[Recorded by Electronic Apparatus]
Tuesday, May 2, 1995
.1529 
[English]
The Chairman: I'd like to call this meeting of the foreign affairs committee to order. I'd like to welcome, on behalf of the members, the minister.
Minister, your visit today is very timely. We are presently in the process of writing a report on the reform of the international financial institutions. We know you've spoken a great deal about this recently. Your office has been good enough to circulate to us various of the speeches you've made on the subject. We look forward very much to your comments and guidance and anything else you feel would be appropriate.
.1530
I understand you must leave at 4:20 p.m., so I just would remind the members of that.
Also, Minister, I don't know how many committees you've attended since the rules were changed, but it is now no longer possible to have a speech taken and put into the record the way we used to because of the way the proceedings are now reported. So depending on what you had to say, I don't know how you intend proceeding, but sometimes -
Hon. Paul Martin (Minister of Finance): Obviously I haven't been to committee in a while. I thought I would make some opening remarks and then basically open it up to questions.
The Chairman: That's perfectly all right. That's what I hoped you would do. In the past some ministers have said, I have a prepared text that I would ask you to just incorporate into the written proceedings, but because of the way we now record proceedings of committees, that's no longer possible. I just wanted to remind you of that.
Mr. Martin (LaSalle - Émard): Thank you, Mr. Chairman.
[Translation]
I would like to thank you and all the members of the committee for having invited me to talk to you today about the international financial institutions and the coming summit.
I would like to take this opportunity to brief you on the activities and the work that will pave the way to the Halifax summit. I just took part in the G-7 and IMF meetings, in Washington, and I have to tell you that the discussions that were held were focused on the reform of those institutions and on monetary matters.
The same thing happened when I went to Asia, recently, to take part in the finance's minister's meeting of the Asia Pacific Economic Co-operation Council. I must tell you that I was struck by the similarity of the concerns raised by my colleagues of the developed countries and of the emerging economies.
Everybody acknowledges the importance of those institutions and everybody wants them to function better.
[English]
Mr. Chairman, first let me say that hosting the summit is a great opportunity for Canada, Nova Scotia and for Halifax. It's a great opportunity for Canada to set the stage for an historic review of the international institutional architecture. I will concentrate today on the Bretton Woods institutions, that is to say the IMF and the World Bank.
I know, Mr. Chairman, as you've said to me, the committee itself has been to Washington to the same end. As you know, therefore, the fund is key to the smooth functioning of exchange markets and, through balance of payments assistance, the growth of world trade. The fund's surveillance of the members' economy and its advice on macro-economic policy are invaluable. The World Bank in turn borrows at low interest rates to provide developing countries with loans and other development assistance they could not otherwise obtain, or if they were to do so, they could only do so on prohibitively expensive terms.
Through the bank, it is important to underline that countries like Canada get great leverage in terms of the volume of development assistance that is provided in relation to the funds that are put up. The fund and the bank have proven their adaptability in the face of many challenges in the past, and I am confident that they will continue to do so in the future. I do not therefore think that a fundamental restructuring of their operations is required, but - and let me emphasize - I do believe very strongly that important reforms need to be considered in these institutions and in their operations as we face the challenges ahead.
Let me begin - and I'll cherry-pick here; I won't deal comprehensively, Mr. Chairman, for time limitations - with capital flows and with currency volatility.
International financial markets have been revolutionized in recent years by liberalization, by technological change, and by financial innovation. While this has produced great benefits such as better access for emerging countries to international capital, it has also increased the risks for countries and for investors.
.1535
As the Mexican crisis illustrated, international capital flows can go suddenly and rapidly into reverse, with wrenching consequences. Shocks can be transmitted rapidly from one country to another. This can result in countries getting side-swiped and suffering from contagion, no matter where they are in the world - it's important to understand that - even when their economic fundamentals are solid.
The volatility of exchange rates that accompany the ebb and flow of short-term capital movements can sometimes seem irrational and divorced from the basic economic fundamentals of the countries concerned. The fact is that markets can get carried away and depart from the fundamentals in the short run. But we cannot forget that markets also serve as powerful warning devices when they perceive any weakening of resolve on economic policy commitments or detect any emerging problems with economic fundamentals.
Whatever the reasons, fundamental or irrational, we are still left with the consequences of short-term capital flows and currency volatility. The question is whether we can improve the functioning of international institutions to help mitigate these effects. I'm convinced we can.
First, we need to improve our early warning system. This means more effective surveillance by the IMF of member countries' national policies. It also means more up-to-date and more up-to-the-minute relevant and consistent information on key economic developments, provided both to the fund and to the public markets. Timely, consistent and accurate data are essential for better informed and therefore better functioning financial markets as well as effective surveillance.
Second, we need the ability to consult quickly and take decisions in the necessary timeframes if assistance to member countries is to be effective. We have to be able to move quickly from the detection of a potential crisis to appropriate responses before the damage can be done. This means that franker policy advice by the fund may well be necessary. The fund must also have the appropriate resources and financing mechanisms to effectively manage international financial problems.
Then again, as important as the scale of resources is the ability to deploy them in a timely and effective way. We are exploring the scope for quicker deployment of fund resources in urgent circumstances.
You talked about the changes in committee, Mr. Chairman, but one thing is consistent, and that is that the coffee is still lousy.
Some hon. members: Oh, oh!
The Chairman: It's a question of finances.
Some hon. members: Oh, oh.
Mr. Martin (LaSalle - Émard): The coffee was this bad under the Tories.
The Chairman: Everything goes back to resource allocation.
