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Proceedings of the Standing Senate Committee on
Foreign Affairs

Issue 21 - Evidence


OTTAWA, Wednesday, May 27, 1998

The Standing Senate Committee on Foreign Affairs met this day at 3:23 to examine and report on the importance of the Asia-Pacific region for Canada (developments in East Asia).

Senator John B. Stewart (Chairman) in the Chair.

[English]

The Chairman: Our first witness is Raymond Chan, who was first elected to the House of Commons in 1993, and re-elected in 1997. Mr. Chan is a professional engineer who worked at the TRIUMF Research Centre at the University of British Columbia. He is a business man, and in 1989 he founded and chaired the Vancouver Society in Support of the Democratic Movement. He came to Canada in 1969, and he became a Canadian citizen in 1974.

Please proceed.

Mr. Raymond Chan, P.C., M.P., Secretary of State, Asia Pacific, Department of Foreign Affairs and International Trade: In early April, I visited Indonesia with Jim Peterson, the Secretary of State for International Financial Institutions. We were accompanied by officials from the Department of Foreign Affairs and International Trade, CIDA, EDC, and the Department of Finance. Secretary Peterson went on to Malaysia and Singapore, and I travelled to Manila.

Our mission's objectives were to deliver a $280 million bilateral aid package for the Indonesian people, and to encourage the Indonesian government to enter into good, serious negotiations with the IMF negotiator in Jakarta. At the same time, we encouraged the IMF to be more flexible when demanding actions that are sensitive to the well-being of the people, such as some of the price subsidies. We also hoped to assess where future Canadian support might be most appropriate. Our overall initiative was to demonstrate Canada's concern. We also wanted to show that Canada maintains a presence in the region.

When I was in Indonesia, we met with the then-President Suharto and a number of the cabinet ministers, including the Minster of Justice, who still continues in that post, and the Coordinating Economic Minister, Ms Ginandjar, who also maintains her position. We also spoke with Mr. Juwono, the Minister of the Environment, about the forest fire issue. He has since moved to Education and Culture. The meetings went very well. The message was delivered to both the government and the IMF negotiator.

We also met with local non-government organizations, or NGOs. We wanted their assessment of the situation in Indonesia, both on the social side and the political side.

In Malaysia, Secretary of State Peterson called on Anwar Ibrahim, who is both the Deputy Prime Minister and the Minister of Finance. He also visited the Governor of the Malaysian Central Bank. In Singapore, Secretary of State Peterson met with National Development and Second Minister of Finance Lim, and Second Minister of Trade and Industry Yeo.

I went on to Manila and called on the Mr. Caday, who is the Acting Secretary for Foreign Affairs. He is also the Secretary of Socio-Economic Planning, and of the National Economic Development Authority (NEDA).

We were very pleased with the reception that we received at these meeting, and by the frank discussions that we were able to have. Canadian bilateral assistance in Indonesia was well received. It received front page coverage -- not only in Indonesia, but also in Vietnam, Malaysia and Singapore.

In Manila, I met with executives from the Asian Development Bank -- the directors that are in charge of each country -- to assess the situation. In Indonesia and Manila, we discussed the forest fires as well as the economy. At that time, the fire was raging fiercely in East Kalimantan, and a resumption of the dry season was causing a lot of trouble there. CIDA is preparing to work on that issue with other donors and with Indonesia.

Dramatic and historical changes have taken place since I left Indonesia. This is due to massive demonstrations by students and other advocates, followed by tragic violence and bloodshed in Jakarta and elsewhere. Last week, this led to President Suharto's resignation, and the investiture of former Vice-President Habibie. President Habibie has appointed a new cabinet, and declared his commitment to reform, including the holding of general elections. Canada welcomes this commitment by the new Government of Indonesia, as it will provide an opportunity for the country to launch genuine political, economic, and legal reforms that meet the democratic aspirations of the Indonesian people.

The release of political prisoners began this week, and there are other encouraging signs that President Habibie and his government are committed to reform. It has been reported that President Habibie is working in a reform council with leading advocates of reform such as Amien Rais, and that the Indonesian Government has lifted a ban on independent trade unions such as Mr. Pakpahan's Indonesian Prosperity Trade Union. The Information Ministry is also abandoning the practice of revoking the publishing licences of press publications critical of the government. Further, President Habibie and other government ministers are asking their relatives to resign government and legislative positions obtained through family connections.

Canada applauds these moves, which will help to restore international confidence in Indonesia as a country committed to setting a new standard of openness, transparency and democracy for its people.

It is not Canada's place to prescribe the steps that Indonesians should take to advance the necessary reform agenda. There are, however, several elements that we consider to be important to the process. These include: the release of political prisoners, the revision of laws on elections, political parties, subversions, and independence of the judiciary, free and fair elections as soon as possible, and investigations into allegations of misconduct by the police and security forces during the recent demonstrations. All of these have been carried out by the government.

The implementation of economic and financial reforms, such as the introduction of competition into the economy, is important, and it was agreed to with the IMF. The Indonesian government needs to carry out these reforms. The early ratification of international human rights instruments is desirable, as is a political settlement in East Timor that is both just and internationally acceptable. These three points are important issues that must be dealt with.

Let me share the feelings of ADB executives with you, expressed to me during my meeting in Manila. They feel that, although Malaysia may not be as involved in foreign borrowing as other countries directly impacted by the financial crisis, it may be most at risk should Indonesia take a turn for the worse. They feel that Malaysia has a much greater investment in Indonesia, just as Singapore does. They do believe, however, that Malaysia could have stronger monetary backing, and that it should be recovering from the recession in two or three years.

The economic situation in Korea should be fine in three to five years. The implementation of the IMF package is helping to turn things around. The demise of the Korean economy means that no single country has either borrowed heavily from Korea, or significantly lent to it. Korea's loan was spread amongst the other countries, so no one tried to take ownership of the Korean problem. Therefore, it must fight harder to get support from the IMF.

Let us consider China. The experts in ADB feel that the macroeconomic situation is good, and that it should be able to hold out against the depreciation of the Chinese currency. They feel that China would be able to withstand the pressure.

The ADB experts feel that Thailand has consolidated, and that it is on the road to recovery. In spite of the crisis, many international players have not reduced their involvement in Thailand's economy, and many joint venture enterprises are turning their attention to the export market. Specifically, a few years ago Japanese investments in Thailand started to target the manufacture of products for export purposes rather than for domestic consumption.

Even with the economic crisis, food production is still very strong, and the drought has not hurt Thailand as much as it has Indonesia. Owing to this, it is felt that social unrest will not be a problem in Thailand.

Of the affected countries, the Philippines is the least impacted by the economic crisis. Even in the midst of the economic crisis, it still has positive employment growth. About $7 billion U.S. is remitted from overseas workers, and another $7 billion is coming into the country, although not officially. The ADB officials do not feel that there would be any social problems in the Philippines.

Senator Andreychuk: You said that you had frank discussions with the Indonesian regime, but you have not elaborated on that. At that time, what was the Government of Canada's position vis-à-vis the President of Indonesia? We know what your expectations of the new government are. Did you have the same discussions with the previous government?

Mr. Chan: Yes. Actually, our discussions began before the last trip. In 1996 I went to Manila for the APEC Summit meeting, and I had a long discussion with the Minister of Foreign Affairs. Canada pushed for the release of political prisoners, a political settlement on East Timor, and judicial reform. At that time we even talked about the Human Rights Commission, which was started there with our encouragement.

