Hell or High Water

by Paul Martin

  Sheila, who was very involved with the “Politics and the Pen” event held in Ottawa each year, was instrumental in the establishment of the Shaughnessy Cohen Prize for political writing, whose recipients have included Jane Jacobs and General Roméo Dallaire.

  Politicians sometimes need to be reminded that no one is irreplaceable. Well, almost no one. We will truly never see anyone quite like Shaughnessy again.1

  1 The journalist Susan Delacourt, who was a close friend of Shaughnessy, wrote a fine and touching biography after her death, which I would recommend to anyone interested in learning more about her remarkable life and personality.

  CHAPTER FIFTEEN

  Taking on the World

  I believe that a finance minister’s work internationally can be every bit as important as the work at home, because in a world of interdependent markets, no one can succeed in a world in chaos. The many meetings that take place among finance ministers and central bankers attract relatively little attention outside the business media. To make matters even more remote from the average Canadian, the world of international financial management is populated with an alphabet soup of organizations — the IMF, the WTO, and the G7 — whose discussions may seem arcane to all but the specialists.

  And yet, the issues are big ones. In my time, they involved several international crises, each of which threatened our prosperity here in Canada, caused untold suffering in the countries directly involved, and foreshadowed issues we are dealing with to this day.

  We also grappled with the stranglehold of Third World debt and aid that affected the very survival of some of the poorest people on earth.

  Despite their importance, I find these issues hard to convey to the reader, to lift off the page effectively. This may be an instance where a picture is worth a thousand words, especially if we can explain that the child in the picture does not lack a school because of a typhoon or some other natural disaster but because of a failure in his country’s banking system. Or if we can show a destitute family ground into poverty and explain that their hopeless situation is not caused by war, or disease, but by the fact that the world’s financial architecture was built for another era.

  And I still feel passionately that if we get the right structures in place, we can help make sure that the globalization process the world is going through today works to the benefit of Canadians — who are a trading people — and of humankind.

  At my first G7 finance ministers meeting, which was held near Frankfurt, Germany, a meeting was arranged between Lloyd Bentsen and me. Bentsen was Bill Clinton’s treasury secretary at the time, but he was best known for his eviscerating riposte to Dan Quayle during the 1988 vice-presidential debate after Quayle compared himself to JFK. “Jack Kennedy was a friend of mine,” Bentsen replied. “Senator, you’re no Jack Kennedy.” I had my own brush with Bentsen’s historical memory at this first meeting, held in a castle in Kronberg, built for a daughter of Queen Victoria whose son became Kaiser Wilhelm II. In an attempt to make small talk I remarked to Bentsen that I had heard the castle had also once served as General Eisenhower’s headquarters near the end of the Second World War. He didn’t seem as surprised at this insight as I thought he might have been. “That’s right,” Bentsen replied in his Texas drawl. “I came here, and it was in this room that I tried to persuade him to run for president as a Democrat.”

  “Isn’t that interesting,” I said lamely.

  For me, the attraction of the world stage did not come from the chandeliers and the fancy locations. It came from the impact of its issues — their sheer scale, and the daunting mechanics of addressing them. Globalization, the environment, poverty, disease: these were places where Canada had to make a difference. I began, of course, as a rookie among the G7 finance ministers but, as my years in Finance mounted, ended up being the dean. In my first years at Finance, my focus, naturally, was mainly domestic. On the other hand, it had always been obvious to me that the success of our economy was based on our ability to compete internationally, which meant we had a vital interest in the way the international trading and financial systems operated. If I had any doubts, the Mexican peso crisis had driven this truth home: we could do everything possible within our borders to get our house in order and still get sideswiped by problems abroad.

  Along the way, over the course of many meetings in many far-flung places, I made some good friends and some important allies. Just after the 1997 election here in Canada, the G8 summit was held in Denver, Colorado. Tony Blair had recently taken power in Britain as leader of the first Labour government in nearly two decades. My office had arranged for me to have a bilateral meeting at the Denver summit with my British counterpart, the new chancellor of the exchequer, Gordon Brown, whom I had never met. When I arrived in Denver, I went to the official reception hosted by Bill Clinton. Every Democratic Party operative in the Denver area was there, and the president spent his time introducing this mayor and that congressman, and, oh, say hello to my friend in that corner there.

  After about ten minutes of this, I wandered back to the summit shuttle bus to go through some documents. Already sitting in one of the seats reading was a man with unruly black hair. “Are you Gordon Brown?” I asked.

  And he replied, “You must be Paul Martin.”

  “So,” I said. “Why don’t we have our bilateral meeting right here and now.”

  He agreed immediately — something that we both found all the more agreeable because of the consternation this would create with our departmental handlers. Forty-five minutes later we were well on our way to becoming fast friends. He was open. He was smart. And, to my surprise, he shared more of my fiscal philosophy than I expected from a Labour politician. As our friendship grew over the many encounters we had at finance ministers’ meetings in the coming years, it was not lost on either of us that our relationships to our respective prime ministers were very similar — although that was something we rarely discussed. Our bond was really forged from a common set of values and a similar approach to public life.

