Democracy & Governance

IMF Bailouts and Global Financial Flows

Key Points The IMF has been transformed into an instrument for prying open third world markets to foreign capital and for collecting foreign debts. This transformation violates the IMF charter in spirit and substance, and has increased the costs to countries requesting IMF financial aid. The IMF’s operational crisis stems from growing debtor resistance to its policy demands, soaring fiscal costs, and accumulating evidence of IMF policy failure. The International Monetary Fund (IMF) is the central agency for enforcing the Bretton Woods Articles of Agreement, whose terms serve as its charter. The objective of the agreement, which was reached by the major capitalist powers toward the end of World War II, was to establish a postwar economic order in which international trade and investment as well as stable, convertible exchange rates would not conflict with high employment, progressive taxation, and other components of welfare capitalism. Controlling international capital flows was judged essential for this entire set of goals to be mutually attainable. Hence, Article VI requires the IMF to deny emergency credits if used “to meet a large or sustained outflow of capital,” authorizes members “to exercise such controls as are necessary to regulate international capital movements,” and mandates the IMF to ask for such controls. In practice, the IMF has neither requested such controls nor suspended credits when they were used to finance capital flight. During the first three post-war decades, however, its importance as an emergency lender was subordinated to cold war-motivated official grants and credits in the 1950s and 1960s, and (as “foreign aid fatigue” set in) to commercial bank lending to assorted third world countries in the 1970s. Since then, the U.S. has found the IMF increasingly useful for handling third world debt crises and for opening third world commodity and asset markets to foreign capital. From minor lender of last resort, the IMF has become the enforcer of foreign debt service and a promoter of integrating developing countries into the G-7 financial markets. In pursuing these functions, the IMF has made capital controls a major target of attack, moving from neglect to active violation of Article VI. This pursuit has augmented the policy changes that the IMF routinely demands of countries seeking its credits. Prior to the 1980s the IMF’s primary intent was to relieve foreign exchange crises at moderate socioeconomic cost to the supplicant economies. As such, the fund insisted on combinations of monetary-fiscal tightening and devaluation but left capital controls largely untouched. After 1980, however, the goal became to resolve these crises by attracting private capital. Thus, measures that cut deeply into the structures of the supplicant economies and increased their adjustment costs were added to the IMF’s policy demands. Supplicant countries are now forced to ease capital controls and rely instead on higher interest rates to halt capital outflows and attract inflows. Often these moves have generated massive bankruptcies, a systemic banking crisis, and a credit crunch that has depressed domestic output and employment. To attract equity investment, supplicants are expected to privatize state assets, reduce social expenditures, and repeal laws protecting employment or privileging domestic over foreign firms. One component of the operational crisis enveloping the IMF is an increasing resistance to the augmented hardships the fund imposes and to IMF meddling in politically sensitive areas. Debt relief has also hardened. When official loans constituted most of third world debt, the IMF could ease debt servicing by persuading official creditors to stretch out repayments. But leaning similarly on private lenders deters new lending, undermining the goal of advancing global financial integration. Protecting debt service has thus become de rigeur for the IMF, and to pacify panicky creditors the fund has even required supplicant governments to sign retroactive rewrites of private debt contracts. During its 1995 crisis, for example, Mexico was forced to transform tesebonos (government notes payable in pesos at a price indexed to the peso/dollar exchange rate) into U.S. dollar payments. In compensation for its hard-line policy on debt servicing, the IMF has been expanding its emergency credits. But as currency-cum-banking crises have become more frequent, a second component of the IMF’s operational crisis has emerged legislative resistance in creditor countries to the rising fiscal burden of replenishing IMF coffers and providing supplemental loans. The Mexican bailout, for example, dwarfed previous bailouts, and the Asian bailouts are nearly triple the Mexican totals. A third component of the IMF’s operational crisis is a growing awareness that the fund lacks workable remedies. Typically, third world debt crises catch the IMF unaware. It then reacts with assessments that demand drastic measures only of the stricken countries, not of the lenders or of the international financial markets governing their behavior. The remedies notwithstanding, new crises erupt, followed by revised one-sided assessments and corrective measures, and then more crises Problems with Current U.S. Policy Key Problems The current policy line is based on flawed theorizing about the behavior of decontrolled financial markets. Globalized financial markets thwart G-7 efforts to contain exchange rate volatility and the rising incidence of financial crises. Debt leveraging and mounting G-7 bond rates have triggered a prolonged rise in global wealth concentration reminiscent of the 1920s. The IMF’s operational crisis reflects a major flaw in its basic policy line. But since the U.S. sets the essential policy line of the Bretton Woods institutions and cuts them little slack, the IMF’s crisis is a U.S. policy crisis. The IMF’s current policy line stands the original Bretton Woods position on its head, contending that free international capital mobility advances (rather than undermines) the basic Bretton Woods goals. The claim is that by globally integrating financial markets, capital flows reduce the cost of capital and bring about both an international converging of real interest rates