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Frames No Frame



by Joan M. Veon

The Women's International Media Group, Inc.

JUNE 21, 1997

Q. Sir Nicholas, you have been part of the G-7 process for a number of years, could you give us an overview of your experience and background--where you have been in this process?

A. I have been all of my professional career a member of the British Diplomatic Service and in contact with these summits from the beginning as I was serving in the British Embassy in Paris in 1975 at the time of the first Summit. Later in London, I was involved with the Economic Relations Department - Foreign Office which prepared the briefings for the British participation in the Summit and I did that from 1979 to 1982. Then I was given a leave of absence for a year and I went to the Royal Institute of International Affairs in London. From there I teamed up with an American professor from Harvard, Richard Putnam. We co-authored a book about the G-7 Summits up to that point, called Hanging Together published in 1984 and a new edition in 1987. I then went back working as a diplomat and after a spell as the Organization for Economic Cooperation and Development (OECD) Representative in Paris, I returned to London in 1978 and for three years was Economic Director of our Foreign Office and was responsible again for a high level of summit preparation, including the London Summit in 1991, the Summit which President Gorbachev appeared at. I am now retired from diplomatic service but I retain my very active interest in the Summit process and since writing the book, have written a number of articles in journals on the way in which the Summits have developed to the present day.

Q. I am indeed honored, Sir Nicholas, you probably bring all of the background that someone like myself would love to know. Let me ask you a question to help it all come down to where we are now. In your opinion, where is the integration process currently, where does it need to go and what will it mean for the people of the world.

A. I think the Summit leaders themselves do not have an exaggerated view of influence and power. I think it is right that we should not have one either. One of the processes of globalization is a decentralization process and lots of countries now exert an influence on how the world works. We did not ten years ago. We see for example many of the countries of East Asia--Korea, Malaysia, Singapore and in particular China, developing into economic powers in their own right. So while the Summit leaders are still the leaders of the economies which are most influential in international trade and finance, they have to recognize that other power centers are developing so that in exerting leadership they have to do so in a tactful and persuasive way to make others come with them.

Q. Sir Nicholas, back in 1991, Richard Nixon severed the dollar from the gold standard and that precipitated the need to gather the developed countries together and determine where the monetary system was going. What do you see as the most useful or necessary tool that they developed with regard to the global integration process and world economics?

A. Since the end of the regime of fixed parities and the development of floating exchange rates the power has passed very much out of the hands of government and monetary authorities into the hands of the market. So it is no longer possible on an international dimension for the government to determine exchange rates in defiance of market pressures. The scale of the market and currency movements is too great. the only way in which currency movements can be kept relatively stable and predictable is by the efforts which the leading governments make to have stable and predictable economic policies which are compatible with one another. The experience of the last 3-4 years--since the end of 1994 to now, has shown a much greater degree of currency volatility than in the years before. We see in the first half of 1997, the central bankers saying that they thought it was time for the rise of the dollar to end and the yen to begin to recover and that's exactly what been happening. The currencies are responding to the economic signals which they are getting from the policies adopted by the government. it is instructive to compare what's happened on the international scale without what has been going on within Europe with the 15 members of the European Common Market. They tried for several years to link the exchange rates of national currencies together and found that the pressures of the market are too strong. They have decided to go beyond that and not link the currencies together but actually replace them by a single currency.

Q. With regard to the volatility of the dollar in the world currencies markets, the dollar dropped to .80 yen, then rose to 1.55 and is now down to 1.12. What do you think this signifies with regard to both the Japanese and American economies?

A. It signifies that the Japanese economy [was] going through a period of considerable weakness is now recovering. So they are beginning to gain--the strength of the dollar reflects a long period of strength in the U.S. economy while the European and Japanese economy were much less affected. Now you see in the Japanese .....this unfamiliar pay of no growth are beginning to rise up again and that is really welcome to everyone because it is unhealthy when one economy is getting too far ahead of the others [JV: Economic socialism] because that' when you get the greatest risk of distortions and sends the market into a panic.

Q. What about the parity of the dollar to the yen and Deutsche Mark. where to you see it going?

A. If I know that I would be a millionaire and we wouldn't be having this discussion.

Q. All right--when we start to talk about a look at the whole global structure, it appears that the Bank for International Settlements , through a number of Accords and studies are looking to integrate the financial markets. What is the role of the BIS?

A. The BIS within the last 12 months they need to broaden their participation and instead of being very much concentration on traditional economies of Europe, and North America, have now brought in a group of emerging and formerly communistic countries. What they are going is to develop rules and disciplines for improved supervision of financial institutions and markets. That includes the supervision of banks, but not just banks and their deposit taking function but the investment banks and securities markets. It not impossible to draw precise borders and frontiers between these activities. But there is , the BIS recognize that the greater flexibility which is now given to financial institutions, the greater variety of business they can enter in, I mean, does contain dangers for the system, for the consumers, the depositors unless supervisory standards are improved. And that's necessary both for developed countries, but also, particularly for developing countries who are coming onto the world market for the first time.

