Crisis in Asia: Implications for the Region, Canada, and the World
The Standing Committee on Foreign Affairs
Chair : The Honourable John B. Stewart
Deputy Chair: The Honourable Raynell Andreychuk
December 1998
CHAPTER 1
INTRODUCTION
CHAPTER 2
THE FINANCIAL AND ECONOMIC CRISIS: EVOLUTION, CAUSES AND LESSONS LEARNED
A. East Asia’s Historic Economic Success
B. Evolution of the Asian Financial and Economic Crisis
1. The Origins of the Crisis in Thailand
2. The Emergence of Contagion Effects in the Region
3. Economic and Policy Stagnation in Japan
4. Developments in ChinaC. Causes of the Crisis
D. Lessons Learned
E. Impacts of the Crisis on Regional and Global Economies
CHAPTER 3
IMF INVOLVEMENT IN ASIA: AN INSTITUTION IN NEED OF MAJOR REFORM OR A STABILIZING
FORCE?
A. Is the IMF Rescue Attempt Warranted?
B. Has the IMF Response in Asia been Appropriate?
C. Improving the Structure of the Global Financial System
D. The Case for and against Controlling Short-Term Capital Flows1. The Case for Controls
2. The Pitfalls of Controls
CHAPTER 4
CANADA AND ASIA PACIFIC
A. Links between Canada and Asia Pacific prior to the Crisis
1. Canada-Asia Pacific Trade Links
2. Canada-Asia Pacific Investment Links
3. Canada-Asia Pacific Immigration Links
4. Japan and China: Key Countries for CanadaB. Economic Impact of the Crisis on Canada
1. Direct Trade Effects
2. Commodity Price Impacts
3. U.S. Indirect Effects
4. Impact on the Canadian Dollar
5. Regional Consequences
6. Tourism
7. Canadian Bank ExposureC. Increased Asia Pacific Trade and Investment Promotion: Requirement or Lost Cause?
CHAPTER 5
ENHANCING ACCESS TO THE ASIA PACIFIC MARKET: IS APEC STILL A USEFUL POLICY TOOL?
A. APEC Defined
B. APEC’s History and Achievements
C. What Legacy did the 1997 Vancouver Summit Provide and where does APEC go from here?1. Trade and Investment Liberalization
2. Business Facilitation
3. New Directions for Economic and Technical Cooperation
4. China’s Accession to the World Trade Organization
CHAPTER 6
ASIA PACIFIC SECURITY ISSUES
A. Traditional Security Threats
1. Three Major Potential Clashes in the Region
a) The Korean Peninsula
b) China and Taiwan
c) The South China Sea2. Internal Armed Conflicts
3. Growth of the Business Involvement of Asian Armed Forces and the Spread of WeaponsB. Non-traditional Security Threats
1. Economic Security
2. Environmental Security
3. Transnational CrimeC. Towards an Effective Security Policy For Asia Pacific
D. Regional Balance of Power and Security Mechanisms1. Japan and China
2. The United States
3. ASEAN Regional Forum
4. Track II MechanismsE. Bilateral Relations and Foreign Aid
CHAPTER 7
HUMAN RIGHTS IN THE ASIA PACIFIC REGION
A. Factors Supporting Adherence to Human Rights
1. Good Governance
2. Democratization and Civil Society
3. The Rule of Law
4. The Need For An Independent JudiciaryB. Other Specific Human Rights Concerns In The Region
1. Women
2. Trafficking in Humans
3. Refugees and the Internally Displaced
4. LabourC. The "Asian-Values" Debate
D. Integration of Human Rights with Trade and Investment
E. Principles for a Coherent Canadian Human-Rights Policy
CHAPTER 8
CONCLUSION
APPENDIX 1
LIST OF ACRONYMS AND COUNTRY GROUPINGS
APPENDIX 2
BASLE CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION
Preconditions for Effective Banking Supervision
Licensing and Structure
Prudential Regulations and Requirements
Methods of Ongoing Banking Supervision
Information Requirements
Formal Powers of Supervisors
Cross-border Banking
APPENDIX 3
BORDER/TERRITORIAL DISPUTES IN THE ASIA PACIFIC REGION
APPENDIX 4
INTERNAL CONFLICTS IN ASIA PACIFIC
APPENDIX 5
HUMAN RIGHTS VIOLATIONS IN THE ASIA PACIFIC REGION
APPENDIX 6
WITNESSES
Throughout the past decade the Standing Senate Committee on Foreign Affairs has dealt chiefly with international economic developments. We have dealt with matters such as the Free Trade Agreement between Canada and the USA, the North American Free Trade Agreement, the establishment of the WTO, and the implication for Canada of the enlargement of the European Union and Europe's move towards the creation of a European Central Bank, a common currency, and a common monetary policy.
