Conclusion

The 1997-8 Asian-turned-global financial crisis was ultimately stemmed when the United States' Treasury Secretary, Central Bank Governor, and Congress acted at the last hour to lower interest rates and thereby prevent the clear and present danger of a financial meltdown that threatened to engulf a hitherto secure United States. The United States, however, crippled by Congressional constraints and by frozen domestic credit markets in the wake of the LTCM collapse, needed the support of its G7 colleagues to mount an effective response in order to cope with panicking markets simultaneously on three regional fronts. With Japan as part of the problem and Germany distracted by a government transition, it was the lesser G7 members of Britain as host, and Canada as guardian of the Halifax program of IFI reform, that played substantial, front-line roles.

Canada's major role was driven by a recognition of its own broad economic interests, its position as custodian of the 1995 Halifax program, and a systemic induced sense of responsibility to provide global order as a member of the governing global concert institutionalized in the G7. During the three phases of the crisis, Canada recurrently displayed both intellectual, policy and structural leadership. Intellectually, it did so with its Halifax program, peer supervision and "roadmap" proposals and September 29 six-point program. Through early interest rate cuts, and calls for fiscal stimulus, peer supervision, social responsibility and controlled capital liberalization, Canada led on the policy front. Structurally, Canada led by making proportional contributions as a G7 member to the supplementary support packages for South Korea, Thailand and Brazil as well as providing its share of the GAB/NAB plurilateral and IMF, IBRD, IDB and ADB packages. It often acted against US preferences, notably on capital account liberalization, social responsibility, a precautionary facility and delayed NAB repayment, and succeeded in having its distinctive positions reflected in collective outcomes. Above all, its diplomacy was effective, as the action of the G7 which was supported by APEC ultimately contained the looming Asian and then global financial crisis.

Canada's diplomacy during the 1997-8 financial crisis also calls into question some traditional interpretations of Canadian foreign policy. Firstly, Canada's behaviour was centered not on broad multilateralism, but on restricted membership plurilateralism, with an overwhelming emphasis on the concert that the G7 represented. More generally, multilateral solutions were insufficient--given the magnitude of the crisis, the lack of resources of the IMF in light of the US failure to authorize its quota share increase, but most importantly, the unwillingness of markets to take comfort and confidence from programs not backed directly by the major industrial democracies. In the end the markets were the ones which distrusted multilateralism. Perhaps this was due to a rational calculation that the resources of the IFI's were insufficient to meet the looming, contagious challenges, and that IMF programs and predictions had failed in Asia and Russia. Indeed, there was a widespread consensus inside and outside government that the IFI architecture was inadequate to meet the needs of the new global economy, that standard IMF prescriptions were inappropriate, and that a new international financial architecture had to be constructed to reinforce or replace the Bretton Woods edifice.

Thus, the central multilateral institution, the IMF, was dependent throughout on G7 leadership. New groups such as the G22, rather than a revived IMF Interim Committee as proposed by the French arose as the centre of broader consultation. And Canada's initial preference was for a new stand-alone system of peer supervision of financial institutions, rather than for an investiture of this function in the IMF, as the French wished or a joint IMF-IBRD arrangement, as the British proposed. Only in the case of Canada's emphasis on social responsibility was the influence of multilateralism clear, as a World Bank study and presentation at the Kananaskis AFMM helped alert Canada to this dimension of the crisis.

Secondly, Canada's response to the crisis showed that globalism and regionalism are not alternative approaches for a Canada whose diminishing relative capabilities in the 1990's have forced it to turn to a more restricted regional focus. Rather they are mutually reinforcing parts of foreign policy that, with the G7 at its centre, is inherently systemic in its orientation and impact (Kirton 1997c, Fawcett and Hurrell 1997, Hawes 1998). Regionalism alone proved to be insufficient. The first crisis - Thailand - did evoke a regional response, with only Asian countries providing national funds in a first line of defence. But the Indonesian package required the participation of the US and Germany, and that of South Korea all the G7 countries. By April 1998 trans-Pacific Canada had joined the Thai package. And for Brazil in November 1998 all G7 countries and several others contributed as well.

