Canada as a Principal Financial Power

Abstract

The 1990s have not been kind to the thesis that Canada is emerging as a principal power in a more diffuse international system called into being by the sustained, significant decline of the United States as a system-dominant power.(f.1) Rather, this decade has been marked by the apparent rise of the United States, in the wake of the cold war s end and a globalizing world, as the only superpower, fuelled by a 'Goldilocks economy' that inspired President Bill Clinton, at the 1997 Denver summit, to recommend to his Group of Seven (G-7) partners that they adopt the American way.(f.2) Prolonged economic stagnation in Japan and major structural problems in the German and other European economies have widened the once steadily narrowing gap in gross domestic product (GDP) between the United States and its leading economic rivals.(f.3) Canada, beset by recurrent national unity challenges, sluggish productivity growth, and a declining currency has also seen the gap widen.(f.4)The Asian financial crisis, which began in Thailand in July 1997 and went global in the summer of 1998, seemed at first to intensify these dynamics. A powerful United States appeared to act in classic hegemonic fashion, as the international lender of last resort, while a weak and paralyzed Japan formed part of the problem, and a relatively small, very open, commodity-intensive Canada was highly vulnerable to the assaults of a globalized international financial system.(f.5) As the crisis became acute in the autumn of 1998, Canada's underlying weakness seemed to overshadow its position as a long-standing G-7 member and as host in Vancouver in November 1997 to the leaders of the Asia Pacific Economic Co-operation (APEC) forum.Such appearances, however, were deceptive. To be sure, by the autumn of 1998 the Asian financial crisis had begun to slow the solid growth in the Canadian economy of the previous two years, contributed to a further weakening of commodity prices, and reduced Canada's trade with crisis-afflicted countries in Asia, with clear costs to the Canadian prairie wheat and pork economies.(f.6) However, robust domestic demand, strong exports to a vibrant United States economy at the core of the North American Free Trade Area (NAFTA), and modest dollar depreciation protected Canada. The real threat was posed by a systemic crisis in the autumn of 1998, marked by a plunging Canadian dollar and paralysis in United States financial markets. The threat to Canada was thus global rather than regional and systemic rather than directed. And it was at these levels that Canada responded.Even in the autumn of 1998 Canada had a far more substantial impact on the crisis than vice versa. Canada was able to help contain the global threat and to use the crisis to shape a new international financial architecture and reform the affected Asian countries.(f.7) Canada used its privileged position in the most relevant global forum, the G-7, as supported by the International Monetary Fund (IMF), APEC, and the new Group of 22 (G-22, composed of the G-7 together with 15 developing countries), to play an effective leadership role.Specifically, Canada's intellectual leadership took the form of comprehensive programmes and initiatives for coping with the crisis and defining a new international financial architecture. Its leadership was apparent at the Halifax summit in 1995, continued with its peer supervision plan and 'roadmap' concept in the spring of 1998, and culminated with the Six-Point Plan of 29 September 1998 and the debt relief plan of March 1999. Canada also undertook policy leadership by identifying in advance and consistently pursuing to ultimate success distinct positions based on Canadian interests and values. In place of the inflation-fighting, fiscal consolidation, neo-liberal stance that dominated G-7 policy in the previous decades, it supported controlled capital liberalization; financial system surveillance and peer supervision; private-sector burden-sharing, social responsibility in adjustment and debt relief packages; fiscal stimulus and enhanced Official Development Assistance (ODA) expenditure. …