Adhering to this pattern, two years ago the Committee began to study the implications for Canada of its deep involvement in Asia Pacific. For several months most aspects of the Canada-Far East relationship seemed wonderfully promising. But then, just about the time, in June 1997, when we presented an Interim Report, dark clouds began to appear doubts about the productivity of investing in certain countries, such as Thailand and Indonesia; the withdrawal of short-term investment; the flight to the United States dollar; the devaluation of certain Asian currencies, etc. The direct and indirect consequences for the Canadian economy soon became clear not only were our exports to Japan, for example, falling, but the flight to U.S. currency had the effect of reducing the value of the Canadian dollar in the world money exchanges. In this report, based on the evidence we heard, we try to provide an accurate general account of what happened.
Also, we call attention to the lamentable social and political consequences of the economic situation in certain Asian countries.
To make realistic proposals designed to prevent a recurrence of the Asian crisis is difficult. Aside from the problem of writing new rules and creating new regulatory regimes for international capital flows, there is the political problem of how the governments of certain Asian countries would react to such an intervention. And, even if they reacted favourably, are those governments strong enough to enforce the reforms, e.g., to quash "crony capitalism?"
The Committee spent much time discussing what we should say about the human rights question. Given the difference in views among the members on how far Canada should go in linking trade and human rights, we decided that, in this report, we should state certain principles on which we are agreed, but beyond that to do no more than record the basic arguments, with the understanding that any Committee member who wishes to do so should feel free to speak her or his mind in the Senate.
At this time I wish to record the Committee’s appreciation for the cooperation of the witnesses to whom we turned for help. In addition, we are most grateful for the constant support of the Clerk of the Committee, Serge Pelletier; also to Josée Thérien for formatting the text. The expertise and dedication of Peter Berg, our chief researcher, facilitated our work greatly, and for this we are most thankful. The assistance of Anthony Chapman in the preparation of the Interim Report has not been forgotten. Also, the Committee is deeply indebted to Colleen Hoey, an interim from the Norman Paterson School of International Affairs at Carleton University, for her able contributions to the regional security and human rights chapters of this report.
John Stewart
Chair
Prior to July 1997, there was no end in sight for the "East Asian economic miracle." The Asian development model, based on high rates of savings, massive investment in human and physical capital, a good work ethic on the part of employees, prudent fiscal management, and increased openness, was an inspiration to many policy-makers. Economies were booming, foreign investment was streaming in, and predictions of rapid growth in trade and economic activity were everywhere to be found. As Dr. William Saywell (President and CEO, Asia Pacific Foundation of Canada) put it to the Committee, the world was moving towards the Asian century.