and a more accurate pricing of capital assets. This should raise the global rate of investment and improve its efficient allocation. By rewarding “sound” policies with capital inflows and punishing “unsound” ones with capital outflows, the globalized financial markets should also improve domestic policymaking. All this should raise productivity and global output;most dramatically in the capital-short, technology-dependent third world, where the return on investment should be highest. Thus, the increased socioeconomic costs to debtor nations of IMF stipulations merely prescribe short-term pain for greater long-term gain. But this claim is an assertion with negligible support from economic theory and is refuted by the actual trends since the 1970s. Removing capital controls has opened the gates to an accelerating volume of financial flows. This has been paralleled, however, by slackened growth of investment, savings, output, trade volume, and productivity in both the third world and the OECD countries, with the main exceptionsthe East Asian “ miracle” economies now joining the pack. The explosive growth of cross-currency financial flows has also been paralleled by increasing volatility of both nominal and real exchange rates and by sharply rising real interest rates. This identifies one of the causal links between increased capital mobility and its attendant growth slowdown. Higher volatility raises the risks of investing long-term, while higher real interest rates boost the cost of capital. Each deters long-term investment. Thus, private investment has been tilted toward projects with short-term payoffs, which contribute less to productivity growth than did the long-term investments dominating the less-volatile Bretton Woods decades. An extreme example is the upsurge since the 1980s of investments in mergers, acquisitions, and exchange and interest rate speculation, none of which adds to productive capacity. The surging financial flows have been predominately short-term. Over 80% of global foreign exchange (Forex) turnover;which exceeded $300 trillion in 1995 compared to only $4.6 trillion in 1977;involves round trips of a week or less. About 5% of Forex turnover is used to finance trade in commodities and nonfinancial services, compared to around 30% in the 1970s. Most of the rest reflects purely financial transactions: to exploit discrepancies between intercountry interest rate differences and corresponding exchange rate differences, to capitalize on movements of bonds and equities in different markets, and to speculate on exchange rate variations. The short-term focus of these flows makes them highly skittish. Hence, as their volume has increased, so have the frequency and disastrous effects of these sudden capital inflows and outflows. Since 1980, one-fourth of the IMF member countries have suffered major currency-cum-banking crises, usually with adverse economic repercussions on other members. The architects of the Bretton Woods Agreement had contended that the dynamics of unregulated international financial markets tend inexorably to the dominance of short-term speculation and increasing financial instability. They therefore built into the agreement controls on international capital movements as well as a lender-of-last-resort facility. By contrast, the present policy line views hot money surges as the financial markets mode of purging countries of & ;unsound economic policies and practices. In the midst of the current Asian crisis, Washington and the IMF are still pressing for the replacement of Article VI with the prescription that the IMF require its members to commit to the complete elimination of capital controls. The increasing frequency and severity of the crises, however, and the chronic failure of the IMF to identify unsoun policies before these crises hit or to devise sets of &l sound policies that ensure against new crises are eroding the current Washington-IMF policy line of credibility even in conservative circles. Reflecting on the current Asian collapse, Alan Greenspan observed that ;excessive leverage and short-term bank lending may turn out to be the Achilles heel of an international financial system that is subject to wide variations in financial confidence. Further evidence of fragility is the rising share of GDP generated by finance, insurance, and real estate (FIRE) activities that facilitate asset trading and the transfer of risk. Until the mid-1970s the rising FIRE/GDP ratio in each G-7 country was accompanied by a faster output growth of goods and nonfinancial services. Since then, however, the relationship between rising FIRE/GDP ratios and economic growth has turned negative, implying that the liberalized international financial system has been crowding out the production of goods and nonfinancial services. Even more troubling is the rise of the real interest rate on G-7 high-grade bonds to twice the real GDP growth rate of G-7 countries. Reinforced by increased debt leveraging, the holders of financial assets largely members of the wealthiest 10% of G-7 households have (since 1980) garnered a rising share of national income. Over the past 115 years, only the two interwar decades exhibited such a high real interest/GDP ratio, partly because real GDP collapsed in the deflationary 1930s. Toward a New Foreign Policy Key Recommendations Washington and the IMF should cease trying to abolish all controls on international capital movements, and should instead start enforcing Article VI of the IMF s charter. To discourage speculative financial flows, the IMF should require creditors to bear more of the cost of resolving currency crises along with their debtors. The G-7 should tax foreign exchange transactions at a uniform rate (e.g., the Tobin Tax) in order to stabilize exchange rates and to weaken the power that financial markets wield in dictating domestic policies. The Clinton administration s request that Congress replenish IMF coffers with another $18 billion is evoking criticis most vehemently from free market conservatives that IMF interventions have catalyzed financial instability. The IMF bailouts, they charge, have primarily aided international bankers and speculators, who are thereby encouraged to engage in still riskier forays. The 1995 Mexican bailout sowed the seeds of the current