Mr. Martin (LaSalle - Émard): To be meaningful, any reform of the IMF or the World Bank must be embraced by all the shareholders, and not simply the G-7. We have to pursue a co-operative approach that takes into account the concerns of others, including the developing countries. This is fundamental to any discussion of governance in these institutions.
[Translation]
Which brings me to mention the development and the World Bank. Over the past 10 years or so, we have greatly increased our awareness of what is effective for development and we have learned even more on what does not work.
[English]
The paradigm has shifted. Development strategies have radically changed. There's a better appreciation now of the role of the private sector and of private financing. The importance of human resource development has been underscored. The need for real sensitivity to the environmental impacts of development and the devastating consequences of insensitivity have been driven home.
[Translation]
We acknowledge that the World Bank as well as other development institutions have changed over time. The huge challenge that we face is to determine how we can increase development effectiveness at a time where financial resources are getting scarcer.
How can we get the best return on our development dollar? Priorities must be defined, institutional overlapping must be reduced and governance must be improved. These priorities should be sustainable development, lower levels of poverty, private sector development and debt reduction.
.1540
[English]
I emphasize the private sector aspect of this, which is absolutely crucial in the development of all these emerging economies, certainly the poorest economies, and that the international financial institutions must concentrate on them.
Coordination of effort across development institutions is necessary to cut out duplication. Development policies must be geared to the receiving country, not just imposed by institutions. Developing countries are partners in this process. Co-ownership of developmental priorities is therefore essential. Policies must emphasize investment in health and education as well as infrastructure. A better bang for the aid dollar can be achieved if scarce concessional resources are devoted to countries that need them the most and demonstrate the capacity to use them effectively.
These are the perspectives guiding us on the question of institutional reform. As summit host this year in Halifax, Canada has a unique opportunity to ensure a fundamental review. This is a tribute to the Canadian Prime Minister, whose idea it was in the first place. I believe that as a result of his actions we have succeeded in engendering a debate that will lead to a better system, one better able to meet the challenges we face today and anticipate facing tomorrow.
Mr. Chairman - and I say this in all sincerity - your committee's report will play a very important and useful role in that debate, particularly if your focus is on needed improvements in those institutions. The fund and the bank will continue to play essential roles in world economic and financial development into the next century.
I understand that you, as a committee, have heard from other stakeholders in this debate and you have seen the institutions firsthand. As the Minister of Finance, certainly, but as a Canadian as well who supports fully our deep-seated commitment to the ongoing evolution of the world's multilateral institutions, I have to tell you I look forward with great anticipation to your report.
[Translation]
Mr. Chairman, may I conclude by thanking you again for having invited me today. I'll be happy to answer your questions.
[English]
Thank you, Mr. Chairman.
The Chairman: Thank you very much, Mr. Minister.
Mr. Leblanc and then Mr. Mills.
[Translation]
Mr. Leblanc (Longueuil): Minister, welcome to our committee. I have two questions.
First, you said recently that Canada should invest more in the IMF, the International Monetary Fund, and Great Britain said that since the donor countries are fairly in debt themselves, the IMF should draw instead from its gold reserves. Could you elaborate on that?
Second, in the course of our meetings, some experts told us that the three major world powers which have the greatest leverage on currency, namely the United States, Japan and Germany, should perhaps talk to each other more often to try to find a way to stabilize currencies in the future.
I know that Canada cannot influence currencies, but we should perhaps express our point of view in this regard in order to make these three world powers aware of the necessity to find a way to stabilize international currency so that the world economy will be more stable.
Since the economy is more and more open on the world, currency should be more stable to make investors feel more secure. I would like to hear your views on these two questions.
Mr. Martin (LaSalle - Émard): With regards to the first question, I said that I believed that international financial institutions should certainly increase their resources. I did not say that it would absolutely essential that this increase in resources come from member countries. There are other ways to do it namely by increasing the capacity of the
[English]
general arrangement to borrow
[Translation]
or, as you just suggested yourself, by drawing from the gold reserves of the monetary fund as Great Britain suggested.
Moreover, when I was in Washington, at the IMF meeting last week, I supported England's position, that is to say the feasibility of selling from five to six percent of its reserve and, this is very important, not to spend the capital, but rather the interest on that capital in order to help the poorest countries.
.1545
As to your second question concerning the three greatest powers, which is to say Germany, the United States and Japan, who should discuss their own currencies amongst themselves more often, the G-7 ministers meet four or five times a year. Do those three speak with each other at other times? It's quite possible.
Our position is that, to have currency stability, each country should look, inwardly, into their own policies, their basic principles, the management of their economies. As we said last week, when you look at the yen and the American dollar, you see a gap that is far and beyond the principles that should exist and that, fundamentally, the reason for this has to do with the domestic policies of these countries. We know that on the one hand there is the fiscal deficit of the United States and on the other hand over-regulation in Japan.
Mr. Leblanc: We should delve into this because, the more we open up to international markets, the more important stability will be. You know very well it would be too easy, at a given point, to lower the dollar so as to export more or help our manufacturing industries, for all sorts of reasons.
That is why even if we speak of stabilizing our deficit, reducing the debt, etc..., I don't think it will have an influence on international currencies. With that in mind you should... I strongly suggest that, as Minister of Finance, you suggest to those countries that they should engage in serious talk because they are the main countries responsible for international monetary stability.
Mr. Martin (LaSalle - Émard): We've held these discussions. I must say that if a country doesn't face its own domestic challenges, in its economic policy, mere consultations will not close the gap between their currencies.
Is the yen too strong or is the dollar too weak? We know one thing: there is a gap and the solution is within these countries. Should the rest of the world say to these countries: "Solve your problems domestically"? Absolutely. We should do so and we do. From that perspective, I think that your suggestion is valid.
