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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

FIXING THE WORLD

The G8 needs to grapple with financial reform and debt relief


WHEN THE LEADERS OF the G8 - the Group of Seven industrialized nations plus Russia - gather in Cologne, Germany, for their annual summit this week, they will have some reason to pat themselves on the back, or at least heave a sigh of relief. The Kosovo crisis seems to be stumbling toward a relatively peaceful conclusion and the world economy appears to have avoided a much-feared recession. But the summiteers should not waste too much time on self-congratulation as problems abound.

Kosovo will undoubtedly hog attention after the confusing confrontation last week between Russian and NATO troops entering the province to enforce the peace. Certainly, the leaders should use the opportunity to hammer out once and for all how the international protectorate will work. But after that, they should focus on what the rest of the world is looking for - a concerted effort to strengthen the underpinnings of the international economic system.

One achievement is almost in the bag. The G7 is expected to endorse an accord reached by their finance ministers last week that could erase $70 billion in debts owed by the world's poorest nations, most of them in Africa. The plan builds on the Highly Indebted Poor Countries initiative launched in 1996 to cut the $200 billion owed by some 40 nations. But the requirements of HIPC were so strict that only two countries have benefited from it. The latest plan lowers the hurdles. It is good news - and, if anything, should be made more generous.

These countries are not simply poor. With crippled economies and fragile societies, they are barely on the world's economic map. And as knowledge and technology become ever more important, they risk falling off entirely. True, debt forgiveness raises the risk of moral hazard. But applicants must show a three-year record of sound economic practices to win relief - which they will be pressed to invest in education and health. That should lay a stronger foundation for the future.

While the enhanced HIPC effort should help get the poorest nations to the economic table, the rest of the world - and especially Asia - is still wondering if the table is stable. Two years after the Asian currency crisis abruptly slammed booming economies into reverse and threatened a global recession, there has been much talk about reforming the international financial architecture, but less action. The topic is high on the G7 agenda. The world's dominant economic powers should give it a firm push forward.

Broad consensus already exists on the areas that need action. They include the development of internationally accepted standards, increased transparency of governments and markets, and improved monitoring and supervision of capital flows. Also on the cards is faster and more socially sensitive crisis management, as well as greater private-sector participation in such efforts. In many areas, only G7 members have the power to bring about change. Besides having the most experience and expertise, they boast the deepest markets, the biggest intermediaries and the most influential investors. Many of the mooted changes will place some limits on hitherto little-restrained private players - or at least subject them to greater scrutiny. The G7 governments must deliver those players' participation if a revamp is to be successful.

But as the G7 grapples with the issue, it must remember to consult those its decisions will affect most. Asia is still smarting after the United States squelched Japan's proposal early in the Crisis to set up a regional intervention fund, while the International Monetary Fund pressed excessively puritan fiscal regimes on stricken governments that caused deeper-than-necessary recessions. There is also much closet support for the way Malaysia flouted conventional wisdom by imposing capital controls (including within the IMF, now that predictions of doom have proved unfounded).

While Washington has tended to urge theoretical purity, Asia has pressed for whatever works. Each side should heed the other. In this respect, it is encouraging that the three working groups set up by the G7 to scrutinize highly leveraged institutions, offshore financial centers and short-term capital flows saw fit to include developing-nation voices. Market fundamentalists in rich countries should recognize that unorthodox methods, if used judiciously, can work in times of crisis. But Asian pragmatists should also remember that the market is bigger and faster than governments. Therefore, reforms should center on ensuring that market risks become more readily identifiable, and that the costs of future mishaps are more fairly shared among borrowers, investors and governments.

Finally, the G8 needs to consider whether it can be complete without China. While the G7 tends to focus on economic affairs, the G8, with Russia's inclusion, covers geopolitics. That makes Beijing's exclusion seem ill-considered - as the furor surrounding NATO's bombing of the Chinese embassy in Belgrade amply showed. Asia would certainly benefit if another voice from the region, especially one more independent from Washington, were to join Tokyo in the exalted forum. As the G8 makes decisions for the world, it ought to become more reflective of global opinion and interests.


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