Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 8 - Evidence, May 5, 2009
OTTAWA, Tuesday, May 5, 2009
The Senate Standing Committee on Foreign Affairs and International Trade is meeting today at 5: 36 p.m. to study the rise of China, India and Russia in the global economy and the implications for Canadian policy.
Senator Di Nino (chair) is in the chair.
[Translation]
The Chair: Welcome to this meeting of the Senate Standing Committee on Foreign Affairs and International Trade.
[English]
The committee continues its special study on the rise of Russia, India and China in the global economy and the implications for Canadian policy.
Appearing before the committee today is David Malone, President, International Development Research Centre. Mr. Malone is no stranger to many members of this committee. He is a career foreign service officer and an occasional scholar. I will have to ask about that ``occasional,'' Mr. Malone.
He has served as Canada's High Commissioner to India from 2006 to mid-2008. Prior to his nomination to India, he was from 2004 to 2006 Assistant Deputy Minister in the Department of Foreign Affairs and International Trade, responsible initially for Africa and the Middle East and, subsequently, for global issues, in which portfolio he oversaw Canada's multilateral and economic diplomacy.
We also have with us today John M. Curtis, Distinguished Fellow, Centre for International Governance Innovation. Prior to CIGI, as a Distinguished Fellow, in September 2006, Dr. Curtis was the first Chief Economist at the Department of Foreign Affairs and International Trade. He was also Senior Policy Adviser and Coordinator, Trade and Economic Policy; and Director of Trade and Economic Analysis, Department of Foreign Affairs and International Trade.
Welcome to the Senate.
Before I call on our guests to comment — after which time we will have questions — I understand that Senator Downe wants to raise a point of order.
Senator Downe: Thank you, chair. The point of order refers to our study of the Export Development Corporation review. On March 10, 2009, I asked the president of the Export Development Corporation, Mr. Siegel, if EDC was financing companies that are doing business in Burma or with the Burmese government. Mr. Siegel replied he could not answer that question.
I then asked him to send the information: ``I do not want to know the specific names of the companies, for privacy reasons if that is a problem, but if you are funding Canadian companies doing business there, I would like to know that.''
He said he would do that. He then sent a letter to the chair's attention dated March 27, 2009, and he did not answer that question. I want an answer to that question prior to approving the report.
I notify the committee of that situation so perhaps the clerk can contact him for clarification.
The Chair: Thank you, senator. We will contact him for an answer. We are studying the report tomorrow. I do not know if I can obtain an answer before tomorrow. However, before we approve the report, we will do our best to obtain a response.
Senator Downe: Thank you.
[Translation]
We will hear first a presentation by Mr. Malone and then by Mr. Curtis.
[English]
Mr. Curtis, I will try to do this in French and it is not very good.
[Translation]
These presentations will be followed by questions from members of the committee.
[English]
Will you speak the other way around? Mr. Curtis will have the honour of speaking first, then.
John M. Curtis, Distinguished Fellow, Centre for International Governance Innovation: Thank you, chair. I am not a president, so I was ready to defer. Coming from the same family in the Department of Foreign Affairs and International Trade, I guess we non-Foreign Service officers always learn to be deferential to our Foreign Service colleagues.
I am delighted to be amongst you this evening. I know we will have an overall discussion and then turn to questions. I will try to summarize these remarks under four headings for clarity. First, I will make a few introductory remarks. Second, I will speak about foreign economic policy in the largest context to make five or six pointers for you to consider the context with which we are discussing trade and economic relations more generally. Third, I will talk briefly about the impact of China, India and the larger ``emerging'' or ``re-emerging'' economies on Canada. Last, I will talk about the macroeconomic prospects, given the economic meltdown that much of the world is involved with.
If I can proceed on that basis, I will do so quickly.
In terms of introduction, let me make a couple of comments. First, an awful lot of myths are floating around in the media and in the official world, as well as in academe. There is not as much analysis as might be desirable, so I will try to give you a little more analysis; the ``why'' rather than the ``what.''
Second, in terms of introduction, I will make the point that is well documented and well understood, but it is still profound: The world economy is undergoing substantial transformation. We are in a transition period. It is not as dramatic as some will state, but it is occurring. There is a slow shift from the northern parts of the Western hemisphere — Canada and the United States, in particular — and Europe, particularly Western Europe, to points east in terms of Europe and across the Pacific to Asia. This shift is a long-term process, interrupted a little bit with a speed bump of the economic meltdown we are presently in. However, this slow shift is underway.
In fact, we are economically regressing to where the world was in 1820, which has been documented by the Organisation for Economic Co-operation and Development, OECD, and other agencies.
Third, when we talk about transition of power, it is always important to define what one means by ``power.'' Often it is only size of the gross national product, and people talk about whether Canada should be in or out of the G7. It is about size of GDP, but it is also much more than that. I will define ``power'' as being the willingness to influence others and/or the capacity to influence the behaviour of others. I think that is what power involves, and that is where Canada can play a major role in exercising what is often called ``soft power'': the power to influence and shape others and the willingness to do so.
Looking at Asia in particular, the countries you have asked us to look at, as well as Brazil and South Africa, there are two questions.
First, what is happening there? Second, how should we adjust to these changes? This is something that think tanks and others think about and one that we can address perhaps in terms of questions later on.
Finally, under the introduction, let me make the point that the current global economic meltdown is in some ways accelerating the changes underway and exposing the fault lines between and amongst countries and regions. That point is always important to bear in mind as we go forward.
The second heading was to look at the broadest level of foreign economic relations. Again, I will not take the time to discuss them. However, I will put them in the context that the committee might find helpful either today or as you turn to write the report in due course.
These are longer-term shifts happening. One is demography: the rural-urban shift we see in this country — the shift to cities and to local areas and missing what we call provinces, states and sub-national areas. This major shift is where people are as comfortable in Toronto, New York City, London, England, Paris, Shanghai and Singapore as they are in rural areas of any given country.