On this trip we talked with President Suharto, and we appealed for political reform. We also asked that the reports of missing students be investigated. I also met with the Minister of Justice, and I offered our support for judicial reform. We had a very frank discussion about the lack of transparency in the legal process. The Minister of Justice was a professor. He believes in reform, and he gladly accepted the initiative from us. I am very glad that he has maintained that portfolio, because he is a very open person. He believes that a lot is wrong within the country, and that it needs to be reformed.

Senator Andreychuk: Much of the difficulty was with the Suharto family and the cronyism that went on. Did you address that as a prerequisite for your support for IMF moves in the country?

Mr. Chan: The Human Rights Commission was established in 1993, and it quickly became the centre of attention. It became a sort of ombudsperson for all complaints about the government.

There had been a sense of the freedom of the press, which openly asked for Suharto's resignation. The students and the academics openly accessed outside information about the developments occurring inside the country. We believe that the integration efforts with the people of Indonesia were making some fundamental changes within the country. Therefore, we did not want to be too confrontational in our presentation.

Senator Andreychuk: Political change was occurring under Suharto?

Mr. Chan: Yes. It was not systematic change, but the press was allowed some freedom, and the Human Rights Commission was established. These were positive government initiatives. The Human Rights Commission was able to attend the police academies and military schools to talk about rights issues to the students. Such opportunities would help to ferment change from within.

Senator Andreychuk: Would you not agree that the economic crisis brought about the fundamental political changes in the country?

Mr. Chan: It is a blessing in disguise that it happened, but that strengthens our argument. The economic reform integrated the Indonesia economy to the global economy. President Suharto and the Indonesian government could no longer ignore the concerns of the outside world. They had to change.

Senator Andreychuk: I do not understand you. Do you feel that the economic crisis actually brought about the political change?

Mr. Chan: I believe so.

Senator Andreychuk: It was not the limited freedom of the press, and the establishment of a Human Rights Commission?

Mr. Chan: The biggest change is that individuals understand their rights, and they are now able to stand up against the government. That is the major element of change. If people do not stand up for themselves, if they do not understand their own rights, and if they are not financially independent from the government, no economic crisis would help them. The people must demand change.

Senator Andreychuk: Your assessment is interesting. Everything that I have read and everyone that I have talked to indicates that the rioting and change came from the frustration and desperation of the people. No one else has suggested that this came about because the people understood their freedoms, and had access to them. You are the first to state that significant change occurred under Suharto, and I want to know where you base that assessment.

Mr. Chan: The significant change is in the thinking of the people. Independent institutions were established -- think-tanks, academic groups, and the Human Rights Commission. It is amazing how important a factor the Human Rights Commission is in the whole process.

In the beginning, Indonesia committed to establishing the Human Rights Commission in order to avoid a resolution to condemn its human rights record. The NGOs thought that the west had sold out, because the commissioners were appointed by the government. They are reputable people, however, and they began to speak out and to take the job very seriously once they had authority inside the Human Rights Commission.

When I first visited Indonesia, I met with a legal network which was a revolutionary group under the auspices of a human rights group. At that time, the members of the group were very critical of the Human Rights Commission. When I met with them on my most recent trip, I asked them how they felt about the performance of the Human Rights Commission. They told me that it is more than a Human Rights Commission; it has become an ombudsperson.

Anyone who encounters an injustice goes to the Human Rights Commission, and it has tens of thousands of cases into which it must look. Its existence gives people a sense of their rights, and it is amazing how much that propagates into the society.

Senator Bolduc: When I was in Indonesia in 1972, I mostly saw military people. I got the feeling that the country had a very good military establishment. I wonder if the political change from one general to another will really accomplish the changes that seem to be desired by the people. It is a huge government, it is a huge bureaucracy. The replacement of one general with another is not a political solution that will bring about democratic improvement.

How do you see changes coming in? We realize that a few moves have been made, but the changes must be more profound than that.

Mr. Chan: That is right. We are still watching it very closely and carefully. It is very difficult to predict the intentions of the generals, but there must be some kind of power struggle within the military. Suharto must have yielded when he can see that his supporters in the military had been lost to the reform forces, or to the other forces. It is difficult to say whether or not the opposition in the military came from reformers.

If you look at the military establishment, the younger military people generally have much better training and education than the older ones. I met with one of the visitors from Indonesia, a director general within the government, and I pointed out that his country was facing a tough time. His response surprised me; he said that he was going back to be with the students. When he was a student, he was part of the student movement, and he was arrested. Now he is a director general within the government.

The new generation has changed because Indonesia has opened up, and the integration of the country has continued. The only way to help a country change is to help the people change.

Senator Bolduc: Is there a leader in the social movement who could eventually progress to the top? We all remember what happened in Poland, where there was a strong union leader. It was the same situation in Czechoslovakia. It is not so obvious that the social organization in Southeast Asia will produce a leader.

Mr. Chan: I agree. It is difficult for us to see who will emerge as a leader. There is no obvious reform-minded leader who would be able to take over the whole thing.

In Indonesia there are open-minded people both inside and outside the government. For example, the Minister of Justice was drafted into the cabinet by Suharto. He was very reform-minded, as was the Economic Coordinating Minister, who was in charge of negotiating with the IMF.

It is nice to see this new generation moving up into authority. It is not always a good thing to have one strong man take over, however. Deng Xiaoping came after Mao Zedong, and he was supposed to be more open-minded. He had absolute power and a strong personality, however, and he started to believe that he was the only solution for the country. A group leadership in China only began to emerge after his death, and group leadership is not necessarily a bad thing.

Senator Bolduc: Is it possible that such leadership may come from outside the military? The military forces were not on the socialist side.

Mr. Chan: I do not have the information about the military to be able to say who is a reformer and who is not. Even within the military, however, some people have a conscience, and they know that things must change. Indeed, as I travelled across the region, all the politicians in other countries told me that the military entrenchment in the economy is Indonesia's worst problem, and the most pressing difficulty for the government.

Many of the politicians told me that Suharto might not be able to fix the problem, and his successor may not be able to, either. Indonesia still faces a lot of challenges. The country's future depends upon the resolve of the people, and also the resolve of the reform-minded leadership. They are certainly not home-free, but it is nice to see the changes that are taking place.

Senator Grafstein: You referred to the East Timor situation. It has been a bloody civil war, and it has lasted for years. You believe that the release of one of their leaders from prison would contribute to a peaceful settlement. Is that war continuing? Is it still taking lives?

Mr. Chan: The East Timor situation fluctuates. At times, it is quite peaceful, and there are no confrontations. It was very peaceful before the currency crisis. The triparty negotiations are ongoing, at least bilateral negotiations between Portugal and Indonesia. There is also a parallel meeting among the East Timorese, to try to find the best solution for the future of East Timor. Canada encourages a triparty settlement, and we encourage the Indonesian government to give more autonomy to East Timor. At the time, we believed that the issue could only be addressed politically, as opposed to with violence.

During this time of political trouble, we are trying to help the East Timorese rebuild and educate themselves. Our focus in East Timor is on education and economic development. Approximately 60 per cent of our aid money goes to East Timor, but we also recognize that the political flexibility in Indonesia at the time would not allow that kind of change. True democracy in Indonesia would allow a settlement to be reached with East Timor.

