By: Kevin K. Ho

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Increasing involvement of heads of state in international economic policy coordination efforts should be viewed mainly as a response to the substantial integrating effects of globalisation and the questions they pose to national financial control, and not to national sovereignty. Conversely, the preference towards informal settings like Group of 3, -7, -8 and –22 summit structure also reflects the growing constraints placed on international public political organisations like the United Nations by the developing world and the complexity that entails. World leaders have had to take the prerogative to deal with these contemporary obstacles in the best way they can—with each other. Therefore, in order to consolidate and account for increased ‘summitry’, one can think along the lines of a ‘3M’ shorthand -markets, mayhem and mandate. The first ‘M’ –markets-- was the result of liberalising global capital markets and currency markets along with the reduction of trade barriers. The move towards floating currency-exchanges in the 1970s combined with falling trade tariffs between nations allowed for increased trade and capital flows. The move towards a unified ‘globalised’ market was underway. ‘Mayhem’ refers to the monetary and oil crises of the 1970s and the debt crises of the early 1980s that shook world leaders out of the complacency felt during the relatively prosperous 1960s. These financial shocks required greater international macroeconomic collaboration among leaders in efforts to avoid a repeat of the Great Depression. These shocks were classic definitions of a catalyst. While relatively short-lived, they accelerated the process of interdependence and shaped the long-term by forcing leaders to cooperate to minimise the potential damage from these shocks. Lastly, the continuing and expanding complexity stemming from the ever-faster forces of globalisation requires that leaders mobilise their political mandates as heads of state.

This paper mainly concerns itself with the G-series summits but assumes that the marriage between politics and economics was formally made with the first of these summits in 1975. It makes no value judgement on globalisation, (i.e. increasing communications, expanding markets and falling trade barriers—the move towards ‘one’ marketplace) except to note that forces of integration this time around (as opposed to pre-WWI and the Interwar period) are being handled through means of positive cooperation among heads of state. The results evident with increased material gains by leading OECD countries that have far outpaced background inflation, whether or not this is a good thing is subject to debate. Regardless, the G summits are (and were) an irresistible elite format to politicians, who by their very nature, have to be involved with anything that affects the social and economic welfare of their nations.

The Markets.

Economist David Henderson points out that governments, more or less, have chosen to accept diminished economic autonomy in realm of currency-exchange and capital flows, but he asserts that this acquiescence is not a permanent nor a binding one.[1] Regardless, with such trade institutions like the GATT and its successor, the WTO, global trade has increased substantially. However, this is only part of the picture. This paper assumes that various factors built upon each other that led to increased cooperation and a more substantive marketplace. Greater interdependence due to an increase in world trade, the reduction of capital controls and the elimination of fixed-exchange rates all combined with greater participation of heads of state to accelerate the push towards a globalised and more unified marketplace. Due to the demise of economic influence the United States wielded immediately after WWII in the 1970s, financial liberalisation was pushed. The Uruguay Round of 1994 formally solidified the trend of reducing barriers that started in the 1960s with such events as the Kennedy Rounds to a system contingent on more integrated trade while dismantling obstacles such as tariffs, non-tariff barriers and voluntary export restraints, results from the removal of trade barriers were self-evident (see Fig. 1). The trend towards increased trade and capital mobility was clear.

Figure 1. Selected Trade Growth: the United States, Britain and Germany, 1963-1993.

