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G7 urged to stir growth
02/04/2003 10:49 - (SA)
Washington - World banking and investment titans on Tuesday pressed the Group of Seven powers to stir growth in the war-shaken global economy and to calm nervous financial markets.
G7 finance ministers and central bankers must beware of under-estimating the scale of the threat, Institute of International Finance (IIF) managing director Charles Dallara said.
"Concerns about the economic outlook reflect not only the Iraq situation but also the underlying fragility that is a consequence of the lingering imbalances and excesses accumulated during the bubble years," Dallara wrote in a letter to the G7 finance ministers and central bankers, set to meet on April 11.
"These problems should not be under-estimated as you gauge the need for clear measures."
The IIF, representing more than 300 of the most powerful private sector banks and investment houses around the world, said intensified policy co-ordination among the G7 members was essential.
If the war in Iraq was quick and contained, the economies of the G7 - Britain, Canada, France, Germany, Italy, Japan and the United States - would likely grow 1.9% in 2003 and 2.8% next year, the IIF said.
The US economy would grow 2.4% this year and 3.4% next year, the euro zone economy would expand 0.9% this year and 2.0% next year, and Japan would creep up 0.7% this year and 1.0% next year, it forecast.
Action should be taken to restore confidence, reinvigorate growth and dampen financial market volatility, the IIF said.
It called for - a bias towards cutting interest rates, backed by a promise to act as warranted by circumstances, flexible fiscal policies without risking government finances longer term, structural reform of labour and product markets, pensions and taxes in Europe, banks and companies in Japan and corporate governance in the United States, and determined progress in World Trade Organisation talks to dismantle trade barriers.
"Of course, the duration and outcome of the war in Iraq are still highly uncertain, with that uncertainty acting as a major drag on global economic activity," the report said.
"All told, the world economic setting this year is not one conducive to any significant pickup in economic growth in emerging market countries," it warned.
Emerging markets finance had been rocked by successive crises over the past eight years, Dallara said in his letter.
Net private capital flows to the emerging market economies were expected to amount to US$135bn this year, down $50bn from the average of the past 10 years.
Finance ministers and the senior officials of the International Monetary Fund and World Bank who meet on April 12-13 should replace words with action to free investment flows, Dallara said.
The IMF should abandon its proposal for a new bankruptcy-style system to cushion crisis-torn nations while they undergo debt restructuring, Dallara said.
Instead, he called on the Fund to support the use of "collective action clauses" to be placed in the terms of bonds issued by debtor nations.
Those clauses would allow a set majority of creditors holding the bonds to agree to the country restructuring its debt, rather than requiring the consensus of all creditors.
Debtor nations and creditors also should agree to a voluntary code of conduct for handling debt crises, Dallara said.
Adherence to the code could be monitored by representatives from the public and private sectors, industrial and emerging markets, he said.
- AFX
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