"It would mean the end of national sovereignty in economic matters, no country would be master in its own house."

Paul Hellyer...... Former Deputy Prime Minister of Canada

Presentation to the Standing Committee on Finance

Tuesday, April 21, 1998

I would like to thank members of the committee for the opportunity to speak briefly concerning Part 13 of Bill C-36, the section entitled Financial Assistance to International Financial Institutions and Foreign States.

If it were my privilege to have a vote on this section my conscience would demand that I vote against it. In the few minutes available to me I would like to give you some of the reasons why. The International Monetary Fund (IMF) was part of a 1949 agreement by the major capitalist powers. Its role was to facilitate convertible exchange by providing temporary assistance to countries which had depleted their foreign exchange reserves. This allowed them to pursue high growth and full employment through a low interest rate policy. It was an era when capital controls were permitted and the IMF was actually mandated to ask for such controls if deemed either necessary or desirable.

I am informed that the IMF has never requested capital controls nor suspended credits even when there was a large or sustained outflow of capital. For most of the cold war period its importance as an emergency lender took second place to official grants and credits designed as much for political as for economic advantage.

With the advent of commercial bank lending to third world countries, and the increasing deregulation and globalization of financial services, it has abandoned its raison d'etre almost totally. Instead of a lender of last resort it has become the enforcer for international banks and financial institutions and performs a role comparable to the bouncer at a glitzy bar. The big banks invite third world countries to line up for drinks on credit. But when they drink too much and exceed their credit limit the IMF takes over as enforcement agency.

Its tactics are brutal. It refuses to allow supplicant countries to impose capital controls. Instead it demands that they raise interest rates to attract foreign investment. This slows the economy and results in increased bankruptcies and high unemployment. Governments must also reduce expenditures for health and education. Food subsidies, in most cases, have to be eliminated. Instead of growing food for its own citizens the government is coerced into growing crops for export in order to earn the U.S. dollars to repay the IMF.

It was this kind of Draconian policy which led me to ask, in a book that I published in 1996, if the IMF had not outlived its usefulness. Since then I have come to the conclusion that it has. It would be a great boon for the world to wind it up and turn its assets over to the World Bank to use partly for debt forgiveness to the world's poorest countries, including a number of African countries, and partly to provide a massive amount of capital for micro-banking which would offer hope and opportunity to millions of impoverished people worldwide. As ours is not a world of logic and common sense, however, one has to assume that the ideal is unlikely to happen in the short run and that it is more profitable to deal with more likely scenarios.

The IMF's current policy line stands the original Bretton Woods on its head. Instead of recommending or at least permitting capital controls to mitigate the consequences of massive inflows and outflows of capital, it takes the opposite position. It is making capital controls major target of attack in direct violation of Article VI. It does this on the pretext that global financial markets reduce the cost of capital and permit a better allocation of resources worldwide.

This neo-classical assumption is refuted by the actual trends since the 1970s. Removing capital controls has opened the flood-gates to an accelerating volume of financial flows. Foreign currency transactions have increased from about $18-trillion a year to some $250-trillion a year - $1-trillion a day, a fourteen-fold increase. World trade, by contrast, has little more than doubled. The ratio of foreign exchange transactions to trade soared from six to one, to about thirty-five to one. The explosive growth of cross-currency financial-flows has been paralleled by increasing volatility of both nominal and real exchange rates and by sharply rising real interest rates. Instead of reducing the cost of capital it has become more expensive.

International bank lending also surged many times faster than economic activity. Outstanding international bank loans grew from 4 percent of Gross Domestic Product (GPD) of the twenty-four countries of the Organization for Economic Cooperation and Development (OECD) to 44 percent between 1980 and 1991. All of this has been paralleled, however, by slackened growth of investment, savings, output, trade volume and productivity in both the third world and the OECD countries, with the main exceptions the East Asian "miracle" economies - now joining the pack. This is a dramatic change from the earlier post war years. The architects of the Bretton Woods agreement believed that unregulated financial markets tend inexorably to short-term speculation and increasing financial instability. This led to acceptance of control on capital movements and the establishment of the IMF as a lender of last resort.