Senator Grafstein: As Canadians, we may applaud our government's efforts, which are all positive, but we do not have that much political leverage with respect to the Indonesian government. Traditionally, we have strengthened our political views by working with a multilateral group, where we share common interests.

What steps has the Government of Canada taken to be part of a regional, multilateral activity, one that would be much narrower than the APEC situation? APEC covers the world -- we are not talking about that. What countries would share our interest in facilitating your progressive agenda?

Where do we stand with respect to Australia and New Zealand, who have traditionally been close to the Commonwealth? Has the government given any thought to that as a strategy?

Mr. Chan: I agree that Canada is not a huge power. We are a middle power in the global issue. However, because of our strength and our memberships in organizations such as NATO and the UN, and also because we are objective in pursuing our policies, and we were never a colonial power, we usually have more power than we exercise.

An example of this would be the fact that our ambassador, Gary J. Smith, was invited to witness the release the release of a prisoner. No other ambassadors were invited to do that. Canada was the only country invited to participate in the process, which says a lot about our leverage. We do not go in with a big stick, but we do gain respect. They know that we are concerned about human rights issues, so they want us to be there when they do the right thing.

Canada does work with like-minded countries, such as Australia, New Zealand, the United States, and other European countries that are concerned about the region. We exchange notes, and we talk about our common positions on the issue. We continue to exercise our influence in the ASEAN regional forum, which is a regional structure that deals with security issues. Our dialogue partner this year is the Philippines. We continue to talk to other ASEAN countries that have much more open and transparent political systems, such as Malaysia, Singapore, and Thailand. We encourage them, and challenge them to use their influence on Indonesia to ask for change.

The same thing happened in Myanmar, which used to be Burma. Every time that we meet with the ASEAN groups, we discuss their efforts in Myanmar. There was some concern that the acceptance of Myanmar into ASEAN would tarnish that organization's image, because of the lack of human rights in that country. We also talked about how change could be introduced in Myanmar. We obviously do work inside these multilateral institutions to exert our inference.

Senator Losier-Cool: In your presentation, you mentioned that it is not Canada's role to decide what measures must be taken. In the letter that you wrote after your visit to Jakarta, did you impose any conditions on Canada's foreign aid contributions?

Mr. Chan: There is a $7 million fund targeted for democracy development and human rights issues in our foreign aid program. It is a fund dedicated to those issues, and I expect to draw upon it. Diane Marleau is the minister in charge of that, and I encourage her to allocate some of those funds for this kind of thing.

There are no strings attached to our bilateral package to Indonesia. It deals primarily with humanitarian issues -- wheat sales, medical supplies, and basic import necessities. We do not generally go into a country and say that things must be done a certain way. We always state Canada's concerns, and what we believe to be the right thing to do. That objectivity allows us to have a very frank dialogue with the host country, and we are respected.

Senator Losier-Cool: Last week I was pleasantly surprised to hear Paul Martin talk about a program for women and children. Will that be included in the $7 million?

Mr. Chan: The issue of the status of women is a priority for CIDA, but it is not inside the development fund for democratic and human rights. It depends upon how the programs are structured. A program might deal with both women's issues and institution building. In that case, aid might be able to come out of that fund.

Senator Stollery: Approximately 39 years ago I had the misfortune to visit what is now known as East Timor. It was a Portuguese prison colony at the time, and it was possibly the most dreadful place I have ever visited.

As I was moving from Dili to Baucau, I remember that one really spent one's time with Chinese traders, because even in Portuguese Timor they ran the place. We have all seen the pictures of Chinese traders being burned out in Indonesia, Java, and Sumatra. Even today the Chinese community in Indonesia is really the major economic community.

We remember the terrible massacres in Sukarno years ago. What is the situation there? Is that settling down? Are those people at risk?

Mr. Chan: The Chinese who can afford to leave began to do so about a year ago. The biggest problem is that there are lots of Chinese there, and most of them are not rich. They might run a small business, and then they become the target of a riot. It is a very sad thing, and the problem can be traced back to the monopolies -- how the government works to control the economy.

We support the IMF initiative because it tries to dismantle the government monopolies -- it goes to the heart of the problem. It is difficult to deal with the military on this, because we are taking their bread and butter away.

The new regime is taking reform seriously, because the IMF would not advance any funds until it had seen reforms. They negotiated twice before, and Suharto was told at the time that it was his last chance. If the government does not go through with reform, that will be it. That is the reason for the new government with the reform-minded people.

Senator Stollery: Therefore, the Chinese traders and the large Chinese population are much safer now than they were during the 1960s, when the Chinese communist party was wiped out.

Mr. Chan: Approximately 200,000 died then, so it is comparatively smaller in scale this time.

The Chairman: I wish that we had more time, and that we could widen our focus beyond Indonesia. We may want to ask you back in the future, and we hope that you would accept our invitation.

Mr. Chan: I would like to acknowledge the support of John Donaghy, the Director of the Southeast Asian Division.

The Chairman: Our next witness is Dr. Rudner. He was educated at McGill University, Oxford University, and at the Hebrew University of Jerusalem, where he also taught. He was a senior research fellow at the Australian National University in Canberra. He has lectured at many universities in Japan, Southeast Asia, Australia, Taiwan, Europe, South America, the United States and Canada, and he is a past-president of the Canadian Council for Southeast Asian Studies.

We have seen heavy movements of capital around the world. Money goes into a country such as Indonesia. There are changes in the economic structure. A certain expectation is created, and then, for reasons which can be quite remote from a country like Indonesia, the money is gone.

When we had witnesses here dealing with security in the South Asia area, they said that socio-economic factors might very well be the most important destabilizing consideration. I thought that we ought not to leave this particular reference without having heard from an authority on the relationship between economic destabilization and political stability. Please proceed.

Mr. Martin Rudner, Professor of International Affairs, Norman Paterson School of International Affairs, Carleton University: As a political scientist, it is a privilege to have been invited here to discuss the political consequences of the economic catastrophe that has impacted on the countries of Southeast Asia and other East Asian countries.

I will focus my remarks on Indonesia, but I will also refer to some of the other countries, because that will help us to understand the likely trends in Indonesia, the probable outcomes for the region as a whole, and the implications for Canada.

I will attempt to put into context the relationship between the financial crisis and the political consequences that we have seen in Indonesia and in these other countries. The key lies in the flow of international capital. The countries of East Asia and Southeast Asia have experienced very high growth rates over a period of 30 years -- we are talking about economic growth in excess of 5 per cent, and in excess of 7 per cent in some countries.

This growth has attracted a large flow of international capital to these economies, as investors sought to profit from the dynamic competitive advantages offered by them. Coincidentally, they contributed additional investment resources for Southeast Asian development. Therefore, there is a high degree of synergy to this flow of capital.

There were two aspects to this capital flow. The first was direct foreign investment; companies in other Asian economies, in Europe, or in North America, invested in the establishment of plant and production capacity in Southeast Asia. For the most part, this capital is stable -- there is a plant, factory, or equipment. It is producing, and in that sense it is not volatile.