Such a prediction could not have been more wrong. In July 1997, the economy of one East Asian country after another began to unravel as a massive tidal wave of speculative currency attacks, loss of investor confidence, and capital outflows hit the region. The "Asian flu" hit hard, beginning in Thailand, but soon spreading to neighbouring countries. By year end, numerous banks and other financial institutions had collapsed, hundreds of firms including South Korea’s conglomerates (chaebol) had been severely damaged, and the International Monetary Fund (IMF) had taken over decision-making in the countries most adversely affected. Since then, other symptoms of economic trouble have appeared, as exemplified by the rioting and social unrest which has occurred in Indonesia, the slump experienced in the Japanese economy, the severe economic and social dislocation felt in China as that country has proceeded with substantial structural reforms, the onset of financial difficulties in Russia and Brazil, and ongoing turbulence in global financial markets.
In just over a year Asia has been transformed from the world’s fastest-growing region into its slowest. The area has been left reeling by the effects of an asset price deflation and credit crunch, severe unemployment, doubts about the internal security of certain countries (e.g., Indonesia), and great uncertainty about the future of East Asia and its hitherto successful development approach. The world’s attention has been squarely placed on the historical weaknesses found in East Asian countries’ financial sectors and in their political and social structures, notably the occurrence of corruption and cronyism. A deep and prolonged economic slump has settled upon the region.
The crisis has also brought social and political tensions to the fore. The potential social impacts of the crisis, such as increased poverty, displacement of workers, and the persecution of minorities (e.g., ethnic Chinese, who make up only 3% of Indonesia’s population, but control 70% of the country’s wealth), are now increasingly being observed. Political stability has also been affected, with governments having changed in South Korea and Thailand, and with the leaders of both Indonesia and Japan having stepped aside.
Who could have predicted accurately that a crisis of this magnitude and world wide reach would be forthcoming? Certainly not the IMF, the global financial fire-fighter in charge of managing the crisis, which had been positively glowing in its forecasts for a number of the emerging economies of the region. Not other economic forecasters, who also assumed that growth would continue unimpeded. Not the Government of Canada, which transferred significant trade and investment promotion resources out of other geographical regions into East Asia and which was such a proud sponsor of "Canada’s Year of Asia Pacific" in 1997. Not this Committee, which in June 1997 issued an Interim Report that was optimistic about the economic potential of the East Asian region and the business opportunities awaiting Canadian interests there.
How did the Asian crisis evolve, and what lies in store for the regional and global economies? What were the underlying causes of the Asian financial and economic crisis, and what lessons can be learned from its evolution? Can the crisis be attributed to mischievous currency speculation and investor panic, to inefficient financial sectors, corruption and crony capitalism, or to other factors? What lessons can be learned from the turmoil in the region, and what economic and political reforms need to occur if a return to economic health is to be achieved? These aspects of the Asian crisis will be addressed in Chapter 2 of this report.
Long savaged by its critics for its lack of openness, its use of "bailout" money to support corrupt and inefficient regimes, and its imposition of harsh structural reforms as the quid pro quo for temporary financial assistance, the IMF increasingly has come under attack for its handling of the situation. Just how poorly has the IMF managed the crisis? Should the Fund continue to exist as the international lender of last resort? What implications do the developments in Asia have for the supervision, regulation, and possible control of short-term capital flows, which seem to be increasingly fickle in this era of globalization? The Committee turns its attention to these important questions in Chapter 3.(1)
What trade, investment, and other links existed between Canada and Asia Pacific prior to the crisis? What is Canada’s relationship with Japan and China, the two key players in the region? How extensive have been the impacts of the crisis on the Canadian economy, particularly its external sector and the now depressed value of the dollar? Is there a viable future for Canadian trade and investment links with Asia Pacific, and what should Canada’s trade and investment strategy be in the new environment? Chapter 4 addresses these salient issues.
Is Asia-Pacific Economic Cooperation (APEC) still a relevant policy tool through which long-term Canadian access to the large Asian market can be enhanced? How can APEC’s contribution to increased trade liberalization, business facilitation and economic and technical cooperation in the region be strengthened? The Committee’s views on the role of APEC are presented in Chapter 5.