This shift is affecting the countries you are interested in, for instance, Russia. European Russia is being pulled westward and Asia Russia is being pulled much more into the Chinese orbit. This shift has enormous consequences as one thinks ahead. Demographic changes ought to be kept in mind.
The second issue is the importance of the Internet and the communications revolution. Of course, they affect politics and we have seen that in the United States over the past year. They make us more vulnerable to infrastructure. However, the point I make here is that, if the Chinese are successful in their version of the Internet — using their characters — this version will have a profound impact on much more than only the firewall we worry about in terms of what information is permitted into China. If the Chinese are successful in what they call their IPv6 venture, which is to make the language of the Internet Mandarin, there will be huge implications.
Climate change, which I know this committee and others have focused on, is third. I will not go on about that issue but it does affect domestic economic growth and international cooperation.
Fourth is what I call the issues of ``values and democratization.'' Values including, unfortunately, human rights and universal rights, gender rights and other things are moving slowly, I would suggest, to power relationships. This is particularly true in the U.S.-China situation. China has the money. The U.S. has the need for money, and I think you will see the U.S. being much more careful in terms of how it uses its military power because of that kind of change. There will be less focus on values as we look ahead.
Six, look at the non-state actors. I will not spend time on this issue except the importance of multinational enterprises, civil society and city states and how we think of these countries coming onto the world stage.
Last is the issue of security, which we tend to think of in terms of either border security or military security. I suggest to you that, as we think ahead, security will be much more food security and energy security. If countries start damming headwaters of various rivers, for example, this act could be in the future an act of war rather than only sending in armies and trying to restore order in various countries.
That is my second general heading.
What I will say next is only for you to think of but not necessarily to respond to quickly today.
What impact will the growth of these countries have on Canada? One point to emphasize to you is that the physical, geographic location of Canada in the world economy is important to the volume of trade that one would expect — the volume of investment that one would expect. It is almost like a real estate: Location, location, location is everything. If we measure how Canada is performing compared to what we would expect, given geographic distance, we are not performing badly in Asia, notwithstanding the myth that we are performing poorly.
We are performing relatively poorly in the area of services given our distance and the size of this economy compared to those economies, all of which are somewhat different. We are a serious laggard, especially in all the commercial services including tourism and others.
Our performance in trade in services is far behind in Asia, Brazil and South Africa. Even in terms of the Canada- U.S. relationship, we are far behind the rest of the OECD.
To some extent, analytically, that is because the original Canada-United States Free Trade Agreement, and followed by the North American Free Trade Agreement, NAFTA, was focused on goods, not on services. We have liberalized and opened markets for goods, but we did not perform nearly as well on services. That area is where economies as a whole are evolving and there is a serious problem.
I have undertaken work with a couple colleagues comparing Australia and Canada in their links to China, India, Brazil and South Africa. Notwithstanding the mythology that we are performing badly, compared to the Australians, we are not performing badly except in services, particularly educational services.
Please bear in mind that I suggest the committee not jump to conclusions overly quickly. Look at the reality of what is happening given the economic arrangements we have and the importance of geography and size, which ultimately determines the flow of goods, services and investment.
I want to make a couple of macro or bigger picture points in terms of the economy. In particular, the growth of China currently, which will be followed by others, will affect the prices of resources much more quickly than manufacturing. We will probably see the Canadian recovery starting on the resource side. To some extent, that recovery will be led by Chinese demand for resources.
The larger question is how quickly China and India will move up the technology ladder. Perhaps, Mr. Malone will also have a view on this question. How quickly will they provide value-added to their national output and how much will be sold domestically versus how much will be traded?
All these questions are important. If the Chinese, Indians and Brazilians — and to a lesser extent the Russians and South Africans — move up the technological ladder quickly, this movement has major implications for Canada. It means that the standards they adopt for food, health and manufacturing will be much more important in the world economy.
We will be required to make choices. Do we follow the American and Western European patterns of economic organization, including standards that manufacturing and other sectors will follow, or will we turn to what will become increasingly international standards?
If we decide to follow international standards, that decision has implications for us. If we decide to follow U.S. standards, that decision has implications. We are on the cusp of not being entirely certain which way to go.
Finally, there are a number of factors to consider relating to the United States. Is it capable over the next couple of years of bringing its domestic balances into shape? In other words, are households no longer broke as they are now? Will the national debt come under control over time and international accounts be put in order? Will the U.S. be able through their good economic management to restore the United States dollar as the world's reserve currency? None of this picture is clear yet.
It will be more comfortable for Canada if China, India and Brazil move up the technological ladder more slowly than they appear to be moving. If all these situations comes to pass, Canada can carry on as we have for the last 20 years or 30 years and move along in the shadow of a pre-eminent United States, which remains the G1.
On the other hand, if this is not the case and the U.S. takes years to sort itself out, this situation will affect Canada more than any other given country since we have a front-row seat. If we are forced to choose between following Chinese, Indian and other standards — for example, regulatory standards — Canada will be in a much less desirable position.
We then must choose if we adopt fully North American standards, including a common dollar and everything else that choice implies for little Canada. Alternatively, will we take it as a challenge, as our forbearers did after the Second World War, to say that we must rebuild the international system and Canada must play a major role in helping shape international rules that cover everyone.
Thank you.
The Chair: Thank you, Mr. Curtis. Please proceed, Mr. Malone.
[Translation]
David M. Malone, President, International Development Research Centre: Mr. Chair, thank you for having us two.
[English]
I emphasize that I am not speaking for the government when I speak on any foreign policy issue. My pew is far removed from the formulation of Canadian policy. I hope honourable members will bear with me in that regard.
I am honoured to have served as India's High Commissioner for a few years, as the chair noted. I am currently writing a book on Indian foreign policy, which has allowed, indeed forced, me to try to see the rest of the world through Indian eyes rather than our eyes. That process has been an education for me, of course.
I have read the remarks of the Indian High Commissioner and his lively exchange with members of the committee. I thought the exchange was remarkable. I will not cover the same ground because I think the High Commissioner covered it well.