The flow of direct foreign investment to the Southeast Asian economies also brought about a challenge, however, because it created a sense that increasingly large components of the economies were being occupied by foreign firms. While these countries were experiencing high growth rates, saving rates, and investment rates of their own, there was a concern that international enterprise would overwhelm domestic enterprise. As a result, a so-called "Asian model" was introduced, whereby governments collaborated with their private sectors, and firms in the private sectors cooperated together to develop a sufficiently strong domestic private sector presence in these expanding economies.

How did this work in practice? The mechanism was the banking system. Governments sent a signal to their banking systems. First, they established new and enlarged banks, and encouraged the banking systems of their own countries -- Thailand, Malaysia, and Indonesia amongst others -- to borrow abroad from international banks, private sector to private sector. Ostensibly, there was no government intervention. The domestic banks were then to lend the capital that they had borrowed to domestic entrepreneurs.

These private sector bank-to-bank loans are highly volatile. They tend to be short term, and in that sense, they are present when the international banking community has confidence and credibility in the local banking system, and they can fly away when it does not. Therefore, we have the stable flow of direct foreign investment, and the more volatile aspect of the lending from banking system to banking system.

What was the purpose of this banking system approach? The answer is that the government acted as a gatekeeper. The government gave domestic entrepreneurs permission to open banks. The government in effect directed the banks, and it directed them to lend to selected borrowers in the domestic economy. The government had a very powerful influence, because it was the gatekeeper of the domestic economy. It created a patron-client relationship in the domestic private sector.

What does this mean in terms of the political economy of the Southeast Asian countries? First, it created a role for the state as the gatekeeper of the private sector. The private sector was growing, but the state determined who got capital and when. It created cronyism in that sense. Governments tended to favour people who favoured the government. It was an exchange of resources for loyalty.

The second dimension was that it gave the government a role as the guardian of social stability. While governments were sponsoring this private sector style development, every single government also took major responsibility for the welfare and well being of its rural economy. This goes back to the fears of the 1960s which Mr. Chan mentioned, when there was a concern that a Maoist Marxist uprising in the countryside might overwhelm the cities. The response in each Southeast Asian country was the creation of major poverty alleviation and rural development programs aimed at the rural economy.

Rural prices tended to be kept high, credit was subsidized, and there was major investment in the rural social and economic infrastructure. This continues today. The unrest which we have seen throughout Southeast Asia has been urban unrest, not rural unrest. These are societies where the overwhelming majority of the population is still rural, and where most of the poor are still in rural and agricultural occupations. In that sense, the government succeeded in poverty alleviation and rural development. Where it failed was in the development of the instruments of a modern state for the urban economy.

Let me give you a sense of where these failures occurred in Southeast Asia and why, in a political context.

The first of the great changes was the emergence of a middle class right through Southeast Asia. For the first time in Southeast Asian history, a class of people emerged who were dependent on neither agriculture nor the government for their prosperity. The emergence of this middle class took place across the region. Even though it originated in patron-client relationships, the clients ultimately felt that, while the patron gave them the resources, their prosperity was a result of their own initiative, and this gave them autonomy vis-à-vis the governments.

The emergence of the student movement was more significant. The children of the patrons' clients went to the universities. These were the elite universities in their society; Universtas Indonesia, a state university which is the most prestigious university in Indonesia, and Trisakti University, a private university, which has very high fees. These were elite students in both a social and an academic sense, and they were taking a very different role in society. In effect, they were saying that the old system of patron-client relationship was korrupsi, and they demanded the same standards of excellence in competition for society that they experienced as students in an elite academic environment.

The students voiced the main challenges to the status quo in Thailand, Korea, Malaysia, and especially Indonesia. They demanded a society that would be open to their intergenerational creativity. What they ask for, in a certain sense, is a move from gerontocracy to democracy.

The second major impact has been on the weakness of the state. In each of these cases, we have soft states. Economic and social development occurred at a very impressive rate throughout Southeast and East Asia, but the state lagged behind. In part, this was the fault of the international community. We tended to believe that the development of market-oriented systems required deregulation and the absence of government.

A market-oriented system demands a transcendent government to keep the system honest, however, and to keep it functioning competitively. This was not seen to be the case, and state institutions tended to suffer weaknesses as a result. Their development and capacity for building lagged far behind the abilities of other institutions, including local government. In effect, local government is the basis of any democratic system, but it is weak everywhere in Southeast Asia.

Previously, parliaments and legislative systems tended not to have the same capabilities as other institutions on the administrative side of government. Electoral processes were underdeveloped, and political party systems in all cases were compromised by patron-client relationships.

In fact, some would say that the army was that the only strong national institution in Southeast Asia was the army. The army plays a very different role in Southeast Asia than it does in Canada, and it even differs from the Western European experience. To borrow from P.J. Vatikiotis talking about the Middle East example, "Dans l'armée demeure la conscience de la nation." That is, the army has the consciousness of the nation. In Indonesia and in many other cases, this is true, not only in a moral sense, but also through direct activity in social programs. The army is the institution which delivers credit to the farmers, imports rice to feed the people, and markets domestic food stuffs to the urban economy. Those components of the economy are considered far too important to leave to the civilian sector and to a weak bureaucracy.

Another area of political consequence is the fact that economic development in Southeast Asia does not overcome the primordial fragmentations of society. We tend to forget that societies are not always well-structured and seamless. Southeast Asian societies bring to mind something to which Shmuel Eisenstadt, the Israeli sociologist, and Walker Conner, the American political scientist, called attention to 35 years ago. In deeply fragmented societies, improvements in economy and in social systems do not necessarily bring together the whole, but strengthen the components, and may strengthen them against the centre. For example, in Indonesia tensions of ethnicity have come to the fore -- ethnic Indonesians versus ethnic Chinese. The same is true in Malaysia and elsewhere.

We see religion as an issue of immense tension in Indonesian society. This is also true in other societies -- Buddhist as well as Islamic -- where powerful forces struggle between a secular state and a religious one. Within religious states the struggle is between moderate Muslims and Buddhists, or radical and militant Muslims and Buddhists. Further, some of those who put themselves forward as political reformers in Indonesia are people who would prefer the Iranian concept of revolution over the French one.

Tension exists on a regional basis, and this is especially true in Indonesia. There are over 3,000 islands in the country, and they have very strong traditions of local autonomy, local separation, and local economy. East Timor is not the only region to challenge Indonesia's unity. Acheh, Sulawesi, Irian Jaya, Madura, and Kalimantan also do so, to a degree. Tremendous regional tensions struggle against the integrity of the country.

When the centre is weak, we do not tend to get a simple articulation of all of these competing interests -- we tend to get an explosion. There is an explosion of economic violence, similar to the one that we saw ruin one quarter of Jakarta. The violence tends to follow the primordial fault lines of society. In that case, it was a pogrom against an ethnic Chinese community who were innocent of any malfeasance in Indonesian political, social or economic history.

The problem of legitimacy is another dimension. All of these governments developed their legitimacy around the concept of development, and it did work for 30 years. Legitimacy is development, development is growth, and growth is improved well being. All of this was true. When economic growth faltered, however, the basis legitimacy was brought into question. The legitimacy was challenged from outside by people like the students, who called korrupsi and said that the practice of patron-client dealing had brought down the system. The legitimacy was also questioned by the supporters of the patron-client practice. People who had previously benefited found themselves with immense debt. They did not have the assets to remedy that debt, and the soft state was unable to assist them.