Q. Sir Nicholas, with regard to the BIS and what they're working on, the United States has the Glass- Steagall Act and the Ball Commission set up, well it was the BIS that set up the Ball Commission, IOSCO and IAIS, the Tripartite. They are really looking to, I guess, level the playing field on a global basis with regard to financial conglomerates. What do you think is going to happen in the U.S. so that we can then participate fully in the development of financial conglomerates which appears to be part of the whole globalization process?

A. I mean, I'm not an expert on the U.S. scene, but I'm aware that there have been a number of measures being taken which remove, or at least mitigate some of the rules imposed by the Glass- Steagall Act that the U.S. Treasury and the Federal Reserve system are not making use of the powers they have to enable banks and other financial institutions to undertake a wider range of business. And, I know, I'm sure this is welcome to many U.S. institutions is also welcome to British and other European institutions who have been trying to establish themselves in the United States, take a part in this very vibrant market. But, the details of that is a bit beyond my knowledge and whether it's necessary actually to repeal the act or whether it's the U.S. bodies have enough powers to achieve their aims without repealing the act, that's more than I can say.

Q. Most recently the Bank of Japan and the Bank of England have been given broader powers to set interest rates. One of the things that I did not know is that they were "catching up" to the Federal Reserve. Where will that lead with regard to globalization?

A. I mean, it's true that the powers that the new British government have given to the Bank of England, the operational responsibility for setting interest rates really just brings the Bank of England up level with the Federal Reserve and with most of its European partners. Because, there has been a general trend to give greater independence from government to central banks. The central banks, both in Britain and elsewhere, most of them still retain an obligation to explain their policies to national parliaments. But, they no longer have to obey instructions from the governments. And I think that is a healthy sign. It's certainly regarded in that way by the markets, because the markets are prone to think that governments will tell central banks to be less rigorous than the banks themselves would want to be. And, this is generally helpful in the objectives which all develop government share which is to keep, to bring inflation down low and to keep it low. Because, they recognize that this is one of the essential ingredients of having a competitive economy in conditions of globalization. That it's fatal if you allow your inflation rates to rise, or even for business to believe that you would let your inflation rates rise, because rather than take the risk of that they'll move elsewhere. So, keeping inflation down, developing an anti-inflation mentality is very high on the priorities of governments and they realize that one way to do that is to pass the responsibility out of their own hands to the hands of the central bankers.

Q. How does that play out with the United States? We have the highest interest rates in the world right now. Interestingly enough, they say inflation is low, but I always thought, maybe I'm in the old school of business, that high interest rates was equivalent to higher cost of living?

A. What the Federal Reserve is doing, as I understand it, is a preemptive strike. In order to avoid the risk of interest rates going up, of inflation accelerating, they are prepared to put the interest rates up even before the evidence says that it's essential. And that's because as we were saying earlier, the U.S. economy has been showing sustained output growth at a time when the Japanese and the Europeans have been rather slow. And if you look at the comparative inflation figures, even though U.S. inflation is very low, it's still higher than inflation in some of the other European countries, let alone Japan. So, this is as I understand it, a pre-emptive strike by the Federal Reserve, and even then Alan Greenspan is sometimes criticized for not having done enough.

Q. But, Sir Nicholas, help me understand that we have the highest interest rates of any country in the world. We've got a lot of foreign money flowing into our markets that is creating, or helping part of the U.S. Market. They are also buying U.S. Treasury bills, notes and bonds which finances our debt, and therefore if the Federal Reserve were to reduce interest rates, that money would flow out and create another kind of problem. Is it not true, or is it not consistent with policy that at this point our high interest rates is basically allowing other countries, if you will, a financial edge with regard to their products?

A. The U.S. interest rates are not the highest in the world. They may be the highest in the G-7, but I mean British interest rates, compared with some of our partners are also quite high. Governments have to make choices. It's very seldom that they can get the best of all possible worlds. They can have their cake and eat it. And, in present day conditions, nobody's prepared to take risks with inflation. Even if that gives your other countries a competitive edge, it's better to allow that than to risk igniting inflation once again. And it's true, and I read that the U.S. trade deficit has been rising. Nonetheless, overall, the U.S. economy is in a very healthy state. And a lot of the continental European economies wish they had a high performing economy like the United States has.

Q. When we start taking a look at the global infrastructure, what is the role of multinational corporations?

A. The -- what multinational corporations can do is that they can bring investment capital, new technology and management skills to developing countries that need it. It took developing countries quite a long time to understand that they should be going out and attracting private investment rather than worrying about foreign firms buying up their countries. There had been some bad experiences in the past, but now all the more successful developing countries realize that multinational companies bring them in very precious resources, both in terms of cash, but particularly in the technology and in the ways of doing business.