Rather, I will try to describe briefly how Indians might view Canada at this point in their history. The period is one of transition to a greater role in international relations, but one that is, to a large degree, still unformed as India deals with its domestic challenges. This point was made by the Indian High Commissioner.
It is important to understand that our history is different from Indian history. We both proceed, to a large degree, from British Empire. However, while British Empire was a relatively happy story for Canada, it was not a happy story for India.
The empire in India was run for Britain's sole benefit. Any collateral benefits that accrued to India were only that. When India became independent in 1947, the leaders of the Indian Congress held a deep suspicion of imperialism and, it has to be said, the West. There was not a particular project at the outset of Indian foreign policy, but the sense of having been ill-served by the colonial adventure was naturally strong.
It inclined India — excessively in my view and in the view of many Indians today — towards sympathy with communist narratives in international relations at the time. India was much softer on the Soviet invasion of Hungary than we would have expected it to be, and than we were. However, that inclination largely proceeded from an anti- imperialist agenda. More positively, India participated in UN peacekeeping fully and enthusiastically from the outset and continues to participate today largely.
Canada-India bilateral ties were much more affected by the anti-imperialism of early Indians than we realized in Canada. Relations were cordial between Mr. St. Laurent and other Canadian prime ministers and Mr. Nehru, but they were not close.
As the Indian High Commissioner outlined, two issues came to bedevil the relationship. First was the area of nuclear cooperation. India conducted a test in 1974 made possible largely by Canadian technology provided for other purposes. Canada and others in the international system held this strong complaint against India for a long time.
However, soon the Indians had a complaint of their own about Canada, and that related to what they perceived as strong support from fringe elements in the Indo-Canadian community for the ``Free Khalistan'' movement in the Punjab, which Indians perceived as a dagger pointed at the heart of their federation in India.
This perception culminated in the Air India bombing, which we all remember as a Canadian tragedy. However, of course, it was largely, on the human scale, an Indian tragedy, as so many of those killed were Indian.
These wounds festered on both sides for a long time — until about eight or nine years ago, I would say. Then, paradoxically, in the wake of a second set of Indian nuclear tests and nuclear tests in Pakistan, I think, perhaps, Canadians came to be of the view that the ``horse was out of the barn door'' and that having conniptions over it was not helpful. The Indians also felt it was time to move on to a more positive agenda with Canada.
This change happened as the Indian economy was liberalizing and Indian engagement with the rest of the world, particularly with the West, was expanding rapidly.
There have been always several positive bridges between India and Canada. The first is the Indo-Canadian population: Nearly a million Indo-Canadians, almost 3 per cent of our population, contribute tremendously to Canada and bring to it things it needs, such as entrepreneurship, dynamism, hard work, family values, et cetera. These contributions are positive but they also created a bridge back to India. The experiences of Indo-Canadians related back to India were portrayed positively and created a positive image of Canada amongst Indians.
Education is second, as mentioned by Mr. Curtis. So many Indians early on were educated in Canadian universities and took back to India positive memories of this experience. They communicated these positive memories. As Dr. Curtis mentioned though, the engagement at the educational level is no longer what it was.
Where is India today? India has experienced high economic growth for a long period now, and this growth has changed the way Indians perceive themselves and the way in which they are perceived by the rest of the world. Twenty years ago, India was seen principally as a country of benighted, poor masses underserved perhaps by their government. Today, India is seen as an economic powerhouse, albeit one with large populations that continue to live in poverty, particularly in rural areas.
Everyone is courting India because it is a great market of the future, as the Americans saw first. This was the reason the Americans negotiated an agreement on nuclear cooperation with India. If India had not been a great market of the future, I doubt the Americans would have gone to the trouble of making the Indo-U.S. nuclear deal one of their make- or-break foreign policy issues of the early 21st century.
How do Indians see the world? First, their neighbourhood matters to them tremendously, and the neighbourhood is a turbulent one: Pakistan, need I say more; Nepal, currently in full government crisis; Bangladesh, recently in full government crisis; and Sri Lanka, with a worrying situation pertaining to the plight of civilians at the tail end of the civil war there.
Indians have a great deal to worry about in their neighbourhood. It is an unstable one. They are the anchor of South Asia. Could they have done more to build positive relationships with their neighbours? Doubtlessly they could have. However, they have been trying hard for the last ten years or so to be a more engaged and positive neighbour to the countries in the area.
Second, the great powers: India sees itself as an emerging great power. They are conscious of the extent of poverty in India. They are conscious of the deficit in infrastructure and in public education, but are confident they will be a great power. They are confident they will be a great power because, until the British Empire, they had always been a great power. Therefore, to them it comes naturally to think of themselves as a major player in the world.
With India rising, and other developing countries rising — we think of Brazil and China, but there are a number of them — obviously Canada is not the first priority for a country like India. Canada is a country that benefits from a positive rather than a negative image. It is a country that is of interest to India as part of a larger North American market. It is a country of interest because we are rich in natural resources and India has a huge population hungry for natural resources. Our service sector is much admired. Indeed, the Indian service industry is competing in Canada: in pharmaceuticals, in retail banking in Ontario, and so on.
However, we should not kid ourselves that we are a primary concern of Indian foreign policy or economic policy- makers. We are a respected interlocutor but, perhaps, not of the first rank, from their view.
Finally, I wanted to say a couple of words of a technical nature relating to earlier comments made to this committee; they relate to economic figures in the bilateral relationship. One thing I came to realize while I was in India was that both the trade and the investment figures between the two countries are heavily distorted.
Take Canadian exports to India, for instance. Many of those exports do not flow directly to India; they flow first to countries with which India has free trade agreements: Mauritius, Sri Lanka and Singapore, for example. The exports turn up in those trade figures rather than in Indian trade figures, although the ultimate destination is India.
Second, on investment, curiously — and Dr. Curtis is more of an authority than I am — takeovers of companies do not count as investment; they do not count in investment figures. When a Canadian company takes over an Indian company, that investment does not appear. When, as happens often, an Indian company takes over a Canadian company, even a large one like Algoma, it appears nowhere in the investment figures, even though it is the most relevant thing that has happened in investment.