If the state has failed and development has failed, the Bismarckian question is "Why should I obey?" To put a wrinkle on it, "Who should I obey?" This was private debt, but the IMF solution, and the one which the international community imposed on each of the Southeast Asian countries, required taxpayers to pay off the private debt. These were the private banking system's debts; it was not a failure of the state planning system. The private sector system had accumulated massive debt, however, and it became incumbent upon the state to reimburse the IMF's loans to the private banking system. In effect, the debt was socialized. The pertinent question for the challengers became "Why should I obey, who should I obey?"

There was a leadership problem. Asians tend to hold the view that leaders enjoy the mandate of heaven. Benedict Anderson, probably the leading scholar of Indonesian politics, pointed out that there is a Javanese concept of power. Power is charismatic, but when charisma fails -- as when development fails -- there is no substitute for legitimacy. In Indonesia, the real question now will be how legitimacy in politics is defined for its current leaders.

Those who challenge legitimacy are not challenging the constitutional order. The constitutional order is accepted, even by its challengers. What is in question is the legitimacy of those who occupy places of power in the political system.

We will wait to see how Mr. Habibie does. He is not a military man. As an engineer, he set up the Indonesian aircraft industry based on his experience working for Messerschmitt Bolkow Blohm, or MBB. He managed to finance the Indonesian aircraft industry by borrowing massively from the state banks, but he is a civilian. He lacks a political base and support, and he does not have the support of the army. The army was unhappy with him for diverting resources to his industry from the military's preferred investments in other industries.

What is the political agenda, and where could Canada fit in? Firstly, we must recapitulate the problem. These are robust -- or potentially robust -- economies with fragile societies and soft states. How do we do build states, while also working at nation building and economic and social development?

The challenge is state building. One must pursue democratic political development in a way which is congenial to political culture in those societies. When one speaks, for example, of democratic participation, rule of law, representative and responsible government, and efficient and effective public administration, one must see it in terms of a political culture which, first of all, values these things. There is no question that people value them, but they have no experience with them. The problem is that primordial pressures in society militate against democratic political development. How do we pursue democratic development so as to internalize it in political culture and in state building?

There is no answer to that question. I suggest, however, that Canadians, who have engaged in this process for 100 years, could perhaps contribute to the abilities of Southeast Asian countries to identify appropriate solutions for themselves through our learning example.

The Chairman: You have focused primarily on Indonesia, but would it be correct to say that what you have said could, with appropriate modification, be applied to several of the countries in the area?

Mr. Rudner: It could be applied to each of the ASEAN countries, and also to countries such as Korea, Taiwan, China, and even, to an extent, to Japan.

The Chairman: You said that these economies could potentially be robust. How much of an exaggeration would it be to say -- whether we are exporters of money or exporters of technology -- that we have introduced a kind of western economy into social and political circumstances which are not suitable for that particular economic model?

Mr. Rudner: I do not agree with that assumption for several reasons. Firstly, the concept of a western economy presumes that the Southeast Asians themselves were not, in fact, an international trading economy before the Europeans came to the region, or while they were there. Historically, these were trading societies when Europe was in a feudal period.

Southeast Asian traders -- especially Indonesians, and the overseas Chinese communities in Southeast Asia -- are traders and investors par excellence, internationally and regionally. If you were to read the histories through the prism of their experience, they would say that the Europeans came to Asia to suppress local trading systems and to impose unfair competition. They liberated themselves. In Indonesia, a revolutionary war succeeded in achieving that.

They do not see the international trading system as alien or hostile to their aspirations -- quite to the contrary. They see themselves as comfortably engaged in a global economy. The problem is one of state building. In every single case, the difficulty is that these nation states do not have pre-colonial roots. This is true even in Thailand, which some people think is an exception to the rule. These nation states are post-colonial creations, and they underwent immense turmoil during the 1940s to the 1960s.

Indonesia knew constitutional liberal government, it knew guided democracy, and it knew NASAKOM, which comes from nationalisme, agama -- which means religion -- and komunisme. It encountered massacre, then it went into new order. Over 50 years of independence, it has not had a peaceful transition in government, which is remarkable.

In Thailand, one could count the coups d'état and threatened coups d'état over the years. We do not have yet the consolidation of proper states in Southeast Asia. The weaknesses are on the political side, but the achievements are on the economic and social side. That is the great developmental disparity confronting the region.

The Chairman: You started off by telling us that the money went to the domestic banks when it went in, and then the banks, guided, I suppose, by friends, decided where the money would be invested. Then, of course, the financial tide receded. When I referred to a western economic system, that is what I meant. Perhaps I should have talked about a western financial model.

Senator Grafstein: We have been trying to grapple with this. The Chairman and I have had an intellectual debate over whether hot money is good or bad as it applies to developing or underdeveloped economies. I just do not know. However, you raised something that tends to give some support to a theory that I have. The fastest way for Canada to help developing economies move towards a democratic system is to increase the middle classes in those economies as best we can.

There is no question that the middle class was increasing quite rapidly in Indonesia. The middle classes have high expectations, however, and when their expectations are lowered you have revolution. This revolution is not a result of the masses, the aristocracy, or the cronies. It occurs because the expectations of the middle classes are being lowered or disregarded. The problems in Indonesia come from private money, middle class losses, and revolt. Where does the revolt come from? It comes from middle class students, just as it did in China. All of this was set out in a book called by Eric Hoffer called The True Believer: Thoughts on the Nature of Mass Movements.

We must determine if the continuation of the hot money is the best fix for Indonesia, because it will re-establish a growth pattern that will allow the middle classes to continue to expand. Alternatively, perhaps we should do what President Hoover did, which was to tighten up in a deflating regime and in a shrinking economy. In other words, do we take Roosevelt's theory or Hoover's? It is a political science question as much as it is an economic one.

Mr. Rudner: The essence of the problem originates in something which any banker would have said; you do not borrow short term and lend long-term. The bankers in Southeast Asia did not think or could not believe that these international loans were not going to be rolled over. They thought that they were permanent, and that growth was a natural phenomenon in the region. After 30 years of growth, it was believed that it would continue.

The desire is to turn loans over quickly, in order to take advantage of things like falling international interest rates. If you borrow in 1993 at a certain per cent, you borrow again in 1995 at a lower per cent, and again in 1997 at a lower interest rate. You also take advantage of exchange rates, by shifting from Japanese currency, to U.S. currency, to the Canadian dollar. This seemed to work, but you cannot borrow short term and lend long-term.

What is the problem of creating a middle class in Southeast Asia? The problem is that populations grow -- and this is back to Malthus. Geometric progressions and middle class aspirations grow at logarithmic progressions. Resources grow at arithmetical progressions. Even with high rates of savings -- in Malaysia 40 per cent of GDP is saved, in Singapore, 50 per cent of GDP is saved, in Indonesia up to 35 per cent of GDP was saved. Massive rates of savings growth cannot keep up to the logarithmic growth of aspirations, so you borrow from abroad.

There are two solutions. One is domestic, which is that a BMW is not a prerequisite for membership in the middle class. One could be middle class with less. In fact, there was an extravagance to middle class development in Southeast Asia. During the emergence of the middle class, middle class students were living more lavishly than Canadian university professors are able to. Middle class business people in Southeast Asia were living extremely extravagantly. It was the world's largest market for the finest cognac, champagnes, and products of the European fashion houses. This is middle class, but it is not necessary.

