In a wide-ranging interview, one of Canada’s most respected political figures offers his views on third-world debt forgiveness, the G7 and G8, globalization, managing a surplus and other complex, and at times, intractable, issues. Mr. Martin goes beyond explanations and provides astute analysis and eminently sound solutions to many of these important geopolitical issues.
As a federal election looms large on the horizon, many Canadians will be watching Paul Martin, Minister of Finance in the Chrétien Government and the man most people credit for putting Canada’s Financial House back in order.
The son of one of the architects of Canada’s social policy, Paul Martin Jr. was a successful businessman in Montreal before he entered federal politics. A fiscal conservative with a strong commitment to the social safety net, Martin is seen by many as a possible successor to Jean Chrétien, who defeated him in the last Liberal leadership race. He is a man with strong views, and as is obvious from the following interview, someone with a firm grasp on the complex issues of globalization, debt reduction and world trade.
Mr. Martin met with Ivey Business Journal in his offices on Parliament Hill after a gruelling Question Period on the first day of the fall session.
Journal: Indicators seem to be pointing to a slowing down of both the American and the Canadian economies. You’ve stated that Canada’s economy was strong enough to withstand a downturn in the American economy. Do you still think we will have a soft landing?
Martin: Yes. Essentially American economic policy is designed to have a soft landing and they’re going to achieve it. The only issue is, are they going to overachieve that soft landing, or is the tremendous increase in productivity in the New Economy simply impervious to any actions by government? But essentially on the assumption that the American economy slows down, do I believe that there is sufficient momentum in the Canadian economy to carry us through that? The answer is clearly yes. Domestic demand is very strong, business confidence is up, consumer confidence is up, job creation continues apace. Our inflation is clearly in check. So the answer to your question is: Yes, I’m quite confident about the future of the Canadian economy.
You mentioned that the American economy is going to come in for a soft landing. There’s some concern about that. Some economists have said in the last month that they felt that the Americans were overreaching a bit.
Well, there is a tendency among economists sometimes to feel that they can fine-tune this down to the 14th decimal point. That’s just simply not possible. I think what you can say is that the best judgment is that the soft landing is within reach. They may overreach by a bit or under-reach by a bit…I don’t know that anybody could tell you at this time. The economy is going to slow down to a sustainable level in the U.S., and if that occurs the Canadian economy’s certainly got enough momentum on its own to be able to do slightly better than the United States. Which is only natural given the fact that we went into this recovery later than the United States.
What do you estimate as the economic growth of Canada for the next 12 to 18 months?
I think that the numbers that are coming out of the IMF and the Bank of Canada are quite achievable. They show growth anywhere between 3 ½ to 4 ½ percent…I think that those numbers are quite achievable.
One of the major changes in the Canadian economy over the last five years is the fact that the government accounts are back into a surplus situation. With the projected slowdown in the economy plus the reduction in taxes that you have been talking about are we going to start eating up that surplus? Are we going to get back to deficit financing?
First of all, there’s no doubt that we are going to be running stronger surpluses than projected. Let me simply say that if a government in good times did not provide stronger surpluses than projected, that government would not be doing its job. Because you should be. The only way you can protect yourselves in bad times from going unnecessarily into deficit is if you’re prudent in good times. So, will we do better than projected? Yes, we will, as long as the economy continues strong. But that’s not only a Canadian situation…it’s the situation in the United States, in the United Kingdom, and virtually every other country that has reasonably managed its economy.
There are two factors that we should discuss when looking at the reason why the Canadian economy is doing well. We only seem to discuss one. The one that we discuss is the elimination of the deficit, the fact that we’ve got our interest rates down and inflation in check. And those macroeconomic levers that are within the federal government’s hands are very, very important, and I believe they have been working well in the last five years.
The secondary factor, however, which we don’t talk about…and which I think we’ve got to talk about, is the enormous amount of growth that we’ve seen occurring in the New Economy. Either in the New Economy per se or in the impact of the New Economy on the traditionally economy. One of the reasons that I am quite confident about the Canadian economy looking ahead is that we really have a much stronger position in the New Economy than the world gives us credit for. That’s a major area of growth. And also a major area of public policy that is going to become very…is in fact very, very important. Unfortunately, the public debate has not focused on that yet.
I think because people were totally obsessed with either the state of the national balance sheet, or because there were too many Canadians who bought the myth that this is not an area where we could compete.
I understand your comment about the strength of the Canadian economy, but I still want to get back to the surplus, if I may.