Asian crises. Without IMF interventions, these critics say, financial markets self-adjust more smoothly, while still effectively disciplining national policies. Rather than granting the IMF more funds, Congress should vote to abolish it. There is merit to their criticism of the bailouts, though not to their solution. Forcing speculators (and the institutions that bankroll them) to absorb more of thelosses when crises hit would lower the speculative fever. But replacing the IMF with a free-marketer s pipe dream a fully self-adjusting global financial market is a sure recipe for recreating 1930s-style chaos. The IMF needs substantial reforming, not elimination. Congressional liberals, on the other hand, condition their support for the $18 billion measure on the inclusion of language requiring the IMF to protect labor rights and environmental integrity in the borrower nations. Such a sop is no more likely to advance such worthy goals than have similar provisions in the NAFTA treaty. Instead, IMF critics should parlay their current opportunity, created by the Asian and IMF crises, into an effective effort to curb the power of the international financial system to disrupt trade and production and (by quick capital flight) to torpedo full employment and social welfare programs with their more delayed payoff periods. For over a decade, the G-7 has been trying unsuccessfully to curb exchange-rate volatility and misalignments by setting upper and lower bounds to exchange-rate movements, and by buying and selling foreign exchange to keep the rates within those bounds. These efforts have failed because the globalized financial markets can overwhelm the official Forex reserves that central banks stockpile in order to contain market movements. Global official reserves in 1977 totaled nearly 17 days of global Forex turnover. Yet despite a quadrupling of global official reserves in the interim, they totaled less than one day of Forex global turnover by 1995. Limiting exchange-rate variance requires curtailing Forex turnover, which requires curbing the short-term speculative flows that largely account for its rapid expansion. Stabilizing exchange rates would advance a full-employment objective, and curbing hot money flows would undermine the power that financial markets wield to impede egalitarian reforms. Nobel Laureate James Tobis proposal to impose a small, globally uniform tax on all Forex transactions offers a relatively efficient, market friendly way of advancing both objectives. The tax would reduce Forex turnover by squeezing the net profits from large-volume, rapid-turnover activities (such as exploiting interest rate differences across currencies and speculating in exchange rates) while leaving returns from long-term capital infusion (such as foreign trade and direct investment) relatively untouched. Exploratory estimates suggest that a global 0.25% tax could cut Forex turnover by up to 50% while generating annual tax revenues of $200 to $300 billion. Both developments would substantially strengthen the power of the G-7 to confine exchange rate movements. Such a tax would also reduce the power that financial markets wield (by threatening capital flight) to coerce domestic policies. For example, a 0.25% tax rate would allow country A interest rate on 30-day notes to diverge from s by an additional 6% before triggering arbitrage flows. This leeway, plus the tax revenues generated, would augment the economic feasibility of socioeconomic reforms, which yield mainly long-term payoffs. To date, the G-7 has avoided the Tobin proposal and discouraged public debate over its merits. The U.S. suppressed an attempt in 1996 by the UN Development Program to circulate a volume of expert papers on the Tobin Tax, pursuing, instead, its campaign to abolish Article VI of the Bretton Woods Agreement. Policymakers and concerned citizen groups should insist on the following conditions for supporting any new IMF funding: (1) Article VI should be preserved and enforced, (2) future IMF bailouts should equally penalize both lenders and borrowers, and (3) the Tobin Tax should be placed on the G-7 agenda. Sources for more information Organizations Bretton Woods Project Hamlyn House Macdonald Road London N19 5PG UK Tel: +44 2075617546 Email: Web: Center of Concern Rethinking Bretton Woods Project 3700 13th St. NE Washington, DC 20017 Voice: (202) 635-2757Fax: (202) 832-9494 Email: Website: Contact: Jo Marie Griesgraber Friends of the Earth 1025 Vermont Ave NW Washington, DC 20005 Voice: (202) 783-7400 Fax: (202) 783-0444 Email: Website: Contact: Michelle Chang 50 Years is Enough : U.S. Network for Global Economic Justice 1025 Vermont Ave NW, Suite 300 Voice: (202) 879-3187 Fax: (202) 879-3186 Email: Contact: Lisa McGowan Halifax Initiative (for information on Tobin Tax) One Nicolas Street, Suite 412 Ottawa, K1N7B7 Canada Voice: (613) 241-4611 Fax: (613) 241-2292 Email: Website: New School for Social Research Center for Economic Policy Analysis 80 Fifth Avenue, 5th Floor New York, New York 10011-8002 Phone: (212) 229-5901 Fax: (212) 229-5903 Email Website: Public Citizen Global Trade Watch 215 Pennsylvania Avenue SE Washington, DC 20003 Voice: (202) 546-4996 Fax: (202) 547-7392 Email: Website: Contact: Mike Dolan Publications David Felix, Financial Globalization vs. Free Trade: The Case for the Tobin Tax, UNCTAD Review 1996 (New York, NY: United Nations, 1996). On Drawing General Policy Lessons from Recent Latin American Currency Crises, Journal of Post Keynesian Economics , Vol. 20, No.2, Winter 1997-98. Le Projet de Taxe Tobin, Bete Noire, Le Monde Diplomatique . February 1997. Mahbub ul Haq, Inge Kaul, and Isabelle Grunberg, eds., The Tobin Tax: Coping with Financial Volatility (New York, NY: Oxford University Press, 1996). UNCTAD, Trade and Development Report, 1997: Globalization, Distribution and Growth (New York, NY: United Nations, 1997). Alex C. Michalos, Good Taxes: The Case for Taxing Foreign Currency Exchange and Other Financial Transactions (Dundurn Press, 1997). to receive weekly commentary and expert analysis via our Progressive Response ezine. This page was last modified on Tuesday, April 1, 2003 4:57 PM Contact the IRC’s webmaster with inquiries regarding the functionality of this website. Copyright 2001 IRC. All rights reserved.