 

 

In addition to liberalising trade barriers, during the 1970s many central banks were freed from the currency constraints of the Bretton Woods system. In fact, with the Conference of 20 in 1974, and the formal amendment of the IMF two years later in 1976, fixed exchange rates were dead. This was not necessarily a cause for mourning however. Major central banks could now exercise a greater amount of control over domestic circumstances than under the Bretton Woods system. Their goal of having domestic interest rates and capital flows in line with global trends was now much easier to accomplish. Debts could be serviced privately through a fluid marketplace, rather than be financed through official reserves. Also, as a consequence, many OECD countries started to ease capital flow restrictions to encourage trade and foreign direct investment. This freedom of capital and currency exchange rates allowed a financial market based on securities, bonds and derivatives to flourish. Evidence of this increased flow comes from data that speaks to this trend. In 1970s the daily turnover from currency exchange transactions barley totalled an average of $60 billion, in 1995 the amount jumped to $1.3 trillion, and in 1998 to $1.5 trillion. (See Figs. 2, 3 and 4, Cable 33). With this turnover increase, many would argue that governments have lost control over their currencies. To a certain point this may be true, but if that diminished control extends to other areas of sovereignty is doubtful as the next section illustrates.

Henderson’s point of non-diminished government control in the face of globalisation and liberalisation is supported by an examination of public sector expenditures. With exchange controls gone, ministers and governments were allowed to borrow a far greater amount of money. In fact, public spending among the leading 15 Western economies (EU Members, the U.S. and Canada) for the period rose from an average of 28.5 percent of GDP in 1960 to 47.1 percent in 1990.[2] So governments, along with the private sector had much more money to spend on more expenditures. This not only demonstrates that governments were very much still in control of their sovereignty, but also reaping the benefits of globalisation. Public expenditure figures reveal that governments are still spending at least same proportionate amounts of their national revenues as they did during periods of greater economic and financial regulation. In fact they are spending more. Still more critics of globalisation argue that heads of state participate in macroeconomic policy coordination because governments are desperately losing control to private sector funds and trading houses. However, it would seem that the degree which governments have become intertwined with each other is the more salient factor to keep in mind. States have, in fact, become more vulnerable to the economic policies of their financial partners, but it becomes a larger question of collective risk as well as a question good faith. Returning the discussion of whether or not states have any influence vis-à-vis the marketplace one should consider that a majority of bonds and securities, currencies that make up financial markets are issued by governments themselves. Henderson was very right to point out that diminished government financial control is not necessarily binding, as governments maintain a huge amount of control over their money supply and creditworthiness. Interdependence, not desperation, then is the keyword here.

 

Figure 2a. Breakdown of Global Turnover, 1992

Figure 2b. Global Foreign-Exchange Turnover 1980-1992.

 

 

Figure 3. Currency Comparisons for the U.S. Dollar 1975-1995

 

During the period, daily turnover ballooned from just a few billion dollars a day in the 1970s to just over a trillion dollars recently. Currency trading rates far outpaced inflation for the period as well. But, as figure 3 shows, it has not been a smooth ride, and market volatility represents some of the financial controls that governments have yielded to the markets.  

 

Figure 4. Cross Border Bond and Equity Transactions from 1980 to 1996 & Foreign Exchange Trading 1986-1996.[3]

 

It can be seen that a huge increase in bond trading –the trading of financed debt—skyrocketed after the debt crisis of 1980. Thanks to the removal of barriers of the Bretton Woods system, huge increased in currency trading can be seen as well.

 

Some Mayhem...

The emancipation from the Bretton Woods system, however, was not an entirely gentle event. The ‘mayhem’ of the 1970s started with the demise of the relative economic calm of the 1960s. In response to doubts placed on the U.S. economy out of increasing pressures of interdependence, the United States suddenly took itself off of the gold standard on August 13, 1971 in efforts on getting a more favourable valuation for the dollar vis-à-vis other competing global currencies. The world never went back a fixed dollar rate again as two years later, on October 16 1973, the ‘sticker shock’ from OPEC’s unilateral price increase sent the price of oil from $3 a barrel to more than $12 a barrel. The resulting inflationary pressures forced the hands of OECD countries to allow currencies to float as average inflation jumped from 4 percent throughout the 1960s to more than 13.5 percent by 1974.[4]

…Mostly Mandated.

