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Canada and the G7

The Honourable Paul Martin, Minister of Finance
The Robert H. Catherwood Lecture
12 November 1997, Albany Club, Toronto
Delivered text is official version

In considering my remarks today, two points struck me in looking back to the origins of the G7.

The first is that the initial meeting, held in France in 1975, drew its inspiration from two former Ministers of Finance –Helmut Schmidt and Valery Giscard d'Estaing. Surely, this is a clear demonstration of the thoughtfulness and perspicacity of Finance Ministers.

Now, you will be relieved to know that this is about all the G7 history you will hear from me today. What I would like to do however, is to focus on our present and future challenges.

Let me begin, not with the G7, but rather the global context within which it operates. After all, the G7 – its potential, its performance and its purpose – are very much a function of the broader international environment.

First, there is, of course, the extraordinary synergy between technological change and an expanding global market – which is more open, and more interconnected than ever before. Whether in terms of investment, trade or currency transactions.

No one has anywhere to hide any more. There is no longer any such thing as the long distance feeling.

Next is the transformation of the political landscape.

The G7 was born at a time when the East-West conflict was at the core of its agenda.

One doubts if, in 1975, even the most farsighted would have thought that one of Leonid Brezhnev's successors would be invited to join in.

Yet, as of Denver, the G7 Summit has become the Summit of the Eight -- and support of reform in the former Soviet Union and the states of Central and Eastern Europe is now at centre stage.

A final trend governing the G7's evolution is the unprecedented institutionalization of the international economic environment.

Whether to negotiate or regulate, police or promote, the number, the scope and size of the world's linking institutions has expanded significantly.

The World Trade Organization enjoys a growing role.

The mandate and size of the IMF have been substantially bolstered.

The OECD is larger.

Albeit with some difficulty, Europe is moving from community to union.

A new dialogue of leaders and ministers from the western hemisphere has begun.

And finally APEC, the fourth summit of which will be hosted by the Prime Minister in Vancouver this month, has become a new focal point for trans-Pacific relations in one of the most dynamic – and currently turbulent – economic regions of the world. The question is, how have these changes in the international environment impacted on the G7 since that initial meeting at Rambouillet some years ago?

In sum, all the world is a stage – and it has become very crowded in a very short period of time.

A very different world. And, as a consequence, a very different G7.

In broad-brush terms, I would suggest that in terms of its economic agenda, the G7 of the past was pre-occupied with the promotion of globalization. Today, precisely because of the success of that effort, it is now pre-occupied with the effective management of globalization.

In fact, one of the great ironies of the G7 is that while its members have consistently advocated a more open, global market, its contemporary agenda is in fact dominated by the challenges resulting from what they themselves have helped create.

Whether in terms of development, democratization, economic growth or collective and individual prosperity, the consequences of a more open world economy have been tremendously positive. The problem is that while the interconnectedness of the economy has expanded multifold, good governance has not kept pace. This, because the erosion of the authority of national governments, has not been accompanied by a compensating increase in the capacity of the international infrastructure to handle the gaps opened up by increasing globalization and evolving technology.

The fact is that globalization has proceeded at a pace that has outstripped the capacity of governments to fully manage its consequences .

And here, let me suggest that the responsibility of the G7 today must be to help establish the role of modern government in the modern world.

Simply put, the primary emphasis of the G7 – collectively and individually – must shift from putting the necessary framework in place to let globalization happen to putting the necessary infrastructure in place to make globalization work.

Let me elaborate in the context of two sets of issues: first, the ‘internal' G7 agenda, that is issues relating to the domestic policies of G7 members; and second, the ‘external' agenda, the challenges that arise from non-member states and regions.

In so doing, I will focus not on the annual leaders' Summit, but on the process with which I am most familiar. That is, the meetings of G7 finance ministers and central bank governors held at least four times a year, which is supported by a great deal of work done by our officials in the interval – or so they would have us believe.

In terms of the intra-G7 agenda, there continues to be a focus on macro-economic policy – on economic growth, job creation, and on inflation.

That dialogue remains central. And it is critical in helping G7governments deal with problems of common application.

The fact is that on issues where very difficult decisions are required – yet the natural reluctance of elected governments to take determined action risks ruling the day – the G7's deliberations have served the interest of good public policy.

For instance, this has been true of the collective effort to restore fiscal health – where the clear consensus on the need to deal with the dangers of runaway deficits has bolstered the resolve of each G7 member to take action.

It is not quite as true as the G7 considers the common challenge of coping with demographic change.

The reality here is very clear: ageing populations; foreseeable pressures on our retirement income and health care systems; the knowledge that global competition is very likely to reduce, not increase the revenues available to governments to pay for those programs; the fact that many countries outside the G7 – our competitors – have much younger populations and will not therefore face the same pressures as us, all should be leading to much greater dialogue and resolve within the G7.