There are a couple of problems. There’s the lesser problem and the greater problem. The lesser problem is that you project these surpluses out and then you take a look at your spending and you take a look at your taxes and you basically gear them to an expected level of surplus. If you’ve done that, you’re going to reduce those surpluses. So by definition, you will take action to reduce them in the best ways possible, which are cutting taxes, paying down debt, or spending on health care. So a lot of the debate that takes place on the basis of a surplus really is not going to occur because governments take action to deal with it in one of two ways.
The second thing is that there is a tendency among a lot of people to assume that things are going to occur according to linear projections. When things are good, they’re good for everyone, and when things are bad, they’re bad for everyone. Well, that’s not the way it is. When things are good, people make a set of projections for five years and then say here’s nothing that could come along and interrupt that. I’ve been the Finance Minister for seven years and I’ve had to live through two international crises—the Mexican peso crisis and the Asian crisis. And what you’ve got to do is to assume that somewhere in that five-year period somebody will come along and throw a monkey wrench into your numbers. So part of the problem we are all having with the debate is that people are asking us to allocate surpluses, which are mathematically possible but realistically improbable.
You’re under pressure to cut taxes even more, you’re under pressure to increase spending even more…At one point you used the formula of a one-third for debt reduction, one-third for lower taxes and one-third for social programs. I don’t know that that was ever really achievable, but do you have any ratio in mind now?
No, I don’t. I expect that what we should do is have good public policy and that good public policy will say if your taxes are too high you should cut them (and I believe that our taxes are too high); if your debt to GDP ratio or the absolute level of your debt is too high, you should do something with your debt. Good public policy will also tell you that there are certain areas, like health care, education or research and development, where the needs are great. And so you’ve got to balance that. But that I wouldn’t balance it against a mathematical formula. I would balance it against the circumstances of the ties.
You talk about crises—the Asian crisis and the peso crisis. One potential crisis that seems to be looming on the horizon is Third World debt and the problems of Africa and what was the former Soviet Union. I know you’ve been working very hard to try and solve some of these problems. Is there going to be a solution to the problem of debt repayment?
I think this is one of these things where you make progress. The idea of designating 41 or 42 countries as heavily in debt and as the ones we should focus on was a step forward. I think the idea of then saying that we will forgive the debt provided you live up to certain conditions—if you spend the money on health and not on guns—I think again that was a step forward. But I also think we’re dealing here with a learning process. I think one of the things that we have learned is that the conditions were too tough. And that we were waiting too long for debt forgiveness. So my intention is to push for much quicker results. I think a lot of that debt forgiveness should occur not at the time that people complete the program but when they begin the program. Because we are really dealing with debt forgiveness of countries where some of the very basic human needs are simply not being met. I also, by the way, think that the debate has got to go far beyond debt forgiveness to the whole question of trade, and the idea about the digital divide between rich and poor. The process is a little empty when at the same time we’re not allowing the goods that the poor countries can provide to enter into our countries. So I think that the debate has got to go much further.
The public doesn’t seem to understand this. We have the example of what happened in Seattle with the WTO, this outpouring of feeling about how free trade is really trying to take away people’s rights. The public doesn’t seem to understand what free trade would do for the poorer nation…Can we get them to understand?
Yes, I think we can. I think the role that the churches have played is a tremendously positive role in raising the awareness of the whole question of debt. I think that civil society and the public at large could play a very important role in supporting…or in fact in pushing us to deal with issues such as trade and debt…or at least supporting those of us who believe that this is the way we have to go. One thing is quite clear. And that is that the benefits of the newer technologies, the benefits of globalization, are huge. But they will not occur if they are restricted either within a rich country to a privileged few, or if they are restricted only to the rich countries. Because eventually the process will be brought to a halt. There is a view that further globalization is inevitable. I think that globalization as it currently exists today is a reality. But there is no guarantee that it’s going to continue on a “winner-take-all” basis…it’s not going to happen.
Globalization is not going to occur if it only benefits a privileged few. Because whether it’s increasing numbers of refugees, major health problems which spread worldwide, or major dislocations…these are all going to come back to haunt us unless we begin to deal with them in a much more humane way than we have so far.
What’s the context in which you’re going to deal with them?
I think the periodic meetings of the G7…I also believe that the G20 has a very important role because it’s a much broader group than the G7; meetings of the World Bank and the IMF, I think. It is also something the United Nations has got to come to grips with.
It’s pretty difficult to bring all these organizations to the table.
