14th Annual Plenary of the InterAction Council of Former Heads of State and Government

I am pleased to have the opportunity to address this distinguished group on an issue of such importance.

We have all seen a period of remarkable change in the international financial system. Globalization and technology are drawing national markets closer and closer. Capital flows have increased dramatically. The ups and downs of one market are transmitted to others with the touch of a keyboard.

When Canada hosted the Halifax Summit last summer, these changes were very much on the minds of the G-7 Leaders.

Our economies are increasingly dependent on capital from beyond our borders. So much, in fact, that many people believe the economic sovereignty of the nation state is in question.

When there is a sense of not being able to control our economic destiny, it adds to the general anxiety about job security, our standard of living, and the world our children will inherit.

I believe we have to confront change, not hide from it. We have to prepare our citizens not just to cope with change, but to seize the exciting opportunities that it presents.

We need to see change from the broad perspective. I am convinced it will lead to a better world, both for developing and developed countries.

The more integrated we become as a community of nation states, the more people encounter different views. And the more difficult it becomes for authoritarian governments to repress dissent and democracy. The implications for human rights and quality of life are profound.

In Halifax, G-7 Leaders reflected on whether global economic institutions such as the IMF and World Bank are up to the new challenges of the global economy.

As we prepare for the Lyon Summit next month, Leaders will be asking how we can improve prospects for both developing and developed countries in this rapidly changing world economy. The objective of policy makers must be to ensure that globalization works for the benefit of all.

International finance knows no borders. Tidal waves of money wash effortlessly backwards and forwards, buffeting interest rates and exchange rates. And we all know what that can do to the best-laid plans of governments.

These financial waves often seem motivated by quick-changing sentiments or the short-term expectations of the proverbial twenty-eight-year-old trader in red suspenders. When a crisis erupts, a nation state can seem powerless.

In my view, the nation state is not powerless. It can influence these flows even if it cannot control them.

Policy makers can work to make the global finance system more secure by improving global governance.

But fundamentally, capital flows are the life-blood of prosperity and well-being.

In the 90s, we have seen phenomenal growth in capital flows between countries. For example, capital flows from developed countries to developing countries have tripled, from $40 billion in 1990 to $125 billion in 1994.

I myself have seen the very positive effects of that trend in Asia and Latin America: new infrastructures, new industrial facilities and equipment, and greater competitiveness. We are witnessing a remarkable strengthening of the trade liberalization process.

In the same way, when we analyze economic performance, in both developed and developing countries, we see very clearly that countries that have liberalized trade, opened their borders to foreign savings, and worked to promote greater integration of their economies, are rewarded with stronger growth.

Of course, the road to globalization is not always smooth. The economic and political conditions prevailing in Mexico in late 1994 coincided with a weakened investment climate in developed countries. The result: a currency crisis that devastated Mexico.

I travelled to South America in the weeks following the Mexican crisis. I remember the serious concerns of the leaders of Brazil, Argentina and Chile. Although those countries do little trade with Mexico, the crisis had an instant effect on their exchange rates.

Those events showed us that capital flows, because they are so important, so rapid and so vast, were both potentially threatening and potentially advantageous. Economic information travels at the speed of a data signal. Reactions can be unexpected and devastating.

The main lesson we can learn from such market reactions is a very simple one: a country can better absorb such shocks if its public finances are in good shape.

All borrower countries, whether large or small, must take note of that lesson. Many developed countries, including Canada, have chosen to count on international financial markets to help finance not only investment, but also governmental measures. While that may be viable in the short term, the growing burden of public debt and budget deficits eventually becomes insupportable. As a result, interest rates take off and there is greater uncertainty with regard to capital flows, which can sometimes lead to more volatile exchange rates.

All of the industrialized countries have learned the hard way -- and have paid the price.

Now we are getting the fundamentals right. We are restoring our fiscal health and regaining our fiscal flexibility. This will allow us to channel our scarce financial resources to the people that need them most.

We can point to some success in achieving these goals in Canada. We have been able to keep inflation low, and the amount of money that the Canadian government needs to borrow is rapidly declining.

By 1997-98, Canada's financial requirements will drop well below 1 per cent of GDP, compared to 2.6 per cent in 1995-96. On this basis, Canada will have its lowest fiscal deficit in 30 years, and the lowest among our G-7 partners.

It is true that putting our house in order does limit what a government can do in the short run. But it does not mean that we are surrendering sovereignty to the markets. In fact, the more solid our fiscal shape, the less vulnerable we are to the whims of those young traders in red suspenders.

On an international level, the key is to anticipate a crisis like the one we saw in Mexico before it happens. And to be able to mobilize into action quickly.

Since the Bretton Woods conference of 1944, we have progressively improved the safety net for the global financial system. In 1994 and 1995 we saw that the net had some new holes. At the Halifax Summit, the G-7 launched a number of initiatives to improve our safety net mechanisms.

Since then, we have improved the IMF's ability to predict crises, developed better data processing standards, and put in place financial emergency mechanisms, and we are currently working to double the additional resources available to the IMF in the event of a crisis.