There's no panacea. You have to manage your own economy properly.
Mr. Paré (Louis-Hébert): Over the years, the international situation has changed a lot. But it would seem that the mandate granted the IMF at the beginning, and the one it is fulfilling today are quite different.
Moreover, there is a kind of certainty that the World Bank and the International Monetary Fund, in many circumstances, overlap. You don't seem to be suggesting a fundamental restructuring of these institutions, and yet, you talk about the need to get rid of overlap, to turn towards sustainable development, to further reduce poverty, to cut the debt and develop the private sector.
Personally, I find that, concerning the IMF's mandate in particular, those changes are extremely important. I'd like you to explain to me why you don't find them important. I would think that it's a very important change.
Mr. Martin (LaSalle - Émard): I think we have different opinions on what is important in other areas, too. But I think that the opinion you've just stated is quite valid. We still need to have an International Monetary Fund and a World Bank.
However, it's obvious we must eliminate the overlapping between the two. There's no doubt that there's a lot to be done concerning the environment. There is no doubt that there is a long way to go before we can absorb all that private sector capacity.
.1550
I believe that there is common ground between us on that issue.
The Chairman: Thank you Minister.
[English]
Mr. Mills.
Mr. Mills (Red Deer): I have a couple of questions, just following on from what we've been talking about.
The IMF managing director suggests that we need to have a doubling of the capital resources. Obviously, you've suggested we can get that in a couple of different ways, other than raising the contributions by a country.
I wonder what you would be prepared to look at in terms of raising our contribution. More specifically and politically, I would ask what you think the Canadian public might be interested in, in terms of increased contributions to that area.
There's another area we've been looking at in quite a bit of detail, and everybody seems to agree that bureaucratically the IMF and the World Bank.... Well, we've had all kinds of words used, all kinds of adjectives, but basically it's a horror story in terms of the way the bureaucracy has grown and how much they could be cut down. We've had people like Mr. Williamson in Washington tell us that he couldn't believe the amount of bureaucracy.
I wonder what your feeling is about pushing that agenda at the G-7 in terms of real reform of these two institutions.
Mr. Martin (LaSalle - Émard): In terms of your first question, I believe in Canada's case, and I think in fact in the case of the vast majority of the members of the IMF, we're all coming to grips with major budgetary problems and there is not a huge appetite out there to have to see increases in contributions from member countries.
That having been said, we also recognize that as member countries we have an enormous amount to gain from the proper functioning of the system and an enormous amount to gain from the developing countries receiving the funds they require so that in fact they can improve the standard of living for their people and be stronger members of the world community.
So there is obviously very much a balance that has to be here, and that's why as a government we have really put a lot more emphasis on getting a lot more bang for the buck out of the existing resources of the international institutions or seeing the international institutions leverage them.
Now, how do you leverage funds? Well, I've already mentioned the general agreement to borrow and the possibility of gold sales. Something else that I think is very important for this committee to look at is the whole concept of mezzanine financing by these international institutions in order to leverage a great deal more private sector capital. Also, it's important to see these institutions helping individual countries set the rules by which this international capital is going to come in.
Let's be very honest. You could double, you could triple, you could quadruple the contributions to these institutions. I'm going to tell you, it would be a drop in the bucket compared to the amount of money that is required out there. Therefore, if we don't seek to leverage private sector capital, we're simply not going to do the job that is required.
On your second question, the one about the bureaucracy, I think this is endemic to any large institution. The International Monetary Fund, the World Bank, and the whole group of institutions are certainly not exempt from what happens when bureaucracies get too large, and I think it's one of the reasons that periodically you basically have to go in there and make sure that not only do you not have too many people, which is always a problem, but that in fact the people you do have in place are doing the right job. I think that's obviously something that has to be looked at constantly.
Mr. Mills: Do you think there's a commitment amongst the other G-7 members to that sort of reform?
Mr. Martin (LaSalle - Émard): Yes, there is. I can say that unequivocally.
.1555
Mr. Martin (Esquimalt - Juan de Fuca): I've got a couple of questions for you; I'll start with the most important one.
You mentioned the early warning idea for the IFIs. It's an excellent idea. Are you prepared to examine whether using the IFIs in a carrot/stick approach is a good idea with developing nations who might be engaging in domestic policies that would not be in their best interests or engaging in foreign affairs policies that would pose a regional or international security threat?
The second question relates to the developing world and its indebtedness, which we spoke about a little bit. As you well know, the developing world simply cannot get up on its feet with the reverse capital flows that are occurring right now to the IMF and the MDBs. Are you going to propose at the G-7 summit that the players get together and develop the beginnings of a comprehensive plan to address that perhaps most serious of economic problems addressing the developing world right now?
Mr. Martin (LaSalle - Émard): The reverse capital flows?
Mr. Martin (Esquimalt - Juan de Fuca): Yes, to address the reverse capital flows that are occurring there.
Mr. Martin (LaSalle - Émard): There are two questions there; first, the carrot and the stick. The situation of the international financial community in terms of dealing with countries is analogous to that which all of the developed countries went through in terms of how they regulated securities markets internally some 30 or 50 years ago. That is why we put so much emphasis on the need for transparency and for the provision of timely and accurate consistent data.
As for the carrot and stick, do I think the IMF has a role to play in basically identifying those countries who are doing that and those countries who are not? The answer is yes, I think they do. I think the IMF should [Inaudible - Editor] the countries, providing this information on a timely and consistent basis.
Do I think the IMF should go further and publish lists of problem countries and that kind of thing? I would be quite hesitant, simply because of the possibility of self-fulfilling prophecies. I think one would have to watch that.