The current vogue is that international financial markets act as policemen to keep politicians feet to the fire. They reward governments that cut back social programs and other spending designed to make life better for their citizens and penalize governments that don't. In practice this theoretically perfect control mechanism has resulted in one crisis after another. The increasing frequency and severity of the crises and the fact that they have been unpredictable has eroded the credibility of the Washington-IMF line. Reflecting on the current Asian collapse Allan Greenspan, Chairman of the U.S. Federal Reserve Board, observed that "excessive leverage" and short-term bank lending "may turnout to be the Achilles heel of an international financial system that is subject to wide variations in financial confidence." Indeed it may. A system under which mega-banks print money willy-nilly to lend to almost anyone in the world who will line up for it is inherently unstable. The IMF bailouts only exacerbate the situation. The 1995 Mexican bailout sowed the seeds of the current Asian crisis. The assurance that the IMF will ride to the rescue encourages international bankers and speculators to make still riskier loans. They escape the consequences of their actions while the costs of their excesses are socialized and picked up by taxpayers at large.

In the face of all the evidence it is more than astounding that the IMF is now pushing to have its articles amended. With the active encouragement of the Clinton administration it is pressing for broad new powers. The IMF is seeking global authority over national governments’ ability to control capital inflows and outflows including the power to require member countries to commit to full capital account liberalization.

This move should be recognized for what it is. It would mean the end of national sovereignty in economic matters. No country would be master in its own house. The IMF seeks the power to control the world economy. The urgency, according to the IMF's First Deputy Managing Director, Stanley Fischer, is dictated by the fact that the alternative mechanism to achieve the same ends - the Multilateral Agreement on Investment (MAI)- has been slowed down recently.

The world should view the prospect with fear and trembling. It should be obvious to all except the most encrusted ideologue that the world financial system has been completely disconnected from the real economy. Wall Street (or Bay Street) is in cyberspace and programmed to ignore the real needs of the vast majority of the world's population still in need of food, clothing and shelter. Only the holders of financial assets - a tiny fraction of the world's population and the ones whose needs have already been met - have anything to gain from perpetuating the global mythology.

Even they have reason for concern.

A globalized financial system dominated by highly leveraged banks is a recipe for disaster. When that disaster strikes the social consequences are completely unpredictable. This is the reason I would not give the IMF any additional resources that would encourage it to continue on its present path. Nor would I make support for needy countries conditional on their submission to the IMF's hurtful demands. Nations that have been brought to their knees by the IMF's sharp whip are understandably resentful and Canada should not contribute further to the source of their anger. It has not earned the trust of the people who pay the bills and should be cut off at the pass before it can do more damage to more people.

There are, of course, other financial reforms essential to a stable world economy. But as of today a total reformation of the IMF is the most urgent.

1. Solomon, Steven, "The Confidence Game: How Unelected Central Bankers Are Governing the Changed World Economy", New York: Simon and Schuster, 1995, pg. 39.

2. Ibid.

3. David Felix, Professor Emeritus, Washington University in St. Louis.

4. Ibid.

P.S: My apologies and thanks to everyone whose material I may have used or paraphrased.


We really had a fantastic campaign launch in British Columbia on Wednesday, March 19th-97. It took place at Mile Zero of the TransCanada Highway on Vancouver Island where Claire Foss, Leader of the Canada Party, announced that his Party would not be running candidates in the next federal election but that they would be supporting the Canadian Action Party fully.

Both Claire and Paul Hellyer spoke of CAP's determination to provide renewed hope for Canadians of all ages. Two hundred white pigeons were released in a symbolic gesture to carry that hope across the country. During meetings on the 19th and 20th a nucleus for a solid B.C. campaign team was assembled. The Party has been very active and a number of candidates lined up and ready for nomination.