International Monetary Fund (IMF) and the international community on a financially and socially sustainable economic reform program that will enhance prospects for growth and future foreign investment. Recent events have highlighted the importance of an improved, predictable and fair framework, involving the private sector, to prevent and resolve international financial crises. We are committed to playing a leading role in improving this framework and will review progress at our next meeting. In this regard, we welcome the IMF management's proposal on sovereign debt restructuring as a useful contribution that addresses some of the legal and practical obstacles to timely and orderly debt restructuring. We recognize the difficult challenges that the world's poorest countries face in reducing poverty and raising living standards. We explored ways to enable all countries to benefit more from greater global economic integration. We will continue to work with other donors to resolve outstanding issues on the 13th replenishment of the International Development Association, in order to ensure that additional resources for development are made available. We underlined the need for more effective use of development assistance and a commitment to sound policies, good governance and the rule of law by all countries. We had a productive discussion of development policy issues, including possible

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innovative ways to mobilize additional domestic and external resources, trade and external debt, and look forward to continued discussions at the UN Financing for Development conference in Monterrey in March. We welcomed Russia's strong growth and significant structural reforms, and encourage further progress in strengthening the financial sector, improving corporate governance and the investment climate, and combating terrorist financing. We agreed on the importance of Russia's early accession to the World Trade Organization (WTO).

Action Plan: Progress Report on Combating the Financing of Terrorism G7 countries have been joined by over 200 other countries and jurisdictions in expressing support for the fight against terrorist financing. Our October 2001 Action Plan to Combat the Financing of Terrorism contributed to this international effort by setting out clear priorities: vigorous application of international sanctions, including the freezing of terrorist assets; rapid development and implementation of international standards; increased information sharing among countries; and enhanced efforts by financial supervisors to guard against the abuse of the financial sector by terrorists. Significant results have already been achieved. Since September 11, almost 150 countries and jurisdictions have issued orders to freeze terrorist assets, and over $US 100 million has been frozen worldwide. Each G7 country is implementing UN Security Council Resolution 1373 and has signed and is committed to ratifying the UN Convention for the Suppression of the Financing of Terrorism. The Financial Action Task Force (FATF) has agreed to a set of Special Recommendations on Terrorist Financing and is implementing a comprehensive action plan encouraging all countries to adopt them. All G7 countries have established or are in the process of establishing Financial Intelligence Units (FIUs) that will facilitate the sharing of information on money laundering and terrorist financing. We have also all established mechanisms to share information relating to the tracking of terrorist assets. Continued success requires even closer cooperation and an intensified commitment. We now set forth the following steps to further advance the global fight against terrorist financing. To enhance international coordination in the freezing of terrorist assets, we will develop a mutual understanding of the information requirements and the procedures that different countries can use to undertake freezing actions. We will also develop key principles regarding the information to be shared, the procedures for sharing it, and the protection of sensitive information. We will also work with other countries to identify jointly terrorists whose assets would be subject to freezing. We will continue to review our institutional structures to ensure that they facilitate the international flow of information necessary to identify, track, and stop the flow of terrorist funds. In this regard, we support the Egmont Group's work on improved information flow among FIUs.

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253

The G7 are committed to fully implementing by June 2002 the FATF standards against terrorist financing. We urge all countries to accept the FATF's invitation to take part in a self-assessment and to commit to the rapid implementation of the standards. We look to the FATF, IMF and the World Bank to quickly complete their collaborative work on a framework for assessing compliance with international standards, including all FATF recommendations, against money laundering and terrorist financing. We urge all countries that have not done so by February 1, 2002, to implement the measures set out in the November 2001 Communiqué of the International Monetary and Financial Committee of the IMF, and look forward to the IMF's report to the spring meeting of the Committee on all issues raised by the Communiqué. We urge the Basle Committee on Banking Supervision to review its enhanced customer due diligence standards for banks to ensure that they address terrorist fmancing, and the Financial Stability Forum to review its role in combating terrorist financing, including in relation to offshore financial centres. We look forward to the quick implementation of the IMF and World Bank plan to provide increased technical assistance for measures to combat money laundering and terrorist financing in coordination with the FATF, regional FATF-style bodies, the UN and the Egmont Group. For our part, G7 countries are committed to providing technical assistance on a bilateral basis as well as through these coordination mechanisms. We recognize that continued success in the fight against terrorist financing requires the close cooperation and unwavering commitment of the broad international community. We therefore encourage all countries to join us in implementing these measures.

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Appendix G

Statement of G7 Finance Ministers and Central Bank Governors Washington DC, 20 April 2002

We met last night and today with prospects for the global economy more positive than a few months ago. This is in part a tribute to strengthened international cooperation. We discussed the global economy, international efforts to combat the financing of terrorism, approaches to financial crises, and the importance of more effective development assistance. We remain strongly committed to combating the financing of terrorism and we take note of the progress made in implementing our previous Action Plans. As a further and positive step forward in the war on terrorist financing, the G7 Finance Ministers announced today the first G7 joint designation of terrorist entities and the associated freezing of assets in the G7 countries; the Ministers encourage other countries to freeze these assets as well. We again urge all countries to participate in the FATF selfassessment and to implement quickly the FATF recommendations against terrorist financing. We look forward to the report of the IMF on the efforts it and its member countries are making to combat the financing of terrorism. We urge the IMF and World Bank to begin conducting their financial sector assessments, incorporating reports on compliance with anti-money laundering and terrorism fmancing standards based on FATF recommendations. We are working to ensure that legitimate institutions, organizations, and networks are not misused by terrorists and their supporters. Economic recovery from the slowdown is underway, supported by appropriate and proactive macroeconomic policies that were in part a response to the tragic events of September 11, but downside risks remain, including those arising from oil markets. Each of us has an ongoing responsibility to implement sound macroeconomic policies and structural reforms to sustain recovery and support strengthened productivity growth in our economies. We welcome the work programs of the Financial Stability Forum and International Accounting Standards Board responding to financial and related vulnerabilities. We look forward to the FSF report by September. We will continue to monitor exchange markets closely and cooperate as appropriate. We welcomed Russia's continued strong economic growth, progress in implementing key reforms, and work toward WTO accession. Many emerging markets and developing economies are also now showing clear signs of recovery, building on improved economic policies. Better availability and clarity of information furnished to markets have enabled market participants better to assess and differentiate across economies the fundamental causes of market

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Sustaining Global Growth and Development

developments. The situation in Argentina is of serious concern. Reforms of the fiscal framework encompassing the provinces, establishing a monetary anchor, and improving the bankruptcy and economic subversion laws will all help to restore investment and growth, thereby raising the living standards of the Argentine people. We thus support the IMF and the work it is doing with Argentina. In February, we committed ourselves to making the crisis management framework more predictable and fair. Today, we announced an Action Plan to improve stability, growth, and potential living standards in emerging markets. Rapid progress in the weeks and months ahead is essential. We will review progress at our next meeting. We affirmed our strong commitment to advancing development and combating poverty in the poorest nations including by linking greater contributions by developed nations to the adoption of good economic policies by developing countries. We recognize that official development assistance and private financing yield better results when used in a good policy environment and in support of sound policies such as good governance, human capital investment, and private sector development. These are the essential ingredients for raising productivity growth and reducing poverty in developing nations. We are committed to increasing the effectiveness of bilateral and multilateral development assistance, and to continuously inonitoring and measuring its results. We also stressed the importance of continued trade liberalization, particularly in support of improving the effective participation of the poorest countries in the multilateral trading system.

Action Plan We, the G7 Finance Ministers and Central Bank Governors, have today adopted an integrated Action Plan to increase predictability and reduce uncertainty about official policy actions in the emerging markets. The Action Plan is part of an overall endeavor whereby the sovereign debt of all countries would ultimately be investment grade, a rating that every country could eventually achieve with the right policies. The Action Plan would help prevent financial crises and better resolve them when they occur, thereby creating the conditions for sustained growth of private investment in emerging markets and helping raise living standards of the people in emerging market countries. We pledge to work together to carry out this Action Plan. The plan comprises the following elements that are complementary and reinforce each other. We will work with emerging market countries and their creditors to implement a market-oriented approach to the sovereign debt restructuring process in which new contingency clauses would be incorporated into debt contracts. These new clauses should describe as precisely as possible what would happen in the event of a sovereign debt restructuring. The clauses should include super-majority decision-making by creditors; a process by which a sovereign would initiate a restructuring or rescheduling; including a cooling-off, or standstill, period; and a description of how creditors would

Statement of G7 Finance Ministers and Central Bank Governors

257

engage with borrowers. Within these parameters, we will work with borrowers and creditors to make the clauses as effective as possible, examining such issues as aggregation, new private lending, and treatment of existing debt. We will also work with the International Monetary Fund on incentives for countries with IMF programs to adopt such clauses. With this market-oriented approach to the sovereign debt restructuring process, we are prepared to limit official sector lending to normal access levels except when circumstances justify an exception. It is becoming clearer that official sector support is being limited. Limiting official sector lending and developing private sector lending are essential parts of our Action Plan. We will work with the IMF to improve the quality, transparency, and predictability of official decision-making as a key means of crisis prevention. Specific actions include a more pre-emptive analysis of debt sustainability using market-based measures of credit-worthiness, a consideration of a greater degree of independence between the surveillance or analysis role and the lending role at the IMF, and a clarification of the lending into arrears policy of the IMF. We support further work by the IMF on proposed approaches to sovereign debt restructuring that may require new international treaties, changes in national legislation, or amendments of the Articles of Agreement of the IMF. Since these changes would take time, this work should not delay the expeditious implementation of the approach described above; indeed, this work is complementary. We emphasize that this Action Plan should increase the incentives for governments to pay their debts in full and on time. These incentives, which include the benefit of continued market access at reasonable interest rates, should remain.

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Appendix H

Statement of G7 Finance Ministers Halifax, 15 June 2002

Since we last met, growth in our economies has strengthened and should continue to consolidate throughout the year. We are thus confident about our future prospects. Looking forward, this foundation for stronger and sustainable productivity growth can be enhanced globally by policies and institutions that support people, markets, and ideas. These include sound macroeconomic policies, measures that support wellfunctioning labour, capital and product markets, a policy environment that fosters innovation and entrepreneurship, and a commitment to trade liberalization through a strong and effective multilateral trade system. Continued attention must be paid to strengthening the financial sector to ensure the most productive use of resources as well as to strengthen the resilience of the domestic economy to external shocks. We emphasize the importance of transparency, including in the private sector, to well functioning markets everywhere. We welcome the work of the Financial Stability Forum and International Accounting Standards Board responding to financial and related vulnerabilities. We recognize the difficult circumstances facing the people of Argentina, and that the way forward is for Argentina itself to develop a plan to build a credible and sustainable economic recovery. We are encouraged by the significant progress made by Argentina in reforming the fiscal framework encompassing the provinces, and addressing their bankruptcy and economic subversion laws. However, much more needs to be done, especially regarding the monetary framework and bank restructuring. We welcome the decision to invite an IMF mission to Argentina this week. We call on the Argentine Government to work with the IMF on a new program to implement such a plan; we will continue to support Argentina and the IMF in this effort. We are actively pursuing the Action Plan we adopted in April to improve predictability in emerging markets by strengthening crisis prevention and resolution. We are working with the Fund and others to advance all of its elements, including the active pursuit of contractual clauses. We welcome the interest many in the private sector have shown in this approach. At the IMF, we are pursuing more objective and transparent surveillance, including the assessment of debt sustainability, and consideration of greater independence between the IMF's surveillance and lending roles. We will continue to work to enhance discipline on the size of IMF assistance packages, and define more precisely the circumstances where exceptions might be justified. We strongly support the Fund's continuing work on a sovereign debt restructuring mechanism.

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Sustaining Global Growth and Development

We reiterate the call made at Monterrey for a Global Development Compact between developed and developing countries based on mutual accountability for results. We emphasize that development assistance is most effective when recipient countries have sound economic policies, strong institutions and good governance, and agree that priority in development assistance should be given to poor countries that meet these criteria. We agree that developed countries have a responsibility to improve development cooperation in support of country-owned poverty reduction and growth strategies, increase technical assistance, provide appropriate aid and debt relief, and expanding market access. We welcome the progress achieved by the Multilateral Development Banks in implementing the proposals for reform discussed last year, but more needs to be done. We urge the MDBs to continue to increase their collaboration and the effectiveness of their assistance, including through increased priority on improving governance in recipient countries, an enhanced focus on measurable results, and greater transparency in program decisions. We also examined several key development issues in more detail, including the Highly Indebted Poor Countries (HIPC) initiative, education, and the International Development Association (IDA). With regard to the HIPC initiative, we will work with the IFIs and other donors to promote the participation of all creditors that have not yet done so, in particular some multilateral institutions, to fully participate in the initiative; to complete the financing of the HIPC Trust Fund; and thus to deliver on our commitment to help achieve debt sustainability for the world's poorest countries. We also endorse full replenishment of IDA, the cornerstone of multilateral support for low-income countries. We welcome the increased use of results measurement to track development outcomes. We support an increase in the use of grants, in the range of 18 per cent to 21 per cent of the IDA13 program, to enhance the effectiveness of IDA in helping the poorest and debt vulnerable countries combat HIV/AIDS, support the social sectors, including education, and overcome the effects of devastating conflict. We will work with our fellow IDA donor governments to finalize the negotiation as soon as possible along these lines. We also note the World Bank's Education Action Plan and strongly endorse the expeditious implementation of a plan focused on program quality and measurable results. Each of us in turn will work to support the Education for All goals with countries that have credible education plans and strong policy commitments in place. We urge other donor governments and the multilateral development banks to join us. Following the tragic events of September 11, 2001, we issued an Action Plan to Combat the Financing of Terrorisin and committed to work with the broader international community to achieve results. Our Action Plan has fostered international cooperation to stop the flow of funds to terrorists, protect the international financial system from abuse, and enhance transparency. In this regard, we welcome the work underway to combat the abuse of charities and Hawalas. Over 160 countries and jurisdictions have taken action to freeze terrorist assets. The implementation of UN

Statement of G7 Finance Ministers

261

instruments has intensified and countries are working diligently to comply with the FATF's Special Recommendations. We call on the FATF-member countries to comply quickly with these recommendations. To encourage the broadest possible participation in this fight, we call on the FATF to identify countries for follow-up assessment and technical assistance, by the IMF, the World Bank, and the United Nations. We urge the IMF and World Bank to begin conducting integrated and comprehensive assessments of standards to combat money laundering and financing of terrorism. We agree that the administration and enforcement of tax laws depend increasingly on transparency and effective international exchange of information. We call on all countries to permit access to, and exchange, bank and other information for all tax purposes; OECD countries should lead by example. Progress in this area is urgently needed and we intend to review developments at our next meeting. A stable and more prosperous Afghanistan is important to the Afghan people and to the world. We are determined to ensure that the international community supports Afghanistan, and delivers on the commitments pledged at the Tokyo Conference in January 21-22,2002. We discussed with the Finance Minister of Russia the progress made by this country toward structural reforms. We encourage further efforts to strengthen the financial sector, improve corporate governance and the investment climate, and combat money laundering and terrorist financing. We agree on the importance of Russia's early accession to the World Trade Organization (WTO). We will be reporting on a number of subjects discussed at this meeting to our Leaders in connection with the June 26-27 Kananaskis Summit. We welcomed the participation in, and contributions to, our discussions preparatory to the Summit, the Finance Minister of Spain representing the Presidency of the European Union and the European Commissioner for Economic and Monetary Affairs.

