Canada's Role In System Reconstruction, 1999

The third stage of Canada's international financial diplomacy came during the first half of 1999 as the G-7 moved through the final instalment of the crisis, in Brazil in early 1999, to the construction of a strengthened system at the Cologne G-7/8 summit in June. Canada's response to the onset of crisis in Brazil was largely channelled through the IMF, using the instruments put in place in the autumn. Canada drew several lessons from the crisis and the particular response of the international community to it. The first was a reinforcement of its belief, based on a close analysis of the Asian crisis, that there were no innocent victims - that Brazil's heavy external debt held in very short-term instruments and the threat of non-payment by one of its state governments had rendered the country vulnerable and precipitated the crisis. In other words, it could not be blamed on any irrational 'contagion' at work in a newly globalized economy. The second view, based on the failure of private-sector investors to participate in the response to the second Brazilian crisis, was that much stronger measures for private-sector burden-sharing were required. The third judgment, shared by the new German chancellor, Gerhard Schroeder, was that Clinton's preferred precautionary mechanism, the Contingent Credit Line (CCL), was a relatively ineffective instrument for dealing with the crises likely to emerge.

Canada took these lessons into the G-7 finance ministers meeting in Berlin on 20 February, in Washington on 26 April, and in Frankfurt on 11-12 June, and to the G-7/8 summit in Cologne on 18-20 June. Canada made some advances in the early meetings. Most notably, the new Financial Stability Forum (FSF), a German initiative, contained a mechanism for peer supervision of national financial systems that gave life to an early Canadian proposal - in a different institutionalized forum. Yet as Cologne approached, significant differences remained on the core architectural issues: private-sector involvement; moral hazard and the Standstill mechanism; crisis prevention and resolution; international institutions and the role of the IMF; membership in the FSF; debt relief of the poorest; and the overall approach to globalization.

On private-sector involvement, Canada took its lead from the prime minister, who retained a strong aversion, evident from Halifax onward, to privatizing profits and nationalizing losses. Canada thus remained wedded to its Standstill proposal, the option that would force the greatest degree of private-sector involvement. The proposal initially evoked strong opposition from the government and leading intellectuals in the United States, whose lenders would be the primary private-sector actors called upon to contribute.²¹ Yet in the lead up to Cologne, Canada continued to set private-sector participation and the related issues of transparency and disclosure as its two priorities among the six architecture items on which the G-7 would focus. It received support for Standstill from Britain. The continental Europeans remained unconvinced and the Japanese provided no reaction. Rubin continued to see problems with Standstill but began to refer to the concept in speeches. On the broader principle of private-sector participation, Canada took real pleasure from an agreement at Cologne to send a clear message to private-sector lenders in emerging markets that they could no longer assume that the G-7 or IMF would bail them out of all difficulties.

The views of the prime minister were also evident in crisis prevention and resolution. Here again Canada had a strong aversion to relying on public funds to compensate private-sector actors for imprudent lending. It thus worked, with considerable success, to narrow dramatically the conditions under which the CCL - with its antithetical approach of lending public money first - could be activated.

On international institutional reform, Canada faced strong demands from France and from Michel Camdessus, the French managing director of the IMF, who wanted primacy for the IMF. Canada had reservations about transforming the Interim Committee of the IMF into what it saw as a de facto directoire. On the FSF, the earlier agreement of the G-7 finance ministers had left to the leaders the issues of how broad participation in the Forum should be and whether more emerging economies should be included. Canada, in notable contrast to the United States, was in the vanguard of those pressing for broader participation.

It was on debt relief of the poorest that Canada's intellectual, policy, and structural leadership was most fully expressed. During the spring, the German government agreed, despite its continuing Central Bank reluctance, that a 'Cologne debt initiative,' including the sale of IMF gold, would be the centrepiece 'deliverable' of the Cologne summit. As spring proceeded, a G-7 agreement on the sale of five million ounces of IMF gold led rapidly to a demand for the sale of ten million ounces, to raise the substantial funds required to make the initiative credible. As Cologne drew near, Canada, Britain, and, now, the German chancellor and Foreign Ministry encountered strong resistance from France and Japan on a second component of the initiative. Both countries had continued their programmes of large ODA loans rather than grants and thus would be faced with large costs to their national budgets in a proposed G-7 programme to write off loans.