It is easier to do it at the Finance Minister level. I think that there is an increasing consciousness in terms of the necessity to deal with it. All of the measures which we have put in place to make the market work efficiently…banking regulations, security regulations…all these measures that make the market work efficiently within our countries were implemented because people realized that the market, left to its own devices, would not work. But the market, with a set of rules that people could understand, would work very well. I believe that same process is taking place within the context of globalization. The reason those rules were put in place is that people understood one thing: If big people were able to act on insider trading and make money in the market, little people would get hurt, and eventually, big people would not have a market at all. I think the same thing is going to occur with globalization.
Speaking of big people and influence, the megaplayer, if you will, on the world economic stage right now is the United States. Its impact is huge. It’s had a mixed record in terms of its involvement in globalization and working with the Third World. The American election, which will occur at about the same time as this magazine comes out, is obviously going to have a huge impact. Do you feel that there will be a bit more of an outward look to U.S. policy than there has been in the past?
Obviously Gore and Bush have different perspectives. But to be quite honest, I don’t believe that the problem of having more of an outward look or less of an outward look is one that depends upon the presidency totally. The Clinton government had a very outward look. A lot of it depends on what happens in Congress. And if you look at the United States, traditionally the executive branch, Republican or Democrat, has had a much more outward look than has Congress, which represents the interests of individual states or districts. So I think that’s really the answer to your question. Let me just pick up on that. I think that there’s no doubt that the United States is the dominant economic power, the only superpower. My own belief, and I have said this many times, is that it is crucial that we establish the Rule of Law internationally if in fact globalization is going to work to everybody’s benefit.
This has come down to, in many cases, a difference of opinion between people like myself who say we’ve got to establish a rule of law a priori and a number of people in the United States who say, let’s deal with it on a case-by-case basis. That is one of the differences that exist out there, and it’s a difference which exists between reasonable people. My own belief is that the Americans are eventually going to have to come to the point of view which I’ve just expressed, despite the fact that they are the dominant economic power and therefore can deal on a case-by-case basis. And the reason for that is that they have got to take advantage of what is effectively enduring. At some point, they are not going to be as dominant as they are today. China is a more powerful country today than it was. And if Japan’s economy comes back, or Russia’s or Brazil’s for example…and these countries are going to come on strong, the issue is when. Is it in 10 years, 20 years or 30 years? I don’t know. But I do know that 20 or 30 years goes very quickly. My own view is that we’ve got to take advantage now of having a country like the United States, which is the dominant power, and which is, at the same time, a very responsible power…to put in place a structure that will allow us to function progressively when all these other countries become major rivals.
It’s pretty difficult to get the United States to move when you have people like Jessie Helms controlling whether or not it even pays the United Nations…
That goes back to your earlier question when I said that I don’t think the issue is in the executive branch, the issue is in the hands of Congress.
Gordon Thiessen is retiring at the end of this year. Naming his replacement will have a major impact on Canadian economic and financial policy for a number of years. Are you looking inside the bank at the moment or are you looking outside?
We’re looking inside and outside. The way the law works is that the board appoints and the government approves. This is important in terms of the independence of the bank. And I have taken that very seriously. There is a committee of the board, which has had meetings for the last six months, interviewing the major candidates both inside and outside. It will eventually make the appointment and hopefully we will agree. Obviously there will be discussions. But essentially we will recognize the independence of the bank and the government’s responsibilities.
One of the things that Canadians worry about is the relative value of the Canadian dollar versus the American dollar. If you look at how strong our economy is…while I recognize that capital flows, and we have both the luck and the misfortune to live next to the United States…shouldn’t the Canadian dollar be higher than it is?
I’m not going to comment on the value of the Canadian dollar, but your question is a very pertinent one. The U.S. dollar is very strong because money is going into financing a very large current-account deficit, and also, it’s an attractive place to invest. The Canadian dollar, however, is not weak. The Canadian dollar is the only dollar in the last 18 months to have strengthened against the U.S. dollar…the only one. Te euro has declined by 25 percent, the pound by 15 percent, the Australian dollar by 10 percent…so the Canadian dollar in absolute terms is not weak…In fact the Canadian dollar, as I mentioned, is strengthening. And it’s obviously strengthened substantially against all of the other currencies. The problem is, you’ve got tremendous growth potential in the U.S. because of the New Economy, and you’ve got this insatiable need for cash in the U.S. because of its current-account deficit.
A lot of people feel that the low Canadian dollar papers over problems that we have with our own economy, including the lack of productivity. We can argue over degrees, but the reality is that productivity hasn’t been that high.