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Appendix I

G8 Africa Action Plan Kananaskis, 27 June 2002

1. We, the Heads of State and Government of eight major industrialized democracies and the Representatives of the European Union, meeting with African Leaders at Kananaskis, welcome the initiative taken by African States in adopting the New Partnership for A frica's Development (NEPAD), a bold and clear-sighted vision of Africa's development. We accept the invitation from African Leaders, extended first at Genoa last July and reaffirmed in the NEPAD, to build a new partnership between the countries of Africa and our own, based on mutual responsibility and respect. The NEPAD provides an historic opportunity to overcome obstacles to development in Africa. Our Africa Action Plan is the G8's initial response, designed to encourage the imaginative effort that underlies the NEPAD and to lay a solid foundation for future cooperation. 2. The case for action is compelling. Despite its great potential and human resources, Africa continues to face some of the world's greatest challenges. The many initiatives designed to spur Africa's development have failed to deliver sustained improvements to the lives of individual women, men and children throughout Africa. 3. The New Partnership for A frica's Development offers something different. It is, first and foremost, a pledge by African Leaders to the people of Africa to consolidate democracy and sound economic management, and to promote peace, security and people-centred development. African Leaders have personally directed its creation and implementation. They have formally undertaken to hold each other accountable for its achievement. They have emphasized good governance and human rights as necessary preconditions for Africa's recovery. They focus on investment-driven economic growth and economic governance as the engine for poverty reduction, and on the importance of regional and subregional partnerships within Africa. 4. We welcome this commitment. In support of the NEPAD objectives, we each undertake to establish enhanced partnerships with African countries whose performance reflects the NEPAD commitments. Our partners will be selected on the basis of measured results. This will lead us to focus our efforts on countries that demonstrate a political and financial commitment to good governance and the rule of law, investing in their people, and pursuing policies that spur economic growth and alleviate poverty. We will match their commitment with a commitment on our own part to promote peace and security in Africa, to boost expertise and capacity, to encourage trade and direct growth-oriented investment, and to provide more effective official development assistance.

264 5.

Sustaining Global Growth and Development

Together, we have an unprecedented opportunity to make progress on our common goals of eradicating extreme poverty and achieving sustainable development. The new round of multilateral trade negotiations begun at Doha, the Monterrey meeting on financing for development, this G8 Summit at Kananaskis and the World Summit on Sustainable Development in Johannesburg, are key milestones in this process. 6. NEPAD recognizes that the prime responsibility for Africa's future lies with Africa itself. We will continue to support African efforts to encourage public engagement in the NEPAD and we will continue to consult with our African partners on how we can best assist their own efforts. G8 governments are committed to mobilize and energize global action, marshal resources and expertise, and provide impetus in support of the NEPAD's objectives. As G8 partners, we will undertake mutually reinforcing actions to help Africa accelerate growth and make lasting gains against poverty. Our Action Plan focuses on a limited number of priority areas where, collectively and individually, we can add value. 7. The African peer-review process is an innovative and potentially decisive element in the attainment of the objectives of the NEPAD. We welcome the adoption on June 11 by the NEPAD Heads of State and Government Implementation Committee of the Declaration on Democracy, Political, Economic and Corporate Governance and the African Peer Review Mechanism. The peer-review process will inform our considerations of eligibility for enhanced partnerships. We will each make our own assessments in making these partnership decisions. While we will focus particular attention on enhanced-partnership countries, we will also work with countries that do not yet meet the standards of NEPAD but which are clearly committed to and working towards its implementation. We will not work with governments which disregard the interests and dignity of their people. 8. However, as a matter of strong principle, our commitment to respond to situations of humanitarian need remains universal and is independent of particular regimes. So, too, is our commitment to addressing the core issues of human dignity and development. The Development Goals set out in the United Nations Millennium Declaration are an important component of this engagement. 9. At Monterrey, in March 2002, we agreed to revitalize efforts to help unlock and more effectively utilize all development resources including domestic savings, trade and investment, and official development assistance. A clear link was made between good governance, sound policies, aid effectiveness and development success. In support of this strong international consensus, substantial new development assistance commitments were announced at Monterrey. By 2006, these new commitments will increase ODA by a total of US$12 billion per year. Each of us will decide, in accordance with our respective priorities and procedures, how we will allocate the additional money we have pledged. Assuming strong African policy commitments, and given recent assistance trends, we believe that in aggregate half or more of our new development assistance could be directed to

G8 A frica A ction Plan

265

African nations that govern justly, invest in their own people and promote economic freedom. In this way we will support the objectives of the NEPAD. This will help ensure that no country genuinely committed to poverty reduction, good governance and economic reform will be denied the chance to achieve the Millennium Goals through lack of finance. 10. We will pursue this Action Plan in our individual and collective capacities, and through the international institutions to which we belong. We warmly invite other countries to join us. We also encourage South-South cooperation and collaboration with international institutions and civil society, including the business sector, in support of the NEPAD. We will continue to maintain a constructive dialogue with our African partners in order to achieve effective implementation of our Action Plan and to support the objectives of the NEPAD. We will take the necessary steps to ensure the effective implementation of our Action Plan and will review progress at our next Summit based on a final report from our Personal Representatives for Africa. 11. To demonstrate our support for this new partnership, we make the following engagements in support of the NEPAD:

I Promoting Peace and Security Time and again, progress in Africa has been undermined or destroyed by conflict and insecurity. Families have been displaced and torn apart, and the use of child soldiers has robbed many individuals of the opportunity to learn, while also sowing the seeds of long-term national disruption, instability and poverty. Economic development has been deeply undermined as scarce resources needed to fight poverty have too often been wasted in deadly and costly armed conflicts. We are determined to make conflict prevention and resolution a top priority, and therefore we commit to: 1.1 Supporting African efforts to resolve the principal armed conflicts on the continent — including by: • Providing additional support to efforts to bring peace to the Democratic Republic of the Congo and Sudan, and to consolidate peace in Angola and Sierra Leone within the next year; • Assisting with programmes of disarmament, demobilization and reintegration; at the appropriate time, • Taking joint action to support post-conflict development in the Great Lakes Region and Sudan; and, • Endorsing the proposals from the UN Secretary-General to set up, with the Secretary-General and other influential partners, contact groups and similar mechanisms to work with African countries to resolve specific African conflicts. 1.2 Providing technical and fmancial assistance so that, by 2010, African countries and regional and sub-regional organizations are able to engage more effectively to

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prevent and resolve violent conflict on the continent, and undertake peace support operations in accordance with the United Nations Charter — including by: • Continuing to work with African partners to deliver a joint plan, by 2003, for the development of African capability to undertake peace support operations, including at the regional level; • Training African peace support forces including through the development of regional centres of excellence for military and civilian aspects of conflict prevention and peace support, such as the Kofi Annan International Peace Training Centre; and, • Better coordinating our respective peacekeeping training initiatives. 1.3 Supporting efforts by African countries and the United Nations to better regulate the activities of arms brokers and traffickers and to eliminate the flow of illicit weapons to and within Africa — including by: • Developing and adopting common guidelines to prevent the illegal supply of arms to Africa; and, • Providing assistance in regional trans-border cooperation to this end. 1.4 Supporting African efforts to eliminate and remove antipersonnel mines. 1.5 Working with African governments, civil society and others to address the linkage between armed conflict and the exploitation of natural resources — including by: • Supporting United Nations and other initiatives to monitor and address the illegal exploitation and international transfer of natural resources from Africa which fuel armed conflicts, including mineral resources, petroleum, timber and water; • Supporting voluntary control efforts such as the Kimberley Process for diamonds, and encouraging the adoption of voluntary principles of corporate social responsibility by those involved in developing Africa's national resources; • Working to ensure better accountability and greater transparency with respect to those involved in the import or export of Africa's natural resources from areas of conflict; • Promoting regional management of trans-boundary natural resources, including by supporting the Congo Basin Initiative and trans-border river basin commissions. 1.6 Providing more effective peace-building support to societies emerging from or seeking to prevent armed conflicts — including by: • Supporting effective African-led reconciliation efforts, including both preconflict and post-conflict initiatives; and, • Encouraging more effective coordination and cooperation among donors and international institutions in support of peace-building and conflict prevention efforts — particularly with respect to the effective disarmament, demobilization and reintegration of former combatants, the collection and destruction of small arms, and the special needs of women and children, including child soldiers. 1.7 Working to enhance African capacities to protect and assist war-affected populations and facilitate the effective implementation in Africa of United Nations

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Security Council resolutions relating to civilians, women and children in armed conflict — including by supporting African countries hosting, assisting and protecting large refugee populations.

II Strengthening Institutions and Governance

The NEPAD maintains that "development is impossible in the absence of true democracy, respect for human rights, peace and good governance". We agree, and it has been our experience that reliable institutions and governance are a precondition for long-term or large-scale private investment. The task of strengthening institutions and governance is thus both urgent and of paramount importance, and for this reason, we commit to: 2.l Supporting the NEPAD's priority political governance objectives — including by: • Expanding capacity-building programmes related to political governance in Africa focusing on the NEPAD priority areas of: improving administrative and civil services, strengthening parliamentary oversight, promoting participatory decision-making, and judicial reform; • Supporting African efforts to ensure that electoral processes are credible and transparent, and that elections are conducted in a manner that is free and fair and in accordance with the NEPAD's commitment to uphold and respect "global standards of democracy"; • Supporting African efforts to involve parliamentarians and civil society in all aspects of the NEPAD process; and, • Supporting the reform of the security sector through assisting the development of an independent judiciary and democratically controlled police structures. 2.2 Strengthening capacity-building programmes related to economic and corporate governance in Africa focusing on the NEPAD priority areas of implementing sound macro-economic strategies, strengthening public financial management and accountability, protecting the integrity of monetary and financial systems, strengthening accounting and auditing systems, and developing an effective corporate governance framework — including by: • Supporting international and African organizations such as the African Capacity Building Foundation (ACBF) and the African Regional Technical Assistance Centres (AFRITACs) initiative of the International Monetary Fund (IMF) in expanding regionally-oriented technical assistance and capacity-building programmes in Africa; and, • Financing African-led research on economic governance issues (through the United Nations Economic Commission for Africa (ECA), sub-regional and regional organizations, and other African institutions and organizations with relevant expertise).

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2.3 Supporting African peer-review arrangements — including by: • Encouraging cooperation with respect to peer-review practices, modalities and experiences between the Organisation for Economic Co-operation and Development (OECD) and the ECA, including the participation by the ECA in the OECD Development Assistance Committee (DAC) peer-review process where the countries under review so agree; • Encouraging, where appropriate, substantive information sharing between Africa and its partners with respect to items under peer-review; and, • Supporting regional organizations in developing tools to facilitate peer-review processes. 2.4 Giving increased attention to and support for African efforts to promote and protect human rights — including by: • Supporting human rights activities and national, regional and sub-regional human rights institutions in Africa; • Supporting African efforts to implement human rights obligations undertaken by African governments; and, • Supporting African efforts to promote reconciliation and to ensure accountability for violations of human rights and humanitarian law, including genocide, crimes against humanity and other war crimes. 2.5 Supporting African efforts to promote gender equality and the empowerment of women — including by: • Supporting African efforts to achieve equal participation of African women in all aspects of the NEPAD process and in fulfilling the NEPAD objectives; and, • Supporting the application of gender main-streaming in all policies and programmes. 2.6 Intensifying support for the adoption and implementation of effective measures to combat corruption, bribery and embezzlement — including by: • Working to secure the early establishment of a UN Convention on Corruption, and the early ratification of the UN Convention Against Transnational Organized Crime; • Strengthening and assisting the implementation and monitoring of the OECD Convention on Bribery and assisting anti-bribery and anti-corruption programmes through the international financial institutions (IFIs) and the multilateral development banks; • Intensifying international cooperation to recover illicitly acquired financial assets; • Supporting voluntary anti-corruption initiatives, such as the DAC Guidelines, the OECD Guidelines for Multinational Enterprises, and the UN Global Compact; • Supporting the role of parliamentarians in addressing corruption and promoting good governance; and, • Assisting African countries in their efforts to combat money laundering, including supporting World Bank/IMF efforts to improve coordination in the delivery of

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technical assistance to combat money laundering and terrorist financing in African countries.

III Fostering Trade, Investment, Economic Growth and Sustainable Development

Generating economic growth is central to the NEPAD's goal of mobilizing resources for poverty reduction and development. A comprehensive effort is required to stimulate economic activity in all productive sectors while paying particular attention to sustainability and social costs and to the role of the private sector as the engine for economic growth. In this context, the particular importance of infrastructure has been emphasized by our African partners — including as a domain for public-private investment partnerships, and as a key component of regional integration and development. In order to achieve adequate growth rates, Africa must have broader access to markets. The launch of multilateral trade negotiations by World Trade Organization (WTO) members in Doha, which placed the needs and interests of developing countries at the heart of the negotiations, will help create a framework for the integration of African countries into the world trading system and the global economy, thus creating increased opportunities for trade-based growth. We are committed to the Doha development agenda and to implementing fully the WTO work programme, as well as to providing increased trade-related technical assistance to help African countries participate effectively in these negotiations. With these considerations in mind, we commit to: 3.1 Helping Africa attract investment, both from within Africa and from abroad, and implement policies conducive to economic growth — including by: • Supporting African initiatives aimed at improving the investment climate, including sound economic policies and efforts to improve the security of goods and transactions, consolidate property rights, modernize customs, institute needed legal and judicial reforms, and help mitigate risks for investors; • Facilitating the financing of private investment through increased use of development finance institutions and export credit and risk-guarantee agencies and by strengthening equivalent institutions in Africa; • Supporting African initiatives aimed at fostering efficient and sustainable regional fmancial markets and domestic savings and financing structures, including microcredit schemes — while giving particular attention to seeing that credit and business support services meet the needs of poor women and men; • Enhancing international cooperation to promote greater private investment and growth in Africa, including through public-private partnerships; and, • Supporting the efforts of African governments to obtain sovereign credit ratings and gain access to private capital markets, including on a regional basis. 3.2 Facilitating capacity-building and the transfer of expertise for the development of infrastructure projects, with particular attention to regional initiatives.

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3.3 Providing greater market access for African products — including by: • Reaffirming our commitment to conclude negotiations no later than 1 January 2005 on further trade liberalization in the Doha round of multilateral trade negotiations taking full account of the particular circumstances, needs and requirements of developing countries, including in Africa; • Without prejudging the outcome of the negotiations, applying our Doha commitment to comprehensive negotiations on agriculture aimed at substantial improvements in market access, reductions of all forms of export subsidies with a view to their being phased out, and substantial reductions in tradedistorting domestic support; • Working toward the objective of duty-free and quota-free access for all products originating from the Least Developed Countries (LDCs), including African LDCs, and, to this end, each examining how to facilitate the fuller and more effective use of existing market access arrangements; and, • Ensuring that national product standards do not unnecessarily restrict African exports and that African nations can play their full part in the relevant international standard setting systems. 3.4 Increasing the funding and improving the quality of support for trade-related technical assistance and capacity-building in Africa — including by: • Supporting the establishment and expansion of trade-related technical assistance programmes in Africa; • Supporting the establishment of sub-regional market and trade information offices to support trade-related technical assistance and capacity-building in Africa; • Assisting regional organizations in their efforts to integrate trade policy into member country development plans; • Working to increase African participation in identifying WTO-related technical assistance needs, and providing technical assistance to African countries to implement international agreements, such as the WTO agreement; • Assisting African producers in meeting product and health standards in export markets; and, • Providing technical assistance to help African countries engage in international negotiations, and in standard-setting systems. 3.5 Supporting African efforts to advance regional economic integration and intraAfrican trade — including by: • Helping African countries develop regional institutions in key sectors affecting regional integration, including infrastructure, water, food security and energy, and sustainable management and conservation of natural resources; • Working towards enhanced market access, on a WTO-compatible basis, for trade with African free trade areas or customs unions; • Supporting the efforts of African countries to eliminate tariff and non-tariff barriers within Africa in a WTO-consistent manner; and,

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• Supporting efforts by African countries to work towards lowering trade barriers on imports from the rest of the world. 3.6 Improving the effectiveness of Official Development Assistance (ODA), and strengthening ODA commitments for enhanced-partnership countries — including by: • Ensuring effective implementation of the OECD/DAC recommendations on untying aid to the Least Developed Countries; • Implementing effectively the OECD agreement to ensure that export credit support to low-income countries is not used for unproductive purposes; • Supporting efforts within the DAC to reduce aid management burdens on recipient countries and lower the transactions costs of aid; • Taking all necessary steps to implement the pledges we made at Monterrey, including ODA level increases and aid effectiveness; and, • Reviewing annually, within the DAC and in coordination with all relevant institutions, our progress towards the achievement in Africa of the Development Goals contained in the United Nations Millennium Declaration.