In fact, Indian investment in Canada has been significant in the last three or four years, which signals how seriously the Indians take the Canadian economic market as a stable and valued performer. Canadian investment in India has remained unremarkable, to put it one way.
The trade and investment figures need to be looked at skeptically and, if you decide to look at them a bit more closely, I invite you, if you have the time, to bring in a real expert on what is happening in the economic relationship, so you can have a better idea than the raw figures translate for any of us looking at them.
Senator Stollery: I have a couple of questions. I listened to an interview with Sir Nicholas Stern last night, and I received a transcript of the interview. I suppose this question is directed at Mr. Curtis, but it does not matter who answers.
As honourable senators will know, Sir Nicholas Stern wrote the report on environmental change while Chief Economist of the World Bank. He is probably the preeminent person in this field at the moment. Mr. Stern says that we should think about the kind of economy we are creating for the future. The low-carbon economy will be the big growth story for the next two or three decades.
To put that point into context, Mr. Stern is talking about the climate change effect on economies. Sometime at the end of this century or early next century, the temperature will be 5 Celsius degrees higher relative to the mid-19th century. The world has not been at that point for 30 million years. Humans have been around for only about one hundred thousand years.
This question is for either witness. Have you any thoughts on this subject?
As Mr. Curtis said, what may lead Canada out of the recession is exports of raw materials. It is not much of a stretch to think that China, with its 9-per-cent or 10-per- cent growth, will be a great customer for raw materials. Alberta, in particular, and Saskatchewan have a certain dependence on oil exports. It seems to me that oil exports do not qualify. That will be a problem in a low-carbon economy. Whether it is in this generation or the next, there is no question that these issues must be dealt with. What do you say in that regard?
Mr. Curtis: I will be brief.
Climate change is as significant in this century as the abolition of slavery was in the 18th century. It is probably the most significant public policy issue in front of citizens of the world, if I can put it in those terms.
Sir Nicholas Stern is considered to be closer to the extreme, but many scientists support him. You quoted the increase in temperatures of 5 Celsius degrees. That increase is a scientific estimate.
Be that as it may, the fact is that it will change short-term economic prospects, medium-term — say the next decade — and well beyond. Climate change will affect different countries differently. It is one of the major challenges for the world, not only for us in the developed world, but it is a large question for China and India. Mr. Malone might know better in terms of India.
My sense is that it is a significant issue to balance the social order and economic growth in China. Since the reforms of 1978, which are the basis of the strength of the Communist Party of China at the moment, I think this balance is their major problem and issue as well.
The issue is before all of us. You can get into every corner of the issue, but it is probably the issue of the century.
Mr. Malone: In regard to India, Canada and India share one unwelcome phenomenon. That is melting ice. Canada's North is melting and the Himalayas are melting. The effects in both countries will be challenging and perverse.
They will present opportunities also. Indians are always looking for opportunity in disaster. They are alert to the fact that whatever goes on in multilateral negotiations relating to climate change, India will have to take action of its own for its own reasons. The flow of water from the Himalayas is likely to be less. Effects of climate change throughout India are likely to be unwelcome and they are keenly aware of this fact.
They are also keenly aware that Canada is a high-tech country and that we have focused on environmental technologies for some years. I will disclose something that is not sensitive from my past. When I presented my credentials to India's president in 2006 — he is one of India's great scientists, Abdul Kalam, who visited Canada last year — the first thing he talked to me about was Canadian environmental technologies and how impressed he was with them.
In the bilateral relationship between Canada and India, the challenges that climate change present to both countries can be an economic and research and development opportunity for Canada to engage with India. Canada joined a group of countries, then called the Asia Pacific Six, — now with Canada, it is seven — a couple years ago to engage on environmental issues. We have significant opportunities there. I think our science community in Canada, and our high- tech people who commercialize science will be tremendous boons to the Canadian economy and its role internationally in years to come.
Senator Zimmer: I will give a preamble, then ask my questions.
Climate change is forcing communities around the world to adapt their agricultural practices and the use of water resources. In India, for example, the International Development Research Centre, IDRC, supported research that noted large swings in level of participation, stream flows and groundwater. In addition to changes in climate, rapid shifts in patterns of trade investment and competitiveness, environmental degradation and resource use are also common. However, when communities face uncertainty and change, conventional planning scenarios are no longer useful.
Researchers from the International Institute for Sustainable Development in my home province of Manitoba and The Energy and Resources Institute in New Delhi are identifying farmers' adaptive practices in two Canadian provinces — Manitoba and Saskatchewan — and in six Maharashtra state villages in India.
Some adaptive practices are crop insurance, land drainage, temporary migration employment and taking children out of school to work as farmhands. Also, the research aimed to help policy-makers understand how this community- scaled adaptation links to policy and how policy can adapt to unexpected circumstances.
In your opinion, what are some of the necessary key resources required to sustain economics in India? What is being done to combat the negative effects that have surfaced as a result of the recent economic growth such as an increased population of citizens living in poverty? Would you say similar sources of sustainable economic success can be applied to countries facing similar rapid economic growth such as China?
Mr. Malone: Thank you, senator, for those remarks and the question.
India faces enormous developmental challenges. Some have been brought into focus by rapid growth in some sectors of the economy because other sectors have lagged. The agricultural sector in India, which many Canadians know well, did not keep up after the green revolution in India with progress in the services sector and, to some degree, in industry.
The links between Indian and Canadian agricultural exports go back a long way. When one looks at the University of Saskatchewan or the University of Guelph and other institutions — some in Quebec — with strong agricultural research programs, many of these universities were engaged with India years ago. Here is a small historical detail: India's Minister of Agriculture, one of India's most powerful politicians, Sharad Pawar, started his career in Ottawa in the Prime Minister's office as a Commonwealth exchange fellow in 1965.
