Calling on the World’s Lumberjack
International economic relations are all jammed up. Brett House on how Canada can help get things moving.
Deputy chief economist, Scotiabank
This weekend Jean Charest warned that Canada has reached a “danger point” in its free-trade negotiations with Europe.
This is just one of many logjams in our international economic relations. Sovereign bankruptcy procedures, the crisis in Europe, the future of development financing, and climate change discussions – all are caught in impasses that have dragged on for years, and in some cases decades. These bottlenecks impose enormous costs on both Canada and the world.
It’s high time that Canada brought its lumberjack skills to bear on five major international logjams, and one small but vital blockage at home:
Improving our approach to sovereign debt crises. The world’s responses to crises in Greece, Cyprus, and the rest of Europe have been ad hoc and arbitrary. The absence of a more systematic approach is rooted in the 2003 failure of an attempt by the International Monetary Fund (IMF) to create a bankruptcy procedure for sovereign governments. When the proposed Sovereign Debt Restructuring Mechanism (SDRM) was shot down, sovereign debt resolution became the new third rail of international financial politics.
The collective taboo around discussion of sovereign bankruptcy didn’t have many consequences in the final years of the great moderation during 2003–07. But five years into the current crisis, we’re still making up our responses to sovereign debt distress as we go along.
This uncertainty dents growth, inhibits investment, and hurts trade. IMF research shows that when countries can’t pay their debts, it’s less costly for everyone to restructure them quickly. And more restructurings are likely coming.
The IMF staff has bravely reopened discussion on options to improve sovereign bankruptcy procedures. Canada should use this opening to push for the creation of a sovereign debt forum where creditors and debtors can enter into a predictable process that leads countries quickly through restructuring and back on the road to growth.
Pulling the IMF out of the European Troika. The IMF is in a jam. Europe has pushed the Fund, in conjunction with the ECB and European Commission, aka ‘the Troika’, to support bailouts in several countries that stand little chance of success—and serve mainly to reduce the burden of the European crisis on German taxpayers. Emerging markets, led by Brazil, are starting to push back.
With the IMF as cover, Europe has ignored its own advice from past crises. It has created a regional monetary fund, the European Stability Mechanism (ESM), and it has allowed capital controls in Cyprus. Its adjustment programmes have pushed unemployment to levels that threaten social unrest. All things Europe warned against in the late-1990s during the Asian crisis. All things that conflict with settled IMF policy.
Canada has rightly refused requests to add capital to the IMF’s rescue of Europe. Canada could now use its seat on the IMF’s executive board to lobby for the IMF to pull out of the Troika. While the IMF can’t withdraw its current financing from Europe, Canada can ensure that any future lending is consistent with the IMF’s own policies and global interests.
And while we’re at it, Canada could help to ensure Europe’s anachronistic lock on the IMF’s leadership is finally ended.
Moving climate change negotiations to the G20. The United Nations Framework Convention on Climate Change (UNFCCC) talks have been stuck for years. Negotiations amongst 180-plus countries won’t produce a deal. We need to move these talks to a smaller group. The G20 accounts for 85 percent of the world economy and a similar share of global carbon emissions. A deal in the G20 would get the world at least 85 percent of the way to a comprehensive solution without distractions from bit players.
Ending concessional finance for emerged markets. It makes no sense for the federal government, the World Bank, and regional development banks to send money on favourable terms to countries that can raise capital on international markets at exceptionally low rates. Poverty in these countries is a domestic political failure that their own governments should address.
We’ve known this basic point for years, but the federal government’s ‘Countries of Focus’, which receive 80 percent of Canadian bilateral aid, are still a hodgepodge of middle-income countries and very poor states (see the graphic below). The group rightly includes relatively well-governed low-income nations such as Senegal, Tanzania, and Mozambique; but it also includes recent middle-income darlings Colombia and Peru, which regularly raise money on international bond markets. Canadian aid should become more focused on the poor, post-conflict, and post-disaster states where it can have the greatest impact—and where alternative sources of financing are limited.
Similarly, the executive boards of the World Bank and the regional development banks, where Canada has seats, have wrung their hands for decades about the role multilateral lending should play in middle-income countries. It’s time for Canada to help bring this discussion to a conclusion and get multilateral aid targeted on the world’s poorest countries instead.
Reforming UN finances. The quickest way to reform the UN is to change the way we fund it. The UN is a balkanized mess because most of its financing arrives earmarked for individual countries’ pet causes. The UN’s structure is designed to follow the money—not to optimize its effectiveness. Rather than continue to lecture the UN, the federal government should simply change the way it writes its cheques.
Filling empty Canadian seats on international bodies. It’s time to break the logjam in our own appointments processes. We’ve started by filling our two empty chairs on the International Joint Commission, whose management of the Great Lakes waters directly affects nearly half of all Canadians. But there’s more work to be done. As Woody Allen once said, ‘Eighty percent of success is showing up.’