Now, your second question was on the whole question of reverse capital flows. I think this really is something we are very much going to have to deal with. On the one hand, the whole purpose of surveillance is to make sure that when those flows are going in, they understand the situation so that they don't leave quite as quickly as we have seen in certain instances.
But I think there are a couple of other things. It's understandable not to have restrictions on capital flows in developed countries with deep capital markets and at mature stages of economic development. In terms of some of the emerging economies without deep capital markets, I think we should be prepared to look at staged liberalization. I think that Chile is an example of the kinds of things I think are perfectly acceptable.
Malaysia is another interesting example. At one point in the last year Malaysia essentially said, if you're coming in here, you're staying for a year and we want to see the money coming in in infrastructure and longer-term investments as opposed to simply coming in portfolios. As a result, they protected themselves substantially. It was a very controversial move from the contagion that flowed from the Mexican crisis.
I think that's perfectly acceptable. I think we cannot impose on some of these countries the same standards that we would impose on the London and U.S. markets.
Mr. Flis (Parkdale - High Park): Referring to where the minister left off on the Mexican crisis, it was the Mexican crisis that pointed out to the international community the weakness in the whole IMF structure. Yet you're not recommending any fundamental restructuring to the World Bank, IMF or other financial institutions. I think if we want to make an impact in the Halifax summit, surely the contribution would be to come out with some structure or model to prevent a similar crisis again, because if we don't then we haven't accomplished anything.
.1600
You also mentioned in your remarks the volatility of the currencies, etc. This committee has heard how people play a trillion-dollar poker game overnight. We'd be interested in your views on that. Should we tax some of those profits, as Mr. Tobin suggested? It's a very volatile international situation there in the currency, and yet you're saying we don't need major restructuring.
Mr. Martin (LaSalle - Émard): I guess it really comes down to defining what you mean by fundamental restructuring. I think this is really in many ways the same kind of question that I answered earlier, and perhaps I should have chosen my words a bit more carefully.
When I said there shouldn't be a fundamental restructuring, what I was really referring to were those who called into question the very existence of the IMF or the World Bank, because I really do believe they've shown themselves to be very adaptable, and I think they continue to play a very important role.
That having been said - and I think it probably is my choice of words - I do believe there are very important changes required in the operation of these institutions to bring them into the very different world that exists in the 1990s compared to when they were immediately set up, in the immediate post-war period. So perhaps it was a choice of words; I do think we are on the same wavelength.
As to your question on the Tobin tax, essentially I am not sure the Tobin tax would work as a means of slowing down the kind of volatility that we see, even theoretically. I do believe theoretically that the Tobin tax is quite attractive as a way of raising money, and I suppose I would be a darned poor finance minister if I didn't look at that kind of thing.
The problem is that from a practical point of view, it would be very hard to see how the Tobin tax could work, for two reasons. One, you'd absolutely have to have the unanimous support of virtually every country capable of having a stock exchange in the world, which is a level of cooperation quite difficult to attain.
The second thing - and I think we really have to understand this - is that nobody should ever have any doubt as to the ingenuity of the financial community. I think it would be very difficult to find a comprehensive form of taxation that the financial community could not find a way of circumventing by the development of new financial instruments.
For those reasons, my practical answer to your question is that I don't think the Tobin tax would work.
Mr. Flis: And some structure, some model, that the summit will recommend to prevent another Mexico crisis?
Mr. Martin (LaSalle - Émard): The Prime Minister is obviously very keen on this, and I don't want to anticipate what will happen at Halifax. Canada has taken a very strong lead in this. There will be, I'm sure, a number of suggestions put forward for discussion.
One of the things, for instance, that Canada discussed quite extensively in Washington last week was far greater cooperation than exists today between our own regulators and securities exchanges within each individual country. Just think about it. We're talking about private sector capital. Most of these countries have extensive regulations and securities exchanges within themselves. Then you have to ask yourself how much exchange of information really exists.
As for the Mexican crisis, which you raised, the fact is that the Mexican finance minister made the point that all of the information that was required in Mexico was available. The problem with it was the lack of critical analysis. Now, you could make your own judgment on that point.
The Chairman: Minister, I want to assure you that while I know you're doing your thinking on this, when we get our report done we will enrich your menu considerably by our recommendations as well in that respect.
I have Mr. Lastewka next.
Mr. Lastewka (St. Catharines): Thank you, Minister, for your opening remarks and the free dialogue amongst the group.
On the trip that we all made to Washington to review the World Bank and the IMF bank, it became very clear to us that there was about 30% to 35% duplication going on between the two institutions. Over and over we heard about the fact that the World Bank, the IMF, regional banks and so forth were competing with each other.
.1605
You did clarify what you said earlier. I would like to hear your remarks on the fact that they are competing among each other, but there is only one stakeholder here, and that's the people who contribute to the banks.
When we try to become more informed specifically about the IMF, the transparency and the accountability, even for us it was very difficult to understand and really get beyond the first or second question about why they are doing certain things. I have a great concern about the transparency of these institutions, and as a result, I start questioning their mandates and their accountability to the stakeholder.
Mr. Martin (LaSalle - Émard): Just before I respond to Mr. Lastewka, Mr. Chairman, I must admit I committed an unpardonable social gaffe, the kind of thing that can make a minister go out and hang himself. I forgot to introduce the Associate Deputy Minister of Finance, Louise Fréchette, who is responsible for the G-7 and without whom I will not get out of this room alive, so I apologize.
The Chairman: Your social solecisms are pardoned by us because we all know Madame Fréchette. We really just assumed she was there to think and you were there to speak.
Some hon. members: Oh, oh!
The Chairman: Now I've committed a solecism.