Canada regularly exports large quantities of wheat and pulses to India. The agricultural relationship is not mentioned much when we talk about India and Canada because it has been so successful. That foundation is a good one on which to build more success in the future.
You mentioned groundwater. The problem is terrible in India. Excessive or wasteful use in agriculture combined with overuse of fertilizers, has led to serious problems. Fertilizers, when overused, become toxic for groundwater.
After a long period of not investing in agriculture, India is reinvesting and, in my view, there are a lot of opportunities for Canada there.
There are areas India has to worry about, looking ahead. The first is education. Indians are proud of their demography; of having the country with the youngest population profile of any major country in the world. That demographic could work well if these young people turn out to be skilled or highly educated. However, if they are undereducated, the so-called ``population boom'' could turn out to be a population bomb.
In my mind, the jury is still out on which it will be because the education sector in India is not performing as well as it should be, though progress has been registered since 1947. In particular, higher education has not prospered in India. Large numbers of graduates are churned out every year. How employable many of these graduates are is a matter the Indian private sector pronounces on regularly, and disparagingly.
Higher education is one big challenge for India, which the next government of India, whichever group of parties emerges from the current election, will have to focus on.
The second is infrastructure. The Chinese started their economic reforms with agriculture first, then infrastructure. India has rather neglected both, and the neglect of infrastructure is beginning to be a major hindrance to the expansion of the economic renewal of the country. The current Indian economic plan foresees a need for $500 billion of investment in infrastructure in India. Frankly, the global economic crisis, which also affects India — though in a much smaller way than it affects us — signifies that infrastructure will remain a major challenge for India and could be an increasing one as time goes on.
I see education, infrastructure and agricultural renewal — all things which Canada can contribute to — as the three biggest challenges.
Mr. Curtis: I will re-emphasize what Mr. Malone has said, and remind senators of the great success The Colombo Plan, Canada's original foreign aid policies, had in the 1950s and 1960s. For any number of reasons, we tend to have let that plan go, as Mr. Malone has said. It is probably important to delve into history once in a while to make that point.
Second, to come back to the senator's question and, more importantly, his comment, as we look ahead, it will be interesting to see how we deal with intellectual property regarding agriculture and research. To some extent, how to encourage useful innovation in agriculture and in other areas — and how to incorporate traditional knowledge, even relating to agriculture — in international negotiations is proving to be difficult for us, India and for all the countries in the world. We are not entirely there yet.
In the current trade negotiations, in the Doha Round of multilateral trade negotiation, Canada and India did not see eye-to-eye on protection for certain aspects of agriculture. That is not especially related to intellectual property, though. However, we should keep in mind that the picture is not entirely rosy.
The Chair: Mr. Malone, I have a brief question. I visited India a number of times and I was there recently, particularly in Gujarat. There are regional disparities that make your comments valid. However, the problems do not exist necessarily throughout the whole country, Gujarat being an example. Do you agree?
Mr. Malone: Absolutely; Gujarat has been a big economic success story, particularly in terms of how it has organized itself. Indians all over the country are innately entrepreneurial and talented. Some state governments have been able to provide, particularly in south India but Gujarat is a northern example, infrastructure support and let the private sector get on with being the private sector and doing what it does well. The private sector has government support but not a great deal of government interference.
The Indian public sector is tentacular and tends to interfere all over the country. We saw Tata Motors, an eminent Indian company, stub its toe badly in the state of West Bengal. Local politics got in the way of it producing its Nano, its new mini-car, so Mr. Tata went to Gujarat. It was not his first choice. It was his Plan B because he was sure it could work economically.
You are right to point to the fact that parts of India, notably the south but also parts of the north such as Gujarat and some others, are steaming ahead while other parts of India, notably the tribal states — Bihar, which borders on Nepal — have performed poorly. In my view, that difference is because the public sector in those states is not able to get its act together.
Senator Andreychuk: Thanks to both of you for bringing some new and practical insights.
Mr. Curtis, you spoke about values and democracy. I think you were talking mainly about China at that point and said that the United States, perhaps, would pay less attention to values as trade and economic recovery become the issues.
Leading from that point, you also talked about international standards: Do we buy into the Western standards or something more international? I would have entered that debate a while back, until I saw that the Chinese want the same kind of standards that we all want. For example, we want food safety. All the standards that we put a lot of time and effort into were not their first preoccupation until their home market started to react.
What standards will be different in the end, as these international standards evolve, from those we have taken years and years to develop within our own cultures? Often, the standards were not driven by government; home issues drove them.
What will be different in these international standards, other than intellectual property, which is a different thing?
Mr. Curtis: That is a good question, senator. I was trying to provoke a bit of discussion, as well. The standards could be largely the same. How one interprets them, how one uses them, how one implements them could be different, as we are seeing today with how the Chinese are handling the flu virus, for example, by locking up young Canadians. The standards are the same but the approach is different.
The general point I make is not that values will be unimportant but that there will be a shift of balance to the values and the power that India, China, the United States, and Europe as a whole will exercise. It will be more complicated for smaller countries like our own, in fact, to work towards, and argue for, international standards.
For example, where it becomes practical — and Senator Zimmer or others will know better than I do — is with pork standards, irrespective of the current problems, where we follow U.S. standards. That means we can export pork to Japan but we do not follow European and the rest of the world's standards so we cannot export to China, for example. That is one particular example. If we look at the export of pork, it is extraordinary, and that is the kind of question I raise, whether Canada ultimately will be forced to choose. I hope that is not the case and we will continue to press for international, worldwide standards.
When driving back from Florida recently I asked a gas jockey in North Carolina: Is it not about time you fellows got up to date and adopted at least litres, if not kilometres; the metric things. I remembered, of course, that it was one of the first acts of the United States Congress when it assembled in 1789 but has never been implemented. He said it was easy why they have not done that: We don't want the People's Liberation Army or the Red Army to know how far it is to Washington. Case closed.
That is America, and that is the kind of thing I touched on; nothing more serious than that.
