Canada's Emergency Plan for Global Financial Crises

Article excerpt


Minister of Finance

Major elements of a Canadian plan to deal more effectively with financial crises have been adopted by the Group of Seven leading industrialized nations. Measures intended to make world financial markets work better were outlined on September 29 by Finance Minister Paul Martin. On October 30, the Group of Seven incorporated Martin's proposals in announcing plans to deal with financial crises, including proposals for greater market transparency, better regulation, greater risk sharing by the private sector, and a "stand still" provision that would temporarily halt the flow of capital in and out of financially-troubled countries. The G-7 statement was accompanied by a commitment of an additional $90 billion U.S. in bail out resources for the International Monetary Fund, and followed recent progress in dealing with the current crisis. Commenting on the G-7 statement, Martin said that "from a Canadian point of view, this is our package. That's very important to us." Following is the text of the speech to the Commonwealth Business Forum, Ottawa, September 29, 1998.

Let me say at the very beginning what a great pleasure it is to address this forum of distinguished participants, at such a crucial juncture in the world economy.

Four hundred years ago, the great British poet, John Donne, wrote, and I quote; "no man is an island, entire of itself."

Today, as we all know, no community, no country, no continent can consider itself, and I quote again; "an island entire of itself." We are confronting a dramatic reality: in an era of rapid communications and technological change, the growing integration of national economies is transforming our world--in unprecedented ways and at an unprecedented pace.

With a few computer keystrokes, more than $6 trillion moves around the globe every day--much of it in just nano-seconds. In short, more capital is flowing to more places than ever before--including, at least until recently, emerging markets. There have been increases in private capital flows, and in direct and portfolio investment.

Let us be clear, these flows have contributed significantly to raising the living standards of billions of people worldwide. That being said, they have also presented new and equally enormous risks. The same integration that can yield new efficiencies and greater wealth can also transmit localized disturbances to other countries and regions and, potentially, to all nations around the globe.

The events of the past year, and especially of the past few months, vividly illustrate how rapid and virulent financial market contagion can be. The market turmoil we are facing today began in Asia but has now swept right around the world to become a true dilemma.

Clearly, financial markets do not always get it right. They travel in herds, they run on rumor, they often ignore fundamentals, and all too often they overshoot.

As history has shown, however, open markets are the best mechanism we have for allocating resources in individual economies and across national borders. Therefore, the task that faces policy makers is not simply to lament the inefficiencies of global financial markets, but urgently to find ways to make them work better. After all, that is what we have done at home. No one, not even the most libertarian of us I would hope, believes that the free market should be a free for all.

To improve the functioning of international markets, we need first to ask why they are behaving the way they are. No one has all the answers. Nevertheless, certain factors brook little debate.

To begin with, events of recent months have reminded investors that risk is a reality, not an abstract term in a textbook.

Global prospects have dimmed.

Commodity prices have fallen significantly, although they have recovered somewhat in recent weeks.

Russia has unilaterally restructured its debt. …