Mr. Martin (LaSalle - Émard): I have to tell you that the chairman of this committee and I went to law school together and so we go back a long way. As politicians in the same party, we have on various occasions spoken for each other. I've done it for the last time.
Some hon. members: Oh, oh!
Mr. Martin (LaSalle - Émard): In any event, on the issue of duplication, you're right, we've identified that. There is an enormous amount of duplication, and I think both of those institutions understand that. For instance, in the Bretton Woods institutions commission, which was taking a look at what ought to be done, they raised this point. I suspect you will raise it too.
On the issue of transparency, I don't think anybody would disagree with you, but there is one point. You have to really ask yourself whether you're placing the blame on the right source. Yes, it may well be that the IMF operates in a way that is not as transparent as some might like - a little secretive - but you have to ask yourself if that is the IMF or if it is in fact being done at the request of the member countries. When they are providing extremely confidential information, nine times out of ten most of these countries provide it on the basis that it will stay confidential.
So almost by definition you enter into the problem that if the IMF is going to be called in by a country and provide the kind of advice that's needed, where a country has big trouble or where there are going to be loans.... If in fact that is done publicly and immediately disseminated widely, not only would you precipitate a crisis in some of those countries, but in fact the IMF would not be called in sooner. What it really wants is to be called in long before the problem arises.
So your point is well taken, but I think there are reasons.
Mr. Lastewka: I have no problem with that, if that's what it is. If that's what it is when parliamentarians from a stakeholder country come to ask questions, there should be clarity about what is confidential and what is the system approach on how to make things happen.
I personally don't believe that when we were in Washington, the IMF were up front with us. I'm not sure how many others on the committee felt the same way, but I was very frustrated when I tried to get information. As a parliamentarian, I believe I should be able to get that information.
If there's confidentiality involved, it's not any different from what we do back home when we challenge our banks, our financial institutions or the superintendent of banks. There comes a point when one of the people comes out and says now we're into confidentiality. I have no problem with that. But I think there has to be more openness from the systematic side versus the confidentiality side. Maybe we distrust them somewhat because they weren't open.
.1610
The Chairman: The minister has about seven minutes left. So I would like to propose to the members that we quickly go around and give everyone a second turn.
Madame Debien and Mr. Penson were next on my list. Then we'll take somebody from the government side.
[Translation]
Mrs. Debien (Laval-East): Good afternoon, minister. You mention in your statement that one of the roles of financial institutions should be to point out the weaknesses and economic variations. You've suggested four ways to improve the situation, which is to say an early warning and surveillance system, updating key information on the economy, consultation and quick decisions. You spoke of a detection and quick reaction process. You've spoken of granting sufficient funds to manage and deploy resources and finally, you mentioned that a co-operative process should be started up, including developing nations.
My first question has to do with the agreement you would set up concerning requests for additional resources from the International Monetary Fund. Shouldn't we wait for the start of financial institutions reform which would be touched off at Halifax, and on which the committee is seriously working here, before granting the IMF additional funds? Wouldn't this be more in tune with the process that Canada itself wants to start up in Halifax?
My second question has to do with developing countries. In your view, should granting of assistance by financial institutions to developing countries hinge upon their respecting human rights? You said that it is your government's position to promote human rights through multilateral actions. I would like you to answer those two questions, please.
Mr. Martin (LaSalle - Émard): You ask me if we should first carry out the reform before increasing funds granted to these institutions. There will be no question of increasing resources before Halifax. I think that the goal you've set out will be met. We'll start the reform first and eventually increase resources.
You've also asked me whether the monies granted by these institutions should be tied to human rights. You know that that is a very controversial matter. It has to do with the reasons for allocating those funds and to whom one gives them. For instance, when the funds are awarded to non-governmental institutions in a country, I think that we can give them. It depends on how significantly a person's freedom or civil rights are infringed upon. There are differences between the countries and, to my mind, you have to judge each case separately.
[English]
The Chairman: We literally have one minute left, so if you have a very quick question,Mr. Penson, you may proceed.
Mr. Penson (Peace River): Welcome, Mr. Minister. I just wondered if you might share my view that although the IMF and the World Bank are very important institutions, especially for Third World countries, the vehicle that might serve them the best is the World Trade Organization because of the fact that it represents trade. It also represents a much larger percentage than the World Bank or IMF fund in terms of the amount of money that is there and the kind of resources that are there to tap.
If these countries are able to trade freely with countries like Canada, the United States, and the G-7 countries in particular, doesn't that open avenues to them that are more important in benefiting their economy than having to rely on the World Bank and the IMF?
.1615
Mr. Martin (LaSalle - Émard): You bring a very important perspective to the discussion. There is no doubt about the importance of trade versus aid. There is no doubt about what we all hope will be the evolution of the WTO as it really finds its feet.
My answer to your question, certainly to the first part, would be yes, you've raised a very important point. That being said, and I have put emphasis on the importance of private sector development, there's no doubt when you look at the demand that is out there and at the amount of private sector moneys that are available, it is very clear that anything you can do to lever the private sector, basically get the private sector in there, is important.
That being said, I also believe, however, that the IMF and the World Bank have a very important role to play in the encouragement of private sector funding. Let me just go through a couple of ways.
First there has to be an understanding in a lot of these countries that the private sector is going to require a reasonable rate of return. The best body to make that point is in fact the IMF. It is crucial to make the point in a lot of these countries that you have to eliminate a lot of bureaucratic red tape and simply the obstacles that are placed in the way of development. The best organization to make that point is in fact the International Finance Corporation, part of the World Bank Group.