Mr. Malone: Can I add, though, that a sense of shared political values is a huge asset between India and Canada. Watching Canadian politicians and Indian politicians interacting, they are speaking essentially the same political language with huge local differences. I am convinced that President Bush was able to pull off the so-called nuclear deal with India in the face of skepticism in Congress on the non-proliferation aspects of the deal mainly because many members of Congress were more comfortable with India as a democracy, were more likely to think of it as a country that had checks and balances and would be a responsible actor in international relations than might have been the case with other partners.
Now, we can also delude ourselves about how much values draw us together, but I think shared democracy is a significant asset in bilateral relations, and certainly between Canada and India.
Senator Andreychuk: I have one quick question to follow up on this issue of democracy in India. One of the fascinating things is to see the population, the poverty, the diversity and the incredible number of languages. We always talk about our own diversity. We only have to go to India to come back and say, I think it is easier in Canada. A lot of Canadians would be shocked at that comment.
What makes the Indian democracy so resilient that it seems to be able to withstand all this buffet: moving close to communism but not embracing it; and moving to liberalization and back a bit now? What makes their system resilient against incredible odds that cannot be matched in history elsewhere?
Mr. Malone: That is a good question, and different historians answer it in different ways, so my take is purely personal but guided by Indian historians.
Mr. Nehru, although an aristocrat, was an aspiring democrat. He always wanted India to be a democracy, and during the 17 years that he was Prime Minister of India he succeeded in those early years in anchoring the habit of elections, the habit of give- and-take, and he assumed his reverses with equanimity in a democratic system.
Then, importantly, his daughter Indira Gandhi, who had a much less democratic outlook and a strong autocratic streak, imposed an emergency on India in 1975. The most important development for Indian democracy over the last 60 years was the failure of that emergency. She was thrown out of office at the next election in 1977. She absorbed that defeat, moved on, and returned as a more democratic prime minister later. There will not be another emergency in India, in my view. That failure was such a political defeat.
I think now democracy is deeply rooted. Indians vote in large numbers. In particular, the Indian poor vote. It is one of the few things in the country that is free. The Indian poor used to vote in ethnic blocs, religious blocs or caste blocs, but that voting has broken down over the last 10 years. Indians now, including poor Indians, vote where they think their interests will be well served. In the last five state elections in India that occurred a month after the Mumbai bombings, all the experts thought the Mumbai bombings would be the dominant issue. They were not. The electorate voted on local issues. They rewarded governments they perceived as competent by returning them and they threw out governments they felt had not served them well.
The Indian electorate is also changing as time goes on, and I am confident about the survival of Indian democracy, although the fracturing of the Indian polity into many small parties may not be healthy for India.
[Translation]
Senator Dawson: Mr. Malone, you spoke about figures that influenced us in the past. You don't have to answer, but I would greatly appreciate if you would recommend witnesses who would be able to give us a more accurate picture of the situation.
Secondly, you have not mentioned services, and particularly financial services. Is it because they are not important enough or because all is well in this sector?
Mr. Curtis, you addressed the dollar issue with Senator Andreychuk, whether or not we should adopt the dollar financial standard or another one. What do you think this other financial standard would be?
[English]
Mr. Curtis: I want to answer the statistics question quickly, although you directed it to my colleague. Perhaps the committee would find it useful to have the assistant deputy minister of business economics at Statistics Canada discuss these questions with you because they are issues with respect to every country, not only India and China. Our trade statistics with the European Union are accurate but they are not as useful as they might be. Most particularly, our trade with the United States is not perfect, but the reasons are complicated reasons.
In the case of the U.S., we use their statistics and they use ours, therefore the quality depends on the U.S. border person in terms of Canadian exports asking where the product came from, and not where is it going. Whether it is going through the United States to South America, Rotterdam or Shanghai is of no interest to the U.S. border person: if it is coming into the United States, it reflects trade with the United States. In fact, our trade is overrepresented with respect to the United States and under-represented with the rest of the world.
Investment is a different question. It is control versus numbers, and that is a point that Mr. Malone raised.
I am sorry that answer was a little off topic, but I think it is important to be clear that numbers are indicative. Only the media like numbers because numbers make them look well grounded in fact but we have to be careful about the use and misuse of those statistics.
On standards, first, on services more generally, our statistics are not as good. On the whole, in Canadian environmental services and financial services, we are performing rather well in most of the countries that we are addressing tonight. However, we are not performing as well as one would expect with the economic structure that we have. We are not performing as well, for example, as what I take to be our competitively similar country, Australia. Australia has done a far better job, except in financial services where we have done well — financial being both banks and, in particular, insurance companies. The situation is complex, so one must look at it sector by sector by sector to come to a good judgment.
Finally, in terms of standards, financial standards are being prepared multilaterally under the heading of the Group of 20. Interestingly, we have not referred to the working group on international financial regulations yet but it is chaired by a Canadian and by an Indian. The Canadian is the Bank of Canada and the Indian I think is from the Reserve Bank of India.
Mr. Malone: He is from the Reserve Bank, the deputy governor.
Mr. Curtis: That is right, the deputy governor. Through Canada punching above its weight, if I can put it in those terms, we might have some influence on the shape of international financial regulations. We are proud of our own regulations and have been, but that ticket will wear out if we do not continue to work to ensure that we have international, worldwide standards, and stability and predictability with those standards in general. I was worried about standards with respect to goods and other services as well as the financial services.
Mr. Malone: I think the suggestion about Statistics Canada is an excellent one. It is puzzling to those of us who try to quantify Canada's international economic relations and run up against the often-significant gap between statistics and what we know the reality to be.
Mr. Curtis: What we think the reality to be.
Mr. Malone: Sometimes we actually know it.
Mr. Curtis: This is an ambassador talking.
Mr. Malone: On the financial sector, speaking of India, first of all, the Indians did not liberalize their financial sector until recently, and then they did not liberalize it fully, so Canadian banks and insurance companies in India are not free to wholly own operations in some sectors of the economy. Sun Life has done tremendously well out of a partnership with the Indian firm, Birla, and has been successful in reviving a name that was great in Indian insurance in the late 19th century. The Bank of Nova Scotia has done well in India, particularly in the gold trade, because it was willing to tough out the bad years in India to be in place when the good years started up again.