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Multilateral Agreement on Investment

Key Points International investment flows have increased rapidly in recent years. Liberalized investment rules, under which money and production facilities can be moved internationally without restrictions, give corporations more power in the global economy. International rules on investment should protect workers and the environment and should require corporate investors to act responsibly. International flows of private investment have risen sharply in recent years. New foreign direct investment jumped from $200 billion in 1990 to $315 billion in 1995. An increasing share of this investment goes to developing countries—32% in 1995, up from 17% in 1990. Added to this annually are hundreds of billions of dollars in portfolio investments, loans, and bonds. Advocates of globalization cite these figures as evidence that removing barriers to foreign investment will spur even greater international capital flows. A look beyond the surface of investment statistics reveals a more complicated picture. Much of the world risks being marginalized in the emerging economic order, as 70% of international investment to developing countries goes to just twelve newly industrialized nations in East Asia and Latin America. In addition, the numbers don’t capture the varied effects of investment on sustainability and societies. Governments need to maintain regulatory flexibility in order to respond to the wide range of impacts on employment and the environment. Finally, rising capital flows raise the question of who is doing the investing. Essentially, the largest corporations and financial institutions control most foreign investment. The top 100 corporations (in terms of overseas assets) control fully one-third of worldwide direct investments; by contrast, all the small and medium-sized companies in the world control only 10%. The fewer international barriers there are to the movement of resources, money, and products, the more power and influence large corporations and investors have in the global economy. Over the past decades, international trade agreements—like the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO)—and regional trade agreements have gone a long way toward deregulating trade. Because there is no similar international agreement on investment, multinational corporations, the U.S. and other industrialized countries are advocating a Multilateral Agreement on Investment (MAI), which is currently being negotiated at the Organization for Economic Cooperation and Development (OECD), a grouping of 29 of the most developed countries. The MAI would do for capital mobility what GATT has taken forty years to achieve in the trade arena: require nations to open virtually all sectors of their economies to foreign investment, treat foreign corporations the same as local companies, and bar governments from altering these new investor rights. This would represent a large step in the direction of global investment liberalization and economic globalization. To illustrate, it helps to consider trade and investment as alternative but complementary routes toward globalization—different ways for corporations to expand their activities outside their home countries. The combination of investment liberalization and free trade allows corporations to pick and choose how to structure their operations on a global level. A typical international economic transaction—for example a U.S. company wanting to sell equipment in Brazil—is composed of several stages and decisions: where to get the raw materials, how and where to produce the products, how to finance the deal, how to reach consumers. Free trade agreements make it easier for corporations to acquire natural resources, subcontract for components, and reach customers throughout the world. Investment liberalization provides the rest of the pieces of the puzzle. An MAI would guarantee each company’s ability to relocate to the lowest cost production sites. Investment liberalization would extend to flows of money, letting investors fund their deals on international financial markets and send profits back to the parent company. As the U.S. and the rest of the world consider international rules for investment, any new rights and powers given to foreign investors need to be balanced by policies that ensure corporate accountability. As currently drafted, the MAI includes no requirement that investors abide by international labor standards, human rights practices, or environmental regulations. Problems with Current U.S. Policy Key Problems Investment agreements, culminating in the MAI, are a core component of the U.S. policy of promoting investment liberalization. The Multilateral Agreement on Investment has been negotiated without democratic input. The proposed MAI is one-sided, giving corporate investors substantial rights without requiring appropriate responsibilities. As the world’s largest source and destination of international investment, the U.S. has an understandable interest in the way foreign investment is regulated at home and abroad. Unfortunately, the U.S. government is facing the challenges of globalization and sustainable development with an outdated mindset that considers its primary role in the global economy to be the zealous protector of U.S. corporations overseas. U.S. foreign policy is part offensive—pressuring nations to open their economies to foreign investors—and part defensive—policing the globe for instances where U.S. investors are unfairly treated. Washington has long used diplomatic pressure, international advocacy, and the leverage of bilateral and multilateral aid to encourage nations to deregulate foreign investment (not to mention some sordid episodes of gunboat diplomacy and covert operations against governments perceived as threatening large U.S.investors). Increasingly, the U.S. is also turning to investment agreements that directly guarantee rights for foreign investors. In the past decade, the U.S. has signed bilateral investment agreements with 38 countries. Recent trade agreements, such as the 1994 North American Free Trade Agreement (NAFTA) between the U.S., Canada, and Mexico, have been as much about investment as trade, containing detailed rules on foreign investor rights. Now, with the MAI, the U.S. is seeking to expand these rules internationally. The agreement would cover the 29 member countries of the OECD, which are the sources of 85% of the world’s foreign investment and the destination for 65% of investment funds. The U.S. also anticipates using the MAI as a lever to pry open developing nations whose governments are likely to impose restrictions on foreign investment. This will be done in three ways: encouraging developing countries to join the MAI when negotiations are completed, promoting the rules of the MAI as a benchmark of what is an acceptable level of protection for foreign investors, and