It is very clear that there's a tremendous need for mezzanine financing in order to lever the private sector capital. Probably the World Bank is one of the better agencies to make that point. I would say to you that while you're right about the private sector, I really do believe that in the ongoing period the IMF and the World Bank are going to play a very important role in encouraging private sector involvement in a lot of these countries.
[Translation]
The Chairman: Minister, I know that you have to leave right now because you have a meeting at 4:30 p.m. I thank you indeed for having come before us. You have enriched our understanding of this issue. Could Mrs. Fréchette stay to answer more of our questions?
[English]
Mr. Martin (LaSalle - Émard): What you're suggesting, Mr. Chairman, and I'm prepared to go along, is that you'd like to get it without the intermediary.
The Chairman: We know what's top-up, bottom-down and all the rest of it - whatever the expression is in this government.
Mr. Martin (LaSalle - Émard): Thank you. If the answers aren't the same, Mr. Chairman, just tell me.
The Chairman: Yes, you have a few people here who would guarantee that.
[Translation]
Mrs. Fréchette, we are being told that you could stay an extra 20 minutes or so to answer a few questions the members still have.
[English]
Mr. Regan (Halifax West): Madame Fréchette, one of the issues we've been looking at is the accountability of directors to the World Bank and IMF, particularly to parliaments. The minister has told us that one of the IMF's problems is that before they'll give information to that agency, countries require that promise of confidentiality, so there is some problem in sharing information publicly.
But it seems to me there is a need for greater opportunities for parliamentarians to have, for example, this country's directors on these institutions come before us. I realize we share the director with several other countries, but surely there should be an opportunity to have them interviewed before parliamentary committees and show some accountability to the public and the parliamentary process.
An hon. member: That's a good question.
Ms Louise Fréchette (Associate Deputy Minister, Department of Finance): Yes,Mr. Chairman, the very formal line of accountability of the IMF is of course to its board of governors, which is composed of the ministers of finance who in turn are accountable to their own parliaments.
But that being said, there's no reason why committees of Parliament could not invite our executive directors to come and explain what's happening in their institutions and explain the positions that have been taken and why. I know that the Canadian executive directors in the various IFIs would be more than happy to take advantage of visits to Ottawa to meet with your committee. It would be a very good practice.
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There's also also another element of accountability through the annual tabling of a report by the Minister of Finance on the activities of the IFIs. Direct contact with EDs would be of great interest to your committee.
Mr. Regan: The IMF, of course, and the World Bank have been criticized a great deal because of their performance in relation to sustainable development, poverty reduction and the policies of structural adjustment.
When we met with representatives of those institutions they were very persuasive in arguing that they were doing great things and making great strides in these areas. I wonder what the government's evaluation is of their efforts in these areas and what the government feels should be done in terms of debt reduction.
Ms Fréchette: It is a fact that both the IMF and the World Bank have learned a lot from their original experience with structural adjustment. The kind of structural adjustment programs they negotiate with the recipient countries nowadays look quite different from what they did some years ago.
This said, there's still a long way to go. Certainly the kinds of priorities we are promoting in these institutions are very much greater attention to the social dimension of development, greater attention to poverty reduction, much greater integration of environmental concerns into their policy thinking from the very beginning, not as a kind of adjunct consideration that's looked at when everything else has been taken care of.
Again there's room for much improvement, but we're starting from a situation where the institutions themselves have evolved over the years. Therefore it's a matter of pressing for more determined progress in these fields.
On the debt side, again if you look since the beginning of the 1980s, there was a lot of progress in creating mechanisms to address various types of debt. Debt held by developing countries to credited governments like ours go through the Paris Club. There are all kinds of mechanisms to reschedule and to make sure the yearly payments they have to absorb are manageable for them.
There's still a problem for a limited number of countries with the debt they owe to the IMF and the World Bank, because the resources of the IMF and the World Bank are basically loans. They have some concessional windows where there are some grants, but by and large the money that comes out of these institutions are loans, and therefore some countries that get into serious problems in fact have a real problem in actually repaying the IMF and the World Bank.
In order to protect the financial viability of the institutions, because the World Bank raises most of its money on the capital market, it's very important that its rating allow it to borrow on the capital market at the lowest possible cost. The notion of just writing off their debt is something that is considered to be not the most desirable course.
However, there are many things that can be done to actually lighten the burden, by rescheduling the debt owed to these institutions over a much longer period, or indeed by generating some of the resources to subsidize the interest rates at which new loans are made. That's one of the possible uses of the proceeds from a modest [Inaudible - Editor] in the IMF, for instance. We in Canada are at the forefront of the discussions in the World Bank and the IMF on this issue.
The number of countries that have a real problem servicing their debt to IFIs is quite small. We think that with a bit of effort and imagination, we would make the problem manageable for these countries. None of that would actually call on new resources from Canada. It's a matter of using the internal resources of these institutions in a better way.
Mr. Regan: I think the figure I've heard - you can correct me - for the net capital flow that actually goes from the poor countries to the rich countries is $9 billion. It exceeds what goes to those countries by a huge amount.
So the issue of the debt these countries are carrying as a result in part of high interest rates in the early 1980s.... I can't see a greater problem for those countries or more of an obstacle to their development and overcoming poverty than that issue, and I think that's one we have to focus on.
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Ms Fréchette: There's one caveat on the reflows to the bank. Many of the big borrowers of the past are now countries that no longer call on loans from the bank. In fact, they're doing so well that they can repay. So a lot of the countries that were big borrowers 20 years ago are now sending back a lot of money to the bank. Since their economy is in very good health, they no longer need to borrow.
