by Paul Martin
There were many other ideas in the air. Canada’s contributions to these debates were enhanced by the superb public servants I had working with me, including Tom Bernes, Ian Bennett, Louise Frechette, Jim Judd, and Jonathan Fried, all of whom went on to yet more distinguished careers in public service domestically and abroad. Paul Jenkins, who was senior deputy governor at the Bank of Canada, was also an extremely valuable voice in these discussions. One of the most important changes to which we contributed was the establishment of an organization that would systematically share best financial practices.
This proposal was originally opposed by Hans Tietmeyer, from Germany, one of the most influential central bankers of his era. Someone — not me, though I wish it had been — suggested that the way to overcome his resistance was to ask him to convene a committee to examine the concept and report back. He agreed and a few months later, it had become his idea, and the Financial Stability Forum was born. The forum played an important role in containing the international contagion of the recent sub-prime mortgage crisis.
Hans wanted to limit the permanent membership of this group to the G7 and a few other countries, however, which I strongly opposed. While an early supporter of the forum I argued that excluding the world’s emerging giants, such as China, India, and Brazil, was a failure to recognize the real world. I didn’t win this argument, but I continue to believe this is a flaw in the makeup of the forum that will inevitably have to be remedied.
There is a never-ending struggle between regulators and the private sector in its ceaseless search for profits — a struggle in which national borders are invisible and the regulators are always playing catch-up. For this very reason, those managing the major economies need to act together. I was on the cutting edge of financial innovation when I left the business world twenty years ago, and as finance minister I had a watching brief on the emergence of new financial instruments. Still, after I left government and became acquainted with the intricacies of many modern financial techniques, I was amazed to learn how much things had changed, and not always for the better.
This phenomenon of business leaping ahead of the regulators was clearly what happened during the “sub-prime crisis.” Many of the United States’ most important financial institutions were deep in the business of securing shaky loans to homeowners who could not handle it when the housing market went sour. And the ripples weren’t just local or national. They were international. For instance a bank went under in the United Kingdom, and several small municipalities in northern Norway were bankrupted by the sub-prime crisis. In the end the Federal Reserve had to step in to save Bear Stearns — a venerable Wall Street financial institution.
Now, imagine, if you will, in the not too distant future, as the Chinese and Indian economies grow in sophistication, what will happen if there is an equivalent sub-prime crisis, only this time rooted in China. Or if a major hedge fund headquartered in India topples. Will Chinese and Indian investors be the only ones to suffer? I doubt it. Who will step in to deal with the international consequences? And how far away from its source will the financial tsunami strike? That is why the Financial Stability Forum and the other exclusive clubs based on past Western hegemony that are supposed to have an important role to play steering the global economy will eventually have to open their doors much wider.
The same was true of the G7, but here I was more successful in making the argument. While the Asian crisis was the result of problems in only a few countries, the rest of the world had to bear the consequences as contagion spread from economy to economy, from continent to continent. Afraid of a global meltdown, the G7 finance ministers sought to convince the governments of emerging economies to adopt the framework of financial rules and regulations that existed within the G7. We did not succeed. They simply ignored us.
They did so for two reasons: First they felt we talked a better game than we played, and second and more importantly, they ignored us because they were not at the table at the time we came up with our solutions. Their criticisms were dead on! Quite simply, too many of them felt they had been harmed in the past by the strictures imposed on them by the IMF, which is essentially the G7 in different guise. They had been asked to open their financial markets, for instance, before they had the capacity to absorb or regulate the new inflows of capital. As a consequence when the inflows quickly turned to outflows, their middle classes were reduced to poverty and their poor to starvation.
For these reasons I came to the conclusion that the emerging economies had to be at the table with us — and not just temporarily — if we were to deal with today’s financial crises and to prevent tomorrow’s. I spoke to Larry Summers, who had by this time succeeded Bob Rubin as the U.S. treasury secretary. He agreed with me and together we made a list of those that should participate. I went out and sought their agreement, country by country. Initially the concept encountered some resistance from Germany, but we overcame that. Everywhere else there was enthusiastic acceptance.
When I spoke to Gordon Brown, it quickly became apparent that he and I had very similar agendas. Both of us wanted to build on the G7 system to include the newly emerging economies, and both of us wanted reforms to the IMF that would make it more responsive to the needs of the developing world. The difficulty was that as we played the same corners, we kept bumping into each other. Eventually, we had a chat and agreed that he would focus his energies on reforms to the IMF and I would concentrate on building a parallel group to the G7 with much broader membership of finance ministers and central bankers. This worked well, and we were able to make progress on both fronts.
Thus the G20 was born. I became its first chairman. The first meeting was held in Germany, the second and third in Canada, and it has become a permanent and valuable fixture on the international financial scene.3 As time passes, I hope its members will always remember why it came into being. History shows that as the moment of crisis passes, so does the push for reform. Crisis prevention will only occur if governments constantly challenge the conventional wisdom of the day. The G20 must continue to do this, because human nature being what it is, it is a lot harder to get governments to focus on crisis prevention than it is on crisis resolution.