Q. When we start taking a look at a King of the Hill game, power, you always follow the money. The Bank for International Settlements has lots of money and the multinational corporations have lots of money. How will the two play out in the globalization process?

A. Well, I think this is all the same money, because the multinational companies are firms in business, they are manufacturing companies principally, some of them are mining companies. But, their earning go into the banks and the BIS is keeping its eye on what the banks are doing with money which is of course not their money but it's their depositors money. And a lot of it comes from the multinational corporations.

Q. A nice little circle, isn't it? That brings me to a fun question, the Prince of Wales. The Prince of Wales has the Prince of Wales Business Leaders Forum and as such, I believe, I read somewhere where it was 5000 multinational corporations that he's working with and they're doing just that. They are going into the developing countries. Can you comment on that at all?

A. The Prince of Wales Business Leaders Forum and other activities promoted by the Prince of Wales, like the Youth Business Trust, has one objective, really, which is to make -- to work with business men, to show that there's more in business than making money. That, they have a tremendous contribution which they can make to the community and responsibility to do so. And he's trying to encourage them in this to find ways in which they can help protect the environment, they can help spread the benefits of their business more widely in the community. They can help to bring young people, so that they have the opportunity to start their own businesses and do their own earnings. And, he's not the only person in this field. There are many other institutions doing it. But, that is his motivation.

Q. Well, you see when I was a young woman, 12 or 13, I thought for sure I was going to marry the Prince of Wales. In any event, the Prince of Wales is a great environmentalist. He has supported a number of the UN conferences, the Rio UNCED conference. Can you comment on that aspect of the Prince of Wales' activities?

A. Not in detail. But, beyond saying that this is -- he follows his environmental activities out of deep conviction. And, it's something where he feels he has a contribution to make, just as the Duke of Edinburgh does with the World Wide Fund for Nature. Because, he is bit detached. He is able to draw people's attention to things which might otherwise escape them. And, he can bring them to see the wider requirements of preserving the natural environment and not destroying things which he should be keeping in trust for future generations.

Q. With regard to this summit per se, let's just wrap up with a question on Russia. Professor Kirton has said that it was really, or it is really bad timing with Russia being invited to this conference that the G-7 can not get on with the business of -- the financial business that they need. Would you care to comment on Russia's participation and what it really means?

A. Yes, I think Russia's participation has been coming for a long time. And, what has happened at Denver is an important step, but it's just one step in a process which has been developing since, well really since the 5th of April, 1990 when Margaret Thatcher made a speech in Aspen, CO in which she suggested that the Soviet Union should be associated with the Summit. The first reason for associating the Soviet Union and then the Russians with the Summit was that the G-7 could help, first the USSR and then Russia to come to grips with their formidable economic problems. And, the G-7 decided that they owed it to the Russians, having decided to liquidate their empire and to move towards a market economy, towards a working democracy, neither of which the Russians had really ever had before. That the G-7 really ought to do everything possible they could to help the Russians achieve those two objectives. But, when you involve the leader of a former super power in your discussions, he's not going to be content with a subordinate position, with coming to the meetings as a supplicant. And, they could see that Boris Yeltsin was increasingly uncomfortable with this and that he was finding it hard to justify his position in the Summit to the Russian people. So, going back to the Naples summit of 1994, the leaders started looking for ways to involve the Russians on equal terms with the summit process. They started with the foreign policy discussions and then they came to the so-called global issues, the environment and such which Yeltsin got involved in at Halifax in 1995. He proposed that there should be a special summit early the following year on nuclear safety which took place in Moscow in April of 1996, close to the anniversary of the Chernobyl disaster.

And so now in continuation of that trend, we've got the Summit of the Eight. But he's recognized that the G-7 will still discuss among themselves without the Russians vital economic issues on which the Russians recognize they are not in the same league. They want, and all the G-7 also want to have the Russians involved in international economy as much as they can, members of the institutions like the World Trade Organization. And that's an important objective. But, having the Russians present doesn't prevent the G-7 from continuing the discussions which they have at the level of the heads of government and at the level of the finance ministers on the same issues which they've been discussing since 1975.

Q. Could you tell me in your opinion, based on your vast knowledge, which was the most important G-7 meeting, or is this the most important G-7 meeting?

A. I don't think I want to single out a single meeting. I think it's more important to see the G-7 summits as a series, and one leads on to the other and indeed the summits themselves build into the network of wider international institutions. And they provide impulses to the international monetary fund and the World Trade Organization and to parts of the United Nations dealing both with economic issues like environment and with political issues. I would hesitate to single out one summit as the most important of all. But, rather you need to track them through and see how they are picking up different issues according to the way the world has changed.

Q. I could ask you a whole lot more. I thank you Sir Nicholas Baynes.