So it's not surprising that there should be very important reflows. Part of that is a sign of very good health on the part of some countries. Other countries, on the other hand - and they're among the poorest, really - have real difficulty servicing their debt to the IFIs, which are their only source of capital. These are countries that cannot borrow on the market; they're very small and they're very poor. Their only source is either the IFIs or bilateral donors. For these countries, yes, there is a problem, but that's a smaller problem.
The number of countries that find themselves in a situation where they won't be able to repay and keep current with the IMF and the World Bank in the foreseeable future probably doesn't exceed 20. These are amounts that are largish but manageable with a bit of imagination, both in the IMF and the World Bank.
We certainly are in favour of some mechanisms whereby you could, for instance, reschedule the debt over a very long period. Technically you wouldn't write off their debt, but you could reschedule it in such a way that it would really lighten the burden for them on a year-to-year basis.
Mr. Jackson (Bruce - Grey): Mr. Chairman, I have just one very quick question.
With respect to the collapse of the Barings bank on the derivatives question, is that a mechanism used by all banks to hedge against currency problems?
Ms Fréchette: Derivatives are used by a variety of actors on the market, from banks to traders to exporters. They will use derivative instruments to protect them.
The literature on derivatives would demonstrate that by and large these are instruments that have been very useful. For instance, an exporter who wants to protect himself against sudden changes in exchange rates in the country of destination can buy some derivatives to protect himself, and the rest is therefore transferred. Therefore, for the exporter it's very useful to have that kind of instrument to protect himself.
I think the investigation that is going on in the U.K. will tell the whole story about the Barings bank. I suspect it will prove that it was not the instrument itself that was the problem but very imprudent practices by the Barings bank office in Singapore and probably very deficient supervisory operations within the bank itself.
Mr. Jackson: So the answer to my question, then, is that maybe all banks or most banks will use that as an insurance tool.
Ms Fréchette: Most actors on the market now can and will use derivatives. The problem is not necessarily in the derivatives. The problem can be in how your markets are supervised and the kinds of requirements you have to allow people to use these instruments.
Mr. English (Kitchener): Madame Fréchette, our own contributions to the MDBs is the highest of any of the G-7 countries. In terms of our own ODA, it amounts to a greatly increasing share over the next two years, in part because of commitments made earlier.
I have two questions. Does this large amount buy us more influence? Secondly, can we maintain the high share?
We heard conflicting testimony. At one of our sessions Professor Kirton argued that we are paying too much to the MDBs and Professor Helleiner disagreed. There was no meeting of minds on the subject. I wonder what is the thought of the government on this question.
Ms Fréchette: Well, first of all there has to be a distinction made between the ``contributions'' to the bank itself, which is a non-budgetary item, and the contribution that one chooses to make to the concessional arms of these institutions, which are part of the development envelope of the government.
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We have traditionally assumed a reasonably significant share of the concessional windows of these institutions. But it's a choice that one has to make within one's aid program. You can privilege more money going to these banks as opposed to more money going to your bilateral program. That's a choice you make. It doesn't increase the pressure on your envelope; it's just a policy choice.
As we have had to limit the size of our development envelope in the last few years, that brings us to reconsider how we allocate our concessional money among the various avenues since these concessional funds are renegotiated and replenished on a regular basis.
The next time around we always have to make a decision. Are we going to take 5% of the total target amount, 4%, or are we going to take 3%? That's a decision we have to make every time the replenishment comes up. Clearly when the total size of our development envelope has been reduced, it might lead us to review downwards some of the shares we're taking in these institutions.
Mr. English: I have one other question. Mr. Martin emphasized the leveraging of private investment flows. In a document that I believe the department passed out, from the joint ministerial committee of the boards of governors of the bank and the fund, two things are noted. One is the high level of total resource flows since 1990, particularly an increase in private finance. But it also notes that portfolio flows have declined. Ministers recognize that markets are likely to be more selective in the provision of such capital. I wanted to focus on the term ``more selective''.
If we emphasize flows...and in the work of this committee we had seen some statistics on the destination of the flows. They tended to be transitional or advanced developing countries rather than poorer countries. If we take cases like Africa, even in countries like Ghana, where as recently as a year ago it seemed there might even be private capital markets developing, it doesn't seem to be very successful there now.
If we do emphasize private flows so strongly, I was wondering whether through these instruments we aren't favouring the transition countries, the developing countries, and ignoring countries such as those of sub-Saharan Africa, which really are the poorest and the ones most in need at this point?
Ms Fréchette: In his various speeches here and in his speech in Washington last week, the minister said that to the maximum extent possible we should try to promote the funding of development needs through the private sector. Therefore we should concentrate the public money, especially the concessional money, in those countries that will not have access to these markets, either because they are in such a primitive state of development that private sector money is not interested in getting there, or because they have particular circumstances that make them very unattractive for private sector money.
That's why, even if there is room for much more leverage of private sector money, it will never be a substitute for some of the institutions that provide funding. For some of these countries the IFIs and our own aid program will be the only source of funding for some time to come.
It's also clear that private sector money is more likely to go into some sectors to meet some kinds of needs more than others. Needs like those in health or in the education sector may not be totally served by private sources and may need some public money.
But I think the basic principle is that you should get as much money as possible out of the private sector so that the public money you can put forward goes to fill all the gaps they can't fill. That is a very good principle and seems to be widely supported in the IFIs at the moment.
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The Chairman: Could I just ask a couple of follow-up questions before we adjourn.
What do you think the G-7 summit's perspective will be on the recommendation of returning to the original Bretton Woods concept of a fixed exchange rate or, if not that, some modification of a floor and a ceiling, a sort of European sherpa-type arrangement? Is that even on the discussion table at this point?