The G20, like the G7, brings finance ministers and central bank governors and their respective deputies together at the same table. I was extremely fortunate that Gordon Thiessen and David Dodge were Canada’s central bankers in my time. We are never the biggest country in the room and our representatives stand out only if they are of a quality that enables them to do so. The weight of Gordon’s and David’s interventions at the table and the respect in which they were held made being Canada’s finance minister easy. Not that we always agreed!
At a G7 meeting during the Asian crisis in Washington I said to the central bankers present: “You are going to have to loosen up considerably on money supply if we are going to get through this.” This was at Blair House, a stately early-nineteenth century manor house across the street from the White House. My message was not unlike that of the other finance ministers: “We have to get consumers buying.”
The Japanese, who were still in their own, longer term economic doldrums, said that they could not loosen up. I had quite an argument with some of the European representatives too, who also said no.
“You’re making a mistake,” I said. “There’s not much we can do in Canada on our own. We could open up the floodgates and it wouldn’t have much impact. I’m telling you that if the Japanese, Europeans, and Americans don’t do something, we are in real trouble here.”
After the meeting, as the big cars rolled up to take the ministers and central bankers away, I was waiting by the door for Gordon Thiessen, with whom I had the habit of walking back to the hotel after these meetings (and getting lost), when Alan Greenspan came over and we struck up a conversation.
“You’re right,” he said. “Your analysis is correct.”
“Well, you were remarkably quiet while I made the case,” I said. “Are you going to move?
” I can’t remember his exact words, but effectively he closed ranks with his fellow central bankers. He did say, however, whatever he did would be in the United States’ interest.
When I told Gordon about this later, he remarked that the resistance to what I was suggesting came because central bankers believe their responsibility is only to their country’s self-interest, and indeed that is as it should be if the international system is to work. My rejoinder was that for the big countries, at least, action on these global dangers was in their national self-interest.
Alan Greenspan certainly wasn’t influenced by anything I said. But, as a result of problems in the U.S. financial sector, the U.S. Federal Reserve soon started loosening the purse strings. I think that the action he took there, along with his intervention to prevent the collapse of the hedge-fund Long Term Capital in 1998, averted what could have been a much deeper crisis. Today he is being criticized for unduly increasing the U.S. money supply, but the fact is that in this particular instance, Greenspan’s actions lifted the world economy at a time when it badly needed it. The problem is that if a comparable crisis were to emerge tomorrow it is hard to imagine that the U.S. Federal Reserve could have as dramatic an impact if the major central banks in the world sat on their hands, as they did in the late 1990s. Shades of J.P. Morgan. It is here that the rubber hits the road.
European thinking continues to be dominated by the fear of hyperinflation born of Germany’s experience during the 1920s and 1930s. Similarly, U.S. thinking continues to be dominated by the desire for growth, as a result of its experience during the Depression. When you realize that these are eighty-year-old traumas, whose memory still dictates very different approaches to managing the economy, you can imagine how difficult it will be to have a cohesive approach among the central banks when they are joined at the table by the huge economies of China and India, each locked into their own historical experiences. Making globalization work will increasingly require a level of international dialogue and co-operation that was not needed before the rise of these economies, and the others who will follow. Like it or not, the line between national interest and global interest is becoming much fainter.
If I were to draw a few lessons from the Asian crisis or indeed from the more recent sub-prime credit crunch, they would be:
Given the complexity and interdependence of today’s global financial system, the need to resolve periodic financial crises, let alone prevent them, means that we can no longer rely on the United States alone, nor can we rely even on the United States, Europe, and Japan working in concert. China, India, and the other regional economic powers have to be at the table.
The agenda for that table has to be forward-looking. One of the reasons the international financial system seems to lurch from crisis to crisis is that the major powers make changes to patch up the wounds of the last scrape but rarely adopt reforms that would prevent the next crisis.
The Financial Stability Forum was created to mitigate, if not prevent, future crises. Its membership, which is currently much too restricted, should expanded to include the emerging economies.
The developed world is not in a position to lecture the developing world on how to regulate its financial affairs. The same lack of transparency that triggered the Mexican and Asian crises underlay the sub-prime crisis that began on American soil. We are all in this together.
Long Term Capital Management and Bear Stearns were bailed out because the potential consequences of their failure were unthinkable. We need to prepare for the day when something similar occurs in China or India, at a point when their international significance is as great as that of the United States. This is important for Canada’s financial stability. It is one of the principal reasons I pushed to create the G20.
It was during the Asian financial crisis that I first met Anwar Ibrahim, who was Malaysia’s finance minister as well as its deputy prime minister. Although Anwar had been appointed by Mahathir bin Mohamad, the country’s long-time autocratic prime minister, he was independent-minded, and completely at ease within the international community. I found him interesting and knowledgeable, and I quickly got to like him. I also saw him as a positive force for change on the Asian side of the Pacific and was pleased to be able to host him on an official visit to Canada.