An important delineation that must be made between the pre-WWI financial integration and the character of the one after WWII is that while capital movements and freedom were relatively the equal, as Kenen points out, policy coordination between nations was not.[5] Granted such trade schemes as the British Imperial Preference system and those of other imperial powers did exist. The number of major international actors subscribing to similar degrees of liberalism, however, did not equal today’s number.[6] It should also be kept in mind that large multilateral international institutions with the scope and breath of a World Bank, for example, or tariff conventions like the GATT did not exist either. The degree of privatisation and private capital in today’s world economic system should be considered as well. The question of evolving international law also has to be considered. Lastly, the spread of accountability to more educated populations –the constituents of these governments—is a factor that is worth bearing in mind. Economist David Henderson points out that over the past 20 years governments are either more predisposed to external economic liberalisation or are “less able to resist it.”[7]  Indeed, world leaders and their financial ministers have been compelled to practice greater multilateral coordination than previous times periods. Hence, the predilection of world leaders to participate in macroeconomic policy coordination is apparent. All of the growth cited by this paper could not have happened spontaneously. Rather, it took the work, and the clout of heads of states and their various ministers to hammer out.  Although simple Ricardian Theory would go to discount tariff and trade barriers, the rhetorical arguments of protectionism were quite seductive ones to overcome (and still remain so).

The fallout from the financial shocks of the 1970s was a choice between policies that would incite ‘beggar-thy-neighbour’ policies of the 1930s Depression-Era or to cooperate. The evidence cited by this paper demonstrated that the choice of cooperation was the obvious one, but at the time, this choice was not clear. Spero and Hart assert that after the U.S. took itself off of the gold standard in 1971 that there was no single economic hegemon to manage the international economic situation. They use this basis to argue for multi-lateral management, however, they highlighted that the operational structure of G summits, at least on a ministerial level, were constrained by “jurisdiction only over a limited subset of issues.” They go onto to dismiss the G structure on the basis that there is no rigid structure that is charged with leadership responsibilities, instead arguing for supreme market supremacy.[8]  However, a cursory examination of the structure of the regular the original Seven-Power Summits will show that they are missing the whole point of the summits.

The seven leading major industrial powers of the world known as the G-7 (plus Russia then G-8) are the primary economic forum asides from the much larger GATT and WTO and were the primary means leaders used during the 1970s. A considerable amount of power and expediency is derived from its reduced forms, the G-3 (the U.S., EU and Japan) and the ‘Quad,’ (the U.S., EU, Japan and Canada). Putnam and Bayne lay out the criteria that French Finance Minister (and eventual President) Giscard set forth when convening these informal meetings of finance ministers in 1973. Meetings would be frank, informal and any subject was fair game. However, what was discussed was kept in the strictest of confidence. One aide usually accompanied ministers and membership was constrained to five leading industrial countries of the time, eventually expanding to the seven leading economies and then to eight with the inclusion of Russia in 1994. Two years later in 1975 Minister Giscard became President of France and his German counterpart became Chancellor. The format the two helped devised—the Library Group—was elevated and extended to that state executive level. The ‘Group of…’ (G) Summit system was born. An analogy that may be appropriate would one of a comparing the new G-7 summit of world leaders to a Native American Council of Elders meeting versus the very public Pow-Wow—in this case the structures of the United Nations for example. During the 1980s the intimate and elite meetings of the G-3, -4, -7 a move away from discussing and advancing specific agendas to a forum where leaders could seek and give mutual support of each other’s policies both at home and in the international context became the norm. Also, with each successive meeting the issues become more and more intertwined with each other, reflecting the complexities of an ever-changing context. Such issues included energy policy, monetary policy, fiscal policy, foreign policy, terrorism, defence matters, international crime, drugs, money laundering—just to name a few. The summit structure itself grew into one where mid-level ministers were used and negotiate along a similar set of arrangements. The most public meetings are still among the leaders themselves, but it is noteworthy that the structure, like many international ones, has grown as well. As Putnam and Bayne point out in their discussion the routineness of having regular meeting allowed leaders to rely on these summits all the while knowing that if deadlock was reached that there was yet another opportunity to smooth out differences.  Personal idiosyncrasies are figured prominently and eventually “habits of accommodation” came into being.[9] These fluid relationships and reassurances entailed with them was something unprecedented, and something that Spero and Hart missed.