IV Implementing Debt Relief 4.1 Our aim is to assist countries through the Heavily Indebted Poor Countries (HIPC) Initiative to reduce poverty by enabling them to exit the HIPC process with a sustainable level of debt. The HIPC Initiative will reduce, by US$19 billion (net present value terms), the debt of some 22 African countries that are following sound economic policies and good governance. Combined with traditional debt relief and additional bilateral debt forgiveness, this represents a reduction of some US$30 billion — about two-thirds of their total debt burden — that will allow an important shift of resources towards education, health and other social and productive uses. 4.2 Debt relief alone, however, no matter how generous, cannot guarantee long-term debt sustainability. Sound policies, good governance, prudent new borrowing, and sound debt management by HIPCs, as well as responsible financing by creditors, will be necessary to ensure debt sustainability. We are committed to seeing that the projected shortfall in the HIPC Trust Fund is fully financed. Moreover, we remain ready, as necessary, to provide additional debt relief — socalled "topping up" — on a case-by-case basis, to countries that have suffered a fundamental change in their economic circumstances due to extraordinary external shocks. In that context these countries must continue to demonstrate a commitment to poverty reduction, sound financial management, and good governance. We will fund our share of the shortfall in the HIPC Initiative, recognizing that this shortfall will be up to US$1 billion. We call on other creditor countries to join us. Once countries exit the HIPC process, we expect they will not need additional

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relief under this Initiative. We support an increase in the use of grants for the poorest and debt-vulnerable countries, and look forward to its rapid adoption.

V Expanding Knowledge: Improving and Promoting Education and Expanding Digital Opportunities Investing in education is critical to economic and social development in Africa, and to providing Africans with greater opportunities for personal and collective advancement. Education also holds the key to important goals such as achieving full gender equality for women and girls. Yet most African countries have made poor progress towards the attainment of the Dakar Education for All (EFA) goals. In addition, the capacity of information and communications technology (ICT) to help Africa exploit digital opportunities, has not yet been realized. ICT has been identified by the NEPAD as a targeted priority for economic and human development in Africa. With this in mind, we commit to: 5.1 Supporting African countries in their efforts to improve the quality of education at all levels — including by: • Significantly increasing the support provided by our bilateral aid agencies to basic education for countries with a strong policy and financial commitment to the sector, in order to achieve the goals of universal primary education and equal access to education for girls. In that regard we will work vigorously to operationalize the G8 Education Task Force report with a view to helping African countries which have shown through their actions a strong policy and financial commitment to education to achieve these goals; and to encourage other African countries to take the necessary steps so that they, too, can achieve universal primary education by 2015; • Supporting the development and implementation by African countries of national educational plans that reflect the Dakar goals on Education for All, and encouraging support for those plans — particularly universal primary education — by the international community as an integral part of the national development strategies; • Giving special emphasis and support to teacher training initiatives, in line with the NEPAD priorities, and the creation of accountability mechanisms and EFA assessment processes; • Working with IFIs to increase their education-related spending, as a further supplement to bilateral and other efforts; • Supporting the development of a client-driven "Education for All" Internet portal; • Supporting programmes to encourage attendance and enhance academic performance, such as school feeding programmes; and, • Supporting the development of community learning centres to develop the broader educational needs of local communities. 5.2 Supporting efforts to ensure equal access to education by women and girls — including by:

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• Providing scholarships and other educational support for women and girls; and, • Supporting African efforts to break down social, cultural and other barriers to equal access by women and girls to educational opportunities. 5.3 Working with African partners to increase assistance to Africa's research and higher education capacity in enhanced-partnership countries — including by: • Supporting the development of research centres and the establishment of chairs of excellence in areas integral to the NEPAD in Africa; and, Favouring the exchange of visiting academics and encouraging research • partnerships between G8/donor and African research institutions. 5.4 Helping Africa create digital opportunities — including by: • Encouraging the Digital Opportunity Task Force (DOT Force) International e-Development Resources Network to focus on Africa, and supporting other DOT Force initiatives that can help to create digital opportunities, each building wherever possible on African initiatives already underway; • Working towards the goal of universal access to ICT by working with African countries to improve national, regional and international telecommunications and ICT regulations and policies in order to create ICT-friendly environments; • Encouraging and supporting the development of public-private partnerships to fast-track the development of ICT infrastructure; and, • Supporting entrepreneurship and huinan resource development of Africans within the ICT Sector. 5.5 Helping Africa make more effective use of ICT in the context of promoting sustainable economic, social and political development — including by: • Supporting African initiatives to make best use of ICT to address education and health issues; and, • Supporting African countries in increasing access to, and making the best use of, ICT in support of governance, including by supporting the development and implementation of national e-strategies and e-governance initiatives aimed at increased efficiency, effectiveness, transparency and accountability of government.

VI Improving Health and Confronting HIV/AIDS The persistence of diseases such as malaria and tuberculosis has remained a severe obstacle to Africa's development. To this burden has been added the devastating personal and societal costs resulting from AIDS, the consequences of which stand to undermine all efforts to promote development in Africa. The result has been a dramatic decrease in life expectancy in Africa and a significant new burden on African health systems and economies. Substantial efforts are needed to confront the health challenges that Africa faces, including the need to enhance immunization efforts directed at polio and other preventable diseases. Therefore, recognizing that HIV/AIDS affects all aspects of Africa's future development and should therefore be a factor in all aspects of our support for Africa, we commit to:

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6.1 Helping Africa combat the effects of HIV/AIDS — including by: • Supporting programmes that help mothers and children infected or affected by HIV/AIDS, including children orphaned by AIDS; • Supporting the strengthening of training facilities for the recruiting and training of health professionals; • Supporting the development, adoption and implementation of gender-sensitive, multi-sectoral HIV/AIDS programs for prevention, care, and treatment; • Supporting high level political engagement to increase awareness and reduce the stigma associated with HIV/AIDS; • Supporting initiatives to improve technical capacity, including disease surveillance; • Supporting efforts to develop strong partnerships with employers in increasing HIV/AIDS awareness and in providing support to victims and their families; • Supporting efforts that integrate approaches that address both HIV/AIDS and tuberculosis; and, • Helping to enhance the capacity of Africa to address the challenges that HIV/ AIDS poses to peace and security in Africa. 6.2 Supporting African efforts to build sustainable health systems in order to deliver effective disease interventions — including by: • Pressing ahead with current work with the international pharmaceutical industry, affected African countries and civil society to promote the availability of an adequate supply of life-saving medicines in an affordable and medically effective manner; • Supporting African countries in helping to promote more effective, and costeffective, health interventions to the most vulnerable sectors of society — including reducing maternal and infant mortality and morbidity; • Continuing support for the Global Fund to Fight AIDS, Tuberculosis and Malaria, and working to ensure that the Fund continues to increase the effectiveness of its operations and learns from its experience; • Supporting African efforts to increase Africa's access to the Global Fund and helping to enhance Africa's capacity to participate in and benefit from the Fund; • Providing assistance to strengthen the capacity of the public sector to monitor the quality of health services offered by both public and private providers; and, • Supporting and encouraging the twinning of hospitals and other health organizations between G8 and African countries. 6.3 Accelerating the elimination and mitigation in Africa of polio, river blindness and other diseases or health deficiencies — including by: • Providing, on a fair and equitable basis, sufficient resources to eliminate polio by 2005; and, • Supporting relevant public-private partnerships for the immunization of children and the elimination of micro-nutrient deficiencies in Africa. 6.4 Supporting health research on diseases prevalent in Africa, with a view to narrowing the health research gap, including by expanding health research

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networks to focus on African health issues, and by making more extensive use of researchers based in Africa.

VII Increasing Agricultural Productivity The overwhelming majority of Africa's population is rural. Agriculture is therefore the principal economic preoccupation for most of Africa's people. Agriculture is central not only to the quality of life of most Africans, but also to the national economy of nearly all African states. Increased agricultural production, efficiency and diversification are central to the economic growth strategies of these countries. In support of the NEPAD's growth and sustainable development initiatives on agriculture, we commit to: 7.1 Making support for African agriculture a higher international priority in line with the NEPAD's framework and priorities — including by: • Supporting the reform and financing of international institutions and research organizations that address Africa's agricultural development priority needs; • Supporting efforts to strengthen agricultural research in Africa as well as research related to issues and aspects that are of particular importance to Africa; and, • Working with African countries to improve the effectiveness and efficiency of ODA for agriculture, rural development and food security where there are coherent development strategies reflected in government budget priorities. 7.2 Working with African countries to reduce poverty through improved sustainable productivity and competitiveness — including by: • Supporting the development and the responsible use of tried and tested new technology, including biotechnology, in a safe manner and adapted to the African context, to increase crop production while protecting the environment through decreased usage of fragile land, water and agricultural chemicals; • Studying, sharing and facilitating the responsible use of biotechnology in addressing development needs; • Helping to improve farmers' access to key market information through the use of traditional and cutting edge coinmunications technologies, while also building upon ongoing international collaboration that strengthens farmers' entrepreneurial skills; • Encouraging partnerships in agriculture and water research and extension to develop, adapt and adopt appropriate demand-driven technologies, including for low-income resource-poor farmers, to increase agricultural productivity and improve ability to market agricultural, fish and food products; • Working with African countries to promote property and resource rights; • Supporting the main-streaming of gender issues into all agricultural and related policy together with targeted measures to ensure the rights of women for equal access to technology, technical support, land rights and credits;

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• Working with African countries to support the development of agricultural infrastructure including production, transportation and markets; and, • Working with African countries to develop sound agricultural policies that are integrated into Poverty Reduction Strategies. 7.3 Working to improve food security in Africa — including by: • Working with African countries to integrate food security in poverty reduction efforts and promote a policy and institutional environment that enables poor people to derive better livelihoods from agriculture and rural development; • Working with appropriate international organizations in responding to the dire food shortages in Southern Africa this year; • Working with African countries to expand efforts to improve the quality and diversity of diets with micro-nutrients and by improving fortification technologies; • Supporting African efforts to establish food safety and quality control systems, including helping countries develop legislation, enforcement procedures and appropriate institutional frameworks; and, • Supporting efforts to improve and better disseminate agricultural technology.

VIII Improving Water Resource Management Water is essential to life. Its importance spans a wide range of critical uses — from human drinking water, to sanitation, to food security and agriculture, to economic activity, to protecting the natural environment. We have noted the importance of proper water resource management. We note also that water management is sometimes at the centre of threats to regional peace and security. We also appreciate the importance of good water management for achieving sustainable economic growth and development, and therefore we commit to: 8. Supporting African efforts to improve water resource development and management — including by: • Supporting African efforts to promote the productive and environmentally sustainable development of water resources; • Supporting efforts to improve sanitation and access to potable water; • Mobilizing technical assistance to facilitate and accelerate the preparation of potable water and sanitation projects in both rural and urban areas, and to generate greater efficiency in these sectors; and, • Supporting reforms in the water sector aimed at decentralization, cost-recovery and enhanced user participation.

Appendix J

Statement by G7 Leaders: Delivering on the Promise of the Enhanced HIPC Initiative Kananaskis, 27 June 2002

Debt relief alone, no matter how generous, cannot guarantee fiscal solvency, longterm economic growth, and social development. Good governance, prudent new borrowing, and sound debt management by heavily indebted poor countries (HIPCs), as well as responsible financing by creditors, are also essential elements of the policy framework needed to achieve these goals. The enhanced Heavily Indebted Poor Countries Initiative, launched following the Köln Summit in 1999, is an important avenue for debt reduction. To date, 26 countries are benefiting from debt relief under this Initiative. Overall, debt relief for these countries will amount to US$40 billion in net present value terms — almost twothirds of their total debt. As many as 37 countries are expected eventually to benefit from debt reduction under the Initiative. While this is very encouraging, there are factors that may prevent the HIPC Initiative from delivering the debt reduction it has promised: • not all creditors have agreed to reduce their HIPC debts; • the expected financing needs of the Initiative have not been fully met; • as a result of weaker growth and export commodity prices, a number of countries could be at risk of not having sustainable debt loads at the Completion Point. In our discussions we agreed to take action to address these three issues.

A. Securing the Participation of All Creditors To provide information on the participation of all creditors, we agreed to call on the International Monetary Fund (IMF) and World Bank to: a. include, in HIPCs' Poverty Reduction and Growth Facility reviews and Completion Point documents, more detailed information on the respective countries' success in obtaining comparable treatment; b. post comprehensive information on creditor participation on the Bank and Fund Web sites, including creditors' explanations for non-participation.

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We will ask the IMF and World Bank to continue to work with regional and small multilateral development institutions to encourage and facilitate their participation in the Initiative. We will also write to the Boards of those institutions that have not yet committed to participate in order to ask them to take part in the Initiative. Furthermore, we will encourage those multilateral institutions that are late in providing debt relief to accelerate their efforts. Noting the importance of commercial creditor participation, we agreed to ask the World Bank and IMF to prepare a comprehensive report on legal action brought against HIPCs by non-participating creditors, including by commercial creditors, and on options for HIPCs to obtain technical assistance to facilitate resolution of disputes. We further agreed to ask the IMF and World Bank to continue to encourage bilateral creditors not to sell their claims on HIPCs in the secondary debt market. As far as non-Paris Club official bilateral creditors are concerned, we will ask the IMF and World Bank to encourage creditors who are members of the two organizations to participate fully in the HIPC Initiative, particularly relatively wealthy creditors that have a significant amount of claims. In addition, we will urge the IMF to identify creditor countries' participation in the Initiative ahead of any debt rescheduling with the Paris Club. We will also ask the Chair of the Paris Club to consider inviting, on a case-by-case basis, non-member official creditors to participate in its negotiations with HIPC countries on the understanding that these creditors will join a satisfactory consensus and will abide by Paris Club principles. We agreed to ask the IMF and World Bank to include participation in the HIPC Initiative in reporting under Article IV as well as other Fund and Bank documents. We will explore means of approaching creditors that are not IMF/World Bank members to encourage them to participate in the Initiative.

B. Completing the Financing of the HIPC Initiative We acknowledged the threat to sustainable exit from debt due to under-financing of the Initiative and we committed to work with other donor countries and the international financial institutions (IFIs) to address this issue. We will also call upon the multilateral development banks to continue to make best efforts to identify internal resources to contribute to the financing of the HIPC Initiative.

C. Debt Sustainability at the Completion Point We will ask the IMF and World Bank to ensure that the comprehensive review of debt sustainability being prepared for the Annual Meetings includes an assessment of the

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methodology for assessing the need for, and amount of, additional assistance (or topping up) at the Completion Point. We committed to work with other donor countries and IFIs to ensure that the need for financial resources for this purpose is inet. Going forward, IFIs need to ensure that forecasts of debt sustainability are made on the basis of prudent and cautious assumptions about growth and exports. Finally, we agreed on the need for bilateral donors to consider financing HIPCs and HIPC "graduates" primarily through grants for a sustained period, and to refrain from supporting unproductive expenditures. We will also call upon multilateral development funds — which are in many cases the main creditors of HIPCs — to make appropriate use of grants in delivering assistance to HIPCs and HIPC graduates.