Instead however, it appears that the fact that the full impact of demographic change will not be felt for years down the road, is leading many to postpone needed action to the common detriment of all of our increasingly inter-related economies.

Across the G7, what must be accentuated is the realization that responsible macro-economic policy, while absolutely necessary, is no longer sufficient to ensure the kind of economic and social security our populations seek.

In effect, the new G7 domestic agenda must deal more and more with the backwash of globalization and technological change. Nowhere is this more true than with the question of employment.

Separately and collectively, the questions we must face – and attempt to answer – are clear.

How do we deal with the decline in traditional low-skilled jobs in our countries – and respond to the extraordinary demand for those that are high-skilled?

How do we best support the unemployed, while at the same time giving them the tools and the incentives to re-enter the workforce?

How do we prevent or mitigate the social inequalities which history has proven can accompany periods of profound technological change?

Across the G7 – albeit in different ways and to different degrees – we face a profound, common challenge. And that is to bolster the old bargain, the old understanding: that sustained economic growth will lead to sustained job creation; that the jobs that are created will be good jobs; that the benefits of growth will be felt across our societies; in short, that the kind of economic growth we seek is matched by the quality of life our citizens deserve.

We must accept the fact that in the era of open, global markets, economic security is anchored in a very different economic and social infrastructure. This I believe, will increasingly have an effect on the G7 domestic agenda.

In the past, economic – largely macroeconomic – issues were considered the principal objects of G7 discussions. Social issues were considered purely internal, of concern only within national borders. However, with an increasing focus on the linkage in the modern economy between a strong economy and a strong society, the solitudes are disappearing. And I believe the G7 agenda will, even at meetings of Finance Ministers, increasingly reflect the disappearance of the once rigid dichotomy between economic and social issues. Indeed, this has become even more manifest in the four short years that I have been a participant. Let me turn now to the G7's external economic focus.

Clearly, this has included a wide range of issues – from exchange rates to the strengthening of the Bretton Woods institutions, from the outlook for European Monetary Union to the management of challenges like the 1994 peso crisis.

I will not canvas this agenda in detail. From Canada's perspective however, there are three sets of issues which I would like to highlight today.

First, we are actively pursuing, within the G7 and elsewhere, further global market liberalization, particularly as it relates to capital flows and financial services. The purpose here is clear: to accomplish in this area what the past five decades has done for trade in goods and services – levelling the playing field; achieving greater transparency in transactions and putting in place an effective system of agreed rules.

To this end, based on a broad G7 consensus, we are participants in complementary efforts within the OECD to produce greater clarity and consistency in national policies on foreign investment, and taxation, within the WTO to liberalize the financial services sector and at the IMF to promote and encourage capital account liberalization.

Second, there is a broad G7 effort to reduce the financial burden on the community of less-developed nations around the world.

Canada traditionally has taken a very generous approach to assistance for the developing world -- although recently perhaps not as generous as we would like, given necessary fiscal restraint.

That being said, we have been at the forefront of the effort to write-off the debt of the poorest countries in the world, recognizing the damaging role that debt plays in hindering the prospects of development.

G7 debate on this issue has been contentious, but Canada has been and remains in the lead in urging the generous treatment of countries facing a crippling plight.

However, the development challenge extends well beyond the issue of debt, and this leads to a third set of external G7 issues.

We all remember the Mexican peso crisis, in response to which the IMF, the U.S. and Canada all committed significant resources.

That crisis stimulated our thinking as we went into the Halifax G7 Summit, determined to take the action necessary to avoid or minimize the risk of problems like that arising in the future.

Central to our deliberations was the need to strengthen the IMF – as the world's pre-eminent international economic institution.

This involved enhancing the IMF's early warning systems, including a Canadian initiative to increase the transparency by governments of their accounts and fiscal and monetary conditions.

Canada was also part of the G7 effort to strengthen the resources the IMF has at its disposal for aid to countries experiencing economic difficulties. In fact, we led the effort to establish the New Arrangements to Borrow, which provided additional resources for the IMF from 25 contributing countries. Agreement on those measures has now been secured.

Finally, following discussions at the G7, the IMF, the World Bank and the Bank for International Settlements were mandated to pursue with greater intensity the whole area of financial institution supervision.

However, despite all these steps, we saw the emergence of new crises this past summer, most particularly in Thailand. What we were striving to prevent, in fact, occurred.

What began as a Thai crisis had repercussions elsewhere in Southeast Asia – and ultimately, as we saw last month, in all the stock exchanges of the industrialized world.

Clearly, this raises the issue squarely if what we did in the wake of the peso crisis was in fact adequate.

This question is now at the heart of the G7 agenda. It dominated our meeting in Hong Kong in September. It has led to a comprehensive reassessment now underway of how we should deal with such crises – whether as individual governments or institutionally, especially through the IMF.

