From Crisis to Construction, 1999
The fourth stage of Canada's international financial diplomacy came during the first half of 1996, when it and the international community moved through the final installment of the crisis, in Brazil in early 1999, to the construction of the new system in the lead up to the Cologne G7 and G8 summit of June 1999. During this phase the earlier pattern of full strength Canadian leadership continued. Canada provided intellectual leadership through its continuing development and promotion of the Standstill concept and through Prime Minister Chretien's proposals for debt relief of the poorest, unveiled in Winnipeg in March. Canada displayed policy leadership in regard to the centrepiece issues, as Cologne approached, of private sector involvement and debt relief for the poorest. And its stood prepared to provide prudent structural leadership, with appropriate burden sharing, in regard to debt of the poorest, prospective financial packages for Mexico and other endangered economies, and a Balkan Stability Package for the reconstruction of Kosovo. In most of these and in other major cases such as its approach to macro and micro-economic policy adjustment, it advanced positions distinct from and occasionally opposed to those of the United States, assembled issue specific coalitions from a fluid and every changing array of G7 partners, and exercised a real impact on the outcomes that emerged.
The first challenge of 1999 arose with the advent of a severe financial crisis in Brazil in early 1999. Canada's response took place largely through the IMF, through the use of the instruments put in place in the autumn. From the outbreak of this crisis and the particular response of the international community Canada drew several lessons. The first was a reinforcement of its belief, based on a close analysis of the Asian crisis, that there "are no innocent victims," – that it was Brazil's heavy external debt held in very short term instruments and the threat of non-payment of a state government within Brazil that had rendered the country vulnerable and precipitated the crisis, rather than any irrational "contagion" at loose in a newly globalized global economy. The second was a view, based on the failure of private sector investors to participate in the response to the second Brazil crisis, that much stronger measures for private sector involvement were required. The third was a judgement that President Clinton's preferred Contingent Credit Facility, was a relatively ineffective instrument for dealing with the crises likely to emerge.
With the crisis in Brazil successfully countered, and no signs of imminent contagion apparent in other countries or regions, Canada and its G7 partners were free to concentrate on the construction of a strengthened financial system. Its diplomacy largely unfolded through its involvement in the G7 process, focused on the G7 Finance ministers meeting in Berlin on February 20, Washington on April 26, and Frankfurt on June 11-12, and the G7 and G8 leaders summit in Cologne on June 18-20.
Throughout this processes, Canada's focus was firmly on the issues at the centre of the G7 agenda, and its approach largely shaped by the priorities, logic and proposed solutions set in Paul Martin's six-point plan in September. Through the early meetings Canada made several advances. The new Financial Stability Forum, launched at German initiative through the crafting of Hans Tietmeyer, contained a mechanism for the peer supervision of national financial systems that gave life to an early Canadian proposal, if in a different institutionalized forum. Yet as Cologne approached, consequential differences among G7 members remained on the architectural issues of private sector involvement and moral hazard, international institutions and the role of the IMF, the financial stability forum, and crisis prevention and resolution.
On private sector involvement, Canada's position flowed from the Prime Minister who retained his strong aversion, evident from Halifax onward, to privatizing profits and nationalizing losses. It thus remained wedded to its proposal for Standstill, which was the option for private sector involvement that would force the involvement of the latter to the greatest degree. The proposal initially received strong opposition from the United States government, and from leading American intellectuals, whose lenders would be the primary private sector actors harmed by the adoption of a Standstill mechanism (Eichengreen 1999: 9,92,125). Yet in the leadup to Cologne, Canada continued to set private sector participation and the related issues of transparency as disclosure as its two priorities among the six architecture items the G7 Finance ministers and then leaders would focus on. It received support for its Standstill proposal from the British, notably its Chancellor of the Exchequor Gordon Brown, while the continental Europeans remained convinced and the Japanese provided no reaction. US Treasury Secretary Rubin continued to see problems with Standstill but did start to refer to the concept in his speeches. Even so, Canada did not anticipate the proposal wold be adopted in the near future. On the broader principle of private sector participation, however, it did take pleasure from the agreement that G7 leaders at Cologne would send a clear message that private sector lenders in emerging markets could no longer assume that the G7 or IMF would bail them out if difficulties emerged. On international institutions and the role of the IMF, Canada faced strong French demands from France ad Managing Director Michel Camdessus to assert the primacy of the IMF. Canada had reservations about transforming the Interim Committee of the IMF into what saw as a de facto directoire. On the Financial Stability Forum, the earlier agreement of the G7 Finance ministers had left for leaders the outstanding issues of how broad participation in the Forum should be, and in particular whether more emerging economies should be included. Canada, in notable contrast to the US, was in the vanguard of those pressing for more inclusive participation.
Crisis prevention and resolution was another areas where Canada's approach was governed by the strong views of the Prime Minister. As with the Standstill clause, Canada had a strong aversion to relying on public funds to compensate private sector actors for their imprudent lending.
It was on debt relief of the poorest that Canada's intellectual, policy and structural leadership was most clearly evident and fully expressed. During the spring, the German government, despite continuing Central Bank reluctance, had agreed that a "Cologne Debt Initiative", including the sale of IMF gold, would be the centre piece "deliverable" of the Cologne Summit. As the spring proceeded, a G7 agreement on the sale of five million ounces of IMF gold led rapidly to a demand for the sale of 10 million ounces, in order to raise the substantial funds required to make the Initiative credible. As Cologne approached, the leadership of Canada, Britain, and now the German Chancellor and Foreign Ministry met strong resistance from France and Japan. They had continued with large ODA loans rather than grant programs, and thus would face a large cost to their national budgets in a G7 program to write off loans. While the French called for fair burden sharing, the Japanese asserted that they had a national legislative obstacle to writing their loans all off.
It was an area where Prime Minister Chretien has strong views. Canada had led the G7, long ago, in giving ODA in the form of grants rather than loans. It further led the way in writing off such loans as it retained from an earlier era. Moreover, Prime Minister Chretien, having singe-mindedly lead Canada through the elimination of a 42 billion annual fiscal deficit and taken it into sustained suplus, was willing to provide a substantial new amount of ODA as part of a balanced package of debt relief from Cologne, as his 1993 campaign Red book had promised. Such a new contribution, on top of the full credit that Canada's Finance Ministry demanded for its past action, would expect the Japanese and French to write off their substantial loans so that a credible Cologne package could be achieved. The Cologne package was thus very likely to provide a package in which all G7 countries agreed to contribute to a minimum level, from which some countries including Canada would provide more, and under which 10 million ounces of IMF gold would be sold.
A final area of Canadian emphasis, and one propelled by Prime Minister Chretien's own views, was the social side of globalization. This was evident in Canada's position on debt relief and elsewhere. For the Cologne debt initiative, Canada led in demanding that debt relief lead to sustainable growth rather than recidivist tendencies. It did so through the new financial resources made available, which were tightly targeted to social, educational, and human capital spending. This relief was to be denied to countries that persisted in violating norms of good governance and in mounting excessive military and other unproductive expenditures. Canada had a general interest in not surrendering the levers for promoting these values and was particularly interested in not using HIPIC funds to reward Myanmar, a country that continued to violate basic human rights. Canada pressed further to include in the debt package Bangladesh, a very poor Commonwealth partner. While not on the HIPIC list and despite being a neigbour to India and Pakistan, two countries currently engaged in an arms race, Bangladesh had maintained a strong record in meeting the international communties' criteria and had further been ravaged by recurrent natural disasters.
||This Information System is provided by the University of Toronto Library and the G8 Research Group at the University of Toronto.|
Please send comments to:
This page was last updated .