eventually attempting to incorporate the MAI as the investment rules for the WTO, a trade body that includes almost all the world’s nations. Meanwhile, the WTO is taking early steps toward its own rules on investment. The U.S. has given only lukewarm support to the WTO initiative, preferring that international rules be developed at the OECD, where developing countries do not participate, and the result is more likely to reflect a consensus on the virtues of economic liberalization. The process by which the MAI has been negotiated is therefore flawed, excluding important constituencies from the bargaining table. Developing nations, which will be encouraged to join the agreement, did not participate in drafting the rules. Additionally, the U.S. and other OECD countries have treated the MAI as a technical agreement, negotiated by low-profile expert groups without public awareness or input. The MAI as currently drafted is built on the principle that international corporate investors should be able to compete with local companies for all the world’s resources, labor, and consumer markets. Translated into international law, this means a standard of national treatment, where governments have to treat foreign investors no less favorably than domestic investors. The MAI will give foreign corporations a right to invest in almost all sectors of nations’ economies, with the exception of national security industries. Countries are also negotiating specific reservations that will allow them to maintain restrictions that would otherwise violate the agreement’s rules. In general, however, the MAI will mean that countries cannot prevent large foreign companies from overwhelming smaller local industries. This could cause particular harm in socially and environmentally significant sectors. For example, the Phillipines currently bans foreign investment in rural banking, and Honduras limits foreign investors in forestry to a minority stake. Such protective measures would not be allowed under the MAI as it is currently written. Once established in a country, foreign investors would be guaranteed equal treatment in the way they are regulated. Other MAI provisions go further than equal treatment. The MAI bars many types of performance requirements, or conditions, even if those conditions are imposed on local companies. Examples of forbidden conditions include requiring investors to form a partnership with a local company and requiring a minimum number of local employees—the types of policies governments use to help ensure that local people benefit from foreign investment. The MAI also lets foreign investors repatriate their assets and profits unrestricted by government controls aimed at cooling down destabilizing investment flows, such as those that contributed to the Mexican peso crash in late 1994. The MAI matters because its rules can be enforced. If a foreign investor thinks a country where it has invested is violating the MAI, the investor has a choice: to complain to its own government, which can take the host country to binding international arbitration, or to directly challenge the host country. In either case, the arbitration process is closed—citizens cannot participate—and one-sided, as neither governments nor affected communities can challenge the behavior of investors. This imbalance points out the MAI’s fundamental flaw: despite the need for corporate accountability in the international economy, current versions of the MAI contain no binding obligations on corporate investors. Toward a New Foreign Policy Key Recommendations The U.S. government should open up the negotiating process to ensure the full participation of Congress and the public. Any international investment agreement should maintain each government’s ability to screen and condition foreign investment and to promote local, sustainable industries. A balanced agreement on investment should include strong, enforceable provisions for holding corporations accountable to the communities in which they invest. The MAI was scheduled to be completed by May of 1997. But because the agreement’s rules are so far-reaching, negotiators have not obtained consensus on all the provisions of the MAI, and the OECD was forced to extend negotiations until 1998. From the point of view of civil society, the risk is that an extra year will allow the OECD—if unchallenged—to meet its goal of unrestricted international capital mobility. The extension could present an opportunity for citizen activism, however, if developing nations and citizens use the delay to examine the agreement’s implications and demand input into negotiations. It is an open question whether the OECD’s closed negotiation process is salvageable, or if discussions on international investments should be moved to a more open forum such as the United Nations Conference on Trade and Development (UNCTAD). To gain legitimacy in the public eye, the OECD should invite developing nations to participate in MAI negotiations so that the agreement’s core rules reflect the varied needs of rich and poor countries. Public participation would require the OECD to publicly release the draft text of the MAI. The U.S. government has a special obligation to ensure the full, democratic participation of Congress and the U.S. public. The Office of the U.S. Trade Representative and the State Department, which are joint leaders in MAI negotiations, should increase consultations with interested parties, taking efforts to ensure that citizens’ groups and labor organizations are given the same access as private sector business interests. These consultations should be more than briefings on the progress of negotiations; Washington should actively seek input on what positions to take at the negotiating table. The U.S. should carry out environmental and social assessments of the MAI to allow the public debate and the negotiating process to be fully informed about the agreements’ implications. President Clinton has not decided how to bring a completed MAI to Congress for ratification: as a treaty requiring a two-thirds vote in the Senate, or as an executive agreement needing a majority in both houses. The administration is likely to include the MAI in a request for fast track authority, under which Congress agrees to consider trade agreements with limited debate and through an up or down vote (no amendments allowed). Congress should resist this request and should not give up the right to fully debate the MAI. A more open negotiating process should lead to major changes in the substance of the MAI. Governments need to retain the authority to respond to changing economic, social, and environmental needs. For example, regulation of foreign investment could help ensure that private development projects don’t undermine a country’s plan for sustainable development. There should be an approval process in which proposed foreign investors and deals would be assessed, and damaging projects