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Thursday, June 17, 1999 Published at 18:30 GMT 19:30 UK

Business: The Economy

G8 test for world peace

Paying for war damage in Kosovo will dominate the summit

The leaders of the world's richest countries are gathering for their annual economic summit on Friday amidst growing tension with Russia.

World Debt
The carefully planned summit of world leaders was expected to be dominated by a discussion of measures to relieve Third World debt and plans to ensure stability in the world economy.

Peter Morgan: "Kosovo threatens to overshadow the issue of Third World debt"
But the problems of the reconstruction of Kosovo - and the uncertain role of the Russians in that process - will now take centre stage.

The G8 summit, which has taken place every year since l974, brings together the leaders of the United States, Britain, France, Germany, Italy, Japan and Canada. Since 1991 Russia has been invited to take part in some discussions during the three-day meeting.

Aid or confrontation?

BBC Diplomatic Correspondent James Robbins: "It is going to be an awkward summit."
As world leaders began arriving in Cologne on Thursday night, US and Russian representatives were still meeting in Helsinki in an attempt to clarify Russia's military role in the Kosovo peace-keeping force.

The Russian forces who are occupying Pristina airport still have not come under unified NATO command, and the Russians are demanding their own sector which they will control.

Meanwhile, the Russians will also be seeking more help from the West for their ailing economy, which has been devastated since the rouble was devalued last summer, plunging the world into a financial crisis.

Russian hopes of getting further loans from the International Monetary Fund were dampened on Thursday when the Communist-dominated Russian Parliament, the Duma, threw out plans to increase taxes on petrol.

Although the IMF has approved further aid in principle, it has made it clear that any loans are contingent on Russia reducing its huge budget deficit.

Russia is also seeking debt relief on the huge loans it received from Western banks.

German Chancellor Gerhard Schroeder, whose country's banks are most exposed to Russian loans, has made it clear he will oppose any attempt by Russia to repudiate its loans.

Cost of the war

Also on the agenda for the Cologne summit is paying for the cost of the war in Kosovo - and the even more expensive process of reconstruction.

The United States, whose forces bore the brunt of the military action, would like the Europeans to pay more of the cost of the peace.

The countries bordering Kosovo have suffered at least $8bn in economic damage, according to the latest estimates from the Economic Intelligence Unit.

A joint task force from the World Bank and the European Union has been charged with drawing up plans for reconstruction.

But Serbia will be excluded while President Slobodan Milosevic is in charge.

"I absolutely share the feelings of President Clinton that there can be no economic development aid to a regime which is not democratic," France's President Jacques Chirac said after meeting Mr Clinton in Paris.

Debt deal

The economic summit is also expected to agree a new deal to help reduce the debts of the world's poorest countries - something that the United Kingdom has taken a lead in arguing for.

German sources suggested that agreement had been reached to write off some $60-$70bn of debts owed by 36 highly indebted countries, mainly in sub-Saharan Africa, and some central American countries that were victims of last year's hurricane.

Most of the money would come from the World Bank and the International Monetary Fund, which would sell some of its gold.

Aid agencies and church groups, who have been campaigning for a year to win debt relief, said that compromise agreement was at best a partial victory.

They had been urging total repudiation of some $200bn in debt, and reduction in the strict qualifying conditions before a country became eligible for debt relief.

"Don't be taken in by the headline number," said Ian Bray, a spokesman for Oxfam, which has been championing the cause of the debtor countries. "Much of the debt that will be written off would never have been paid back anyway."

Agreement on debt relief could be derailed by disagreement among the G7 partners on who will pay for it. Japan, which is the largest lender to developing countries, has the most to lose.

New financial architecture

The disputes over Kosovo and debt may overshadow the generally better news on the world economy.

Since world leaders met last year, their economies have negotiated a dangerous financial crisis with less damage than expected.

Even Japan unexpectedly managed to show positive economic growth for the first time in nearly two years.

That will make it easier to approve plans to strengthen the regulation of the world financial system, including new rules for bank lending and additional money for emergency loans by the IMF in advance of any crisis.

The United States, concerned that it has borne the burden of the world economic growth single-handedly, will still argue for more measures to stimulate the economies of Japan and Germany.

But having shaped the rescue package in its own free-market image, it will take the next world economic crisis to discover whether enough has been done to coordinate economic policy.

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