G7 Leaders' Statement on the World Economy

G7 leaders have reviewed recent developments in the world economy. We welcome the steps our Finance Ministers and Central Bank Governors have announced today to address both the immediate problems and longer term weaknesses in the international financial system, particularly in the light of their impact on the poor and the most vulnerable.

Immediate Measures

2. We welcome the significant steps taken over recent weeks to strengthen confidence in the world economy, including:

- the progress made towards agreeing the IMF Quota increase and the New Arrangements to Borrow, which together will provide additional resources to the IMF of $90 billion;

- the commitment of substantial resources by the Government of Japan to strengthen the financial system. The swift and effective use of public money, with appropriate conditions, together with a sustained boost to domestic demand, is a key precondition for the restoration of market confidence and growth not just in Japan but in the whole Asian region;

- the reduction in interest rates in the U.S., Japan, Canada, the U.K., Italy and several other European countries, which will help maintain strong growth without jeopardizing our continuing commitment to low inflation;

- the policy commitments by the Government of Brazil, which we will work with the international community to support;

- the progress made in many countries in Asia toward establishing the foundation for recovery.

3. These developments have contributed to some improvement in market conditions, though we still face serious challenges which will take time to resolve. We therefore call on our Finance Ministers, working together with their central bank colleagues, to strengthen further their cooperation to promote strong and steady growth with low inflation in our economies.

4. In view of the exceptional pressures in the international financial markets, we welcome our Finance Ministers' and Central Bank Governors' proposals for a set of financing arrangements to ward off destabilizing market contagion, including:

- establishing an enhanced IMF facility to provide a precautionary line of credit that could be drawn on if needed by countries pursuing stong IMF approved polices, accompanied as appropriate by bilateral finance, on a case by case basis, and with appropriate private sector involvement;

- the recent agreement to establish a new World Bank emergency facility, which will provide at times of crisis vital support for the most vulnerable groups and support for critically needed financial sector restructuring and the increased use of financing tools to catalyze private flows.

5. This should significantly strengthen the international financial system, help to reduce the risk that this crisis could intensify, and promote the prospect of the earliest possible return to growth in emerging markets.

Long-Term Architecture

6. However, beyond these short-term steps we also agree that further reforms are now required to create a strengthened financial architecture for the global market-place of the next millennium that captures the full benefits of international capital flows and global markets, minimises the risk of disruption, and better protects the most vulnerable.

7. At the Birmingham Summit, we asked our Finance Ministers and Central Bank Governors to make recommendations to help strengthen the international financial system. They have worked intensively with key emerging markets, other industrialized nations and the relevant international organisations to put in place the building blocks of this new architecture. We have now reached agreement on a number of their recommendations:

- strong global action to promote greater openness in the financial operations of individual countries, of financial and corporate institutions and of the international financial institutions, including through internationally agreed codes of good practice to increase the transparency of governments' fiscal and monetary policy, and to strengthen corporate governance;

- the need to strengthen the global financial system by enhancing the surveillance of national financial and regulatory systems, with better cooperation among national authorities and key international financial and regulatory institutions;

- the importance of an orderly and progressive approach to capital account liberalisation;

- the importance of developing and implementing measures to ensure the orderly and cooperative resolution of future crises, in particular the mechanisms to involve the private sector;

- the need for general principles of good practice in social policy, to protect the most vulnerable groups in society. These should be drawn upon in developing adjustment programs in response to crises.

8. We welcome our Finance Ministers' and Central Bank Governors' detailed proposals in these areas, published today, and agree they should be implemented promptly.

9.But we must do more to build a modern framework for the global markets of the 21st century and to limit the swings of boom and bust that destroy hope and diminish wealth. We therefore call upon our Finance Ministers and Central Bank Governors to extend the reach of their work to pursue further proposals to strengthen the international financial system, including:

- the scope for strengthened prudential regulation of financial institutions in industrial countries to promote safe and sustainable capital flows, encouraging sound analysis and better risk assessment. Examination of the implications of operations of highly leveraged and offshore institutions, including with a view to encouraging offshore centres to comply with internationally agreed standards;

- strengthening financial systems in emerging markets and better ways to motivate countries to adopt and enforce international standards;

- establishing a process for surveillance of the international financial system that draws upon national and international regulatory and supervisory experts and brings together the key institutions and authorities to improve cooperation;

- maintaining sustainable exchange rate regimes in emerging markets backed by macroeconomic policies that promote stability;

- developing new ways to prevent and respond to crises, including new forms of official finance and improved methods to promote a greater role for the private sector in containing and resolving crises;

- encouraging the adoption of policies that better protect the most vulnerable, minimising the human cost of financial crises;

- assessing proposals for strengthening the IMF and strengthening the Interim and Development Committees of the IMF and World Bank.

10. Open markets will play a key role in restoring and sustaining growth. We therefore renew our commitment, made at the Birmingham Summit, for all countries to open their markets further, resist protectionism and to continue liberalisation within the framework of the WTO.

11. We remain committed to keeping these issues under constant review. We have asked our Finance Ministers and Central Bank Governors to consult with other key countries, including emerging market economies, and to work up detailed proposals in each of these areas. We look forward to agreeing these at our meeting in Koeln next year.

30 October 1998