He'd like to be prime minister of Canada one day, but for the moment Finance Minister Paul Martin Jr. is throwing himself into his new duties as head of the Group of 20. Created last September by the Group of Seven, this informal conclave of finance ministers and central bank governors from developed and developing countries is pursuing an ambitious mission: to push forward the reform of international financial architecture. Just about everybody says that reform is necessary, but there is no consensus on the critical details. For Martin, running Canada might seem like a day at the beach compared with his immediate challenge.
Martin, 61, is a shrewd politician and a veteran bureaucrat; with a tenure of seven years, he's the longest-serving G-7 finance minister. He is taking a decidedly activist approach to the task at hand. Martin believes that global capital markets require global rules to make them more stable and efficient, to help prevent financial crises and to limit the fallout when they do occur. If such reforms do not come soon, he says, developed countries could face a widespread backlash to globalization that could ultimately damage, if not destroy, the free-market system that now prevails.
The new G-20 leader began his campaign with a flourish, addressing international policymaking pooh-bahs at an April lunch sponsored by the Institute for International Economics in Washington. Martin asserted that although some progress has been made in reforming the global architecture, much more needs to be done.
"The lessons of the last 75 years demonstrate that free markets only work if there are structures put in place to ensure they work," Martin said in a recent interview with Institutional Investor. "It is immoral to basically say that the poor are going to suffer because of institutional failure. Anyone who believes in free markets had better understand that populations will not stand for this and [market] institutions in the end will not survive."
Martin emerged as the choice of G-7 leaders partly because as a Canadian he offered the appeal of neutrality. (Translation: He wasn't American, Japanese or European.) Since taking office, Martin has argued that recurrent financial crises—notably, the peso crisis of 1994 and the global financial debacle of 1997-'98—prove that global markets can no longer take care of themselves. According to Martin, a new set of principles, which the G-20 will devise, should serve as global counterparts of the rules that now govern local markets in most developed countries.
Specifically, Martin argues that countries should adopt collective action clauses in their sovereign bond contracts that would make the agreements easier to restructure. In Martin's view, this would reduce the moral hazard of private sector lending and help bail in private lenders. Inspiring more heated debate than the collective action clauses is Martin's insistence that financially strapped countries renegotiating their debt should have the right to impose emergency payment standstills—a polite way of saying capital controls—provided that the International Monetary Fund first approves the move.
In crafting meaningful financial reform, the devil, as always, is in the details. Among the G-20 nations there is not even a rough consensus on any of the critical issues facing the financial system: bail-ins of the private sector, capital controls, the proper role of the multilateral financial institutions. U.S. Treasury Secretary Lawrence Summers has long advocated a caseby-case, rather than rule-based, approach to dealing with burden-sharing; he is leery of any kind of capital controls. And Wall Street remains deeply suspicious of outside efforts to interfere with the way markets function.
The G-20 isn't the only organization working on financial architecture reform. Based in Basel, Switzerland, is the Financial Stability Forum, or FSF, a year-old group of central bankers and regulators who discuss regulatory issues, headed by Bank of International Settlements head Andrew Crockett. Then there's the IMF's board of directors, the International Monetary and Financial Committee, led by Gordon Brown, U.K. chancellor of the exchequer. The group is supposed to discuss IMP-related issues, but any proposed reform of financial architecture would no doubt make its way onto the agenda.
The odds are that they'll all fail to push through major financial reforms, because of the difficulty of getting a consensus between and among developing and developed countries. "Martin would not be the first high-profile political figure to fail to get agreement on financial reforms from seven countries or 20 countries," says Joshua Mendelsohn, chief economist at Canadian Imperial Bank of Commerce.
Yet Martin insists that the G-20 must agree on some plan for reform. He says that the alternative—borrowers suddenly imposing capital controls and roiling global markets—is simply unacceptable. "You can't hide your head in the sand," says Martin, who believes the next crisis could prompt other countries to impose ad hoc capital restrictions or other antimarket measures, as Malaysia did during the Asian crisis.
MARTIN MAJORED IN PHILOSOPHY AT THE University of Toronto, where he later earned his law degree. But from an early age, politics beckoned. His father, Paul Martin Sr., was a minister in the Liberal governments of the 1950s and 1960s and an architect of Canada's socialized health care system. The elder Martin stood for the Liberal party leadership in 1958 and 1968 but lost, the second time to Pierre Trudeau.
Martin fils spent two decades in the private sector, working at the Power Corp. of Canada and later becoming chairman and chief executive officer of Canada Steamship Lines, a company he still owns. In 1988 he won election as a Liberal member of Parliament from Quebec. His new career in politics had begun.
Martin, like his father, made a failed bid to lead the Liberal party, losing to Jean Chrétien in 1990. When Chrétien became prime minister in 1993, he named Martin finance minister. Martin quickly made a name for himself by slashing Canada's swollen budget deficit, which at the end of 1992 stood at almost 6 percent of GDP. The Canadian economy continued to grow, the unemployment rate fell from 11 percent in 1992 to 6.6 percent in 1999, and taxes were modestly reduced. Last year Canada's GDP rose 4.5 percent, even faster than the U.S.'s 4.2 percent growth rate. Earlier this year Martin delivered his third consecutive balanced budget.