Canadian banks have dipped their toe into India every now and then but often are distracted by events closer to home in the U.S. market or in Canada itself. I think there are tremendous opportunities in the future for Canadian financial services, not least coming out of the current crisis where Canadian financial services will have made a nearly unique name for themselves as being well grounded and well managed. The international potential, if prudently managed, should be tremendous for Canadian financial institutions throughout the rest of the world. That potential will be the rewards of prudent management, in my view.
Senator Wallin: Thank you both for coming here. I have a couple of complicated questions but easy to answer in one respect. I will go back to the trade. You know the figures that are out there. Our exports to India are 0.5 per cent of the Canadian market while imports from India to the Canadian market are at 0.5 per cent. Even though China is our fastest-growing partner, we still conduct more trade in one week with the U.S. than with China in a year. In percentage terms, how out of whack do you think those figures are that we all operate on and use every day? You both seem to suggest we are not grasping a whole chunk of activity.
Mr. Curtis: Quickly, senator, my central point was: Given geography, given the relative size of the economies we are dealing with, either bilaterally, Canada to India, Canada to China, Canada to Korea, Canada to Brazil, our performance is B-ish. It is not bad. It is not D. It is not great and each country's total is a little different, but on the whole, overall, it is about what one would expect. We must not forget that this country made a fundamental choice in 1988 to integrate a large portion of its manufacturing sector, having started in automobiles in 1965. That choice was a conscious, political one.
Given the integration, for better or for worse, the numbers that you have quoted are not terribly out of line. As I say, my colleagues and I have worked on comparing Australian to Canadian performance, and it is surprisingly not out of line. We have to look at each sector, but performance is not out of line.
Mr. Malone: My view personally is, and I am appearing in a personal capacity, the U.S. relationship is critical for Canada. If we do not get that relationship right, nothing else matters all that much. That being said, Canada can walk and chew gum at the same time, and that is why it is important to look at other major economic powers around the world to see what we can do, and what of importance is going on with them.
Interestingly on India, the story is not bad because we are conducting about 10 per cent of the business in India that the U.S. conducts, and that is exactly what we would expect. Far from it being a tragedy of underdeveloped trade potential, we are ticking along okay in India.
I think there are areas of comparative advantage, agriculture being one for Canada, partly because the Indians are comfortable with Canadian standards in the area of grain. They have a running dispute with the United States over phytosanitary standards applied by the U.S. government to U.S. grain, and that dispute leaves the door wide open to Canadian exports, which I am glad to say we have been taking advantage of.
We have to focus on the United States as a priority and as our senior economic relationship. We will find that with countries like India there is a triangular element to the relationship. Why is a country like India as interested in Canada as it is? Why are Indian companies investing as much in Canada as they are? If Canada were free-floating in the middle of the Indian Ocean, I am not sure that much would take place. I think our proximity to the U.S. and the free trade space with the U.S. is a significant advantage when other countries look at us as a place to invest, including in services.
Senator Wallin: You know my biases on that subject, so we could not agree more.
Mr. Malone: I share them.
Senator Wallin: Yes, exactly.
Another of my areas of interest, as you well know, is Afghanistan, and this answer could be almost yes or no. Can India do anything for us, the West in particular, on the terrorism front with Pakistan?
Mr. Malone: The question is a delicate one because, for Indians and Pakistanis, Afghanistan is part of their neighbourhood. Both countries have an intense relationship — including an intense emotional relationship — with Afghanistan. The Indian government well appreciates that its relationship with Afghanistan, while parallel to that of countries in the North Atlantic Treaty Organization, NATO, and engaged in similar ways in development work — although in the Indian case not military action except in a self-defence capacity — is something that could, if it turned into military action, greatly aggravate tensions with Pakistan.
The Indians themselves are tremendously alert to how delicate their presence in Afghanistan is for Pakistani neighbours. What I found useful was for Canadian politicians visiting India — and this situation often happened — to engage with Indians on how they saw Afghanistan from their perspective. Their security worries are considerable on Afghanistan.
The single worst security incident in the memory of the Indian political world was the hijack of an Indian flight — in Nepal by Taliban figures — to Kandahar some years ago. India renounced all its principles and released a number of prisoners to the hijackers. The Indian foreign minister flew on the flight as a hostage to Kandahar. This event is seared into the political memory of India. Everything to do with Afghanistan is acute for India, but the Indians are mature enough as a government to know that, for Pakistan, their activities in Afghanistan are a sensitive topic, and they have aimed to focus those activities squarely on development.
Their development program in Afghanistan recently exceeded $1 billion spent. That sum is significant for a developing country with many poor of its own. Development has focused primarily on infrastructure, but to some extent on schools. Neither NATO nor the Indians have seen it to their advantage to team up. While they are each happy the other is present with its particular mission and activities, partnership would be too threatening for Pakistan, and that is well understood.
Mr. Curtis: I want to address Senator Dawson's point as well as Senator Wallin's point to re-emphasize to the committee the triangle concept that Mr. Malone spoke to in terms of economic practice. We must remember that economics is not necessarily bilateral; in fact, a lot of it is multi-country and, indeed, a lot of the Canadian worry about being overly dependent on the U.S. is almost irrelevant. If the U.S. is multilateral and we are integrated with the U.S — on our manufacturing at least — that integration makes us multilateral as well. It is important to put the economic relationship of Canada with the world in that broader context. What we call the global value chain is real — although it is under pressure now with the slowdown — and it is something, in terms of looking at statistics, that is important to remember.
The relationship is not only Canada-India; it is Canada through Japanese, Chinese and other partners to work, trade and invest in India.
Senator Zimmer: On page 3 of the briefing notes prepared for this committee it said 10 per cent of India's labour force works in the formal sector; hence 90 per cent of the population is involved in non-taxable and non-monitored economic activity. Despite this figure, India has been able to post staggering growth rates.