My own belief is that the business community does not hide behind the low dollar. Most of the businesspeople I talk to essentially want to compete. They feel that they can compete even if the dollar was strengthened somewhat…I think the dollar is going to follow the fundamentals ultimately. And I think that if you look at the most recent productivity numbers, we’re beginning to see some quite dramatic increases in productivity. So I think that that’s turned around. But finance ministers have got to choose their words very carefully when they’re talking about the dollar. Ultimately, I do believe our dollar will follow the fundamentals, and our fundamentals are very strong.
One of the problems your government is facing, and I guess any government is going to face, is the fact that 80 percent of our exports are now going to the United States. And I know you don’t control international trade…but it is a problem. And it’s a problem that will affect Canada’s economy both now and in the future.
It is, but I think we’ve got to put it in context. Our trade with the United States is growing. Take a look at the rest of the world. The fact is that for the last five years, the United States has been the only economy that’s been buying. Would I like to see our trade with Japan stronger? Yes, I very much would. But Japan has been in a state of quasi-recession for quite some time…they were buying a great deal but it fell off. We’ve seen the structural problems in Europe…now the European economy is coming back. Would I like to see a much broader diversity of our trade? Absolutely. But on the other hand, if other markets are weak and the United States market is strong…thank God we’re selling to it.
But our economy has really become integrated with the U.S. to the point now where most of the trade is North-South as opposed to East-West. It does create a very specific problem, when our trade is dominated by one partner. Hopefully government policy over the next few years will allow us to diversify…the sooner that Japan starts coming back, and Europe starts coming back…
That’s right. There is no doubt that we have got to competitive, and we are. The problem is that nobody is selling to Japan. There’s not a hell of a lot of trade going on between the Asian countries…At one time, the Asian economies were buying. Again…that’s not happening. So the fact that we are able to be so competitive in the United States means that, as these other markets come back, we will be able to be competitive in most of them. You’ve just got to be ready to strike at the main chance. But I think you’re correct. Those economies have got to come back. If they’re not buying from anybody, they’re not going to buy from us. We’ve just got to make sure that when they start buying, they buy from us.
Do you see them coming back? I know Japan showed some signs, but again they seem to be having some problems.
I think the Japanese situation is worrisome. How do you give confidence to your consumer when the consumer doesn’t have any? Yes, I think the situation is worrisome. I was in Japan at the beginning of July. Their finance minister was quite confident that they were making the right moves, and I certainly hope that they are. The Chinese market has always been a great potential market, as has the Indian market. I was in China also at the beginning of July and I’m beginning to see that they are making a number of the right moves. It will not take much of an uptake in the Chinese economy before you start to see major changes.
Talking about the Chinese economy…There seems to be some concern, certainly on the part of some people who have gone over there, that if the upsurge comes…as you say, it wouldn’t take a heck of a lot…but there’s also a very real concern that inflation is going to take off in China. The Chinese government would then have to implement tight money policies to bring it back in line, which could create social upheaval. What I’m leading to…China is a potential time bomb as well as a potential growth factor for the world. Indonesia is another time bomb; the Soviet Union is a time bomb. Do you have a feel for where things are going in these countries?
I think that the Chinese have obviously got a huge state sector that they have to deal with, which is, I’m sure, quite a problem. But I must say that, yes, I do feel that the governmental authorities understand what has to be done from a macroeconomic point of view. I think one of the best examples of that is that during the Asian crisis, when a lot of people were worried about the Chinese devaluation, it did not occur. So I think we’re dealing with people who really do understand what has to happen. Is there a potential for inflation? Are there some of the problems that you pointed out? They obviously exist. The only thing I would say is that if you’ve got a government that understands the problems and how to deal with them…it doesn’t mean everything that government does is right, we’re talking strictly now in terms of the economy…your chances of coming out of it are lot better than if, in fact, that government is an obstacle. One really hopes that the Indonesian government is going to take hold of the economy and one really hopes that the Japanese government is prepared to deal with the problems of financial institutions in that country.
The increase in the price of oil is going to have a major impact on world economies. Can that put our soft landing on hold, and can you say how it will affect the Asian economies?
I think, for those countries which do not have reserves of oil, it’s very, very serious…very serious. I think it will certainly have an effect on their economies. These are countries where…their recovery is clearly occurring but it is fragile…I just came back from APEC and they brought around the table countries like Mexico, which are major producers and countries like Thailand, which are major buyers. I can tell you that the discussion was very hot and heavy. It’s going to be very important for the oil producers to understand in the end that what cooked everybody’s goose last time was that they pushed too hard. And to push everybody’s economy into a recession isn’t going to benefit anybody.
Do you see any other major problems on the horizon that we should be aware of?