The crisis Canada faced may have begun in Thailand, but by the autumn of 1998 the contagion, fueled by financial market globalization, had become fully global and systemic, with even the apparently secure US bastion in danger of financial collapse. Canada's financial contributions were to specified regional partners, through its second line to South Korea, its first line to Thailand and its first line to Brazil, but also global, through its IMF quota share increase, and participation in the GAB and NAB, to countries on three different continents. Moreover, Canada was skillfully able to use its leading position in globe-spanning plurilateral and regional institutions - the Commonwealth, the hemisphere, APEC, and the G22 -- to shape and sustain its positions in the inner decision-making forums.

From this analysis flow several implications for Canadian government policy, as it continues to shape a new international financial system. These implications embrace both the process of participation in the relevant international negotiations and the content of the priorities and positions Canada should advance. They centre on two themes – internalizing the principal power premise as a guide to Canada's international financial diplomacy and securing as quickly as possible a high standard, socially responsible plurilateral agreement on foreign direct investment.

The principal power premises can be enumerated as follows. Firstly, Canada's preferred forum should be the plurilateral G7, rather than the broadly multilateral IMF created at the core to cope with the global economy of 1945. Secondly Canada is large enough to lead and should thus mount routinely full strength intellectual, policy and structural leadership, at least at the norm which the leading G7 partners set. Thirdly, there are advantages to doing so first, before agendas are set, interests established and public plans presented in partner countries. Fourthly, persistence with unpopular initiatives and positions is effective, as the experience with capital account liberalization, socially sensitive adjustment and perhaps peer supervision suggest. Fifthly, moments of acute crisis, by bringing home to US decision-makers the equality of vulnerability that globalization has brought to their own domestic economy, can serve as windows of opportunities for Canada to advance its interests. Finally, Canada should use, flexibly, all its G7 partners, such as the recent host British or Germans, as partners in leadership to secure the outcomes its desires.

In the realm of policy substance, the most fundamental implication flows directly from Canada's core achievement – that of standing alone to successfully stop the unrestricted amendment of the IMF Articles of Agreement to affirm the principal of unrestricted capital account liberalization, with the IMF and all its powers deployed as the one international institution to enforce this principle. Canada's achievement in securing G7 acceptance of the need for a roadmap and the principle of a properly-sequenced liberalization of capital remains at present a rhetorical and normative accomplishment that has yet to be translated into consequential new international rules and decision-making procedures. With rare regional exceptions such as the pioneering NAFTA regime, international rules allow for the largely unrestricted flow of the short term capital that can move into and out of country such as South Korea in an instant, with only a rudimentary and limited set of guarantees for the free international flow of the long term, patient foreign direct investment that will remain to weather the crisis and that will force its private sector owners to share the pain and participate in the creative solution to such financial and economic crisis that come. Moreover, as the NAFTA experience demonstrates, new regimes for FDI would provide stronger and more modern provisions for the enhancement of environmental, labour and other social values than the ongoing effort to revise the rules and procedures of the 1945 regime governing short term finance.

In the wake of the OECD-based MAI, there is an urgent need to put in place a process to secure such an agreement in the short term. At a minimum, this requires installing this as a core mandate for the new Seattle launched "Millennium" Round of multilateral trade negotiations through the WTO, and demanding that this be an early harvest, delivered well before 2003. Even with leadership from the trade ministers Quadrilateral, however, there are international institutional obstacles to having the broadly multilateral WTO delivered the desired results. A more innovative form of G7 diplomacy, supported by other forums of plurilateralism, bilateralism and unilateralism may be required. Within the G7, finance, foreign and investment ministers could be charged with negotiating a super PAI, binding among the G7 members where a vast majority of the world's outward and inward FDI is concentrated. Plurilateral institutions where Canada enjoys a demonstrated leadership position could be mobilized, with, for example, APEC moving to have its voluntary investment codes rendered more binding, while the Commonwealth and francophonie move to develop consensus codes on a broader north-south basis. Bilaterally, Canada could move, beyond Chile, to bring an improved version of the NAFTA investment provisions to additional countries with which it could readily forge bilateral free trade agreements. Unilaterally, as a new net outward investor and one of global consequence, Canada could invite its own home-based MNE to adopt, in their global behaviour and initially on a voluntary basis, the socially responsible investment practices that prevail at the NAFTA minimum within North America and that they profess to practice in their operation within Canada itself.