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Appendix K

The Kananaskis Summit Chair's Summary Kananaskis, 27 June 2002

We met in Kananaskis for our annual Summit to discuss the challenges of fighting terrorism, strengthening global economic growth and sustainable development, and building a new partnership for Africa's development. This was our first meeting since the terrible events of September 11. We discussed the threat posed to innocent citizens and our societies by terrorists and those who support them. • We are committed to sustained and comprehensive actions to deny support or sanctuary to terrorists, to bring terrorists to justice, and to reduce the threat of terrorist attacks. • We agreed on a set of six non-proliferation Principles aimed at preventing terrorists — or those who harbour them — from acquiring or developing nuclear, chemical, radiological and biological weapons; missiles; and related materials, equipment or technologies. We called on other countries to join us in implementing these Principles. • We launched a new G8 Global Partnership Against the Spread of Weapons and Materials of Mass Destruction, under which we will undertake cooperative projects on the basis of agreed guidelines. We committed to raise up to US$ 20 billion to support such projects over the next ten years. • We agreed on a new initiative with clear deadlines — Cooperative G8 Action on Transport Security — to strengthen the security and efficiency of the global transportation system. We discussed the outlook for global economic growth and employment, and the challenges of poverty reduction and sustainable development. We expressed confidence in our economies and in the prospects for global growth. We agreed on the fundamental importance of strong political leadership for the success of economic reforms in our own economies. We support emerging market countries, including Brazil and others in Latin America, in their efforts to implement sound economic policies. • We agreed to resist protectionist pressures and stressed our commitment to work with developing countries to ensure the successful conclusion of the Doha Development Agenda by January 1, 2005. • We agreed on the importance of reaffirming the Doha Agenda and the Monterrey Consensus and to work at the upcoming Johannesburg Summit to produce meaningful partnerships for sustainable development and measurable results. We

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recognized that climate change is a pressing issue that requires a global solution, and we discussed the problem of deforestation. • We will fund our share of the shortfall in the enhanced HIPC initiative, recognizing that this shortfall will be up to US $1 billion. We stressed the importance of good governance in countries benefiting from HIPC debt relief. • We reviewed implementation of the DOT Force's Genoa Plan of Action and welcomed its initiatives to strengthen developing countries' readiness for e-development, such as the e-model to improve the efficiency of public administrations and to enhance the transparency of national budgeting. • We adopted a series of recommendations to assist developing countries to achieve universal primary education for all children and equal access to education for girls. We agreed to increase significantly our bilateral assistance for countries that have demonstrated a strong and credible policy and financial commitment to these goals. We met with the Presidents of Algeria, Nigeria, Senegal and South Africa, and the Secretary General of the United Nations, to discuss the challenges faced by Africa and the G8's response to the New Partnership for A frica's Development (NEPAD). • We adopted the G8 A frica A ction Plan as a framework for action in support of the NEPAD. We agreed to each establish enhanced partnerships with African countries whose performance reflects the NEPAD commitments. • Assuming strong African policy commitments, and given recent assistance trends, we believe that in aggregate half or more of our new development assistance commitments announced at Monterrey could be directed to African nations that govern justly, invest in their own people and promote economic freedom. • We underlined the devastating consequences for Africa's development of diseases such as malaria, tuberculosis and HIV/AIDS. In addition to our ongoing commitments to combat these diseases, we committed to provide sufficient resources to eradicate polio by 2005. • We agreed to work with African partners to deliver a joint plan by 2003 for the development of African capability to undertake peace support operations. • We will continue our dialogue with our African partners. At our next Summit, we will review progress on the implementation of the G8 A frica A ction Plan on the basis of a fmal report from our Personal Representatives for Africa. Finally, we discussed several regional issues that have significant implications for international peace and security. • We stressed our commitment to work for peace in the Middle East, based on our vision of two states, Israel and Palestine, living side by side within secure and recognized borders. We agreed on the urgency of reform of Palestinian institutions and its economy, and of free and fair elections. • We support the Transitional Authority of Afghanistan. We will fulfil our Tokyo Conference commitments and will work to eradicate opium production and trafficking.

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• We discussed the tensions between India and Pakistan. We agreed that Pakistan must put a permanent stop to terrorist activity originating from territory under its control. Both countries should commit to sustained dialogue on the underlying issues that divide them. We welcomed the offer of the President of France to host our next Summit in June 2003. We agreed that Russia will assume the 2006 G8 Presidency and will host our annual Summit that year.

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Appendix L

Statement by G7 Finance Ministers on the Framework for the International Monetary Fund Program for Brazil 8 August 2002

John Manley, Deputy Prime Minister of Canada and Minister of Finance, and Chair of the G7 Finance Ministers, released today the following statement on behalf of his G7 colleagues: "We welcome the agreement on a framework reached yesterday by the Government of Brazil and the IMF for a new Fund program, supported by sound macroeconomic policies and institutional arrangements in Brazil, which should help restore market confidence. We look forward to the presentation to the IMF Board of the final agreement based on prudent fiscal and monetary policies and an overall economic program that lays the basis for strong economic growth."

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Appendix M

Statement of G7 Finance Ministers and Central Bank Governors Washington DC, 27 September 2002

Economic growth in our countries is continuing, though at a more moderate pace than earlier this year. We recognize that risks remain. We are committed to sound economic policies and structural reforms, and to working together to improve corporate disclosure, enhance corporate accountability, and strengthen the independence of auditing. We are confident that these policies, accompanied by continued vigilance and cooperation, will strengthen growth in coming months, and thus support sustained expansion. We will continue to monitor exchange markets closely and cooperate as appropriate. Many emerging markets, buttressed by progress towards sound domestic policy frameworks, are managing well in the current environment. But some face considerable challenges. We urge all countries to implement strong policies to restore sustained growth and reduce external vulnerabilities. We welcome Brazil's continued commitment to sound policies and are ready to support Argentina, through the IMF, in the context of a sustainable program. We are implementing the G7 April Action Plan on crisis prevention and resolution. We continue to work with the IMF to improve our tools for crisis prevention. We also will continue to work with the IMF to implement criteria and procedures to limit official sector lending to normal access levels except where extraordinary circumstances justify an exception. Important progress has been made towards a market-oriented, contractual approach to sovereign debt restructuring. We welcome the private sector and issuing countries' support for placing collective action clauses in sovereign bond issues. We agree that any sovereign that issues bonds governed by the jurisdiction of another sovereign should include such clauses. We welcome the work done to date by the IMF on a statutory sovereign debt restructuring mechanism, and look forward to considering a concrete proposal at its spring meeting. We reaffirm our strong commitment to combat terrorist financing. We applaud the agreement by the IMF and World Bank on a comprehensive methodology to conduct assessments of the Financial Action Task Force's (FATF) anti-money laundering and terrorist financing recommendations and look forward to the formal endorsement of this methodology at FATF's upcoming plenary. We urge the FATF to develop guidance on combating the abuse of non-profit organizations, alternative remittance systems, and fund transfers, as well as making measures for freezing assets more effective. We call on the IMF, World Bank, and the UN to work with the FATF in its identification of jurisdictions that require assessments and technical assistance. We also reviewed

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developments on procedures to exchange bank and other information for all tax purposes, and we are united that further progress is required by some countries. We support increased development assistance based on good policy performance and measurable results. We support the calls made at Monterrey and Johannesburg to combat global poverty and promote sustainable development, growth, and fiscal sustainability through a new and effective partnership between developed and developing countries. We welcome the IDA, AfDF, and GEF replenishments which should make available $30 billion to developing countries, in particular in Africa. We are following through on the Kananaskis commitment to bear our share of the shortfall of up to $1 billion in the financing of HIPC. Each of us will be stating our contribution in the near future and call on other creditor countries to join us. We urge developed and developing country members of the WTO to make substantial progress in multilateral trade negotiations and to reduce significantly trade barriers to global economic growth and poverty alleviation. We call on international donors to expedite the delivery of assistance that supports the budget of the government of Afghanistan and that achieves visible reconstruction.

G7 Combating the Financing of Terrorism: First Year Report, Press Release With the one year anniversary of the tragic events of September 11, 2001, cutting off the financing of terrorism remains a key element of the fight against terrorism. In October 2001, G7 Finance Ministers issued an Action Plan to Combat the Financing of Terrorism and pledged to work with the broader international community to achieve results. The Plan included immediate actions to stop the flow of terrorist funds as well as structural changes to guard against the use of the international financial system for the financing of terrorism. On February 9, 2002, Ministers discussed their ongoing efforts in this area and issued a follow-up Action Plan noting the progress to date and setting out further measures needed. This report describes the wide range of measures taken to successfully implement the G7 Finance Ministers' Action Plan. Stopping the Flow of Funds to Terrorists The Action Plan called for immediate and concerted international action to freeze terrorist assets, consistent with provisions of the relevant United Nations Security Council Resolutions and the International Convention for the Suppression of the Financing of Terrorism. Since September 11, over 160 countries and jurisdictions have taken concrete action to freeze terrorist assets, and approximately US $112 million in terrorist-related funds has been frozen worldwide. Over 200 countries and jurisdictions have joined the G7 in expressing support for the fight against terrorist financing.

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The UN Security Council Committee, established pursuant to UNSC Resolution 1267, currently lists 313 individuals and entities whose financial assets must be frozen by member countries. In keeping with the framework of UN Security Council Resolution 1373, many individual countries, as well as the European Union, have also identified and listed terrorists for the purpose of applying sanctions. G7 Finance Ministers have, in addition to promoting broad participation in freezing actions, sought to improve the coordination of these activities among G7 countries. Significant progress has been made through the cooperative efforts of finance, foreign affairs, justice, law enforcement and intelligence officials. G7 countries will continue to develop mutual understanding of the information needed to support freezing actions, the nature of the actions that can be taken in each country, and the time needed to take such actions. Building on these efforts, G7 Finance Ministers announced, on April 19, 2002, the first joint G7 identification of terrorist entities and individuals and coordinated asset freezing in all G7 countries. These achievements have been made possible by the extraordinary efforts of financial regulators and institutions, which have worked with the relevant authorities to ensure that the assets of listed terrorists are identified and frozen. With the ultimate aim of countering all terrorist activities, the G7 will work closely together in targeting, disrupting, and closing down sources of terrorism financing. G7 countries will continue to take freezing actions against terrorist assets, and to reach out to and work cooperatively with other international partners toward ensuring that terrorist assets do not flow through the international financial system. International Standards to Guard A gainst Terrorism Financing The G7 Action Plan promoted the development and implementation of international standards to combat terrorist financing in a number of ways, including by calling for the vigorous implementation of the relevant UN instruments and by asking the Financial Action Task Force on Money Laundering (FATF) to develop special recommendations to deal with terrorist financing. It also encouraged the International Monetary Fund (IMF) and the World Bank to quickly complete their collaborative work with the FATF on a comprehensive framework for assessing compliance with standards against money laundering and terrorist financing. Implementation of United Nations Instruments United Nations Security Council Resolution 1373 requires that all UN members criminalize the financing of terrorism and refrain from providing any form of support to those involved in terrorist acts. G7 countries are among the 175 UN meinbers that have reported to the UN Counter-Terrorism Committee on the steps taken to implement Resolution 1373. The Committee is following up with the 15 members that have not yet submitted reports. The Committee's review of country reports will help identify areas in which further action is needed.

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All G7 countries have signed the International Convention for the Suppression of the Financing of Terrorism, and have either ratified it or are taking steps to enable them to do so quickly. Over 130 countries have now signed the Convention and 45 countries have ratified it. FATF Special Recommendations On October 31, 2001, the FATF issued eight Special Recommendations on Terrorist Financing. In April, G7 Finance Ministers committed to ensuring that legitimate institutions, organizations, and networks are not misused by terrorists and their supporters and, in this regard, we welcome the work underway to develop guidance on combating the abuse of non-profit organizations, alternative remittance systems, and fund transfers, as well as making measures for freezing assets more effective. As called for by the FATF's plan of action, all FATF countries have completed a selfassessment of their compliance with the Recommendations and are committed to coming into compliance. The FATF, the G7, and the UN Counter Terrorism Committee have encouraged all non-FATF countries to comply with the standards and to accept the FATF invitation to participate in the self-assessment exercise on the same terms as FATF members. To date, over 100 jurisdictions have submitted self-assessment questionnaires to FATF. Regional FATF-style bodies are contributing to the widespread implementation and assessment of international standards against terrorist financing. Most such regional bodies have formally expanded their mandates to encompass the fight against terrorist financing and, in particular, to actively oversee and facilitate the implementation of the FATF Special Recommendations by their members. Identification of Countries that Lack Appropriate Measures At their Plenary meeting of June 19-21 2002, the FATF agreed to initiate a process to identify jurisdictions that lack appropriate measures to combat terrorist financing, and discussed next steps to encourage cooperation from such countries. This is an important element of the international community's response to countries that fail to take appropriate action on a timely basis. To be effective and constructive, the FATF process must encourage and support the rapid implementation of standards and, at the same time, recognize that some jurisdictions will require technical assistance to enable them to make the necessary improvements. Accordingly, G7 Finance Ministers welcome FATF's efforts to develop a process to identify countries that lack appropriate measures to counter terrorist financing for follow-up assessment and/or technical assistance by the IMF, World Bank and the United Nations. It is essential that these international bodies lend their full support and co-operation to this exercise in particular, to ensure adequate technical assistance. IMF and World Bank Initiatives The IMF and World Bank have significantly intensified their involvement relating to anti-money laundering and combating the financing of terrorisin. Since February 2002,

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the IMF has included the examination of countries' anti-money laundering and combating the financing of terrorism measures in the course of their Financial Sector Assessment Program (FSAP) assessments and their assessments of offshore financial centres' legal, regulatory and supervisory systems. These assessments have helped to identify weaknesses, which the IMF and World Bank are helping countries to address. In mid-summer 2002, IMF and World Bank Executive Boards endorsed proposals to further enhance their contributions to the international effort on anti-money laundering and the combat against the financing of terrorism (AML/CFT). The Boards agreed to add the FATF 40 + 8 to the list of standards to be assessed, to endorse methods for undertaking assessments and preparing reports on AML/CFT, and to support a 12 month pilot program. The FATF, in collaboration with the IMF and World Bank, is finalizing a comprehensive and unified methodology for assessing implementation of AML/CFT standards based on FATF Recommendations. The G7 supports these efforts and looks forward to full integration of comprehensive anti-money laundering and combating the financing of terrorism assessments into Fund and Bank operations. Technical A ssistance

The requirement that all countries respond quickly to the threat of terrorism by implementing measures called for by the UN and the FATF means that the need for technical assistance is likely to be more pressing than ever before. Efforts are underway to coordinate and deliver technical assistance quickly — most notably by the UN Counter-Terrorism Committee and by the World Bank and IMF. The UN Counter-Terrorism Committee has begun to compile a directory of available assistance. The World Bank and IMF are establishing a coordination mechanism for technical assistance for both anti-money laundering and combating the financing of terrorism among various stakeholders. G7 countries will provide technical assistance to committed and willing countries on a bilateral basis as well as support the efforts of the international organizations and mechanisms noted above.

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Appendix N

G8 Development Ministers Meeting, Chair's Summary Windsor, 27 September 2002

G8 Ministers and senior officials responsible for development cooperation met in Windsor on September 26-27. Our meeting reflects the commitment of the G8 to eradicating poverty, promoting sustainable development and building a more prosperous, equitable, and democratic world for all. At several international conferences this year in Monterrey, Rome, Kananaskis, and Johannesburg, the international community reaffirmed its support for a new partnership between developing countries and donors — a partnership based on mutual accountability and responsibility for achieving results. Building on these commitments, we discussed the responsibility we have to ensure that our development programs are used in the most effective manner, and to leverage private investments that can produce tangible progress towards the achievement of the internationally-agreed upon development goals in the Millennium Declaration. We believe that development can only succeed when developing countries themselves lead and manage their own development strategies, focused on achieving the international development goals. Several G8 members have recently pledged to significantly increase their development assistance programs in response to enhanced performance by developing countries. This provides us with a unique opportunity to invest significant resources in country-owned development strategies, as articulated in developing countries' Poverty Reduction Strategy Papers, or PRSPs. We will enhance our partnerships with developing countries that are demonstrably committed to reducing poverty and to the principles of good governance and democracy. We agreed that more needs to be done in many countries to engage civil society in these strategies. Donors have an important role to play in fostering such engagement and in building institutional capacity within developing countries. We are committed to reducing the administrative burden that our development programs may impose on developing countries. At the same time, we must reinforce our focus on results and improve our ability to measure them. We will continue to cooperate closely within the Development Assistance Committee (DAC) to improve the coordination of our aid programs and harmonize our procedures around countries' own systems wherever possible. As important as official development assistance is, development cooperation entails much more. Our development assistance should contribute to an enabling environment that will increase access to global knowledge and resources. We have a responsibility