The Lyon Summit will build on the progress made at the Halifax Summit by looking at ways of better integrating developing countries into the globalized economy. One of the problems that is slowing the integration of some of the poorest countries is their debt level.

We have insistently asked the World Bank and the IMF to deal with the debt problem of developing countries, which are among the poorest and the most indebted.

Canada and other creditor countries have made tremendous progress in lightening the debt burden of those countries, by reducing bilateral debt at the Paris Club. We are prepared to do even more. We do believe, however, that multilateral debt problems could be solved in large part through multilateral mechanisms, rather than bilateral mechanisms.

I have just mentioned the risk entailed by economic globalization and what we can do to reduce that risk.

I strongly and sincerely believe, however, that the potential advantages of a globalized economy greatly outweigh the risks it carries.

I have made no secret of my view that increased trade with China, India and other developing countries is one of the most powerful ways of improving the lives of ordinary people on this planet.

I firmly believe that this is key to a more secure international economic and political order as well. More liberalized trade and investment draws countries together and improves economic prosperity. It also opens the way to dialogue on common everyday problems.

Canada has traditionally been a strong believer in multilateralism. We believe the best way to help bring about positive change in other nations is to engage those nations -- not isolate them.

For us, this international experience is a major asset. Canada is a bilingual, multicultural society that has been an active participant in world affairs. As a result, we can relate to cultures on every continent. In a globalized world, that is a major advantage.

But I know that this new openness -- these exciting new global opportunities and markets -- can also create unease. I know that in the more developed economies, people are anxious about the scale and the pace of change. This is true in Canada and in many places around the world.

People are uncertain about their job prospects and those of their children. They are not sure if they can look forward to a more secure and prosperous life. It is hard for people to come to grips with the much broader economic forces that affect our lives today.

Job security cannot be guaranteed by barring the door to the forces of change. Burying its head in the sand does not help the ostrich defend itself or take advantage of new opportunities. Security rests in having the confidence in ourselves to face a dynamic, evolving global community.

The challenges are complex. For example, the explosion of activity in telecommunications offers many exciting opportunities, especially for countries such as Canada which are showing innovative leadership in this field. It also draws both people and countries closer together in a global community, opening doors to new ideas, new values, and new creations. Yes, it is a challenge to the status quo, and our distinct cultural identities. We need a balanced approach.

There is no easy way to adapt to the new challenges around us.

Some want to turn back the clock to simpler days.

We cannot do that. We cannot avoid change. We cannot stop technology. We cannot stop globalization. We need to confront change and to adjust to it. We have a responsibility to the poor of this world to turn this progress to their benefit.

Let us not forget that the global financial system is delivering the goods: a vast flow of financing from savers to developed and developing countries alike.

What is the impact of globalization on human values? Obviously, the record is mixed. But I am convinced that, overall, globalization is bringing many positive changes -- including greater prosperity for more people in more countries, and the opening of societies that were previously closed.

When we look around the world, especially in regions such as Central America and Africa, we see that democratic governments are now the norm rather than the exception. In my view, it is not a coincidence that globalization has been accompanied by a movement to democracy in many nation states.

But the problem is that many of the poorest countries cannot keep pace. They are being marginalized. We see this in sub-Saharan Africa, in the Caribbean, and in Central America. I have discussed these concerns with many leaders from these regions over the past six months: at the Francophonie Summit in Benin, the Canada-Commonwealth Carribbean Summit in Grenada, and in Ottawa last week with six Central American leaders.

I was struck by the fact that the major concern of these leaders is not aid. Their small economies are being battered by forces over which they have no control. They want help in adjusting to these rapid changes.

We cannot overlook these pleas for help. We already allow 90 per cent of the goods from these countries to enter Canada duty free. We will continue to work with these governments to help prepare their economies for the changes to which they must adapt.

In our own countries, governments have a very important role to play in ensuring that people can seize the benefits of change, while helping those who cannot adapt as rapidly.

If we expect our citizens to be adaptable in this rapidly-changing world, we should be prepared to provide the right training and education to help. Because we know that future generations in a globalized economy cannot be guaranteed good jobs without a higher education. We must also provide an adequate social safety net, especially for the most vulnerable, to reassure them that those who cannot adjust can be afforded a measure of protection.

Putting our fiscal houses in order will ensure that we have the resources to live up to this responsibility.

And ensuring a fair distribution of the fruits of increased trade within each of our nations ensures the long term stability that is necessary for continued progress and prosperity.

Many people believe that globalization is imposing a healthy discipline that will result in stronger economies in the long run. I think there is a lot of truth to that.

But as the economist John Maynard Keynes noted, in the long run, we are all dead.

As politicians, we know that voters are much more concerned about today and tomorrow than the next century. We also know that the young trader in red suspenders can cause a lot of havoc in the short run.

As former leaders, you have a unique perspective. You understand the immediate political and economic factors that are at play, probably better than anyone. But in this forum, you have the opportunity to consider the longer-term issues in an environment that is relatively free from the day-to-day distractions of political life. I will be interested to hear your views on these important subjects.

As I said earlier, I believe we need to confront change, not hide from it. I am very confident that we will rise to meet the new challenges we face by harnessing the power of change, just as our ancestors did before us.