  At the Denver summit, the G8 leaders indulged in a form of summit ad-hockery that I have long believed to be counter productive. The meeting was held only six months or so before the famous Kyoto conference at which the protocol was signed, so the issue of climate change was very much on the agenda. Under pressure from the Europeans at the summit, President Clinton declared that the United States would commit to a 7 per cent decrease in greenhouse gas emissions by 2012. He made the commitment, as I learned at the time, without consulting Bob Rubin, his treasury secretary, who felt the number had been pulled out of a hat. Jean Chrétien then increased Canada’s objective to a 6 per cent reduction.

  I think that these impressive promises — which were made by other governments as well in this period — were at the root of the international community’s long-term policy failure on global warming because they were unattached to implementation plans. High-flown rhetoric was never harnessed to practical action. Our electorates and the world thought we were doing something when we were not. A more realistic approach, one that tied our commitments to specific plans, would have let everyone see precisely what we were doing or not doing, and monitor our performance. There is no doubt that the climate crisis confronting us is more urgent and threatening than we realized a decade ago. But much more would have been accomplished if governments around the world had taken their own rhetoric seriously — something Stéphane Dion did when he became minister of the environment in 2004. There was no intention to deceive at Denver, or at Kyoto for that matter, but there was a colossal failure both to plan ahead and to follow up.

  In my role as finance minister internationally, my preoccupation quickly became how to encourage the evolution of the world’s markets and financial institutions in order to ensure the global financial stability Canada required to grow. Several things were apparent to me. The first was how vital multilateral institutions such as the G7 were to Canada, because without them we would simply be excluded from the tripartite U.S.-Euro
pe-Japan management of the world economy. Second, as a small-market nation heavily dependent on exports, we had more at stake in a well-functioning global financial system than almost any other country. Third, we were very much a junior member of the G7 club, and could only have influence by a commitment to sound finance at home and a reputation for generating sound ideas that could command the attention of the larger economies.1 Finally, it was obvious that while the G7 countries were still the bedrock of the international financial system, they were losing relative weight with the emergence of new giants in Asia and elsewhere in the developing world. For this reason, I felt it was important to start drawing these emerging economies into world decision making, which would, incidentally, also help Canada because of our dependence on a multilateral system that works. I believed that the G7 countries could not lecture the newly emerging countries on their economic management from a lofty height; we needed to engage them in a process in which we would work together for our mutual benefit. This strongly held belief drove my actions throughout my time as finance minister and prime minister, and still does in my post-public career.

  The fact is the international financial architecture that had developed following the Second World War was no longer adequate, and was likely to become less so over time. The reforming vision that created the IMF and the World Bank at the end of the war was needed again. We badly needed a new set of reforms that took into account the massive economic changes in the world since the demise of the Soviet Union in the late 1980s and early 1990s.

  For a precedent for what had to be done, I’d ask you to go back to the start of the twentieth century for the most instructive example. In 1907 and 1908, there was a financial crisis in the United States that led to panic and a run on the banks. Banker and financier J.P. Morgan stepped in and organized a coordinated effort, arranging loans to shore up his country’s ailing banks and plummeting stocks. He virtually single-handedly averted a collapse of the U.S. financial system. But after it was over, it became clear that because of the growth of the U.S. financial sector, a single person would never be able to accomplish such a feat again. This realization eventually led to the development of the whole domestic regulatory regime for financial institutions in the United States, an evolution that continues to be thickened and strengthened to this day.

  My first experience with international turbulence as finance minister occurred early on with the Mexican peso crisis, which was resolved primarily by the action of Bob Rubin and the U.S. Treasury. After it was over, I felt that this might be the last time, given the growth and increasing seamlessness of the global financial system, that one country even working through the IMF would be able to come to the world’s rescue.2 In short, I felt the J.P. Morgan example in the United States at the turn of the last century had just been replayed on a global scale for the last time, and I was certain that the world’s regulatory system was going to have to reinvent itself.

  The alarm bell was rung by the Asian financial crisis of 1997. The details may seem complex, but the underlying problem was fairly straightforward, and like the Mexican devaluation crisis in 1994, an important element was a lack of transparency camouflaging inappropriate or inconsistent policy.

  It went something like this. Countries such as Thailand had been under huge pressure from the International Monetary Fund (IMF) to open up their markets to foreign capital investment. This was really a reflection of an attitude at the IMF that every economy should function pretty much like those in the United States or Europe, but the IMF had not thought through the issues of transition. Unfortunately, while there was enormous pressure to liberalize the way investment flowed into these markets, there was no parallel pressure to regulate their capital markets or to ensure financial transparency. As these developing countries opened up their capital markets in the 1990s, they enjoyed huge flows of international investment from banks, mutual funds, hedge funds, and so on. Much of that money went into institutions such as local banks as short-term U.S. dollar loans. These banks would then turn around and lend the money out to businesses and individuals for much longer periods, say ten years, and those loans would be in the local currency, such as the Thai baht.