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to ensure that our commitment to poverty reduction reflects a comprehensive approach and that our aid, trade, and investment policies are coherent. Trade, in particular, can have a profound impact on economic growth and development. We are committed to building the capacity of developing countries to engage and prosper through the multilateral trading system, and we will continue to support the Integrated Framework for Trade-Related Technical Assistance. We also support the development of trade relations between developing countries on a regional basis. We will continue our efforts to support the achievement of development objectives in the Doha Round of trade talks. Rural development, which includes agriculture, the environment, water-resource management and sanitation are indispensable to poverty reduction and sustainable development. In the context of country-led development strategies, we will ensure that these key priorities receive greater attention and are considered in an integrated manner. We will work to reverse the decline in donor support for agriculture and rural development that has taken place over the last decade. We will use ODA resources to meet the water and sanitation targets adopted in Johannesburg, and leverage greater private-sector investment in this area. We discussed how we will carry forward the important decisions reached by G8 leaders in Kananaskis. We will work closely with the leaders' Personal Representatives for Africa to ensure the implementation of the G8 Africa Action Plan. The New Partnership for Africa's Development (NEPAD) is an African-led comprehensive plan that lays out a vision to end Africa's marginalisation. It is an offer of partnership between Africans and the developed world. We agreed that the development of Africa will depend largely upon what Africans do, primarily at a national level, to implement the commitments in this comprehensive plan. Our agencies will support their efforts through the G8 Africa Action Plan our leaders announced at Kananaskis. We thank Wiseman Nkulhu and Kwesi Botchwey, two prominent Africans who joined our meeting, for their perspectives on the African Union, the development of NEPAD, and the peer review process. A credible and functional peer review process, as committed to in NEPAD, is key, but we recognize that such a process will take time to develop with the full support of Africans themselves and that NEPAD is more than the peer review process. We will work to counter scepticism and cynicism about this new partnership, which risk undermining its success. We are confident in the future of those African countries that take their NEPAD commitments seriously. We are gravely concerned about the drought in Southern Africa and Ethiopia, and we are responding to these crises. We agreed that international efforts will be successful only with the cooperation of local governments. We considered the daunting challenge that HIV/AIDS poses in Africa. We took stock of the work of the Global Fund to Fight AIDS, Tuberculosis and Malaria, and the progress that the Fund has achieved in less than a year since its establishment. We

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agreed on the importance of the Fund to address malaria, tuberculosis, and HIV/ AIDS in a balanced manner. We underscored the importance of complementing the Global Fund through our bilateral programs, in order to build health systems and invest in those interventions that have a proven record of success. We strongly believe that allocations from the Fund should support and respect country-led programs and be results-based. We acknowledged the importance of on-going discussions with the pharmaceutical industry to promote the availability and affordability of life-saving medicines. We agreed to take a number of steps to implement the recommendations of the G8 Education Task Force, which were endorsed by leaders at Kananaskis. We pledged to significantly increase bilateral assistance to countries committed to achieving universal primary education and gender equality in education. We will also work in partnership with other bilateral and multilateral donors to ensure the successful implementation of the Fast-track initiative in those countries committed to reform and in need of incremental resources. We noted as well the importance of supporting those countries with large populations not in school. Canada has agreed to co-chair a Donors' meeting together with the Netherlands, as called for in the Task Force report, following the Education for All High-Level Group meeting in Abuja, Nigeria, on November 19-20. Looking forward to the Evian Summit in France in June 2003, we pledged to assist leaders in addressing the key development challenges facing the world community. We will also work with other G8 Ministers who, as part of their portfolios, must consider the needs of developing countries.

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Appendix 0

G20 Finance Ministers and Central Bank Governors Meeting, Delhi Communiqué 23 November 2002

1. We, the Finance Ministers and Central Bank Governors of the G20, held our Fourth Meeting today on 23rd of November 2002 at New Delhi, India. We reviewed the global economic situation and outlook, and deliberated on matters concerning crisis prevention and resolution, globalisation, the challenge of achieving sustained growth and development and combating the financing of terror. We reaffirm our conviction that increasing integration of the global economy is producing benefits, including improvement in living standards and reduction of poverty, and our commitment to maximize these benefits through domestic policies, strong institutions, and enhanced international cooperation.

Economic Situation and Financial Stability 2.

3.

We met against the backdrop of continued uncertainty concerning the global economic outlook. The global economy faces significant challenges and problems associated mainly with slower than expected recovery and heightened risk aversion. However, we have confidence in the underlying prospects and potential of our economies, and in our capacities to achieve higher growth and prosperity. Recent events reaffirm our belief that sound macro-economic policies, strong institutions and good governance are critical for realising this potential while containing vulnerability to financial crises. Stronger and more effective international institutions can contribute significantly towards the creation of a robust global economic environment, thereby complementing national efforts for sustained growth and prosperity. Interdependence among national economies and increased integration of financial markets have brought significant advantages and enormous opportunities for enhanced growth in many countries. However, countries have become more exposed to external shocks and susceptible to the consequences of inappropriate domestic policies. Recent experience has demonstrated the need to strengthen our capacity to prevent financial crises and to develop efficient, expeditious, and socially and economically effective responses to a fmancial crisis when it occurs.

298 4.

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Sustaining Global Growth and Development

We believe that effective and accountable International Financial Institutions (IFIs) and worldwide surveillance are essential for a healthy global financial system. Sustainable exchange rate regimes, prudent asset-liability management, and implementation of agreed standards and codes are important components of an effective strategy for crisis prevention. We agreed on the need for sound national financial systems, effective supervision, and corporate governance in line with global best practice. We also agreed that capital account liberalisation should proceed in an appropriately sequenced manner. A more orderly process of crisis resolution would help to mitigate the social and economic costs of financial crises and to maintain, or restore more quickly, access to international capital markets. We therefore support further work by the international community, in consultation with debtors and creditors, on comprehensive and market compatible approaches to crisis resolution, including collective action clauses, a sovereign debt restructuring mechanism (SDRM), and a code of good practices. We note that proposals are to be tabled by the IMF at the Spring Meetings, 2003.

Globalisation, Trade and Development We reviewed the nature and pace of economic integration, which is at the heart of globalisation, and its implications for the world community. We agreed that globalisation has been delivering rising living standards generally, including to many of the world's poor. The benefits of globalisation can be maximized, and associated risks mitigated, through the pursuit of appropriate domestic policies and a healthy external environment. The IFIs also have a role to play in this process. Our own experience, as revealed by the G20 case studies which are to be published shortly, and by the evidence presented at the Globalisation Workshop in Sydney, shows that strong institutions, a climate that fosters savings and investment, transparency, and the rule of law, coupled with increased investments in infrastructure and human capital in developing countries are essential ingredients for promoting growth and reducing poverty. 7. The process of globalisation, however, has not yet delivered its potential in reducing poverty in some of the world's poorest countries. Reduction of the remaining trade and related barriers and phasing-out of trade-distorting subsidies would contribute to spreading further the benefits of globalisation, including to the poorest developing countries. Trade-related technical assistance is also important to support developing countries' capacity building efforts. 8. Recalling the partnership between developed and developing countries, reflected in the Monterrey and Johannesburg Conferences, we reaffirm our shared commitment to achieving the Millennium Development Goals, particularly in Africa through supporting NEPAD. We recognize that development assistance

6.

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can enable poorer nations to build capabilities for exploiting the benefits of more integrated markets, reduced economic distance between nations and greater exchange of global information and knowledge. Development assistance can play a valuable catalytic role, including in the provision of global public goods. We welcome the increases in international development assistance recently announced by some countries recognising the need for higher ODA. We also welcome the commitment made by the Development Committee at its September meeting this year to the implementation and full financing of the enhanced HIPC initiative.

Combating the Financing of Terrorism, and Other Abuses of the Financial System 9.

When we last met in Ottawa, Canada, in November 2001, we resolved to deny terrorists and their associates access to, or use of, our fmancial systems. While that meeting was shadowed by the events of September 11, 2001, today the recent tragic events in Bali and Moscow reinforce our resolve to combat terrorism and those that would fund it. To this end, we reviewed the progress made in implementing our Action Plan, including the freezing of terrorist assets, implementation of intemational standards, exchange of information, provision of technical assistance, and reporting on our actions. We also agreed to continue our efforts to eliminate other abuses of the financial system, particularly money laundering. We pledged to carry forward our work in this regard, through support of the activities of International Financial Institutions (IFIs) and other relevant international fora, and through appropriate domestic actions. We will review progress on these matters at our next meeting.

2003 Chairmanship 10. We welcome Mexico's assumption of the chairmanship of our group in 2003 and look forward to our next meeting to continue our work toward a more stable, prosperous, and equitable global economy.

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Index

11 September 6, 93, 124, 177, 185, 207, 209, 211,212,213,217,218,222,231, 232, 238, 252, 255, 260-261, 281, 288 Abuja 295 Accenture 71 accounting 108, 163, 223 Action Plan to Combat the Financing of Terrorism 251, 252-255, 260, 288 Afghanistan 177, 186, 211, 230, 233, 261, 282 Africa 118, 121-129, 131-140, 146, 213, 229, 231, 245, 263-276 agriculture 126 bureaucracy 134, 135, 138 civil society 10, 137, 149 democracy 209, 210-211, 220-222, 235 digital divide 66, 67 foreign affairs 134 French-speaking 141 governance 124 health 237 infectious disease 103 integration 123, 234 Kananaskis Summit, 2002 12, 207, 208, 210, 214, 216, 233 market access 108, 112, 134, 208, 236 poverty reduction 6 war 13, 124, 224 Africa Action Plan l, 4, 9, 11, 12, 13, 117-129, 150, 208, 210, 219, 220-221, 222, 229, 230, 232, 234, 235, 236, 238, 239, 247, 294 agriculture 275-276 AIDS 125, 273-274 capacity building 267, 269, 270 conflict prevention 220 debt relief 125, 271-272 digital divide 273 donor countries 125 education 236,272-273 electoral processes 267 environment 125 gender equality 268, 272-273, 275 governance 123-124 growth 269-271

health 273-275 human rights 268 implementation 148, 150 information and communications technology 273 institutions 267-269 market access 125, 270 New Partnership for Africa's Development 121 official development assistance 221 peace and security 123-124 peer review 268 polio 237 standard setting 270 sustainable development 237, 269-271 trade 269-271 water 276 Africa Growth and Opportunity Act (United States) 128 African Capacity Building Foundation 267 African, Caribbean, and Pacific Group of States 136, 147 African Development Foundation 288 African Economic Community 150 African Recovery Programme 141 African Regional Technical Assistance Centres 267 African Union 13, 110, 123, 128, 141, 146, 148, 235, 294 Agenda 21 141, 143, 144 Agreement on Trade-Related Aspects of Intellectual Property 138 agriculture l, 4, 74, 75, 81, 82, 108, 112, 118, 124, 126, 139, 145, 150, 211, 216, 234, 236, 270, 275-276, 294 aid 3-4, 9, 13, 99, 101-103, 107, 110, 122, 124, 139, 160, 164, 211, 234, 235, 237, 239 AIDS 13, 103, 105, 110, 118, 124, 126, 128, 131, 149, 150, 216, 260, 274, 282, 294-295 aircraft industry 20, 25 airline industry 21, 25 Al Qaeda 14, 209, 211, 212 Alberta 217

322

Sustaining Global Growth and Development

Alcala, Francisco 55 Algeria 122, 123, 128, 230, 282 American colonies 192-195 Americas 66, 67, 213, 223 Amoako, K.Y. 121 Amsterdam 160 Anderson, Frances 49 Angola 124, 265 Annan, Kof1 208, 214, 220, 230, 231, 232, 237, 239, 282 antidumping 4, 81 antiglobalisation 82, 83, 84, 86-91, 91, 93, 95, 217, 231 Arafat, Yassar 233 Argentina 4-5, 14, 100, 106, 164, 167, 168, 196, 199, 213, 223, 224, 235, 251, 256, 259, 287 pesification 196 arms 128, 266 Armstrong, Philip 44 Arnal, Elena 49 ASEAN 198 Asia 186-187, 197, 213. See also East Asia; Southeast Asia competitiveness 22, 25 digital divide 66, 67 emerging economies 93 infectious disease 103 monetary union 191-202 regionalism 83 tariffs 112 textiles 84 World Trade Organization 84 Asia-Pacific Economic Cooperation 135 Asian Development Bank 164 Asian financial crisis. See financial crisis, Asia AT&T 21 Atangana-Amougou, Jean-Louis 150 Australia 84, 89, 298 Austria 128, 194 automobile industry 25, 26 automobiles 20, 24 Aznar, Jose Maria 229, 231 Bagehot, Walter 169 Baily, Martin 55 Baldwin, John 45 Bali 237, 299 Balkans 230 bananas 86, 129 Bangalore 21

Bangladesh 106 Bank for International Settlements 174, 178 Bank of Japan 14, 184-185 bank restructuring 259 banking 10, 14, 25, 57, 108, 162, 184 Barlow, Maude 88 Barro, Robert 50 Basle Committee on Banking Supervision 162, 166, 253 Bassanini, Andrea 55 Bauer, Peter 75 Bayne, Nicholas 12, 73, 128, 217 beef hormones 86 beer production 24 Belgium 128 Benin 106 Berlin 161 Berlusconi, Silvio 231, 233 Bernstein, Jeffrey 40 biotechnology 25, 275 Bird, Graham 198 Blair, Tony 127, 217, 229, 231, 233, 236, 237 Blanchard, Olivier 112 Blustein, Paul 157, 159 Bolle, Stéphane 150 Bonn Summit, 1978 207, 215 Bonn Summit, 1985 207 Bono 222 Botchwey, Kwesi 294 Botswana 128 Boughton, James 158 Bouteflika, Abdelaziz 123, 128, 230 Bracciolini, Poggio 101 Brady plan 161 Brazil 4-5, 14, 100, 106, 164, 167, 168, 170-171, 173, 213, 223, 224, 235, 281, 285, 287 Brazzaville 128 Bretton Woods 10, 127, 147, 155, 156, 171, 199 British colonies 192-195 Brown, Gordon 221 Brundtland Report 10 Brussels 83 Brussels Conference 142 Brynjolfsson, Erik 43, 49, 55 BULOG 157 Burkina Faso 106 Burnside, Craig 3 Bush administration (George Bush) 89 Bush administration (George W. Bush) 93, 101, 185, 221

Index

Bush, George W. 91, 108, 112, 128, 168, 213, 215, 216, 218, 219, 220, 229, 231, 232-233, 234, 236, 237, 239 Kananaskis Summit, 2002 216 Putin, Vladimir 231 business sector 37, 54, 56, 108, 265 Canada 37, 38, 39, 40, 44. 45, 54, 55 Canadian 37-38 G7 35 United States 35, 36, 37, 39, 41, 42, 45, 57 Calgary 229, 231 Camdessus, Michel 238 Cameroon 106, 128 Canada 27, 28, 222, 241, 245, 247 Africa 125, 128, 211, 212, 221, 235 agriculture 4 as host 209, 210, 214-217 Britain 127 business sector 54 competitiveness 22-23 digital divide 67 economy 6 education 50, 51, 236 environment 91 environmental nongovernmental organisations 88 Europe 127 exports 51 Genoa Summit, 2001 210 gross domestic product 30, 48, 54 growth 212, 224 imports 51 information and communications technology 2, 66 Kyoto Protocol 89 labour productivity 2, 8, 36-37 least developed countries 126, 129 manufacturing 52, 55 market access 236 Marshall Plan 118, 127 multifactor productivity 30 Multilateral Agreement on Investment 88, 91 official development assistance 221, 234 productivity growth 35-60 research and development 53 textiles 212 trade liberalisation 84 Canada-U.S. Free Trade Agreement 51 Cancun 215

323 capacity building 267, 269, 270, 298 capital 2, 25, 26, 30, 32, 33, 46, 47, 55, 59, 105, 107, 109, 136, 140, 158, 161, 164, 169, 170, 178, 179, 184, 186, 198, 200, 259, 269 human 2, 9, 37, 47, 50-52, 68, 72, 103, 136, 137, 140, 256, 298 natural 140 physical 2, 26, 47 political 11, 133, 209, 213-214 social 137, 139, 140 capital account convertibility 192, 197 capital account liberalisation 138, 298 capital deepening 29-31, 42, 43, 44, 45, 59 capital flight 185, 210, 234 capital flows 73, 135, 155, 167, 170, 173, 223 capital-labour ratio 29, 42, 59 capitalism 82, 95, 99, 101, 108, 111, 160, 164, 211 Caribbean economies 85 Cavallo, Domingo 199 Central Africa 150 Central African Bank 150 Central African Republic 106 Chabal, Patrick 129 chemical industry 20, 25 Chiang Mai Initiative 188, 198 China 11, 93, 106, 187, 191-202 banking 192, 200 dollarization 197 financial services 197 growth 212 Japan 185 U.S. dollar 191 United States 85, 198 World Trade Organization 84 Chirac, Jacques 12, 125, 213, 216, 217, 222, 224, 229, 231, 237, 238 Chrétien, Jean 11, 150, 209, 213, 214-217, 219, 221, 229, 231, 233, 237 Chrisliansen, Karin 128 Chrysler 21 Ciccone, Antonio 55 cigarette production 24 Citicorp 161-162 civil rights. See rights: civil civil society 13, 74, 92, 95, 96, 133, 135, 137, 140, 215, 216, 223, 229, 231, 235, 265, 266 Africa 10, 149 Millennium Round 83