Ms Fréchette: The experience of Europe demonstrates that for the currency ban or target level systems to work, there has to be a high degree of convergence in the performance of the economies. Economies that develop in conflicting directions, in not totally harmonious directions, will in fact find it very difficult to maintain their currency at a set target.
If it is difficult for the Europeans to bring their economies sufficiently in harmony to make the system viable, it would be much more difficult to think of a similar system at a global level that would bring the Japanese, Americans and Europeans into this kind of global harmonization of policy and performance development. Therefore, I don't think you will see much development in that direction coming out of Halifax.
The Chairman: Do you see something coming out of Halifax that focuses on the upper end of the problem as it goes to just the lower end of the problem? We hear so much about deficit economies and the IMF acting as regulator.
Of course, if you look at the Japanese situation, it had to with the fact that the yen appreciated because of Japanese policies. As some people have pointed out, that was one of the failures of the Bretton Woods system. It never really addressed the problem of countries that were accumulating too much money because they refused to open their own economies.
Do you think, then, that in this new atmosphere of surveillance of the IMF there will be a willingness to focus not just on the borrowing economies but also on economies that become excessive creditors?
Ms Fréchette: Well, there's a recognition that strength of surveillance in the IMF should apply to all countries and not only to the countries that have to borrow from the IMF. That's the first point I'd like to make.
Secondly, there is very active surveillance taking place at the G-7 meetings. A good part of our discussion at G-7 meetings and when ministers meet is precisely on that subject. There's a recognition that we will not surmount the problem of excessive volatility in the currencies unless each country takes the measures that are appropriate in its own economy. That was the outcome of the Washington meeting.
To take the Japanese example, this means that excessive regulation in their country is a problem they have to address if they're going to avoid an over-evaluation of the yen. Those new problems that have serious deficits will also find pressure on their currencies. That will only be resolved through addressing their deficit problems.
The Chairman: What's the difference between surveillance and complaints about the conduct of other countries, about which they do nothing?
Ms Fréchette: Well, surveillance -
The Chairman: My question is what's the bite going to be in the new, as opposed to the older, system? What's the prospect of getting some bite in the system of surveillance?
Ms Fréchette: In the IMF right now, if you are borrowing from the fund, the surveillance is quite active and quite direct, but if you stop borrowing from the fund you have a once-a-year review of your economy. That doesn't really give instruments to the fund to anticipate crises. If you look at countries that are fragile or may run into serious difficulty, if you're going to review their economy once a year you're unlikely to spot the problems they develop.
Secondly, I think there's a requirement for more disclosure of economic data. Some countries will publish their reserve data once a year. Well, it may not be good enough if you want to be able to anticipate problems and resolve them before they turn into a real crisis.
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The other thing is that traditionally the IMF has been, shall we say, very courteous in the way it has provided advice to its member states. There's a recognition that courtesy is very nice, but that maybe the IMF should be more direct and more explicit in its policy advice to member states.
Also, at the board of directors there should be more open discussion about the state of the economies and about providing advice to countries that risk generating a real crisis, especially if a crisis in a given economy will have contagious effects beyond its own borders. Then it becomes really important that there be a collective view while things are working out in all these countries.
The Chairman: I have one last question; I'm trespassing a bit on the patience of the members. At what point does this advice become public in order to satisfy the requirement for openness and accountability, about which we've heard so much talk, without...?
We heard about the delicate balance between the need for the IMF not to create a currency crisis.... But at the same time, if the IMF had been more open with its information, perhaps in the past some currency crises that were dependent upon information on the open market might have been avoided. One thinks of the context of Mexico. Where does that line get crossed?
Ms Fréchette: This is a great dilemma. Are you going to get frank advice if the advice is going to be made public? I'm not sure.
There is certainly one level of transparency that would help equip countries against possible jerky reactions from markets. That is the transparency of their own data, not only to the IMF but to the markets. A well-informed market is less likely to react in panic than a market that is taken by surprise. At least there's that level of transparency that is being promoted very strongly by Canada and others.
As to whether we could take the next step and actually see the fund's advice made public, this is more difficult. The fear is that if their policy advice is going to become public, then there will be a lot more pressure on the IMF to couch it -
The Chairman: To tone it down.
Ms Fréchette: - in softer terms. Therefore I'm not sure you win by pushing the notion of complete transparency of policy advice. There's a big debate going on in the IMF just about that.
The Chairman: There's a big debate going on in this committee about it.
I don't see anybody else's hand up, so I just want to thank you, Madame Fréchette, for your frank and helpful advice. I'd just remind the members that these are the issues we'll be discussing on Thursday morning.
The draft report we will be moving on to Thursday morning is available here. Madame Hilchie has it, so I'd ask you to pick up your copy before you leave the room.
[Translation]
The draft of the second part of the report is available. Please pick up your copy before you leave.
Mr. Paré: Before the end of this meeting, may I again deplore the fact that meetings are held on Monday afternoons when all the Bloc representatives are away in their constituencies? We already had the same problem under a previous chair.
The Chairman: Yesterday's problem was due to the fact that four visitors from various areas of the world, from India, from Mexico and elsewhere, happened to be in Ottawa. We're attending an IDRC meeting that takes place on Monday. We held a meeting on Monday to be sure to be able to meet them.
Mr. Paré: That certainly was not the case for Mr. Bezanson, who belongs to the IDRC.
The Chairman: Certainly not for Mr. Bezanson. You can talk to him any day. But as the other three, they came from India, from Mexico and from Indonesia. They could not stay an extra day.
I can assure you that we do not normally meet on Monday, except from time to time, in case of short-term visits by delegations in Ottawa.
[English]
The steering committee meets tomorrow at three o'clock and Thursday morning at nine o'clock.
The meeting is adjourned.