Mr. Malone, as Canada's former High Commissioner in India, I am sure you are able to grasp the importance of India's informal sector, but can you explain to this committee some of the strengths and weaknesses of India's informal sector? Do you have any advice with regards to what the country needs to do to reach the next step in its development?
Mr. Malone: Senator, you were kind enough to mention earlier my current institution, the International Development Research Centre. We fund work in India on exactly these questions. How can all the huge qualities of Indian human capital be best marshalled to even more economic success, but also greater social protections? Social protections have not always been, in India, what we have in Canada.
I recently had occasion to look in the agriculture field at the Chinese model and the Indian model of development. They have been completely different, and that is why the two countries are of great interest to other developing countries. They are considered two radically different models from which to pick and choose.
The Chinese, you may remember, essentially privatized everything in the late 1970s and early 1980s and believed that strong economic growth would allow the population to do without social programs and protection.
In India, the 90 per cent of the population that is working in the informal sector is often supported by extensive government social programs. For example, for the poorest in India, the current government of India launched a program called the Rural Employment Guarantee Scheme, which entitles any poor Indian family to 100 days of labour paid for by the government. If these families cannot find anything else, the government will employ them for 100 days. The governing party announced in its recent platform that the guarantee would be extended to every individual in India, not only every family. That guarantee is a major expansion of the social safety net in India, whether it is pulled off or not.
China had a lot to worry about in the current crisis — because essentially there was no social safety net left, and this situation is what gave rise to worries about large numbers of floating urban workers returning to their homes — in India, a multiplicity of government programs are aimed to help the poor. The programs do not provide help efficiently. Little of the money, unfortunately, reaches the poor, but the Indian government is becoming better at it, including in a number of ways Canadians have advocated.
We have advocated e-Governance to cut out middle people and corruption, and that approach is beginning to take hold in India. People will have direct access to the government money that is owed to them.
I am optimistic about the 90 per cent who are not employed in the formal private sector. The private sector in India is expanding fast, and although its labour requirements are growing more slowly than one might hope, young Indians are hopeful for their futures.
One of my great pleasures of living and travelling in India was experiencing the innate optimism of Indians. The good-news story in the private sector is carried to the Indian poor by satellite television, which reaches everywhere in India now. Instead of depressing Indians who are poor, seeing that the lives of other people are improving, rather like Americans they think: Let us go and be part of that action.
Indians are more, in my experience, like Americans than any other nationality. They are innately entrepreneurial. They are optimistic. They are hard working, as we know in Canada from our Indo-Canadian compatriots.
It is hard not to be optimistic for India. Many of these qualities are also present in China, which is one of the reasons China has been so successful.
Senator Stollery: It is interesting listening to the conversation about India. I know the area from the Afghan border to Rangoon reasonably well. What is interesting about Rangoon is that it is the place where the East Bengalis and the Chinese meet. The Chinese were traditionally shoe repair people in Calcutta. In Rangoon, the East Bengalis are the shoe repair people.
The committee is also seized with the Export Development Corporation, about which you are both knowledgeable. Some of us wonder why the ten-year review, which is conducted by an outside consultant, is necessary. I stand to be corrected, but I believe the current review, which this committee was presented with about six weeks ago, cost about a million dollars. I do not question the value of it, but I and some members of the committee wonder why the ten-year review, which is then presented to a parliamentary committee. It seems to me the parliamentary committee should be the agency to perform the review, possibly in consultation with the consultants, either in the House of Commons or in the Senate; I am not wedded to anything.
Why do we need this ten-year review when the trading environment, as we know, is moving more and more quickly? Can that review be conducted by Parliament when the Export Development Corporation presents its annual report to Parliament? Can you give us the benefit of your wisdom?
Mr. Curtis: Again, I have not been part of that group of activity, although I have followed economic work in the city now for the last 30-plus years. Like the Bank Act, the Export Development Act, which became the Export Development Corporation, had the same ten-year review provision. That review was implemented by Parliament in the 1950s. It strikes me that Parliament, the house and Senate, could change that provision if there were the willingness to do it.
Trade finance is a tough area, but it does not change much over the years. We more or less know how it works. It might turn out that one does not need as large a review of the various aspects as was the case perhaps in the 1960s, 1970s and 1980s. I cannot speak to whether it should be done only in committee or audited by committee. I only make the point that the OECD has looked at trade finance; various countries have changed their institutions to support international trade where it was necessary to support it, particularly for small and medium-sized business, financing insurance. I suggest one would have to go to the government in office and recommend that legislative change as part of the machinery of government over time.
Mr. Malone: I have a couple of comments. With my India hat on, as the senator mentioned the Export Development Corporation specifically, I want to say that EDC played a tremendously positive role in India. Canadian firms were tentative about India, and still are to a degree. The presence of EDC and the willingness of EDC to provide a degree of guarantee, of insurance and encouragement, were tremendously important. EDC is a respected actor in its own right in the Indian financial markets. In the Canadian High Commission, we had a terrific senior EDC officer, who is now the EDC vice-president for Asia and has moved to Singapore; a big plus.
Second, perhaps purely speculatively, I think of my own Crown corporation's various reviews. You noted rightly that we present an annual report to Parliament. We are audited every year by the Auditor General, which we find helpful, because occasionally she will recognize a weakness that we had missed; and every five years she conducts an in- depth review of IDRC programming, and that review we also find useful.
It may be that the ten-year review of EDC is useful to EDC. I am only speculating whether that is the case, because we find the reviews of IDRC useful to ourselves.
Senator Stollery: Your reviews are conducted by the Auditor General, which is a different story.
Mr. Malone: Indeed.
The Chair: Thank you kindly, gentlemen. I am sure my colleagues will agree that your testimony has been enlightening, helpful and useful, and it will enhance our report. Until the next time, we extend good wishes and a good evening.
To my colleagues, thank you all for coming. The meeting is adjourned until 4 p.m. tomorrow.
(The committee adjourned.)