and corporations with bad environmental or labor records could be screened out. Specific investment contracts with foreign investors should contain enforceable provisions to deal with the environmental and social challenges of each project. The revenue stream from approved projects could fund monitoring, social benefits, and environmental mitigation, particularly in countries without developed regulatory systems. Governments should also retain the authority to favor local industry and sustainable development options. Many of the emerging economies of Asia have pursued policies that combine conditioned, targeted foreign investment with promotion of domestic industry. The rest of the developing world, as well as developed countries, should be free to use similar strategies to suit their needs, rather than be forced to adopt complete liberalization. It is particularly appropriate for governments to give preferences to small-scale, local economic activity, rather than rely on the speculative capital and the cross-border mergers and acquisitions that characterize the international economy. Finally, an agreement on foreign investment needs to do more than preserve regulatory authority. A truly balanced agreement would include measures designed to hold corporations accountable to the communities in which they invest. The MAI should include strong, enforceable rules requiring investors to behave responsibly. For example, corporations should be required to operate under the stronger of home or host country core environmental and labor standards. These standards should be enforceable through the MAI’s dispute resolutions system. Only a balanced agreement will do justice to the challenges and risks of a globalized economy. Sources for More Information Organizations Friends of the Earth 1025 Vermont Ave NW, 3rd Floor Washington, DC 20005 Voice: (202) 783-7400 Fax: (202) 783-0444 Email: Website: Harrison Institute for Public Law 111 F Street NW, Suite 102 Washington, DC 20001 Voice: (202) 662-9600 Fax: (202) 662-9613 Website: Preamble Collaborative 1737 21st Street NW, Ste. 20 Washington, DC 20009 Voice: (202) 265-3263 Fax: (202) 265-3647 Email: Website: Public Citizen E. 1600 20th Street NW Washington, DC 20009 Voice: (202) 588-1000 Email: Website: Third World Network 228 Macalister Road 10400 Penang, Malaysia Fax: 60-4-2264505 Email: Publications Canadian Center for Policy Alternatives, The Corporate Rule Treaty: A Preliminary Analysis of the Multilateral Agreement on Investment, Which Seeks to Consolidate Global Corporate Rule , 1997. Friends of the Earth, Ten Reasons to Be Concerned About the Multilateral Agreement on Investment , April 1997. Preamble Collaborative, Writing the Constitution of a Single Global Economy: A Concise Guide to the Multilateral Agreement on Investment, Supporters’ and Opponents’ Views , May 20, 1997. Third World Network, The Multilateral Agreement on Investment (MAI): Policy Implications for Developing Countries , April 1997. United Nations Conference on Trade and Development, World Investment Report 1996 (New York, NY: United Nations, 1996). United States Council for International Business, A Guide to the Multilateral Agreement on Investment (MAI) , 1996. Western Governors Association, Multilateral Agreement on Investment: Potential Effects on State & Local Governments , April 1997. World Wide Web Multinational Monitor (full text of draft MAI) Offical OECD statements on the MAI MAI listserv To receive reports, updates and articles on the Multilateral Agreement on Investments (MAI), subscribe to the MAI listserv. Write to: . In the body of your message type: subscribe MAI–NOT your name organization state (i.e.: subscribe MAI–NOT Chantell Taylor Public Citizen DC). MAI, No Thanks! to receive weekly commentary and expert analysis via our Progressive Response ezine.   This page was last modified on Tuesday, April 1, 2003 4:04 PM Contact the IRC’s webmaster with inquiries regarding the functionality of this website. Copyright © 2001 IRC. All rights reserved.

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G7 Summit: 1997

Key Points The G-7 was formed in 1975 to provide an informal forum for coordination of economic policy among leaders of prominent industrialized nations. Since 1975 the agenda and scope of the G-7 has steadily expanded under pressures of continuing economic and political crises. The G-7 directly influences international financial and trade institutions by virtue of its disproportionate economic power. The G-7, composed of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, will hold its 23rd annual summit in Denver, Colorado, from June 20 to 22, 1997. The impetus for the first summit in 1975 was the perceived need on the part of the leaders of the leading Western industrialized nations to coordinate their responses to the shared economic crises of the early 1970s, most notably the removal of the U.S. dollar from the gold standard, the dramatic increase in the price of oil, and rising inflation and unemployment. It was hoped that a relatively small and informal gathering of leaders modeled on the periodic and productive meetings of finance ministers that had been held in the library of the White House since 1973 would facilitate the reconciliation of policy differences and the development of the collective leadership needed to reimpose some measure of order on the international economic system. Membership in the G-7 has been fixed since the addition of Canada in 1976. Since 1977, however, representatives of the European Union have attended the summits, and Russia (or its predecessor, the USSR) has been invited to meet with the G-7 at every summit since 1991. Despite President Clintons move to formally recognize the participation of Russia by designating the Denver summit as the Summit of Eight,” Russia is not yet considered a full member of the G-7 and does not attend all of the summit’s sessions. Though membership in the G-7 has not expanded over the past two decades, its agenda and scope clearly have. In addition to economic deliberations, a full day of meetings during each summit is now devoted to the discussion of noneconomic issues, such as terrorism, nuclear weapons and energy, and areas of conflict such as Bosnia. The size of each country’s delegation has also expanded as leaders have come to be accompanied by larger teams of advisors and press aides as well as by their key ministers. In addition, officials now meet throughout the year to plan the summit agenda, and separate meetings for G-7 ministers to deal with pressing issues (such as jobs or the environment) between summits have become more common. This recent growth in the G-7 process has prompted some leaders to express concern that the summit’s cherished intimacy and informality have been compromised. Over the years, the summits have played a key role in enabling the seven member countries to work through their differences on such crucial matters