324

Sustaining Global Growth and Development

World Trade Organization 86-91 Clinton administration 85, 88, 93, 157 Clinton, Bill 85, 90, 91, 157, 213 closed economies 2 Cobb-Douglas production technology 59 Coca-Cola 19 Colecchia, Alessandra 46 Cologne Summit, 1999 207, 277 financial architecture 5 protests 86 Colombia 106 colonialism 122 Columbia University 13, 87 Commission for Labor Cooperation 89 Commission on Environmental Cooperation 89 Committee on Payment and Settlement Systems 162 Common Agricultural Policy 4, 75, 126 Common Market for Eastern and Southern Africa 135 Commonwealth 122, 210, 211 communism 120, 124 Communist Party (Russia) 213 competition policy 85 competitiveness 19, 19-33, 74, 108, 147. See also individual countries competitiveness index 22-23 computer hardware 41, 43, 44, 46 computer industry 25, 45 computer software 24, 41, 43, 45, 46 computerisation 26, 27 computers 20, 21, 33, 46, 52, 66 conditionality 6, 156, 158-160, 167, 169, 171, 172 conflict prevention 124, 146, 220, 230, 234, 265-267 Congo 124, 128, 224, 234, 265 Congo Basin Initiative 266 construction 54 contagion 14 Convention on Bribery 268 Cooperative G8 Action on Transport Security 218, 281 Copps, Sheila 91 corporate governance 6, 146, 147, 149, 150, 162-163, 223, 252, 264, 267 corporate scandals 223 corruption 99, 109, 121, 147, 268 Costa Rica 106, 173 Cotonou Agreement 147

Council of Canadians 88 Council on Economic Financial Policies (Japan) 181 Council on Foreign Relations 85 countervailing 81 crisis management 5, 6, 102, 110, 111, 155, 156, 163-164, 166, 168, 171, 212, 298 crisis prevention 6, 256, 259, 287, 297, 298 crony capitalism 164 cultural diversity 141, 149 currency board 195, 199, 201, 202 customs union 120, 270 Daimler-Benz 21 dairy 129, 236 Dakar 149, 272 Dallas 89 David, Paul 49 De Waal, Alex 128 debt relief l, 5, 6, 11, 103-105, 122, 124, 125, 150, 161, 211, 212, 220, 221-222, 234, 236, 238, 260, 271-272, 277-279, 282 debt restructuring 5, 170, 172, 251, 257 debt service 103, 104 deficit 6, 10, 85, 93, 149, 156, 159, 160, 164, 171, 182, 185, 223, 224 deflation 6, 14, 184, 195, 224 democracy 13, 89, 100, 109, 122, 127, 129, 146, 147, 150, 208, 210-212, 214, 216, 218, 223, 235, 263, 264, 267, 293 Democratic Party of Japan 180 Denmark 128 Denver Summit, 1997 223, 238 deregulation 25, 183 desertification 149 Deutsche Telekom 26 Deutschmark 199 developed countries 5, 6, 23, 66, 67, 68, 100, 101, 104, 108, 111, 138, 139, 143, 149, 260, 288. See also industrialised countries developing countries 4, 5, 8, 9, 12, 21, 23, 65-72, 74-75, 84, 93, 94, 100-108, 111, 112, 131, 138, 141, 161, 214, 230, 235, 256, 260, 269, 270, 281, 282, 288, 293, 294, 295, 298 development l, 4, 5, 7, 9, 10, 11, 13, 42, 49, 65, 67-73, 75-77, 84, 85, 93,101-103, 109, 111, 123, 124, 131-140, 199, 208-211, 214, 216, 220, 222, 224, 238, 239, 251, 256, 260, 263-266, 270, 272, 273, 275, 276, 278, 281, 282, 288, 293-295, 297

Index

Development Assistance Committee 268, 271, 293 diamonds 266 dictatorships 101 digital divide 8, 65, 66, 73, 74, 150, 210, 247 'Digital Opportunities for All: Meeting the Challenge' 72 Digital Opportunity Initiative 71 Digital Opportunity Task Force. See Dot Force disarmament 209, 218, 219, 265, 266 Doha Round 4, 83,112, 236, 237, 264, 269, 270, 281, 294. See also World Trade Organization: Doha, 2002 dollar (Hong Kong) 193, 194, 195, 196-197, 201 dollar (Taiwan) 197 dollar (U.S.) 11, 14, 120, 156, 161, 164, 184, 192-193, 194, 195, 196-197, 198-201, 202, 212, 223, 224 China 191, 191-192 Dollar, David 3 dollarization 196, 200 Domestic International Sales Corporation 93 Dominican Republic 106 Dot Force 68, 72, 74, 75, 230, 245, 273 Dumas, Mark 55 Dunning, John 24 Durban Summit, 2002 141, 146 Duverger, Maurice 147 e-commerce 8, 27, 65, 67, 68, 69, 70-73, 74, 75 developing countries 66 policy co-ordination 69-70 poverty reduction 70 taxation 67, 68 East Africa 150 East Asia 164, 197, 198, 199, 200, 202 monetary union 191-202 Eastern Europe 13, 119, 186 Economic and Fiscal Policy Council (Japan) 182 Economic Commission for Africa 121, 122, 128, 143, 267, 268 Economic Community of West African States 135 economic imperialism 101 Economic Revitalisation Strategy Panel (Japan) 182 Ecuador 106

325 education l, 2, 13, 50-51, 68, 102, 105, 124, 125, 131, 149, 150, 210, 221, 234, 245, 247, 260, 272-273, 282, 295 Education for All 260, 272, 295 Edwards, Sebastian 168 eggs 129, 236 Egmont Group 252, 253 Egypt 106, 122, 128 Eichengreen, Barry 160, 162, 165, 167, 170, 199 Eldridge, Lucy 58 electricity 26, 49 electronics 20, 46, 55 emerging markets 5, 25, 93, 167, 212, 223, 255, 256-257, 259, 287 Emerging Markets Bond Index 174 employment 25, 54, 110, 111, 179, 281. See also labour; unemployment energy 102, 108, 149, 210 energy ministers. See G8 energy ministers engineering 21 Enhanced Structural Adjustment Facility 164-165 Enron 14, 95, 107, 112 environment 6, 13, 91-92, 95, 110, 111, 126, 136, 141, 142, 145, 149, 210, 235, 247, 294 environmental nongovernmental organisations. See nongovernmental organisations: environmental environmental protection 141, 143, 146, 149, 209 Estonia 68 Ethiopia 106, 124, 128, 294 Ethyl Corporation 91-92 euro 25, 191, 192, 199, 200 Europe 90, 118, 216, 239 Africa 128 Canada 127 competitiveness 22, 24-25 digital divide 66, 67 economy 6 education 124 employment 25 financial crisis, 1997 162 governance 124 growth 8, 21, 33, 14 information and communications technology 33 Kyoto Protocol 186 Marshall Plan 118-121

326

Sustaining Global Growth and Development

monetary union 192 protectionism 107, 112 recession 224 trade 134 unemployment 25 war 124 World Trade Organization 86 European Central Bank 46 European Commission 24, 126, 211, 229 European Economic Community 120, 123 European Free Trade Area 120, 123, 128 European Monetary Union 94, 192 European Payments Union 120 European Union 110, 121, 128, 231, 245, 261, 289 Africa 147, 211 African, Caribbean, and Pacific Group of States 136 agriculture 4, 75, 126 information and communications technology 68 Kyoto Protocol 89 less developed countries 126, 128, 129 market access 236 Multilateral Agreement on Investment 91 official development assistance 234 protectionism 108 South Africa 136 textiles 212 triad 83, 84, 94 World Trade Organization 74, 84, 86 European Union-G8 Summit 224 Evian Summit, 2003 12-13, 14, 126, 217, 224, 237, 238, 295 Africa 12, 125, 148, 222 Evian-les-Bains 12, 224 exchange rates 5, 156-157, 163, 165, 169, 185, 193-195, 197, 198, 199, 298 exports 11, 23, 24, 51, 81, 82, 86, 105, 107, 108, 118, 126, 139, 183, 198, 208, 211, 221, 266, 269, 270, 271, 277, 279 expropriation 196 Extended Fund Facility 174 Extended Threat Reduction Initiative 219 famine 13, 102, 110, 124 farming 106, 108, 275 Feketekuty, Gaza 84 Feldstein, Martin 157 finance ministers. See G7 finance ministers; G8 finance ministers

Financial Action Task Force 163, 252, 253, 255, 261, 287-288, 289, 290, 291 financial architecture 5, 10, 14, 168, 186, 210, 223, 245, 247 financial crisis 10, 100, 155, 161, 172, 184, 212, 223, 255, 287, 297. See also specific countries or regions 1997 157 1997-99 138, 186, 223, 238 2002 5 2003 33 Argentina 4, 164, 168, 213, 224, 256, 287 Asia, 1997 4, 105, 161, 163-164, 166 Brazil 4, 164, 168, 170, 224, 285, 287 Mexico, 1994-95 4, 163, 167, 213 Russia, 1998 4, 164 South America 6 Turkey 168, 213 financial intelligence units 252 financial sector 32, 100, 252, 259, 261 financial sector assessments 255, 291 financial services 55, 57, 197 Financial Services Agency 178, 184 Financial Stability Forum 253, 255, 259 Finland 22, 66, 67 Fiscal Investment and Loan Programme (Japan) 181 Fischer, Stanley 112, 167 Food and Agriculture Organization 102, 110 food industry 20, 26, 119, 126, 157, 270, 275 food security 85, 275, 276 Ford 20 foreign direct investment l, 4, 8, 23, 51, 82, 85, 89, 90-93, 100, 101, 210, 212. See also investment foreign ministers. See G8 foreign ministers Fowler, Robert 215 France 27, 28, 128, 222, 241, 245, 247 Africa 212, 223 agriculture 126, 236 as host 12-13, 14 competitiveness 22-23, 24 deregulation 25 digital divide 67 education 50 elections 213 European Union 83 Evian Summit, 2003 216, 283 Genoa Summit, 2001 210 gross domestic product 30 integration 128

Index

International Monetary Fund 157 Kananaskis Summit, 2002 213, 216 labour productivity 26, 36 multifactor productivity 30 Multilateral Agreement on Investment 91 official development assistance 212 post-World War II 118 productivity growth 46 Francophonie 210 Frankfurt 20 free trade 81, 82, 84, 85, 87, 89, 93, 96, 102, 136, 270 Free Trade Agreement of the Americas 90, 94, 135 Friedman, Brian 55 Gl0 162 G20 297-299 New Delhi, 2002 14 G6Billion 231-232 G7 70, 127, 230 Africa 132 Brazil 170-171 competitiveness 22, 23 financial architecture 5 governance 8 gross domestic product 30 growth 8 information and communications technology 36 International Monetary Fund 10, 157, 159, 168, 171 Japan 183 Kananaskis Summit, 2002 222, 229, 232 labour productivity 27, 35, 36 new economy 27 productivity growth 46 research and development 52 Russia 219 United Nations Security Council Resolution 1373 252 weapons of mass destruction 232 World Economic Forum 23 G7 finance ministers 230, 289. See also G8 finance ministers 1999 5 Halifax, 2002 211-212, 221, 222, 230, 236 Okinawa Summit, 2000 77 Prague, 2000 174 Russia 217 Washington, 2002 14, 255

327 G8 74, 110 11 September 207 Africa 123, 208 aid 101, 102 digital divide 73-76 Dot Force 75 e-commerce 69, 70, 75 gross domestic product 33 infectious disease 103 information and communications technology 74 Japan 183 leadership 208 Okinawa Charter on Global Information Society 74-75, 76 Okinawa Summit, 2000 70 Russia 123, 208, 217-218, 238 terrorism 210 weapons of mass destruction 219 G8 Africa group 230, 233, 238 G8 development ministers, Windsor, 2002 13, 222, 224 G8 Education Task Force 236, 272, 295 G8 energy ministers, Detroit, 2002 230 G8 environment ministers, Banff, 2002 230 G8 finance ministers 183. See also G7 finance ministers G8 foreign ministers, Whistler, 2002 230 G8 health ministers 13 G8 justice and interior ministers, Mont Tremblant, Quebec 230 G8 labour and employment ministers, Montreal, 2002 230 G8 Task Force on Primary Education 229, 230. See also G8 Education Task Force Gabon 128 Gaddafi, Mu'ammer 128 gender equality 221, 235, 268, 272-273, 275, 295 Africa Action Plan 272 Kananaskis Summit, 2002 282 General Agreement on Tariffs and Trade 81, 83, 84, 89, 92, 132 General Data Dissemination System 162 Geneva 12, 92 Genoa Plan for Africa 128, 209, 233 Genoa Plan of Action 72, 282 Genoa Summit, 2001 11, 207, 208, 209, 213, 216, 217, 223, 229, 230, 231, 237, 238, 239, 263 Africa l, 148, 209, 233

328

Sustaining Global Growth and Development

Africa Action Plan 117, 126, 127 Al Qaeda 211 death of a protestor 209 e-commerce 72 New African Initiative 123, 141 genocide 268 Gera, Surendra 52 Germany 27, 28, 119, 128, 194, 241, 245, 247 Africa 212 as host 207 competitiveness 22, 22-23, 24 deregulation 25 digital divide 67 education 50 elections 213, 224, 231 European Union 83 Genoa Summit, 2001 210 gross domestic product 30 International Monetary Fund 157 Kananaskis Summit, 2002 213 labour productivity 26, 36 multifactor productivity 30 productivity growth 46 Russia 217, 230 Ghana 121 Gillette 19, 20 Global Development Compact 260 Global Digital Divide Initiative 71 Global Environment Facility 288 Global Fund to Fight AIDS, Tuberculosis, and Malaria 230, 237, 274, 294-295 Global Partnership against the Spread of Weapons and Materials of Mass Destruction 13, 208, 215, 218-220, 222, 224, 232-233, 281 globalisation 4, 5, 7, 73, 74, 86, 208, 238, 297, 298 as economic imperialism 83 competitiveness 22-24 production 19-21 gold 194 gold standard 156, 160, 167, 194 Gomez, Ciro 171 Gordon, Robert 42 governance I, 3-4, 9, 22, 47, 70, 77, 82, 111, 118, 123, 124, 131-133, 137, 146, 150, 187, 210, 217, 218, 220, 224, 234, 251, 263, 264, 267, 277, 282, 297 corporate. See corporate governance Government Housing Loan Corporation (Japan) 182

Graham, Bill 231 Graham, Edward 91 Grard, L. 150 Great Lakes Region (Africa) 146, 265 Greece 118 Gresham's Law 194 gross domestic product 23, 26, 48, 51, 52, 103, 104, 105, 127 aid 3 Canada 31, 54 East Asia 198 France 31 Germany 31 Italy 31 Japan 31, 185 machinery and equipment 48, 53 real 30 United Kingdom 31 United States 31 gross national income 107 growth 1, 3-4, 7, 14, 47, 50, 52, 53, 65, 66, 69,99-103,105,108,110-112, 119-121, 126, 133, 143, 150, 159, 160, 183, 211-213, 224, 229, 235237, 247, 256, 259, 260, 263, 277, 279, 281, 287, 288, 294, 297, 298. See also productivity growth Africa 1, 131, 132, 133, 264, 275, 276 Africa Action Plan 269-271 Asia 183, 187 Brazil 285 Canada 212, 224 China 191, 198, 212 determinants 2-3 developing countries 66, 75, 102, 288, 294 emerging markets 251, 256 Hong Kong 195 Japan 179, 184, 185 Kananaskis Summit, 2002 207, 211, 222-223, 229, 232, 234, 281 Russia 212, 252, 255 United States 224 growth model 101-102 intergenerational 103 Gu, Wulong 52 Gust, Christopher 36 Haiti 106 Halifax Summit, 1995 215 Hanuschek, Eric 50 Hague, Nadeem 159