In his history of Britain's industrial revolution, Lord Acton pointed out that the regional entrepreneurs of the industrial revolution lived extremely modestly for generations. The Southeast Asians did not learn that.

The second element of correction must be that middle class does not only mean personal incomes -- it also means the development of institutions of state, society and community. These things were left grossly underdeveloped in the region. That is another topic which would be worthy of our consideration if our question concerns the nature of appropriate Canadian development response, again from the Canadian experience in the 1950s and the 1960s.

Senator Stollery: Trying to forecast the future is a futile business, and the conclusions are almost inevitably wrong.

Your observation that the wealthy people in Southeast Asia showed no restraint in their personal lifestyles is an important one. Compare that with Wedgewood, who had his own leg chopped off because it was interfering with his business. To do his business he had to ride along road roads in carriages, and his leg was bothering him, so he had it amputated. This would not be the case with many of the people about whom we are speaking.

With the exception of Japan and Korea, the economies in the countries to which we are referring are not run by the indigenous population -- they are overwhelmingly operated by overseas Chinese. That was the cause of Singapore's break from Malaysia. What are your thoughts on that?

The Javanese and the Burmese do not control their economies, nor do the Malayans. Each of the Indonesian generals was backed by a Chinese family. One of the players in Bre-X was an Indonesian citizen, but he was really Chinese. He changed his nationality for business purposes. What are your observations on this characteristic, which is unique to these countries?

Mr. Rudner: This is an interesting theoretical discussion which is analogous to the experience of Quebec from the early 1930s through the Quiet Revolution of the 1960s.

There is a high degree of congruence between ethnicity, social structure, and economic structure in colonial society. Malaysia is the most telling example of this. The society was structured so that the peasants were predominantly Malay, the labouring class in the salaried sector was Indian, the entrepreneurial class was Chinese, and the corporate elite were British. The school system functioned in four languages, English, Tamil, Chinese and Malay. Each group also had a different curriculum, so that a peasant was taught to be a better peasant, for example. He could not become anything else.

After independence there was a major transformation. In Malaysia they referred to it as the new economic policy, and it had a dual purpose. The first was to eliminate poverty, and the second was to restructure society so that ethnicity was no longer congruent with economic function.

In Malaysia and elsewhere, two things happened. Firstly, there was the emergence of an indigenous, non-Chinese middle class. In almost every case, these were clients in the patron-client sense of the directed credit through the banking system, however, and that is the problem. It is the only way that they could get capital. The child of a peasant could only get the capital to set up a business if the bank would give him or her a loan. How many Canadian banks will loan anything to the child of a peasant? In Malaysia, two banks will. However, if the government says, "We now have a policy which says you must and will guarantee it," money will be lent to children peasants who will establish businesses, so they are constantly in a protected sector. In that sense they are a niche economy, even if that niche grows.

In Malaysia, there are more Malay millionaires today than there are Chinese millionaires. They are both in business. The problem is that one depends on a degree of protection which the other does not have, and that creates a totally different outlook vis-à-vis the market, personal consumption, and conspicuous consumption.

When you speak of the Chinese domination of the economy, you must not forget that all of these economies are still predominately agricultural economies, and that the agricultural sector is indigenous almost to a person. The agriculture economies are not subsistence economies. In fact, they are very efficient, and these countries are major exporters. Malaysia is the world's largest exporter of natural rubber. Thailand is the leading world exporter of rice. Indonesia feeds itself. In that sense, one should not over-stress the Chinese presence in the trading economy, because it is not the predominant component of the economy. The industrial economy may be shared with Europeans, Japanese, and other foreigners, and the local Chinese are prevalent in trading, but the agriculture economy is indigenous, and the agricultural economies are strong.

Senator Stollery: When I was last in that part of the world, I was with a very prominent Canadian businessman who deals in all of the countries except Japan. We went through each country, and I recalled that the Chinese were never allowed west of Bengal, or out of Calcutta where they were mainly shoe repair people. As soon as you went into Burma, however, where they were competing with the Indians, the Chinese owned everything. This was true throughout most of the Far East, including French Indo-China. I asked my friend about that, but he told me that all of their business was done with Chinese companies, and that the person that they had just selected to run their interests there was Chinese. You do not share this impression?

Mr. Rudner: There is empirical evidence. The largest sector of the Malaysian economy belongs to the national petroleum company Petronas, which is almost exclusively Malay.

Senator Stollery: It is protected because of government policy, however.

Mr. Rudner: Petronas has the same privileged position as Pertamina does in Indonesia, or as Petro Canada does in Canada. Pertamina, the largest enterprise in Indonesia, is almost totally indigenous, as is the aircraft industry set up by Dr. Habibie.

Senator Stollery: Is there not a government role in the employment policies?

Mr. Rudner: Absolutely. In Malaysia you must hire people according to their share of the population. Industrial legislation requires this. Americans would call it affirmative action; they call it restructuring the economy to bring about a situation where race will no longer coincide with economic function.

Major industrial concerns have emerged in all of these countries -- let us keep industry separate from trade. Local shopkeepers can be of any ethnic group, and the Chinese have a very strong presence both historically and contemporaneously. When one looks at the industrial sectors, which in fact produce the bulk of GDP and most of the international trade, those sectors are not Chinese today, and they never were. During the colonial period they were colonial, in the modern period they were the state-sponsored sector, and of course there was the direct foreign investment.

For a variety of reasons, foreigners operating in Malaysia may feel much more comfortable dealing with ethnic minorities than with Malays. Firstly ethnic Malays and Indonesians are almost guaranteed jobs and promotions when they graduate from university. There is a certain comfort level in seeing the end of your career at the beginning of your career, based on your ethnicity. Chinese do not have this option. They must forage for jobs in a competitive market. They will go to foreigners, and they will seek employment with international trading organizations, which is why they tend to dominate in international organizations.

Senator Corbin: An article called "The Social Contradictions of Japanese Capitalism" appears in the June edition of The Atlantic Monthly. The writer, Murray Sayle, argues that a severe social severe crisis lies behind the bad economic news, and that he witnesses it daily in the Japanese village where he lives.

This particular article it seems to agree with what you said, which was that the achievements in a number of countries are on the economic side, but the weaknesses are on the political side. The concluding lines from this article seem to support what both you and Mr. Sayle are saying:

Japan needs to modernize not its all-too-modern industries, or even its rickety financial system, but its society, so that more young people will earn enough money to marry and start families in adequate housing, generating the increased domestic demand (for which read "leading the fuller lives") long promised by Japan and long demanded by its exasperated trading partners. In short, Japan needs a social revolution inspired, for the first time ever in its history, by ordinary people, in their own interest $

But public pressure for real reform is still slight. Today's aging Japanese, formed by an antiquated, inward-looking, ultimately self-defeating system have no idea how to change it -- or whether they even want to.

Do you agree with that? That is what you have been telling us.

Mr. Rudner: Yes, absolutely. Further, there are a number of additional points which make that case. For example, it is remarkable that, 50 years after the creation of a democratic government in Japan, government parties are still fragmented and fractionalized, and have yet to consolidate themselves.

Japan's weakness and soft state are remarkable. We think of Japan as having a strong administration which works in cooperation with Japanese business and the promotion of Japanese exports. A very soft state is behind that strong administration, however, and it is a soft state which is not capable of responding to its own people at a central level or at a prefectural level. Owing to this, many Japanese towns have minimum public infrastructure, minimal social amenities. Housing permits are difficult to get. The soft state with the strong and robust economy is a challenge for Asia.