But Martin's conservative critics refuse to give him credit for balancing the budget, even as they argue that, with a top corporate tax rate of 28 percent and an average top personal income tax rate of more than 50 percent, Canada's taxes remain too high. "Much of the credit for the deficit belongs to the structural reforms made by the previous government," says Scott Brison, a Progressive Conservative member of Parliament. "[Former prime minister] Brian Mulroney planted the seeds, and Martin is picking the flowers." As for taxes, Brison says that the most recent budget includes only "anemic" tax reductions. "A tortoise heading in the right direction on the autobahn is still roadkill," says Brison, who is worried that Canada remains uncompetitive with the U.S. and other developed countries. But even he acknowledges his adversary's skills: "Martin is very shrewd politically."
An accomplished public speaker and effective debater, Martin can coolly dispatch a critic with a well-placed cutting remark. But he isn't afraid to poke fun at himself. When he addressed the IIE in April, Martin delivered part of his remarks in oddly accented and almost incomprehensible French and was quick to assure his amused audience that he was indeed speaking French.
When Chrétien steps down, his finance minister will almost certainly succeed him as party head. The problem for the ambitious Martin is that Chrétien isn't going anywhere anytime soon. The prime minister recently announced that he will run again in elections that could be called as early as next spring and must be called by June 2002. When asked his intentions, Martin says only that he intends to run for Parliament again. "Martin's young enough to wait for Chretien to step down and will be overwhelmingly elected as the new [Liberal party] leader," says Errol Mendes, a longtime Martin watcher who directs the University of Ottawa's Human Rights Research and Education Center.
Clearly, Martin's role as G-20 chairman heightens his stature both at home and abroad. He no doubt hopes to avoid his father's fate—reaching for the top prize but never quire grasping it.
THE G-20 IS NOT A NEW CONCEPT. IN 1998 the U.S. created a high-level, informal political entity called the Group of 22, made up of handpicked developed and developing countries. The group produced three reports on architecture reform before dying a quiet death last year, when excluded European countries forced their way in, turning the club into an unwieldy mob of 33.
Is 20 the right number for the new group? Martin thinks so. "The great advantage of the G-20 is that it represents the vast majority of the world's population and a substantial majority of the world economy [65 percent and 87 percent, respectively]," says Martin. "It will be able to discuss both the problems and the solutions that are required, and that will quite clearly ease their implementation." The G-20 includes the G-7 nations and developing countries such as China, India, Indonesia and Mexico.
Under Martin's leadership the G-20 will engage in debate at a fairly lofty political level—the dry technical details of financial architecture are best left to the FSF, Martin says. But the G-20 will confront difficult, complicated questions: What must be done to help prevent financial crises and limit their fallout? How do you prevent market failures arising from imperfect or assymetric information? How do you increase transparency among governments and market participants? What mechanisms can best alter market incentives to reduce moral hazard?
Martin made a move toward answering the final question when he announced in April that Canada would include collective action clauses in future foreign currency sovereign debt issues. In theory, at least, these clauses allow debt restructuring without the unanimous approval of bondholders, preventing rogue creditors from derailing the process. The clauses are designed to reduce moral hazard by encouraging prudent private sector lending. They also would facilitate private sector burden-sharing by making private credits easier to renegotiate.
Other G-7 countries have been slow to follow Martin's lead. The U.K. issued one foreign currency bond with a collective action clause earlier this year but hasn't indicated that it will do so in future debt offerings. Martin says he sees support from the Germans. But the Japanese remain cool to the idea, and while the U.S. Treasury supports the notion in theory, it does not believe that the G-7's adoption of collective action clauses would persuade developing countries to follow suit.
Lex Rieffel, a senior adviser at the Institute of International Finance, a Washington-based lobbying organization for global financial institutions, also believes that Martin's move will prove futile. ''As a practical matter, the Canadian action will have no impact on Canadian bonds or bonds of any other country,” he says.
In a more radical stance, Martin advocates the use of emergency payment standstills for countries experiencing financial crises, provided that the standstills are first approved by the IMF. Martin believes this would help create a framework for handling bankruptcies on a country level that is analogous to U.S. bankruptcy laws. But the odds that the G-20 will go along with Martin on this are slim indeed. Several G-7 countries believe that he is taking the parallel between sovereign countries and companies too far. “Private investors and lenders have been operating since Bretton Woods with a basic set of principles that they are comfortable with and which have worked very well, says Rieffel.”
Martin has heard it all before. “I think there has to be much greater outreach to the private sector, and that is one of the things the G-20 is doing,” he says. “There is a lot more sympathy in the private sector than you would think.”
Then Martin makes his most forceful argument: If governments don’t deal with financial reform in a coordinated and consistent manner, he says, countries will take matters into their own hands. That would be good news for no one. Says Martin: “Don’t kid yourself. You either do it right or somebody is going to do it in a way you’re not going to like.”