as exchange rates, international trade, and Western policy towards the Soviet Union and Russia. The G-7 meetings have been credited with providing the political will and the momentum needed to ensure the successful completion of the last round of GATT negotiations, which led to the creation of the World Trade Organization (WTO), and with assisting the International Monetary Fund (IMF) in developing mechanisms to forestall currency crises such as that which afflicted the Mexican peso at the end of 1994. The agreements reached by the G-7 leaders profoundly influence the direction of policy within such international bodies as the World Bank, the IMF, the Organization for Economic Cooperation and Development (OECD), the WTO, and NATO. This is the case despite the fact that, unlike these bodies, the G-7 has no permanent staff, no headquarters, no set of rules governing its operations, and no formal or legal powers. The influence of the G-7 derives from its disproportionate economic clout—in 1993, the seven member nations had a combined GDP of $16 trillion, which represented almost 70% of global economic output—as well as from the strategically important position that G-7 countries such as the U.S., France, and the UK (all three of which are nuclear powers and members of the UN security council) continue to occupy, for better or for worse, in international affairs. Problems with Current U.S. Policy Key Problems Persistently high unemployment in G-7 countries and growing economic inequality worldwide indicate that G-7 economic policy has been misdirected. The G-7 countries have failed to act on several important commitments undertaken at global summits. A more serious problem is the questionable legitimacy of the G-7; though it contains only 12% of the world’s population, its decisions affect the whole planet. Though the G-7 has helped the West to navigate through many of the economic and political crises it has faced, its current overall policy direction is suspect. In 1996 the seven leaders asserted that within the G-7 “the economic fundamentals remain sound and well-oriented” and that globally “economic prospects also look very encouraging.” Such optimism hardly seems justified, given that 22 million people were unemployed in the G-7 countries in 1995. Youth unemployment within the G-7 is particularly severe, topping 12% in the U.S., 15% in the UK and Canada, 25% in France, and 30% in Italy. At the same time, despite the fact that the global economy has been growing, the United Nations Development Program reported in 1996 that “the world has become more polarized, and the gulf between the poor and rich of the world has widened even further.” In the face of these developments, the content of recent summit communiqués has been disappointing, focusing primarily on promoting the free movement of capital across national borders. The G-7 has committed itself to continue to further reduce public deficits, to promote greater flexibility in labor markets and the elimination of unnecessary regulations, and to resist protectionism and ensure open markets throughout the world. Aggravating the failure to alleviate unemployment in the North and inequality more globally, there is growing evidence that these neoliberal economic policies are actually damaging the economic performance of the G-7 countries themselves. The OECD’s Employment Outlook 1996 warned that in countries such as the U.S., cuts to social programs and the deregulation of labor markets have resulted in an exclusion of large numbers of citizens from the economic mainstream, which is ultimately costly for society and a drag on the economy. The U.S. and the other G-7 nations have failed to match a number of their summit commitments with significant actions. Though the G-7 has declared its intention to “show leadership in improving the environment,” it is not on track to fulfilling the promise made by industrialized countries at the 1992 Rio Summit to level off emissions of carbon dioxide gas (the combined CO2 emissions of Western countries actually grew by at least 4% between 1990 and 1995). Similarly, the G-7 has said it is concerned about the “excessive transfer of conventional arms.” Yet four of the G-7 countries (the U.S., Germany, France, and Britain) are among the top six arms suppliers in the world. In 1994, the G-7 as a whole accounted for 62% of the world’s exports of conventional weapons to developing countries; the U.S. alone accounted for 47 percent. Because the G-7 is simply the agent of the seven member nations, it has no independent power to call its members to account for these discrepancies between their words and actions. A deeper problem is the questionable legitimacy of the G-7 as a global policy entity. The group is democratic in the sense that all of its members are democracies whose leaders have been elected to office. Yet while the G-7’s combined population represents only 12% of the world’s total, its explicit efforts to manage global economic and political affairs clearly affect the whole planet. The other nations of the world have neither mandated the G-7 to conduct this management on their behalf, nor have they any means of formally contributing to the G-7’s deliberations. G-7 leaders and officials meet behind closed doors, and there is no elected congress or council of nations to whom they must answer. The Commission on Global Governance, a policy studies center in Britain, concluded that: “The Group of Seven is the nearest the world comes to having an apex body concerned with the global economy… But it is neither representative of the world’s population as a whole nor very effective… The development issues that concern most of humanity have low priority on its agenda. Looking decades ahead, it will become more and more anachronistic that non-OECD economies that account for a large and growing slice of the world economy are not represented in the main body with an overview of international economic issues.” Toward a New Foreign Policy Key Recommendations The U.S. government will set the agenda for the Denver summit; it could take this opportunity to prepare a bold agenda that attempts to redress the G-7’s previous failures. The U.S. government could also provide leadership to the G-7 by initiating a series of consultations about G-7 policy with non-G-7 countries and NGOs. Over the long term, emphasis should be placed on developing more democratic institutions at the international level, such as an economic security council, which would then take over the responsibility for managing the global economy from the G-7. Much of the debate over reforming the G-7 has focused first on whether the group should be further institutionalized by establishing a permanent secretariat or council of ministers, and second on whether membership in the G-7 should be expanded. Both moves would likely meet with resistance from the seven governments, which generally prefer the model of small, informal