In a larger sense, Spero and Hart also failed to see that heads of state are politicians after all and are subject to political pressure from various elements within his or her country. The growing complexity that was not present during the pre-WWI era has even grown more so. The number of domestic and international characters that a head of state must deal with has ballooned in the past 50 years. Trade unions, disenfranchised voters, political opposition, nationalist elements, socialist elements, the Green element, are just a small sampling of typical population in one nation, multiply that by seven countries, and picture becomes even more complex. The ideas these elements bring along is weighed and considered by a political leader in a fashion that a market could not emulate. Therefore, for the political leader economic and political policymaking becomes a matter of negotiation, compromise and co-optation. Also, the preference of direct negotiation between heads of states, one only need to consider the levels of bureaucracy involved with policy- and decision-making within and among countries. Most important though, by their very nature, politicians have a long-term perspective and agility on how decisions will affect their survival as an elected official. Heads of state manage to straddle the two worlds in what Putnam and Bayne call a unique “two-level game.”[10] The ability to straddle these spheres is an important one to have, as domestic issues and barriers now restrict the progress towards a unified global market. The adage that President Harry Truman used, “the buck stops here,” is one that particularly appropriate when considering the participation of heads of state. Thirty years of trade rounds and negotiations have advanced the cause of globalisation a considerable amount, as tariff levels are at an all-time low. However, other domestic issues like wages rates, labour endowments, specialisation, and subsidies, among many more, favour elected heads of state resolving them and not their lower-ranking financial ministers. This is so because heads of state bear the ultimate responsibility for their nations; no other single person can wield that much executive power over a government.

Henderson observes that the past fifty years a greater association between economic freedom and political freedom has been made.[11] The assumption of Henderson’s statement is that there is a substantial relationship between economics and politics. But the G summits themselves married politics with economics. Esoteric economic meetings between mid-level bureaucrats now had a politically charged element as well. However, with the formal marriage of politics and economics on a head of state summit level, the policy that maximises the most economic utility is not always the course perused, as this policy may be the most politically unpopular.

Granted, the G summits are not, and were not the only international economic forums during the period. Other organisations like the IMF, the World Bank, the GATT among others also existed. It is interesting that while the G summits tend to exclude the middle and poor countries, they tend to look after them as well, as evidenced by recent UK pushes for debt relief to developing countries. One key difference though, asides from power policy-making, is that, in some ways the G summits are more accountable than the international economic institutions that have received the harshest criticisms. Non-governmental organisations and supranational financial institutions have been accused (despite their structured forums) of having a ‘democracy-deficit.’ As mentioned, the G summits have been expanding downwards, as executive involvement, strong from 1975 to the mid-1980s, was diminished to lower-ranking ministers. This trend does pose a threat to the format Giscard consecrated nearly 30 years ago, however, at its highest levels, the G summits do, in fact, have elected officials presiding over issues that voters can hold them accountable. However, recently, this trend has been reversing itself.

© MM Kevin K. Ho

Bibliography.

 

Cable, V. Globalisation and Global Governance, 1999.

The Economist: Economics: Making Sense of the Modern Economy. London: The Economist Publishing Group, 1999.

Henderson, D. The Changing Fortunes of Economic Liberalism, 1999.

Kenen, P. Managing the World Economy, 1994.

Putnam, R., and Bayne, N. Hanging Together: Cooperation and Conflict in the Seven-Power Summits, 1984.

Spero, J. and Hart, J. The Politics of International Economic Relations, 5^th Ed., 1997.