Index Harchaoui, Tarek 58 Harris, Richard 40, 47 Harvard University 118 health I, 103, 109, 110, 111, 124, 131, 149, 150, 182, 221, 234, 237, 245. See also infectious disease Africa Action Plan 273-275 health care 72, 105, 112 health ministers. See G8 health ministers heavily indebted poor countries 103-105, 212, 221, 230, 245, 247, 260, 277-279, 288 Hemmings, Philip 55 Herstatt Bankaus 162 high tech sector 24, 32, 40 HIPC Initiative 277-279, 299 Africa Action Plan 271-272 Kananaskis Summit, 2002 282 HIPC Trust Fund 221, 231, 236, 237, 260, 271 Hiranuma, Takeo 187 Hitt, Lorin 43, 49, 55 Ho, Mun 42, 55, 56 Honda 21 Hong Kong 11, 191-202, 197. See also Special Administrative Region (Hong Kong) banking 200 competitiveness 22 currency board 195, 196, 202 dollarization 196, 197-198, 200-201 United States 198 Hong Kong Monetary Authority 200-201 Honshu-Shikoku Bridge Authority 182 Hoover Institution 165 housing industry 55 human rights. See rights: human Hungary 106 IBM 20, 21 imports 4, 51, 55, 73, 74, 81, 82, 105, 107, 108, 118, 198, 266, 271 India 21, 106, 230, 233, 283, 297 Indonesia 106, 157, 164, 168 industrial sector 118, 179, 184 industrialised counlries 9, 22, 37, 73, 74, 75, 76, 100, 101, 132, 135, 138, 168, 263. See also developed countries competitiveness 22 infectious disease 13, 103, 210, 221, 238, 247. See also health Kananaskis Summit, 2002 282

329 inflation 6, 33, 55, 101, 159, 160, 168, 184, 198, 201 information and communications technology 2, 8, 27-28, 33, 48, 99, 149, 238, 272 Africa Action Plan 273 Canada 66 development 65-77 growth 8 investment 55 labour productivity 8, 36, 41-46, 49, 53, 59 New Partnership for Africa's Development 272 poverty reduction 72 productivity growth 35, 66 United States 66 information technology 6, 77 globalisation 73 input 35, 59 inputs 20-21, 29-31, 57 Institute for Management Development 22, 23 institution building 9, 13 institutions 208, 217-218, 265, 269 Integrated Framework for Trade-Related Technical Assistance 294 integration 9, 86, 89, 92, 93, 94, 118, 120-121, 122-123,128,132, 135-136, 147, 149, 150, 191, 192, 195, 196, 201, 234, 251, 269, 270, 297 intellectual property 69, 71, 112, 138 Inter-American Development Bank 174 interest rates 33, 155, 158, 161, 164, 171, 174, 184, 257 Japan 185 International Accounting Standards Board 163, 255, 259 International Association of Insurance Supervisors 163 International Civil Aviation Organization 232 International Civil Society 87 International Convention for the Suppression of the Financing of Terrorism 288, 290 International Development Association 212, 221, 231, 251, 260, 288 International Federation of Accountants 163 international financial architecture. See financial architecture internalional financial institutions 121, 131, 132, 169, 260, 268, 272, 278, 279, 298, 299 International Labour Organization 92

330

Sustaining Global Growth and Development

International Marine Organisation 232 International Monetary and Financial Committee 253 International Monetary Fund 4, 10, 102, 105, 110, 138, 155-174, 223, 251, 253, 255, 257, 268, 277, 278, 285, 287, 289, 291, 298 adjustment programmes 159 Africa 267 Argentina 14, 256, 259 Brazil 14 China 191 conditionality 158-160, 169, 171, 172 conflicts of interest 173 crisis management 5, 163-164 Executive Board 157, 172, 173, 291 function 156 G7 159, 171 governance 8 Hong Kong 191, 195-196 Independent Evaluation Office 172, 173 lender of last resort 169-170, 172 mission creep 157, 171-172 New Partnership for Africa's Development 136 oil crisis 161 Pakistan 85 protests 87 reform 165-171 Research Department 159 Russia 164 special drawing rates 199 standard setting 162-163, 173 surveillance 156-158 transparency 5 United States 171 Uruguay 14 voting weights 157 Washington, 2002 14 international organisations 10, 65, 68, 69, 71, 72, 73, 76, 102, 103, 106, 110, 168, 171, 276, 291 International Organization of Securities Commission 163 internet 27, 66, 71, 87 investment l, 47, 48, 53, 74, 82, 122, 124, 135, 150, 234, 256, 267, 269, 298 information and communications technology 41, 45, 49, 55 machinery and equipment 47-48

investment liberalisation 85, 88, 89, 91, 92, 94, 96, 220 Iraq 13, 14, 224. 233 Ireland 22 Israel 233, 282 Italy 22-23, 27, 28, 128, 192, 211, 241, 245, 247 Africa 212 competitiveness 22, 24 digital divide 67 education 50 Genoa Summit, 2001 210 gross domestic product 30 International Monetary Fund 157 labour productivity 31, 36 multifactor productivity 30 post-World War II 118 productivity growth 46 Ivory Coast 106 J.P. Morgan 174 Jl8 86, 87 Jakarta 157 Jamaica 21, 106 Japan 27, 28, 177-189, 198, 202, 216, 239, 241, 245, 247 11 September 177-189 Afghanistan 177, 186 Africa 128, 188 agriculture 4 banking 179, 184, 192 bureaucracy 178, 180-181 Cabinet 177, 181, 188 China 185, 192 competitiveness 22-23, 24, 25 deregulation 25 Diet 182 digital divide 67 economy 6, 212 education 50 financial crisis, 1997 161-162 foreign policy 177-178, 185-186 free trade 187 Genoa Summit, 2001 210 gross domestic product 30, 185 growth 14, 21 health 182 institutions 178-179, 182 International Monetary Fund 157 Kananaskis Summit, 2002 213 Kyoto Protocol 89, 186

Index labour productivity 26, 36 Ministry of Finance 178 multifactor productivity 30 New Partnership for Africa's Development 188 North Korea 178 official development assistance 212, 234 presidential election, 2001 177 Prime Minister's Office 181 private sector 180, 182, 183, 184 privatisation 182 productivity 179 protectionism 107, 108 public sector 177, 179, 180, 182 recession 184, 224 restructuring 177, 178, 180, 181, 183, 184 Russia 218 Singapore 187 taxation 183 trade disputes 185 triad 83, 84, 94 unemployment 25 United States 85, 93, 185, 186 World Trade Organization 84 Japan Highway Public Corporation 182 Japan National Oil Corporation 182 Jeanne, Olivier 174 Johannesburg 13 Jordan 106 Jorgenson, Dale 42, 55, 56 Jospin, Lionel 91 justice and interior ministers. See G8 justice and interior ministers Kaci, Mustapha 58 Kamin, Steven 167 Kananaskis 207, 217, 229 Kananaskis Summit, 2002 11, 108, 123, 188, 207-224, 229-239, 261, 264, 288, 293, 294 Afghanistan 233 Africa l, 11, 125, 208, 220-222, 232 Africa Action Plan 12, 117, 126, 145-146, 148, 150, 238, 282 African leaders 123, 146, 214, 230, 232, 235, 237, 263 agenda 14, 208-209, 229, 232-233 agriculture 126 AIDS 237 civil society 215, 216, 229, 231 debt relief 221, 238

3 31 democracy 210 Dot Force 282 education 236, 282 employment 281 environment 281 gender equality 282 growth 5-6, 281 health 237, 238, 282 HIPC Initiative 282 HIPC Trust Fund 236, 237 India/Pakistan 283 information and communications technology 238 institutions 217-218 legacy 12-13 Middle East 215, 233, 238, 282 New Partnership for Africa's Development 282 official development assistance 150, 208, 221 peace 282 performance assessment 12-14 Russia 230, 237, 283 security 229 sustainable development 237, 281 terrorism 6, 12, 13, 211, 218-220, 232-233, 238 trade 236, 238 transport security 281 weapons of mass destruction 208, 238, 281 Kanbur, Ravi 132, 138 Kawaguchi, Yoriko 177 Kenya 106 Keynes, John Maynard 155, 156, 166, 171 Keynesian policies 99, 101, 102, 108, 110 Khan, Mohsin 159 Khan, Shakrukh Rafi 85 Kim Jong-il 177 Kimberley Process 266 Kimko, Dennis 50 KKK 157, 173 Kofi Annan International Peace Training Centre 266 Koizumi, Junichiro 10, 177-178, 180, 187, 187-188, 213, 218, 220, 229, 231 11 September 177, 185 leadership 181-182, 183 North Korea 177-178 reforms 182-183, 188 Korea. See South Korea Krueger, Anne 170

332

Sustaining Global Growth and Development

Krugman, Paul 24, 188 Kumar, Mammohan 169 Kunz, Diane 127 Kurile Islands 219. See also Northern Territories Kyoto Conference on Climate Change 89 Kyoto Protocol on Climate Change 186, 239 labour 8, 25, 29-31, 30, 82, 109, 134, 259. See also employment labour market 21, 27, 28, 68, 100, 108 labour productivity 2, 8, 19, 26-27, 29-31, 32 computerisation 26 growth 29-31 information and communications technology 41-46, 59 manufacturing 27 measurement 35, 57-60 United States 35, 36, 38, 53 Lagos Plan of Action 135, 148 land rights. See rights: land landmines 266 Lane, Timothy 167 Latin America 14, 168, 186, 231, 235, 281 Lawrence, Robert 55, 85 Lee, Frank 52 lender of last resort 169, 172 less developed countries 69, 70, 72, 77, 85, 122, 126, 128, 142, 236, 270, 271 Levitt, Theodore 20 Liberal Democratic Party (Japan) 177, 180, 181, 183, 184 liberalisation 19, 118, 121, 142 liberalism 155 Libya 128 Lipsey, Richard 49 lira (Italy) 194 Lissakers, Karin 157 London 86, 87, 193, 194 London International Financial Futures (and Options) Exchange 86 London School of Economics and Political Science 87 Lula da Silva, Luiz Inazio 171, 174 Lusaka Summit, 2001 141, 145, 148 Luxembourg 22, 128 Lyon 12 Lyon Summit, 1996 211, 238 Maccario, Aurelio 112 machinery and equipment 47-48, 53, 55, 59

Makin, John 188 malaria 282, 295 Malaysia 106, 133, 202 Mali 106, 123, 128 Malthus, Thomas 2 Mandeville, Bernard 101 Manley, John 221, 285 manufacturing 27, 42, 52, 53, 54, 58, 81, 83, 92 Canada 37, 38, 39, 40, 45, 55 Japan 179 United States 37, 38, 39, 40, 55 Marjolin, Robert 117, 120, 127 market access 6, 9, 11, 69, 82, 84, 94, 122, 125,129,208,212,216,221,224, 235, 236, 238, 257, 260, 269, 270 Markle Foundation 71 Marquez, Jaime 36 Marshall, General George 117, 118-119, 123, 125, 127 Marshall Plan 6, 9, 117-129 Martin, Paul 213, 221 Marxism-Leninism 109 Maryland 193 Masson, Paul 169 Mastroeni, Michele 76 Mauritius 128 Maxwell, Simon 128 Maynard, Jean-Pierre 58 Mazda 21 Mbeki, Thabo 121, 122, 123, 128, 211, 230, 231, 233, 235, 237 McCallum, Bennett 188 McDonald's 19, 86 McKinnon, Ronald 198, 199, 200 McKinsey Global Institute 26 Madecins Sans Frontières 232 Meltzer, Allan 168 Meltzer Commission 169 Mercosur 135 Mexico 83, 88, 106, 163, 164, 167, 213 financial crisis 4 G20 299 micro-credit 269 Middle East 208, 211, 215, 224, 230, 233, 238, 282 Millennium Africa Plan 121, 141 Millennium Challenge Accounts 128, 234, 265 Millennium Declaration 145, 293, 298 Millennium Partnership 141 Millennium Round 74, 83, 142

Index Miller, Marcus 169 Mitterrand, François 147 MMT 91-92 mobilisers 82, 83, 84, 86-91, 91, 93 monetary disunity 192-195 monetary standard 198, 200 monetary union 11 Asia 191-202 internal 193, 195-197 money laundering 163, 186, 252, 253, 255, 261, 268, 287-288, 289, 291 Montebello Summit, 1981 215 Monterey Institute of International Studies 84 Monterrey Conference on Financing for Development 125, 128, 142, 211, 234, 237, 239, 252, 260, 264-265, 271, 282, 288, 293, 298 Monterrey Consensus 281 Montreal 89 Moody's 109 moral hazard 5, 99, 102, 109, 158, 166-167, 169, 171, 172 Moscow 299 most-favoured nation 69, 81 Motorola 21 Mozambique 124, 128 Mugabe, Robert 13, 122, 211 Muir, Dirk 44 multifactor productivity 27, 29-31, 42, 43, 44, 45, 47, 55, 59 Multifibre Agreement 75, 84 Multilateral Agreement on Investment 83, 88, 90, 91-92, 93 multilateral development banks 260, 268, 278 multilateralism 4, 5, 8, 10, 69, 73, 83, 85, 90, 93-94, 133, 147, 150, 160, 165, 192, 214, 215, 239, 256, 260, 288 multinational corporations 20, 75, 82, 83, 89, 90, 91, 92, 94-95, 96 Mundell, Robert 191, 197 N30 87 Naples Summit, 1994 215 nation-state 86, 90 natural resources 137, 140, 141, 144, 146 neo-colonialism 101 neoclassical paradigm 89 neoliberalism 85, 132, 143-144 NEPAD. See New Partnership for Africa's Development Nepal 106 Nestlé 20

333 Netherlands 22, 33, 46, 88, 128, 295 New African Initiative 121, 123, 141, 233 New Delhi 297 new economy 6, 8, 19, 27-33, 28, 29, 32-33, 70, 74, 75, 76, 100-102, 103 New England 193 New Jersey 193 New Partnership for Africa's Development l, 6, 9-10, 13, 117-129, 131, 135-136, 135-137, 139, 141-150, 214, 224, 233-234, 238, 239, 263, 264, 294, 298 AIDS 125 agriculture 275 civil society 216 conditionality 146-148 conflict prevention 146-151 corporate governance 264 democracy 147, 150, 263, 264 education 272 gender equality 268 governance 263 Heads of State Forum 146-147, 148, 150, 264 implementation 145-148 Implementing Committee 122, 128, 148, 150, 264 institutions 267-269 Japan 188 Kananaskis Summit, 2002 216, 220, 282 Marshall Plan 121, 122 origins 121-122, 141-142 peer review 264 Steering Committee 122, 123, 128, 211 sustainable development 141-150, 269-271 New York 20, 193 New Zealand 84 newly industrialising economies 25 Nicaragua 106 Nigeria 95, 121, 122, 128, 211, 220, 230, 282, 295 Nkulhu, Wiseman 294 No Ponzi Game Condition 103-104 nongovernmental organisations 8, 75, 83, 87, 92, 96, 126, 137, 140, 157, 216, 236 debt relief 104 development 234 digital divide 71, 72 environmental 88, 89, 93 market access 82 mobiliser 87, 89, 93, 94, 96 Multilateral Agreement on Investment 88 technical 87-88, 89, 92, 93, 94-95, 96

334

Sustaining Global Growth and Development

nonperforming loans 184, 185, 202 North Africa 150 North America 90, 239 triad 83, 84 North American Free Trade Agreement 83, 88, 91-92, 93, 94, 135, 213 North Atlantic Treaty Organization 124 North Korea 178, 220, 224 north-south relations 84, 137, 140, 215, 220, 222 Northern Territories 219, 220 Norway 128 nuclear weapons 13, 218-219, 224, 232, 238 Obasanjo, Olusegun 121, 122, 123, 128, 211, 220, 230, 231, 233, 235 official development assistance l, 6, 11, 67, 208, 211-212, 220, 221-222, 245, 251, 255, 256, 260, 264, 271, 294, 299 offshore financial centres 253, 291 oil 6, 14, 224, 266 oil crisis 161 Ok, Wooseok 49 Okina, Kunio 188 Okinawa Charter on Global Information Society 70-74, 75, 76 Okinawa Summit, 2000 70, 207, 209, 232, 238 African leaders 128 disarmament 219 Oldani, Chiara 112 Oliner, Stephen 42, 44, 55, 56 OMEGA Plan 121, 141 O'Neill, Paul 128, 168, 222 open economies 2, 3, 94 Organisation for African Unity 235 Organisation for Economic Co-operation and Development 55, 120, 261, 271 Convention on Bribery 268 DIALECT 68, 69 e-commerce 68, 70 Economic Commission for Africa 122 education 50 Guidelines for Multinational Enterprises 268 internet 66 labour productivity 35 Multilateral Agreement on Investment 88, 93 peer review 122, 268 productivity growth 46, 56 regulation 52