Senator Andreychuk: You said that the middle class should in some way dampen its expectations of conspicuous consumption. That may have been all right 100 or 200 years ago when we were more controlled. With today's technology, however, are we not coming to a universal expectation of consumption? Much of what you said about the social emerging middle class could be equally applied to the former Soviet Union, and to the emerging states there. I would like your comment on that.

To what extent did the IMF-imposed regulations contribute to this destabilization, with the devaluation of the currency and the subsequent inflation rate? While you have pointed to the internal banking system and the internal system, there are those who argue, particularly in Indonesia, that this massive political upheaval came about because the IMF has a role to play in the negative consequences of what has happened. Further, it has been suggested that the average Indonesian might be in a better position today if solutions such as currency boards and more selective long-term impositions, rather than outright IMF impositions, had been used.

Mr. Rudner: You have asked three questions, and I will respond to them ad seriatum.

Firstly, you are correct when it comes to conspicuous consumption. Human freedom means that I should be free to disburse my income as I see fit. One of the problems was structural, however. This massive inflow of foreign currency, whether through direct foreign investment or through bank loans, led to an overvalued exchange rate for Southeast Asian currencies in every single case. Economically, the problem with an overvalued exchange rate is that imports are being subsidized. By running highly overvalued exchange rates, Southeast Asians were subsidizing the import of luxury goods. There is absolutely no reason for relatively poor economies to subsidize their imports.

You are also correct about the IMF. The IMF intervention brought about important things, but it also had some negative consequences. In Indonesia, the worst of those was the original decision to close 16 banks. The IMF was right to insist that these banks had to be closed. The problem, however, was that the IMF had no sensitivity when it came to the implications of this for a community.

The community's reaction to the closures was to pull its money out of those banks, and to squirrel it away under mattresses. The perception was that, if 16 banks could close, more could close in the future. The banking system might have been diseased, but the people did not know the source of the contagion, and that led to concern. There was a run on the banks. Canadians have never experienced such a thing, but the Europeans have. The Americans did, too, in the 1930s, and they had a moratorium on their banking system.

In a sense, the demand for the closures was indefensible. The IMF should have had historians and analysts to explain the likely consequences of such an act.

The currency board would have been an unmitigated disaster. Mr. Henke claimed to be an authority on the currency board. I am probably one of the few in the world who has ever written on the history of currency boards in Southeast Asia. It was part of my doctoral thesis. Currency boards were a mechanism for monitoring management in colonial Southeast Asia.

The problem -- and this is the essence of the currency board system -- is that they deflationary. Currency board holds down the domestic economy in order to accumulate reserves abroad, and those reserves must equal 100 per cent of the local currency issue. To maintain that 100 per cent, in fact, it is necessary to maintain 120 per cent -- the so-called premium.

For the local economy, it is a horrific deflationary system, designed to accumulate savings invested abroad in foreign banks. Why anyone would want to return to the system of the 1920s and 1930s is beyond me. That is one of the beauties of history; it does teach us something.

Senator De Bané: In order to discuss a very important issue, a Canadian minister went to one of those countries with a large delegation of officials from his department. When he arrived, he met with the Canadian ambassador to brief him about his upcoming visit with his counterpart. Our ambassador told him to talk about the weather during his half hour appointment -- that he should avoid bringing the substance of the matter up at all costs.

The minister told our ambassador that he was there to discuss the issue with his counterpart. The ambassador told him not to discuss it with the minister -- that if he so much as broached the subject, the bureaucrats would immediately whisk the minister away. In essence, the bureaucrats were to deal with their counterparts; it was not appropriate for the ministers to discuss it. Does that mesh with what you said about the immaturity of these countries in some areas? What does the story mean?

Mr. Rudner: As a person who has been engaged in the region for 30 years, I would interpret it in a Southeast Asian context.

Firstly, there is a sense of pride. The Southeast Asians all came out of a colonial challenge. Even Thailand, which was not colonized, fought the French in 1940, and did not do badly. Few Canadians are aware of that war.

The Burmese fought the British three times. They won twice and lost once, but once loss to a colonialist means the end. The Malaysians were conquered, the Indonesians were conquered, and so were the Filipinos. Each one of these countries struggled to independence. In each of them, there is a view that the residents ought not to view themselves as inherently inferior to others, and there is a special sensitivity to white skin.

The ASEAN -- the Association of Southeast Asian Nations -- countries entered into an arrangement with the Europeans called ASEM, the Asia-European Meeting. The Australians said that they were Asian, and they wanted to belong. The Malaysian Prime Minister, however, publicly mused about whether the Australians would see an Asian face if they were to look in the mirror. There is a high degree of sensitivity on issues such as these.

For a Canadian minister of the Crown to come to a minister of a Southeast Asian country and presume to tell him how to run his society --

Senator De Bané: It was to discuss an issue of bilateral interest.

Mr. Rudner: I understand what you are saying. We are not intervening, but we are making judgments about you. Malaysians took immense offence at an Australian minister who said that the Malaysian minister was recalcitrant. Recalcitrant does not mean something terrible; all of us are recalcitrant at some point or another. Malaysia almost broke off diplomatic relations with Australia over this, however. There is an immense amount of sensitivity.

Secondly, Canadians tend to be adverse to adversarial social connections. We do not like people who yell or complain to one another. We understand politeness, and so do the Southeast Asians. They are non-confrontational. Musawarah; we are together as family and we agree. When we say "yes", we mean, "Yes, I heard you". We do not necessarily agree with you.

There are other mechanisms to deal with social conflict and the resolution of conflict. They are never dealt with publicly, even amongst Southeast Asian countries themselves. There was an ASEAN summit, and the Malaysian prime minister put forward a proposal for an East Asian economic group. The Malaysians had not told the President of Indonesia in advance that they would do this. The Indonesians took immense offence, and my understanding is that the Indonesian President told his officials to kill the idea at any price. It did not matter whether or not the deal was good for them; the perceived slight was the only thing that mattered. There is a certain style of courtesy and togetherness by which issues are to be resolved.

In your story, the Canadian ambassador was trying to impress upon the minister that such issues must be left to the ambassador's working level in this culture, and the he and his counterparts would resolve the issues. The task of the ministers is to create comfort at the level of government-to-government understandings.

These practices may appear strange to Canadians, but they are the norm for Southeast Asians, and for Asians in general. Further, it is emphasized when there is a racial difference. We are not a colonial country, nor do we see ourselves as one. The Southeast Asians do not see us that way either, but they do see us as non-Asian. In that sense, an Asian minister could well say to an "aggressive" Canadian interlocutor, "If you look in the mirror, do you see an Asian face?" In that sense, I can understand what the ambassador in your story was telling the minister, and I might understand why the minister would have been so advised.

It is also true that we expect a lot from our officials, and we ought to be preparing, equipping, and instructing our officials to play that role. Perhaps that will mean a different kind of relationship between ministers and diplomats. Canadians tend to like symmetry; we like ministers doing things. In the Asian context, we may need a different modality if we are to be effective.