I think there are a multitude of problems. The ones we just discussed—the oil crisis, pending inflation in certain countries, the failures of other countries to deal with their institutional structures, their government structures. But it has been my experience that you can deal with the problems that you worry about. It’s the unexpected problems that worry me. That’s certainly the experience I’ve had over the last seven years. Nobody expected the Mexican peso crisis. Nobody expected Russia to default. All understood that Russia was close, but nobody expected they’d actually take that step…which obviously impacted upon Latin America. Then, in terms of the Asian crisis, there were a number of us who actually talked about that potential before it happened. But none of us expected it to occur when it occurred.
Or as deeply?
Or as deeply. I think that actually that’s even more specific. So it is the unexpected. We may muddle through the problems that we know about but we can deal with them.
So hopefully there’s no Mexico on the horizon?
Yes that’s right. In fact it isn’t the individual country, it’s the contagion. With these large flows of capital going around we understand the problem that they create. When they flow in, they’re incredibly destabilizing, and therefore what we’ve got to do is to make sure that they go in there with their eyes wide open, so they won’t flow out. And I think we’re in the process of dealing with that. But what I think is incredibly important to make sure that we don’t see another Asian crisis is that these pools of capital must become much more sophisticated better able to judge individual country risk. What happened in the Asian crisis was that there was no differentiation of country risk. Russia defaulted. Investors said, “By God, who’s next? I’m worried about Brazil.” Now, bang! Brazil is in trouble…as opposed to differentiating between Brazil and Russia for example. Or differentiating between Asian countries. That is the problem. And there are huge differences. Take a look at Korea. Korea had big problems, but the Korean economy has rebounded tremendously. The failure to recognize the difference between Korea and other countries is the kind of thing that we’ve got to deal with.
So you’re dealing with global problems, with people who are ignorant about global realities?
Ignorant is a strong word, but certainly I don’t think they appreciate the differences. They basically just go, “Oh my God, they’re all the same, let’s make a whole lot of money.” When they don’t, what do they do? They immediately go back to the only currency they know, which is the American currency.
What is Canada’s role in al this?
We play a pretty important role, and the G20 is a very good example of that. The G20 is, I think, a major step towards a more satisfactory global governance. And the fact that Canada was made the chair, I think is pretty important. In international affairs, we’ve always played a very important and vocal role between the large powers and the lesser powers.
With all due respect, wasn’t the fact that Canada was appointed the chair have more to do with Paul Martin than Canada? You’re a very well-respected man…
My wife and children would be delighted to hear you say that. I think the reality might be a little different. If I had been from Ecuador, who knows? I’m not sure. A lot of it comes down to the issue of establishing the rules of the game and who best can push for them. A certain amount of it does come down to personality. But to answer your question, Canada can play quite a role. Because an awful lot of the great strength of the G7 is the informality of the discussions. People keep saying, “The G7…but wait a minute, what’s Canada doing there, why isn’t China there, why isn’t Brazil?” Well, it isn’t the seven most powerful economies. It is the seven most compatible economies. And nobody compares in terms of power to the United States. What happens around the G7 table is the informality. Public servants have been there, the G7 deputies, and they’ve prepared all this stuff and you go there, and it’s essentially okay. But when a crisis occurs, let me tell you there are no set-piece speeches…or when we get to a point where we’re not in agreement and we’ve got to strike a consensus…I’ll tell you the arguments range very deep. And that informality is what we want to duplicate at the G20, because we suddenly found that we couldn’t do it without Brazil and China at the table.
What would you like to be your legacy as Finance Minister?
I don’t think that that’s been written. I would not want it to be either the elimination of the deficit or a reduction in taxes…I think that as Finance Minister, that’s your job. I believe that the two most important issues are ahead. One of them is the one we just talked about: putting in place an international structure that will enable us to govern ourselves and the world economically. And the second one is making sure that we affect the cultural shift in terms of the New Economy in this country. I’ll tell you what I mean by that. If I go to London, and I talk about the New Economy, people understand that the New Economy doesn’t only create jobs for computer specialists…but that truck drivers, secretaries…a much wider community can benefit from the engine of growth…and the New Economy is that engine of growth. And if I go to Fredericton, it’s the same thing. They understand that. It’s the same thing. But there are wide segments in this country that don’t fully understand…they think that we’re talking of something that’s only there for a small elite…They don’t really see the connection to the jobs that they’re going to get. To be a leader in the New Economy really means that you can’t borrow somebody else’s technology, because obsolescence is now occurring so fast. I’m sure they understand that in London…I think they understand in Kanata. I’m not sure if it’s fully understood on Parliament Hill.
I really appreciate your time. Thank you very much.