World Economy Needs New Rules to Avert Fatal Financial Crises
Martin, Paul, Canadian Speeches
Minister of Finance
New rules governing the world economy are needed to avoid the type of financial crisis that impoverished millions in Asia, Latin America and Russia during the past two years, and threatened the rest of the world. The old rules and institutions are no longer adequate to deal with the unprecedented flows of billions of dollars of investment capital. Private investors must play a greater role in resolving and preventing crises. But for that to happen, the type of legal framework that governs finance in countries such as Canada and the United States must be extended globally. Speech to the Conference of the Canadian Institute for Advanced Legal Studies, Cambridge, United Kingdom, July 12, 1999.
It is a great pleasure for me to be with you this morning.
Cambridge is at the centre of a vibrant tradition of scholarship in law and in numerous lesser disciplines such as economics and statistics, which occupy ministers of finance.
One of the great highlights of my father's term as Canada's High Commissioner to the UK was his role in the earliest years of the Cambridge lectures.
Therefore, on this occasion - the 20th anniversary of the Cambridge lectures - it is a tremendous honour for Sheila and me to follow in the path of my dad and my mother who - in her own right - was also a great supporter of the series.
My father's Cambridge connection goes back to the 1930s, when he was here as a student. He would be thrilled to know that his grandson - my son David - will begin his studies here in September.
Dad always wanted me to study at Cambridge. I did not do so.
Therefore, I hope he is watching from above today. For thanks to all of you, not only have I finally made it to Cambridge, I have done so as a lecturer - far above the position of mere student!
One of my father's cherished memories of his student days at Cambridge was sitting in on weekly gatherings in the rooms of John Maynard Keynes at King's College.
Keynes was concerned about the future of the tens of millions of people struggling under the weight of unemployment and poverty.
In the context of what I want to talk to you about today-the need to reform the financial architecture that governs the world economy - Keynes' contribution was crucial.
Not only did he identify a positive role for government in stimulating economic activity to end stagnation, he also emphasized that domestic growth and stability could not be achieved if the international environment is prone to instability.
Creating Bretton Woods
Keynes and his colleagues were guided by this philosophy when they gathered at the small New Hampshire town of Bretton Woods in 1944 to create the International Monetary Fund (IMF) and the World Bank.
In creating these institutions, the Bretton Woods architects understood that international financial stability and national prosperity are inextricably linked. They also understood that the prosperity of individual countries depends on the prosperity of all.
These principles are immutable.
In 1944, however, the Bretton Woods creators could not have foreseen the dramatic changes the global economy would undergo by the end of the 20th century.
The Current System is Outdated
Working in the wake of the banking, exchange rate and debt crises of the 1930s, they aimed to promote stability through fixed exchange rates and capital controls.
This "prescription" worked well for almost 30 years. But by the late 1970s, capital controls were no longer desirable. Indeed, they were no longer sustainable.
As a result, today, billions of dollars swirl around the globe in an unprecedented fashion. These capital flows offer real benefits when they finance investment and spur economic development.
But this movement of capital can also be a source of instability when investors panic, and massive inflows become massive outflows of capital from countries whose economies simply cannot withstand the storm. …