Senator De Bané: There are those who believe that the problems faced by Japan at the moment stem from the fact that its ministers are figureheads, and that for years the real decisions have been made by the Department of Industry, the Department of Trade, and the Department of Finance. Some very bad decisions have been made by those departments, the banks, and big industry. Now those bureaucrats are seeing the consequences of their bad policies. Is it not true that this is due to the fact that the ministers are figureheads, and bureaucrats have been making the decisions for 50 years?

Mr. Rudner: Yes, however I would not come to the same conclusion. With respect, your description is apt but there is a minor wrinkle which changes your conclusion. There is no question that those ministers do not manage their portfolios, nor are they expected to do so. That does not mean that they do not command a high degree of respect for doing what they are supposed to do, which is to create an enabling environment.

What is the enabling environment? Japan's main challenge was to bring about a transformation from an imposed to an internalized democratic constitution. Please remember, the democratic constitution was an American imposition which was internalized by Japan. That has not happened too often in history. The Japanese internalized their democracy. That did not happen by itself -- it was the result of 50 years of Japanese governments enabling that to happen. While they were doing that, the bureaucrats managed the shop.

The problem goes back to this concept of directed credit. The banks in Japan did not lend to the best borrower; they lent to those who were friends of the government. Again, we see the patron-client lending pattern. A lot of these investments were poor investments. It happens in Canada too -- not necessarily as patron-client, but as directed investment -- and there are problems with that. The problem is that these loans must be repaid. The money is borrowed short and paid back long -- often very long. That is what happened in Japan.

Senator De Bané: Who runs the department, the bureaucrats or the minister?

Mr. Rudner: A benevolent minister allow these things to happen -- needs them to happen, in fact. Democracy cannot be instilled and internalized in a society unless people are persuaded that there will be an airport in their prefecture, or a new computer chip plant in their area. How is it internalized? Not by means of giving long lectures on Japanese radio, or having some academic speak on Japanese television; you do things.

Sometimes such things do not pay off in an economic sense or in a banking sense, but there is no question that they have helped to transform Japanese attitudes. They have internalized democracy. In my opinion, that is a great achievement.

They certainly could have had a different type of minister. They could have had a more proactive minister, in a French sense. French ministers take charge of a portfolio. I am not sure that it would have led to a different outcome, however. The ministers managing the economy might not have managed the politics, and we might have had a less satisfactory internalization of democracy in Japan. That would have been a worse outcome. I would rather have the failure of a firm than the failure of a policy.

Canada is a partner in APEC, and we are involved in Asia. We also have a very close and cordial relationship with Japan. As such, it was very important, if not crucial, for us to see Japan emerge as a peaceful and democratic country.

Senator Andreychuk: You said that we should not impose our values on their system. It seems to me that international diplomacy is based on compromise, however. It is almost reminiscent of debates we used to have in the Middle East in the 1970s, when we would not send women into those countries because they had no status -- what is intended to be a polite greeting may be rebuked by others.

It seems to me that you are saying that everything must be done their way, and that we do not have legitimacy as an Asia-Pacific country.It is one thing to want to join the club; we must therefore abide by the rules. It is another thing entirely if we have as much legitimacy in the area as anyone else does, and we work together bilaterally in the area. Why must Canada always yield to everyone else's rules, regulations, and ideas of politesse, rather than finding some compromise halfway?

Mr. Rudner: I agree with the implicit thrust of your remarks. No, I do not think it is for us to kow-tow to things that we find unacceptable or inappropriate.

Where do you compromise, and how do you find the mechanisms to reconcile differences? At one level, it is not for Canada to attempt to pronounce judgment on every other country's internal practices on the international stage. If we want to teach our students judgments about country X and country Y, however, it is absolutely appropriate. To translate our domestic opinions into a foreign policy is hazardous because we do not have a mandate to govern the Indonesias, the Thailands, the Irans, or the Japans of the world. Similarly, they do not have the right to come into our country and insist that we adapt to their standards. You can teach what you want; you act according to a multicultural diverse international system.

Where do we compromise? Many Southeast Asians share most values with Canadians, although there are areas where people disagree. Where does religion fit in? Some who believe in human rights are of the view that the ideal state which respects human rights is a religious state -- an Islamic or Buddhist state. Most Canadians would prefer a secular state with a high multicultural component. These values are different, yet each country could explain to the other where it fits.

It is not our place, however, to go to Malaysia and say that any affirmative action which favours Malays and discriminates against ethnic Chinese is immoral. The fact is that in the Malaysian context this is the outcome of a democratic, political solution which satisfies their needs, even if it might violate certain of our principles. We could, however, work with the Malaysians, and ask if we could use our experience to help them find ways to smooth the rough edges in the policy. We could point out that we do have affirmative action for people such as native peoples, for example.

The question is: Where and how do we compromise? What are the modalities of seeking shared resolution and shared learning? One learns from our experience. I am unsympathetic to the notion of dictating to others. We can teach ourselves, but we cannot dictate to others.

The Chairman: You started off by telling us that the countries in this area have quite robust economies, but fragmented societies and weak states. The implication of that comment seemed to be that these countries need stronger states. What are their prospects of achieving those stronger states?

Mr. Rudner: That is the most difficult question of all. Korea has made its first transition from a highly centralized and authoritarian presidency, where the presidents came out of a military tradition, to a democratic presidency. In fact, they have put two former presidents on trial for crimes committed during their presidencies.

Thailand made a successful transformation, and it is holding to an elected civilian prime ministership with a democratic government. That government rid itself both of corruption and of a strong military presence -- an army which had been actively interventionist in political life since 1932. The country maintains a monarchy which accepts constitutional rule and which gives it its blessing, and the country is run by a civilian government.

There are major and significant changes in Malaysia. I believe that we are about to see another peaceful transition of power from one Prime Minister to another. It is the one country in Southeast Asia which has had a succession of such peaceful transitions. It operates within a framework of elected government, one which is representative and responsible, and competitive elections are held. There are grounds for optimism.

Problems exist in countries which have not yet had experiential benefit. Indonesia has not yet had this. The Philippines just had a third election which brought a president to power through the ballot box. That is cause for optimism. There is also cause for optimism in Taiwan, but the situation in China is untested.

What could the countries who have not yet had successful transitions learn from it? Secondly, what would the appropriate role of Canada's development cooperation program be in supporting processes which enable those transitions? These are lessons that we have not yet learned. They are there, however, and we must study them.

The Chairman: This has been a most useful session, and we appreciate your input. It is not as optimistic as some might hope, but it is not as pessimistic as we had feared.

Senator Andreychuk, are you in a position to deal with the budget?

Not much is new in the budget, except that it would be agreed that I would consult with the vice-chair before any commitment would be made to participate in a conference. Is that the only point?

Senator Andreychuk: That was the only point on which there was some discussion.

The Chairman: Otherwise it is all right?

Senator Andreychuk: Yes.

The Chairman: Do I have a mover?

Senator Stollery: Yes.

Senator Corbin: What are we voting on?

The Chairman: We are voting on the summary of expenditures, which is $17,200 and then we have a breakdown of the total.

Senator Corbin: Which conference is it?

The Chairman: There is no particular conference in mind -- this is precautionary. We had it in the previous budget. We did not know whether that line would be used. In fact, there was a conference which Senator Carney attended.

The Chairman: Is it agreed?

Some Hon. Senators: Agreed.

The Chairman: Carried.

The committee adjourned.