Canada's Role In The Asian Crisis, 1997-8

The substantial role Canada played in countering the 1997 Asian currency crisis, in ways that extended democratic and market principles within Asian polities, began only after the 1997 Denver summit.¹⁰ There, the G-7 leaders, preoccupied with welcoming Russia as a virtually equal member, devoted little time to the early signs of crisis.¹¹ Although the finance ministers debated financial regulation at some length, there was no sense of urgency about their discussions. Indeed, when Thailand precipitated the crisis by devaluing its currency in early July, the European G-7 members saw the issue as a regional Asian responsibility. By August 1997, when a US$17-billion package for Thailand had been assembled, Japan, which was regionally affected, was the only G-7 member to contribute national funds.

When G-7 finance ministers gathered in Hong Kong in September 1997, their response to the crisis was to authorize measures to strengthen the international financial system. They agreed to a 45-per-cent increase in IMF core resources; to amend the Articles of Agreement within the year to make the IMF responsible for capital account liberalization; to strengthen IMF involvement in financial sector reform; to improve national governance by reducing corruption; and to expand the allocation of special drawing rights (SDRs).

In the diplomacy behind the Hong Kong reform package, Canada acted as an equal member of the G-7 concert in which different members lead on specific issues and mutually adjust to create a new and effective consensus. On the IMF quota share increase, the United States, fearful of congressional opposition, yielded to the others and accepted the 45-per-cent addition. On capital account liberalization, where a British initiative received American support, strong opposition from Canada succeeded in blunting initial enthusiasm for a blanket grant of authority to the IMF for unrestricted liberalization. Canada, working with the United States and Japan, made progress on its push, begun at the 1996 Lyon summit, for banking and financial sector reform. The United States had Canada's support in securing an IMF agreement to discuss governance issues. Canada encouraged the IMF to double the SDR equity allocation and to devote the proceeds to the new members of the IMF. In keeping with Canada's preference for globalism rather than exclusive regionalism, the G-7 also made it clear that the IMF, rather than any regional support fund proposed by Japan, would remain at the centre of the response to the crisis.

Canada's approach at Hong Kong flowed less from any special vulnerability as a small, open, commodity-based economy than from long-standing positions based on distinct interests, values, and historic experience. Those positions were developed most recently in an approach to international financial institution reform for the 1995 Halifax summit and were conditioned by its experience with the 20 December 1994 Mexican financial crisis.¹² By that time the minister of finance, Paul Martin, and the prime minister, Jean Chrétien, had developed a strong scepticism toward unrestricted capital flows in the face of clear evidence that markets were prone to panic in ways that could have enormously destructive consequences for the public good. Martin had translated this scepticism into policy during the 1996 negotiations for the Canada-Chile free trade agreement when he overcame resistance from the trade policy community within Ottawa to allow Chile to preserve its system of limiting the outflow of short-term capital during the first year after its investment. Spurred by the collapse of Barings Bank, Martin developed a proposal for Halifax for improved supervision of national financial institutions. His concern was reinforced by the knowledge that as globalization brought more foreign banks to Canada, the highly secure Canadian banking system and its stakeholders would become vulnerable to the quality of supervisory practices abroad. The concept was extended after Martin participated in a meeting of western hemisphere finance ministers in Santiago, Chile, in December 1996, where the core of a proposal for peer supervision through a new international supervisory authority was born.

Behind the specific lessons of Halifax and Mexico lay deeper imperatives. The first was a continuing concern with national unity and an acute awareness that separatist forces in Quebec could use a fall in the Canadian dollar or denationalization of the federal government's capacity for financial management to further their cause. The second was the domestic value that Canada placed on equalization, through automatic federal fiscal transfers, to guarantee all Canadians a similar, high standard, social safety net. And the third was a long history of international successes, ranging from Canada's pioneering role with flexible exchange rates as an adjustment device, through its position as a de facto permanent member of the IMF executive board and the G-7 finance ministers forum, to its attachment to the world's poorest states through the Commonwealth and la francophonie.

The impact of these factors was again apparent as G-7 decisiveness and Canada's role expanded in response to the spread of the crisis in the months after Hong Kong. When a support package for a beleaguered Indonesia was assembled, the United States joined Japan as a contributor to a 'second line of defence' of national funds if those of the IMF and other international financial institutions (IFIs) proved insufficient. In November, Canada and its G-7 colleagues formalized the second line of defence and moved to ensure that they all had the legislative authority to contribute to it. In early December, they agreed to a support package for South Korea of US$35 billion from the IFIs, to be reinforced, if necessary, by a second line of defence, to which Japan committed US$10 billion, the United States US$5 billion, each of the European G-7 members US$1.25 billion, and Canada US$1 billion.

When the South Korean won plummeted, G-7 members agreed to activate the second line in return for an agreement from their private banks to roll over and reschedule their South Korean loans. This private-sector burden-sharing agreement was particularly valuable in light of the difficulty the United States government was having in securing congressional authorization for its share of the IMF quota increase. The United States secretary of the treasury, Robert Rubin, who had hoped that the mere existence of a large package with a second line would reassure markets, now agreed that American dollars would be forthcoming. The 24 December announcement that national funds would indeed flow was sufficient to stem the market's assault on the won. No national funds had to be expended in exchange markets.

These actions lessened the pressure on the surrounding Asian economies, although Suharto's Indonesia, which was resisting IMF prescriptions, suffered further attacks. As its situation deteriorated, the United States, reinforced by Germany and supported by the G-7, intervened. On 15 January 1998, the IMF and Indonesia negotiated a letter of intent under which Indonesia accepted revised economic targets and more far-reaching structural reform.

The next threat to Asian economies, and a further opportunity for Canadian structural leadership, appeared in April 1998, when it became evident that both South Korea and Indonesia would be unable to meet their pledges, made in the summer of 1997, to the support package for a still struggling Thailand. Canada assumed the Indonesian share of $500 million, on the grounds that Thailand was honouring its programme with the IMF.¹³ Canada was the only country from outside Asia to make a contribution. The American administration, afraid of congressional criticism of a 'bailout' and any use of the Exchange Stabilization Fund (as in the Mexican rescue package of 1994-5), refused to contribute. In giving when the United States could not, Canada became part of a 'first line' programme. Its disbursements, which started to flow in June, ultimately totalled US$300 million. The Asian phase of the crisis was thus contained through concerted, if just-in-time, G-7 action. In a clear display of their power over markets, G-7 governments often prevailed without expending national funds. Instead, they induced the IFIs, banks, and other private-sector actors to provide the required liquidity.

With the acute phase of the crisis over, G-7 leaders and finance ministers shifted from crisis response to system reform at the Birmingham summit in May 1998. They directed Japan to clean up its bad bank debts and deregulate its economy and thanked the People's Republic of China for not precipitating competitive currency devaluations in Asia by devaluing the yuan. They stressed the need for improved transparency, early warning, and private-sector burden-sharing. ¹⁴ Canada secured an endorsement for the concept behind its major initiative of establishing a mechanism for peer review of national banking and financial system supervisory authorities. Its proposal, unveiled at the April 1998 Washington meetings of the IMF's Interim and Development Committees, included a call for a new international supervisory authority, with a small new secretariat for assembling multinational teams of supervisory experts.¹⁵ Because France preferred to invest the supervisory function in the IMF under its Article 4 consultations, and Britain wanted to use a joint IMF-World Bank mechanism, the decision on how to implement the concept was left to the G-7, IMF, and World Bank meetings in the autumn.