Here Chrétien also had strong views. Canada had led the G-7 long ago in giving ODA in the form of grants rather than loans. It also led the way in writing off its loans from an earlier era. Moreover, Chrétien, having moved Canada from a $42 billion annual fiscal deficit into sustained surplus, 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. The new contribution, in addition to the full credit that Canada's Finance Ministry demanded for its past action, was contingent upon Japan and France writing off their substantial loans so that a credible Cologne package could be achieved.

A final area of emphasis, and another propelled by Chrétien's views, was the social side of globalization. For the Cologne debt initiative, Canada wanted debt relief to lead to sustainable growth rather than recidivist tendencies. Thus, new financial resources would be tightly targeted to social, educational, and human capital spending. Relief would be denied to countries that persisted in violating norms of good governance and that incurred excessive military and other unproductive expenditures. Canada had an interest in not surrendering the levers for promoting these values. In particular, it did not want to use funds for the Highly Indebted Poor Income Countries (HIPIC) to reward Myanmar, a country that continued to violate basic human rights. Canada pressed to include Bangladesh, a very poor Commonwealth partner. Although it was not on the HIPIC list and it was a neighbour to arms-racing India and Pakistan, Bangladesh met international community criteria and had been ravaged by recurrent natural disasters.

By the end of the Cologne summit, Canada had made major advances on all of its priorities. On private-sector burden-sharing, the communiqué bluntly declared that the G-7 would shape expectations 'so that private-sector creditors know they will bear the consequences of the risks they take.'²² On crisis prevention and resolution, it limited the use of the CCL to countries pursuing (by then strictly defined) 'sound and sustainable policies' and emphasized a host of private-sector solutions that were at times intrusive. On international institutional reform a compromise gave the IMF's Interim Committee permanent standing as a new 'International Financial and Monetary Committee,' but also affirmed other measures, including 'an informal mechanism for dialogue among systemically important countries.' A clear Canadian victory came on the Financial Stability Forum when the leaders at Cologne agreed to broaden its membership to include emerging economies.

Canada also enjoyed considerable success on the Cologne debt initiative. G-7 leaders affirmed that relief would be 'faster, deeper, and broader' through measures to reduce the stock of debt by more than half. The target was for rulings on three-quarters of eligible countries by 2000. To finance the package the IMF would sell up to 10 million ounces of its gold, creditor countries would forgive most commercial and all ODA debt, and additional contributions would be made on the basis of a burden-sharing formula that took into account Canada's earlier leadership and contributions. Relief was to be directed towards the Canadian priorities of poverty reduction; health, education, and other social needs; sustainable development; and good governance.

Perhaps Canada's most striking success was in securing an emphasis on a social safety net to offset the negative effects of globalization. The G-7 communiqué heralded the principle that 'social policies are the cornerstone of a viable international architecture' and instructed the IMF and other IFIs to invest in education, health, and social needs as an essential part of their policies. The subsequent communiqué of the G-8 (now that Russia was included) spoke even more broadly and ambitiously of the need to 'strengthen the institutional and social infrastructure that can give globalization a "human face."'²³ Taken together, the Cologne consensus marked a repudiation of, and replacement for, the neo-liberal approach that had dominated G-7/8 thinking at Denver, and during most of the 1980s and 1990s. Notably absent from the Cologne communiqués were any references to capital account liberalization as a valuable international constitutional principle, let alone one worthy of entrenchment in the IMF Articles of Agreement. Emerging economies were now invited to carry out a 'careful and well sequenced approach to capital account liberalization' and to do so only after they had stronger, better regulated, national financial systems in place.