In contrast to Mahathir, who was inclined to meet the demands of the international community with a stiff forearm, Anwar was an economic liberal and a crucial link between the G7 and the countries in Asia. At one point during the Asian financial crisis, Indonesia looked like the next domino to topple. Almost incredibly, Indonesian president Suharto was not taking phone calls from President Clinton. At a meeting of G7 finance and foreign ministers, we realized that it was important to penetrate Suharto’s entourage and impress on him directly the scale of the peril Indonesia’s economy was facing. Surprisingly, none of us knew Suharto or his foreign minister well enough to intervene. Jim Wolfensohn, who was then president of the World Bank, suggested connecting through Anwar, who was indeed able to get to Suharto and convince him to pick up the phone when the president called.
Anwar shared many of the international community’s concerns during the Asian financial crisis. Mahathir, in contrast, was inclined to blame international investors for the region’s problems. Anwar also became identified with opposition to the prime minister’s heavy-handed political style and the cronyism that prevailed in government contracting. Mahathir reacted to all this as a threat to his regime, which it was, and fired Anwar in September 1998 amid rumours of a police investigation. A few days later, Anwar participated in a rally of nearly one hundred thousand people demanding reform. A few days after that, he was dragged into court and accused, rather bizarrely, of corruption and sodomy. He was badly roughed up. The trial was presided over by a judge who received a judicial promotion soon after rendering a guilty verdict. I denounced this travesty as it unfolded, as did everyone from Amnesty International to then U.S. vice-president Al Gore.
I did everything I could, both publicly and privately, to help Anwar through these tribulations and make sure the international community did not lose sight of his plight. I wrote to his wife, Wan Azizah Wan Ismail, a physician and a formidable political leader in her own right, on a number of occasions. More importantly, I also phoned her from time to time, knowing full well that her phone would be bugged and that the Mahathir regime would therefore know that international concern was not going away. I asked Canada’s High Commissioner to Malaysia, John Bell, to keep a close eye on the proceedings, and he was able to pass a message of support from me to Anwar during his trial. In the near term, these efforts did not get Anwar out of jail, but they may have kept him from getting roughed up more than he already had. I also wrote to Anwar directly in prison, and although those letters never got through to him, he subsequently told me that a friendly jailer had told him about them, which helped sustain his spirits. On one occasion during this period, I happened to sit down at the same table as Mahathir at the annual economic forum at Davos, Switzerland, and pointedly raised the topic of Anwar’s imprisonment, much to Mahathir’s displeasure. I am not sure what good that did, but it did remind him once again that the world had not forgotten Anwar Ibrahim.
When Anwar was finally released in 2004, Jim Wolfensohn phoned me to help organize his departure for Germany for treatment on his back, which had been injured during prison beatings. Since then, Anwar has taken up an international academic career, and has now returned to Malaysian politics, where he is effectively the leader of the opposition. We continue to be good friends.
(As I write this in the early summer of 2008, I have just learned that Anwar has been threatened with arrest once again, in a repeat of the earlier scenario. It cannot be a coincidence that a series of by-elections are scheduled in the near future. I have already spoken to his closest adviser to see what I can do, along with — I’m sure — many others in the international community. I hope that everything will have been resolved for the better by the time you read this.)
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While the reforms we undertook in the wake of the Asian financial crisis were going to benefit the emerging economies as well as ourselves, they were entirely inadequate to address the difficulties faced by the poorest countries on earth, many of them in Africa, who could only dream of the troubles faced by the Asian Tigers.
During the late 1990s, a movement called Jubilee 2000 began to urge the elimination of the debt of the world’s poorest countries. The Jubilee movement was strongly rooted in the Christian Church, though it also attracted many secular figures, including various rock stars and movie actors. The name Jubilee came from a passage in the Old Testament Book of Leviticus referring to the freeing of those enslaved by debt from their obligations every fifty years.
At one of the G7 finance ministers meetings, I mentioned the movement to Gordon Brown.
“I was at church the other day,” I said, “and I started really catching it from the parish priest on this issue of debt relief.”
Gordon, whose father was a Church of Scotland minister, laughed and said, “Well, I was just at church and the same thing happened to me.”
I turned to Bob Rubin and Larry Summers, both of whom are Jewish, and jokingly remarked that they would have to come to church one Sunday just to get connected with what was going on. In fact, both were very much involved, as we all were in developing the policy that led to a reduction in the indebtedness of poor countries, particularly in Africa and Asia over the next few years.
In 1996, the G7 launched an initiative to reduce the foreign debt of the world’s poorest countries, dubbed the Heavily Indebted Poor Countries Initiative (HIPC). Although it began to make a dent, it clearly was not having the dramatic effect we had hoped, and at a Commonwealth finance ministers meeting in 1998, I spoke on behalf of my colleagues in calling for a comprehensive review of the system. Following from this, Canada became the first country in the world to go beyond the G7 commitment when Prime Minister Chrétien announced the Canadian Debt Initiative, which set us on a faster track to relieving the debt we were owed by the world’s poorest countries. But at the international level, things were stalled. As a result, the IMF/World Bank meetings in 2000 at Prague took on a new significance.