summits among countries with a similar approach to global issues. It is also far from certain that a more institutionalized or a marginally expanded G-7 would actually produce the changes in its policy orientation required for the G-7 to become more responsive to the needs of both its citizens and those of the rest of the world. In the short term, however, there is considerable opportunity for President Clinton to use the Denver Summit to begin to improve the G-7’s policy and process. First, given that the host country has the responsibility for shaping the direction and themes of each year’s summit, Clinton should prepare a bold agenda for the Denver meetings. Such an agenda should include a detailed and public review of the record of the seven nations in meeting their obligations under various environmental accords (including those reached in Rio), a declaration that the seven leaders will attend the review of progress made since Rio to be held at the special session of the UN General Assembly from June 23 to 27, and a commitment by the seven leaders to enter into further environmental agreements in areas such as forest management. It should also include the decision to take concrete steps to promote human rights by directing the G-7 trade ministers to collectively scrutinize and publicize the activities of multinational corporations currently active in countries such as Burma and Nigeria. The Clinton administration should undertake on behalf of the G-7 to consult both with other nations and with nongovernmental organizations (NGOs). Specifically, the G-7 should initiate a regular series of meetings with developing and newly industrialized nations, and agree to meet with a delegation from the countersummit of NGOs and social justice activists, which will be held alongside the G-7 meeting in Denver. Countersummits have been held in the same city as the G-7 in almost every year since 1981 and are the source of innovative and practical policy proposals focused on achieving a more economically and environmentally sustainable and just world. Consultations of this type would not be unprecedented. At the 1989 G-7 summit in Paris, French President Mitterrand hosted a presummit meeting with the leaders of several developing countries; the Japanese prime minister met with the president of Indonesia, a leader of the nonaligned movement, prior to the Tokyo summit of 1993; and the Canadian government consulted widely with its counterparts in the Commonwealth and la Francophonie (the French Commonwealth) as part of its preparations for the 1995 Halifax summit. In addition, a delegate from Mitterrand’s government officially received the countersummit’s communiqué in 1989, and environmental NGOs were invited to a working session with G-7 environmental ministers prior to the 1996 summit in Lyon. A U.S. initiative in Denver to build on these precedents, and specifically to make them a regular and more prominent part of the G-7 process, would not only constitute a significant acknowledgment of the G-7’s wider responsibilities but would also provide representatives of the wider international community with the opportunity both to confront the G-7 with their concerns and to have some input into G-7 deliberations. Over the long term, however, U.S. foreign policy should also be directed to the goal of developing and strengthening democratic institutions and practices at the international level so that much of the responsibility for managing the global economy could be effectively removed from the G-7. The Commission on Global Governance, for example, has suggested the establishment at the UN of an Economic Security Council, a body that “would exist to give political leadership and promote consensus on international economic issues” and that “would be concerned with the overall state of the world economy and with the promotion of sustainable development.” The competency and authority of a more representative and transparent body such as this could be enhanced over time so that eventually it would be able to take priority over the G-7 in providing direction to the World Bank, the IMF, and the WTO. Likewise, an Economic Security Council could focus on the task of defining and enforcing at the international level a minimal set of social, economic, and labor rights and obligations (such as those listed in the Social Chapter of the European Union’s Maastricht Agreement), as well as creating environmental standards that would provide a common global framework for free economic activity. Such changes would add what sociologist David Held has called the “discipline of democracy” to the discipline of the market. A G-7 that operated within the context of such a democratic global economic framework could continue to coordinate policy among its members while avoiding the pitfalls currently associated with its present role as a de facto executive committee overseeing the operation of the international economic system. Sources for More Information Organizations New Economics Foundation 112-116 Whitechapel Road First Floor, Vine Court London, E1 1JE UK Voice: (171) 377-5696 Fax: (171) 377-5720 Email: Contact: Ed Mayo (Director) Sierra Club 408 C Street NE Washington, DC 20002 Email: Website: Contact: Dan Seligman The Centre for the Study of Global Governance St. Phillips Building London School of Economics Houghton Street London, WC2A 2AE UK Voice: (171) 955-7585 Fax: (171) 955-7591 The Other Economic Summit (TOES-USA) 777 UN Plaza, Suite 3C New York City, NY 10017 Email: Fax: (212) 972-9878 Contact: Ward Morehouse (Chair) Publications Commission on Global Governance, Our Global Neighbourhood: The Report of the Commission on Global Governance (Oxford: Oxford University Press, 1995). Paul Ekins, The Living Economy: A New Economics in the Making (London: Routledge & Keegan Paul, 1987). International Spectator , special issue on the future of the G-7 summits, Volume XXIX, No. 2 (April-June 1994). Sylvia Ostry and Gilbert R. Winham (eds.), The Halifax G-7 Summit: Issues on the Table (Halifax: Centre for Foreign Policy Studies, Dalhousie University, 1995). Andrew Parkin, “Moving Mountains: The Counter-Summit Confronts the G-7,” Dollars and Sense (May-June 1997). Robert D. Putnam and Nicholas Bayne, Hanging Together: Cooperation and Conflict in the Seven- Power Summits , revised edition (Cambridge, MA: Harvard University Press, 1987). Real World International and Real World Banking . Available from: Dollars and Sense One Summer Street Sommerville, MA 02143 Voice: (617) 628-8411 Fax: (617) 628-2025 Email: Website: William E. Whyman, “We Can’t Go On Meeting Like This: Revitalizing the G-7 Process,” The Washington Quarterly , Volume 18, No. 3 (1995). World Wide Web TOES ‘97 (The Other Economic Summit) University of Toronto G7 Summit Information Centre to receive weekly commentary and expert analysis via our Progressive Response ezine. 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