Organisation for European Economic Co-operation 119-120, 122, 123, 125, 127 Organization of African Unity 141, 148, 122, 128, 150 Ostry, Sylvia 87 Ottawa 215 output 29-31, 35, 36, 47, 54, 59, 160 Oxfam 87, 88, 232 Pakistan 85, 106, 168, 230, 233, 283 Palestine 233, 282 paper money 194 Paraguay 106 Paris 91, 93, 160 Paris Club 278 Paris Summit, 1989 163 Paul O'Neill Africa 222 peace 1, 3, 13, 118, 123, 146, 150, 220, 224, 234, 263, 265-267, 274, 282 peacekeeping 266 Pearce, David 140 Pearl River Basin 201 peer review 118, 120, 121, 122, 123, 126, 127, 128, 150, 210, 224, 234, 238, 264, 268, 294 Pelanda, Carlo 112 Pennsylvania 193 People's Bank of China 200 People's Global Action 86, 87 personal representatives for Africa 125, 148, 215, 265, 282, 294 Peru 106, 174 pesification 196 peso (Argentina) 199 peso (Spanish) 192 peso de ocho reales 192 pharmaceutical industry 20, 274, 295 Philippines 106, 164 Phillips, Steven 167 Piatkowski, Marcin 68 piece of eight 192-193 Poku, Nana 128 policy co-ordination 65, 68, 69-70, 74, 75, 121, 122, 139, 187 e-commerce 70, 72 information and communcations technology 76 polio 237, 274, 282 population growth 2

Index

Porter, Michael 24 Portugal 128 poultry 129, 236 pound sterling 192-193, 193, 194, 198, 199 pound sterling (Scotland) 198 poverty 211, 265 poverty reduction 6, 70, 72, 111, 131, 132, 133, 141, 144, 149, 150, 165, 207, 251, 256, 260, 263, 264, 269, 275, 276, 281, 293, 294, 298 Poverty Reduction and Growth Facility 164-165, 277 Poverty Reduction Strategies 276 poverty reduction strategy papers 136, 293 Powers, David 188 Prague 174 Preeg, Ernest 85 private sector 6, 13, 14, 70, 72, 99, 108, 109, 120, 147, 168, 177, 213, 256, 287, 294 Japan 180, 182, 183, 184 Prodi, Romano 211, 231 productivity growth 35-60, 198, 255, 256, 259. See also growth trends 37-41 property rights. See rights: property protectionism 4, 24-25, 75, 83, 84, 87, 93, 106-108, 111, 112, 119, 139, 216 protests 84, 207, 213, 217. See also Genoa Summit, 2001 1999 5 Cologne, 1999 86 London, 1999 87 London, 2000 87 Paris, 1999 91 Seattle, 1999 87 Washington, 2002 87 public sector 13, 14, 70, 99, 111, 177, 181, 274 Japan 179, 180, 182 Puerto Rico Summit, 1976 207 Putin, Vladimir 211, 213, 218, 219, 231, 232-233, 239 Bush, George W. 231 Putnam, Robert 12 Pyongyang 177 Rajan, Ramkishen 198 Rambouillet Summit, 1975 207 Rao, Someshwar 55 Reagan, Ronald 99, 215 real 164

335 recession 14, 33, 66, 101, 184, 224 Reclaim the Streets 86 recovery 38, 39, 42, 43, 54, 117, 119-120, 122, 125, 182, 183-184, 185, 212, 222, 231, 235, 251, 255, 259, 263, 297 Red Cross 110 regionalism 83, 85, 94, 118, 121, 122-123, 136, 147, 187, 263, 269 regulation 108, 179 renminbi 193, 195, 196-197, 200, 201, 202 'Report of G7 Finance Ministers to the Kiiln Economic Summit' 168 Republican Party (United States) 215 research and development 8, 47, 52, 53, 55, 68 resources human 145, 263, 273 natural 266, 270 restructuring 10, 19, 25, 27, 28, 33, 49, 155, 179, 256 retail industry 25, 26, 39, 55 Reynolds, David 128 Rhodes, William 161-162 rice 129 rights civil 101, 102 human 75, 92, 147, 263, 267, 268 land 275 property 3, 196, 275 resource 276 Rio Conference on Environment and Development 89, 141, 144, 145, 146, 149 Rio Declaration 10 river blindness 274 Robbins, Lionel 112 Robidoux, Benoit 44 Rodriguez, Edgar 50 Rogoff, Kenneth 191 Rome 293 Romer, David 112 Rose, Andrew 191 Roubini, Nouriel 170 ruble 164 Rugman, Alan 83 rule oflaw 3, 122, 147, 210, 251, 263, 268, 298 rules of origin 21, 84 rupiah 164 Russia 70, 213, 214, 224, 245, 247, 252, 261 as G8 member 217-218 as host 14, 207, 208, 217, 230, 237, 283 democracy 211

336

Sustaining Global Growth and Development

Denver Summit, 1997 223 Singapore 133, 192, 202 digital divide 67 competitiveness 22 disarmament 209 Japan 187 financial crisis 4 Single Market Program 94 G7 217, 219 Smith, Adam 101 G8 123, 229, 238 Smoot-Hawley tariff 93 gross domestic product 33 Snow, John 224 growth 212, 255 social cohesion 139 International Monetary Fund 164 Solow, Robert 33 Japan 218 Somalia 121 nuclear weapons 13, 232, 236 Sony 179 terrorism 222 South Africa 121, 122, 128, 136, 211, 223, United States 232-233 230, 282 weapons of mass destruction 218-220, 232 South America 6 World Trade Organization 252, 261 South Korea 161-162, 164, 198, 233 Russia-European Union Summit, 2003 12 Southeast Asia 4, 104, 105, 107, 133-134, Rwanda 106, 128 192, 193 Southern Africa 150, 294 . Sabourin, David 45 Southern African Customs Union 136 Saint Petersburg 12, 224 Southern African Development Community Sakakibara, Eisuke 161 136 Sally, Razeen 73 sovereign debt restructuring mechanism 14, Samurai bonds 186 213, 223, 224, 251, 256, 259, 287, 298 San Juan Summit, 1976 207 sovereignty 82, 91, 108, 109, 156, 160, 169, 170, 172, 191 Sargent, Timothy 50 Savona, Paolo 112 Soviet Union 118, 124, 155, 208, 214, 219, Say's Law 100 220, 232, 238 Scarpetta, Stefano 55 space industry 25 Spain 214, 229, 261 Schaan, Susan 49 Schreyer, Paul 46 Special Administrative Region 191, 195-196, Schroeder, Gerhard 213, 217, 231 201. See also Hong Kong Schultz, George 166 Special Data Dissemination Standards 162-163 Schwartz, Anna 166 special drawing rights 172, 174, 199 special interest groups. See interest groups science and technology 145 spillovers 68, 72 Seattle 86 security l, 6, 118, 123, 133, 146, 150, 219, Stalin 119 234, 263 Stand-By Arrangement 174 semiconductors 42, 43 Standard & Poor 109 standards 65, 75, 155, 156, 162-163, 168, Senegal 121, 122, 128, 141, 230, 282 171, 173, 253, 270, 289 September 11, 2001. See 11 September service sector 21, 38, 39, 48, 55, 57, 179, 180 environmental 85, 86, 88, 92 Severe Acute Respiratory Syndrome 103 health 86 Shanghai 197 labour 85, 92 living 23, 24, 26, 35, 47, 131, 256 Sharpe, Andrew 40 Shell 95 monetary. See monetary standard Sherwood, Mark 58 Statistics Canada 44, 55, 57, 58 Sichel, Daniel 42, 44, 55, 56 steel dispute 86, 185, 216, 239 Sieling, Mark 55 steel industry 20, 25, 82 Sierra Leone 265 Steering Committee 128 silver 192, 194 sterling. See pound Simon, William 166 Stiglitz, Joseph 138

Index Stiroh, Kevin 42, 43, 55, 56 Stokes, Bruce 85 Strange, Susan 90 'Strategic Approach to Poverty Reduction' 209 Structural Adjustment Facility 164 sub-Saharan Africa 75, 104, 105, 107, 131 subsidies 25, 67, 81, 86, 179, 216, 270 Sudan 121, 124, 211, 234, 265 sugar 129 Suharto 157 Supplemental Reserve Facility 174 sustainable development 9-10, 83, 95, 132, 133, 140, 141-150, 209, 210, 237, 239, 264, 275, 281, 288, 293, 294 Africa Action Plan 269-271 Kananskis Summit, 2002 281 Sweden 22, 128 Switzerland 22, 23, 128 Taiwan 202 Takenaka, Heizo 181, 184 Taliban 177, 212 Tanaka, Makiko 177 Tang, Jianmin 55 tariffs 51, 82, 83, 84, 89, 105, 106, 107, 108, 111, 112 Task Force on Primary Education. See G8 Task Force on Primary Education taxation 6, 65, 108, 159, 165, 166, 172, 183, 261 e-commerce 67, 68 telecommunications 19, 20, 25, 26, 41, 45, 46, 68, 102, 108 telephones 20 terrorism 6, 12, 13, 14, 70, 121, 124, 185, 207, 208, 209, 210-213, 215-220, 222, 224, 229, 230, 232-233, 238, 239, 245, 247, 251, 252-253, 255, 260-261, 269, 281, 287-291, 297, 299 Texas Instruments 21 textiles 4, 75, 81, 82, 84, 211, 212 Thailand 106, 164 Thatcher, Margaret 99 'The Impact of the IT Revolution on the Economy and Finance' 77 Third World Network 88 Tokyo 20, 230 Tokyo International Conference on African Development, 2002 188, 261, 282 Toronto Summit, 1988 211 Torres, Raymond 49

337 tourism 187 Toyota 21, 179 trade l, 4, 9, 13, 51-52, 53, 55, 66, 82, 100, 105, 123, 135, 150, 234, 236, 239, 245, 247, 252 Africa Action Plan 269-271 development 4 United States 24 trade barriers 51, 69, 84, 111, 118, 120, 126, 270, 288, 298 trade disputes 86, 93, 185 trade law 86, 90 trade liberalisation l, 8, 24, 73, 74, 81, 84, 85, 88, 89, 91, 92, 93, 94, 96, 120, 143, 187, 220, 256, 270 transparency 5, 6, 137, 147, 162, 168, 192, 257, 259, 260, 261, 266, 267, 273, 282, 298 transport security 229, 232 transportation 19, 25, 55, 102, 149, 276 transversality condition 112 Treaty, Abuja 150 Trefler, Daniel 51 triad 83, 84-97 Truman, Harry 127 Tsang, Shu-ki 201 tuberculosis 274, 282, 295 Tunisia 128 Turkey 5, 168, 173, 213, 223 Tyco 112 Uganda 106 UNAIDS 112 unemployment 25, 33, 160, 184, 224 unions 87, 133 United Kingdom 27, 28, 99, 120, 160, 192, 241, 222, 245, 247 Africa 125, 212, 235 competitiveness 22-23, 24 digital divide 67 education 50 European Free Trade Area 128 free trade 82 Genoa Summit, 2001 210 gross domestic product 30 International Monetary Fund 157 Iraq 13 labour productivity 36 monetary union 192 multifactor productivity 30 official development assistance 221

338

Sustaining Global Growth and Development

Russia 230 trade liberalisation 84 United Nations 92, 102, 110, 142, 215, 216, 230, 253, 260, 265-266, 267, 287, 289, 290-291 Agenda 21 141 Congress 85 Global Compact 268 Kananaskis Summit, 2002 208 Millennium Declaration 264, 271 Monterrey 125 New York, 2002 148 Resolution A/57/2 148 United Nations Conference on the Environment and Development 89 United Nations Conference on Trade and Development 69-70, 75 United Nations Convention against Transnational Organized Crime 268 United Nations Convention for the Suppression of the Financing of Terrorism 252 United Nations Convention on Corruption 268 United Nations Counter-Terrorism Committee 289, 290, 291 United Nations Development Programme 71 United Nations Environment Programme 143 United Nations Security Council 218, 266, 288 Committee 289 Iraq 13 Resolution 1267 289 Resolution 1373 252, 289 Resolution 1441 224 United States 27, 28, 99, 128, 161, 177, 213, 224, 241, 245, 247 11 September 207, 212 Africa 125, 128, 211, 216, 235, 239 Asia 198 business sector 54, 56, 57 China 85, 198 competitiveness 22-23, 25 computerisation 27 Congress 90, 93, 120, 127, 128, 221 deregulation 25 digital divide 66, 67 disarmament 219 economy 6, 8, 35, 39, 42, 53 education 50, 236 elections 213 employment 25 environmental nongovernmental organisations 88

farm bill 4, 112, 126, 239 financial scandals 32 Genoa Summit, 2001 209 gross domestic product 24, 30, 48, 198 growth 14, 19, 32, 223, 224 House of Representatives 93 information and communications technology 2, 66 International Monetary Fund 157, 161, 171 Iraq 13 Japan 85, 93, 184, 185, 186 Kyoto Protocol 89 labour 21 labour productivity 8, 19, 26-27, 32, 36, 37, 38-41, 55 least developed countries 126, 128 market access 236 Marshall Plan 118, 118-121 Middle East 208 multifactor productivity 30 Multilateral Agreement on Investment 88, 91 multilateralism 90 nuclear materials 13 official development assistance 212, 221, 234 Pakistan 168 presidential election, 2000 93 productivity growth 53 protectionism 107 recession 32, 33 Russia 232-233 sustainable development 149 terrorism 222 textiles 75, 212 triad 94 unemployment 25, 33 weapons of mass destruction 232 World Trade Organization 74, 84, 86 United States Bureau of Labor Statistics 55 United States International Trade Commission 81 United States-European Union Joint Statement on Data Privacy 69 University of California at Berkeley 87 Urban Development Corporation (Japan) 182 Uruguay 5, 14, 106, 168 Uruguay Round 81, 84, 132 Vandervorst, Alain 150 Vaubel, Roland 74

339

Index

Venezuela 14, 100, 106, 223, 224 von Hayek, Friedrich 99 Wade, Abdoulaye 121, 122, 123, 141, 230, 233 Wade, Robert 132, 133 Wan, Henry 201 Wang, Weimin 55 war 121, 124, 211, 265 Washington DC 87, 215 water l, 102, 124, 149, 150, 221, 234, 266, 270, 275, 276, 294 weapons of mass destruction 11, 13, 208, 215, 218-220, 224, 229, 232-233, 238, 239, 281 Weisman, Jason 201 welfare system 99, 109 West Africa 150 West African Economic and Monetary Union 135 wetland conservation 149 White, Harry Dexter 155, 156, 171 Windsor 13, 222 World Bank 71, 85, 87, 102, 103, 105, 133, 136, 138, 163, 164, 165, 166, 171, 174, 212, 231, 236, 253, 255, 260, 268, 277, 278, 287-291 World Development Report 2000 132 World Economic Forum 23, 71 World Food Summit, Rome, 2002 293 World Intellectual Property Organization 77 World Summit on Sustainable Development Johannesburg, 2002 10, 13, 142, 143, 145, 149, 223, 237, 264, 281, 288, 293, 298 World Trade Center 211

World Trade Organization 8, 81-96, 102, 105, 110, 112, 136, 138, 186, 236, 269, 270, 271, 288 agriculture 126 China 197 civil society 86-91 dispute settlement 86 Doha, 2001 83, 84, 126, 230. See also Doha Round e-commerce 69, 70 less developed countries 85 Millennium Round. See Millennium Round organisation 81, 94 politics 84-86 rules 81-82 Russia 230, 252, 261 Seattle, 1999 84-85, 86, 90, 92, 217 World War I 161 World War II 101, 118, 161, 178, 218 World Wildlife Fund 87, 88 Worldcom 107, 112, 235 Wriston, Walter 166 Wyplosz, Charles 198 Yanagisawa, Hakuo 178, 184 yen 182, 184, 192, 198, 199, 200 Zambia 106, 139 Zimbabwe 13, 106, 122, 211, 235