What are the dominant security issues in the region, and what implications do these have for Canadian policy in Asia Pacific? With the Asian financial and economic crisis exposing the internal political and social fragility of some countries in the region, countries such as Indonesia, what does the future hold for internal security and political stability in East Asia? Chapter 6 deals with these matters.
What are the key human rights issues for East Asia? What is the nexus
between trade and human rights? What role should Canada play to improve the status of
human rights in the region and how can Canadian policy-making change to ensure that both
human rights and trade issues can be adequately considered?
Chapter 7 addresses these questions.
With all the twists and turns which the crisis in Asia has delivered, it is difficult for the Committee to be optimistic about the short- and medium-term prospects for the region. Without a leading engine of growth in the region and with the U.S. economy showing some signs of declining growth, the prospects for a quick export-led recovery in the region are less than glowing. It is our hope that the much-needed financial and other institutional reforms will be implemented and economic growth can be revived. However, it will likely take years before a sense of normalcy returns to East Asia.
(November 25, 1998)
The Honourable John B. Stewart
Chair
The Honourable A. Raynell Andreychuk
Deputy Chair
and the Honourable Senators
| Bolduc | Grafstein |
| Carney, P.C. | *Graham, P.C. (or Carstairs) |
| Corbin | Losier-Cool |
| De Bané, P.C. | *Lynch-Staunton (or Kinsella, acting) |
| Di Nino | Stollery |
| Doody | Whelan, P.C. |
* Ex officio Members
(Quorum 4)
The following Honourable Senators also participated in the work of the Committee:
Lise Bacon, John G. Bryden, Thelma Chalifoux, Joan Cook, Joyce Fairbairn, Marisa Ferretti-Barth, Ronald D. Ghitter, Normand Grimard, Daniel Hays, Archibald Johnstone, Léonce Mercier, Lorna Milne, Donald H. Oliver, and Marcel Prud’homme.
Extract from the Journals of the Senate, Tuesday, October 28, 1997:
The Honourable Senator Stewart moved, seconded by the Honourable Senator Corbin:
THAT the Standing Senate Committee on Foreign Affairs be authorised to examine and report on the growing importance of the Asia Pacific region for Canada;
THAT the Committee have power to engage the services of such counsel and technical, clerical and other personnel as may be necessary for the purpose of its examination and consideration of the said order of reference;
THAT the papers and evidence received and taken on the subject and the work accomplished by the Senate Standing Committee on Foreign Affairs during the Second Session of the Thirty-fifth Parliament be referred to the Committee;
THAT the Committee have power to adjourn from place to place outside Canada; and
THAT the Committee submit its final report no later than October 30, 1998 and that the Committee retain all powers necessary to publicize the findings of the Committee contained in the final report until December 15, 1998.
After debate, the question being put on the motion, it was adopted.
Extract from the Journals of the Senate, Wednesday, October 21, 1998:
The Honourable Senator Stewart moved, seconded by the Honourable Senator Poy:
THAT notwithstanding the Order of the Senate adopted on October 28, 1997, the Standing Committee on Foreign Affairs, which was authorised to examine and report on the growing importance of the Asia Pacific region for Canada, be empowered to table its final report no later than November 25, 1998; and
THAT the Committee be permitted, notwithstanding usual practices, to deposit its report with the Clerk of the Senate, if the Senate is not then sitting; and that the report be deemed to have been tabled in the Chamber.
The question being put on the motion, it was adopted.
Extract from the Journals of the Senate, Thursday, November 19, 1998:
With leave of the Senate,
The Honourable Senator Stewart moved, seconded by the Honourable Senator Pearson:
THAT notwithstanding the Order of the Senate adopted on October 28, 1997, and the motion adopted October 21, 1998, the Standing Committee on Foreign Affairs, which was authorised to examine and report on the growing importance of the Asia Pacific region for Canada, be empowered to table its final report no later than December 3, 1998.
The question being put on the motion, it was adopted.