  The ticking bomb in this situation was that anything that spooked the international investors could lead them to pull their short-term money out. Of course, that’s exactly what happened, and the Thai banks had no easy way to respond, since they had already lent the money out in long-term loans denominated in baht. To make matters worse, Thailand had pegged its currency to the U.S. dollar — a policy it sustained with reserves of U.S. dollars. When investors started pulling out, the Thai central bank quickly used up those reserves trying to keep the baht at its pegged rate. Nobody knew this was happening until the bottom fell out. The Thais then had to unpeg the baht; it came under attack from international markets and dropped like a stone. That left Thai banks with the impossible task of paying back their U.S. dollar loans with the devalued baht. It made for a dizzying spiral.

  Thailand was only one of a number of countries in a similar pickle. As the panic spread, the “Asian Tigers” had their feet knocked from under them one after another. Thailand’s problems surfaced in the summer of 1997; by August, Indonesia had hit the skids; and by December, the world learned that South Korea was in deep trouble too.

  Korea was a particular concern because it was the eleventh-largest economy in the world. Bob Rubin jawboned the big American banks to discourage them from pulling the plug on their Korean loans, which would have had disastrous consequences. He phoned me over Christmas to ask that I intervene with Canada’s “big banks” to do the same. I told him that our big banks were more like the mid-sized American banks that he had chosen to leave off the hook. Still, I knew our banks would co-operate, and when I asked, they did.

  Not long after this Russia defaulted on its debt, and a month later, a major U.S. hedge fund — Long Term Capital Management — got into such trouble that it took a major effort by the U.S. central bank to bail it out. Each of these incidents posed a huge threat to the global system. Things got even worse in October 1997, when word began circulating that Brazil, too, would need a financial aid package. Needless to say, this cast a pall over most of Latin America.

  In a global financial crisis, there are those countries who are hit and whose people suffer, sometimes terribly, and those who try to help. In the Mexican crisis, Canada was hit but Canadians came through it well because the crisis did not last too long. We would not have been so lucky had we become entangled in the Asian crisis. Every night when I went to bed, I said a small prayer of thanks that the 1995 budget had succeeded, and that its healing power was being recognized by the markets. We were not being hit, and that meant we could help.

  Every year, the IMF and World Bank meet in Washington for their annual meetings. One of them was held in 1998, in the midst of the Asian financial crisis. Bob Rubin called me up and said that Bill Clinton would like to meet to discuss the crisis with a group of about two dozen of the finance ministers and central bankers attending the meetings. Bob asked Gordon Thiessen and me to come over to the Willard Hotel, which is a stone’s throw from the White House, at three-thirty that afternoon. Now, not all those present were that keen about wedging this into their already overloaded schedules, but when the president of the United States asks for a meeting, you obviously show up. The problem was that he didn’t. Not at three-thirty, anyway. It turned out that we had been asked to come an hour early so that the Secret Service dogs could do their work, which included German shepherds sniffing down the finance ministers. More grumbling. It was at the height of the Monica Lewinsky scandal to boot, so more than one of us thought that this all might be a photo op to demonstrate the president’s determination to keep working on substantive issues. By the time they piped “Hail to the Chief” over the loudspeakers, we were getting pretty fed up.

  As a group we were deeply knowledgeable about the Asian crisis, since we were grappling with it every day. When Bob Rubin threw the
meeting open, he asked me to begin and I lobbed an easy question at Clinton, as did several others, to which he replied with fairly general answers. So, just to be mischievous, I decided to raise something much more technical, something really tough. Clinton handled himself beautifully. Suddenly the meeting came alive. We talked for two hours and it was pretty clear that he knew and understood the situation as much as anyone in the room. When he had to leave, there was a standing ovation.

  It was in this period that Bill Clinton described the Asian financial crisis as the world’s worst in fifty years, which was an overstatement. But it was helpful in making the case for the reforms I believed now had to be put in place. There was talk for a time of an international bankruptcy court, which would allow countries in financial trouble to reorganize their affairs systematically, just as corporations can. Ultimately the idea didn’t fly, in part because of the opposition of many developed countries and the large international banks. I then championed, with Gordon Thiessen’s strong support, the idea of “collective action clauses” in lending agreements, which would allow a country in trouble to change the terms of its debt with the agreement of a majority of its creditors (instead of the 100 per cent otherwise required, which was almost impossible to obtain). This was strongly supported by the developed countries, but many developing countries said this would stigmatize their debt, making it harder for them to get loans; so I decided that Canada, which by this time had become the darling of credit markets, would start inserting such clauses into its own loan agreements as a way of demonstrating that there was no stigma attached. Collective action clauses are now no longer the exception but more and more the rule.