Now, in the long term, there is no question whatsoever that Southeast Asian economies will recover -- and that the prospects for economic growth there are great.

Nevertheless, it is very much incumbent on us to critically assess not just how to respond to future crises, but whether and how such crises can be prevented in the first instance, particularly through further changes in the mandate and operations of the IMF and other institutions.

I am sure, we all believe we must do much better. The global economy cannot sustain forever chronic disruptions that spread contagion like wildfire.

We must move from crisis management to crisis avoidance.

Clearly, our response must be multilateral. And it must also get to the heart of the matter – of what I believe is destined to become one of the most critical areas for the G7 in the future – and that is the pursuit of what might be called ‘good governance'.

With the global economy as open as it now is, and the global money markets as fluid as they now are, few actions could be more important than helping to promote effective and transparent domestic economic institutions and regulation in all countries.

Ineffective or inadequate laws, the absence of sufficient supervision of financial institutions and banking systems, the presence of pervasive economic crime ranging from money laundering to bribery and corruption – all of these inhibit investment, destabilize individual economies and – as we have seen – can ricochet and destabilize international markets.

This year's report of the World Economic Forum makes the point that these issues constitute the single largest developmental challenge the global economy faces.

Addressing these issues head on is the only way to lessen the prospect of market contagion and better the chances for sustained development in the countries concerned. It is in their interest and ours.

Far too often, economic crises have been associated with failures in banking systems which in turn occurred because of either inadequate supervision and regulation or corruption.

That is why, this past September, the President of the World Bank and I announced a new initiative to help address this problem – the creation of a centre, here in Toronto associated with York University, to provide training for personnel from emerging economies so they develop expertise in the area of financial institution supervision. Given recent events in South East Asia, this could not be more timely.

What I believe the major issues before the G7 will be – and should be – looking to the future. Well the time for discussion approaches. Therefore, let me summarize, at least from the vantage point of one Finance Minister.

First, albeit continuing to focus on macro-economic surveillance, the G7 should also, more and more, deal with what were once considered purely domestic issues – sustaining a strong society and improving the prospects for employment in the modern economy.

Second, the G7 external agenda will become increasingly dominated less by the policies of its own members than by challenges in the newly industrialized regions. The linkages between developed and developing countries will be key.

Finally, ‘good governance' will become a primary focus in order to prevent local economic disruptions and to limit the collateral damage from those that occur.

In effect, the G7's role in the future will be to help guide and manage the transition to a fully integrated global economy.

That integration today clearly, is only partial. There remain institutional gaps, particularly in the developing world, which can pose a clear and present danger both to them and to us. The G7's paramount focus in the future must be to help close those gaps as quickly as possible.

In closing, let me say that no one would pretend that the G7, over the years, has succeeded on every issue, that it has served as a panacea for the world's problems.

However, the fact is that although the G7 is certainly among the world's most exclusive clubs, it is by no means the economic directoire of the world. It was not intended to be. It cannot be.

The G7, after all, enjoys no status under international law, no separate supranational authority. In addition, despite its collective economic weight, global economic power is now more dispersed than ever before.

More to the point, the members of the G7 are, despite being like-minded industrial democracies, still separate sovereign states, each with their own social, political and economic circumstances, interests and constraints.

Consensus is not automatic. Indeed, as I have personally seen, it can be very difficult.

That being said, it is my view that if the G7 did not exist, something like it would have to be invented.

The global economy – integrated as never before – would be a much more dangerous place if leaders and ministers of the major like-minded economies, were unable on a regular basis to meet directly to exchange perspectives and views on the challenges they collectively and separately face.

Open as it is, the modern economy can never be confused with something that can or should function effectively on auto-pilot.

Decisions still must be taken, and leadership exercised, and the power to do that still lies predominantly with the nation state.

The capacity of the G7 to act as a catalyst in mobilizing the international community should not be underestimated.

Indeed, from the strengthening of the IMF's role and resources, to the impetus given to conclude the Uruguay Round of trade negotiations, through to the response now being made to the debt crisis among the poorest countries of the world -- progress would have been much more difficult, perhaps impossible, without the G7 taking the lead.

And I can tell you, having been at that table for four years, there could be only one thing worse – not being at that table at all.

As a relatively small but very open economy – indeed, as the G7 country that depends more than any other on international trade – Canada's membership in this institution has been and will continue to be in our strategic national interest.

For almost a quarter century, the G7 has taken a lead role in putting in place the architecture of the modern, open economy.

Looking ahead, our obligation now is clear. Domestically and internationally, we must supplement that architecture with the necessary infrastructure to make globalization work in our favour. And let me tell you, Canada will be very much part of that effort.

Source: Department of Finance Canada, courtesy of the Wayback Machine Internet Archive

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