Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 9 - Evidence
OTTAWA, Wednesday, October 23, 1996
The Standing Senate Committee on Foreign Affairs met this day at 3:30 p.m. to examine and report on the growing importance of the Asia Pacific region for Canada, with emphasis on the upcoming Asia-Pacific Economic Cooperation (APEC) conference to be held in Vancouver in the fall of 1997, Canada's year of the Asia Pacific.
Senator John B. Stewart (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, this afternoon we are resuming our work on the relations between Canada and the Asia-Pacific region. We will be hearing two expert witnesses. After we have dealt with their testimony, I would like members of the committee to stay for an in camera discussion on the future business of the committee. There are certain practical problems which need to be dealt with.
One of our witnesses is Professor H. Edward English. He received his education at the University of British Columbia and at the University of California at Berkeley. His teaching career was spent at Carleton University, where he was Professor of Economics from 1966 to 1992. Between 1968 and 1973, he was Director of the School of International Affairs at that university. He has held various other posts during periods of leave of absence from Carleton. He was Director of Research at the Private Planning Associates of Canada, a precursor of the C.D. Howe Institute. He served as Assistant Deputy Minister at the Department of Consumer and Corporate Affairs and as Director of Canadian Studies at the School of Advanced Studies at the Johns Hopkins University.
His involvement with Asia-Pacific began in 1968 when he joined the Pacific Trade and Development Conference Steering Committee. Since then, he has been involved in Asia-Pacific issues through his work with the Pacific Economic Cooperation Council.
There is much more I could put before you, honourable senators, but I think I have said enough -- if there was a need to so do -- to establish Professor English's credentials to be of assistance to the committee.
Our second witness is Professor Ozay Mehmet. From 1968 to 1976, Professor Mehmet taught at the University of Ottawa. Since 1968, he has taught development economics at the Norman Paterson School of International Affairs at Carleton. During a leave of absence from that university from 1991 to 1993, he served as Chief Technical Advisor of a joint project in Jakarta between the International Labour Organization and the United Nations Development Program. He has also been given numerous consulting assignments in Asia, including with the World Bank in Malaysia in 1979 and in Bangladesh in 1986-87; with the International Labour Organization in Malaysia, Thailand and Jordan; with CIDA in Malaysia, Jordan, Turkey, Indonesia and Ghana; and with U.S. Aid, again in Indonesia. He has written extensively on development, particularly in the human resource field.
If any of you would like the names of his books, I have a list of them here and will be happy to afford you an opportunity to make a copy of that list.
We shall turn first to Professor English. I believe that he will make an opening statement, after which we can determine whether we want to deal with questions for Professor English before we turn to our second witness.
Would you proceed, sir.
Professor H. Edward English, Norman Paterson School of International Affairs, Carleton University: Mr. Chairman, I appreciate the opportunity to speak to your committee today. On one previous occasion, I spoke to the joint committee and found that very stimulating. I am looking forward to the same kind of treatment today. In academic life, one expects to be challenged, so please do so.
My statement is provocative in some ways, in the sense that I am suggesting some ideas which may be considered way out, but only by certain standards. We will see.
I like to be up to date in my thinking when talking to a group, especially such a group as this which is concerned about today. I therefore call my paper "Canadian Identity and Unity: A Role for International Initiatives, Especially Through Asia-Pacific Economic Cooperation." That gives you a pretty wide hint of the ideas contained in this paper.
Canada's position in the international economy, and also possibly on political and security matters, can be intimately associated with the country's capacity to maintain and strengthen national unity.
The less attention we pay to international initiatives, the more we are likely to attempt to exaggerate our regionalism and to foster different priorities in different parts of the country.
This would likely reinforce dependence on Canada-U.S. relations and priorities chosen by our southern neighbour. I should hasten to say that I am not anti-American. That is said with the judgment as to the relative importance of this factor.
For example, I worry about recent proposals by my academic friend Tom Courchene, who calls for decentralization of powers to provincial governments on the grounds that most of them are primarily dependent on economic links with the United States. Therefore, why should not all the running of the economy be at the provincial level? That is the implication. This neglects both the importance of interprovincial trade and the diversity of the particular areas of specialization among Canadian regions.
The interest of the Harris government in such reasoning appears to reflect a trend toward parochialism in Ontario. That is not only my judgment; I have heard that from others. Surely, that must be temporary if Ontario is to restore its role as the centre of industrialization in Canada.
In the area of human resources development and other sources of technological advance, the federal government has already played a distinctive role reflected, among other ways, in the rise of Silicon Valley North, here in Ottawa. A greater role for the national governments, both in fostering a common history and in a common technological base, is much needed.
We are the only member of APEC that does not have a federal department of education. The importance of direct and substantial economic links with the United States will continue, but the continued 75 to 80 per cent of our share that is measured as bilateral is subject to some criticism on measurement grounds and even more on the probability that this percentage will decline. Most of all, it is already easily demonstrable that the U.S. is no longer the dominant power neither in international trade and other transactions, which it was up until the 1970s, nor in the determination of an optimal and durable policy and institutional framework.
The number of nations is now close to 200 in the unity of the present economic elite group of seven -- of which we are the last member -- and is in doubt and of doubtful relevance. What we have as signs of the most significant elements of future institutions are a combination of regional and multilateral institutions that, together, can respond to the needs of a world of countries at different stages of development and of a changing potential of relations among them.
That is my broad background framework.
To identify the relative importance of multilateral and regional institutions and approaches to the management of international economic transactions, I make reference to an appendix which may or may not have been included with what I left with your staff the other day. I will leave a copy of that with you now.
It is extremely important <#0107> and it is obvious from the dealings within APEC -- that we view international economic relations under quite a few headings and not just one, namely, trade. I have listed them in what I call order of mobility, which is very important in the subsequent analysis.
The most mobile of all international transactions is money. For that reason, I immediately set it aside because the only international system that is really relevant there is the multilateral one. It is pretty hard to regionalize money. The remainder can all be important, both to multilateral and to regional institutions. They include the next most mobile factor, technology. Ideas move in spite of people's efforts to put them in a corner. After that follows trade in goods, trade in services, and direct investment. The least mobile of all factors is labour, although it is not immobile. You can see the populations of some Canadian cities have been very much affected by its polity.
I mention this "order of mobility" because it does have a fundamental role to play in how we assess the use of regional institutions especially and the Pacific ones notably. I will return to that area later.
Turning to the real subject of today's discussion, first, I wish to say something about what APEC is, because a lot of people do not pay attention to the following: It is unique in size and diversity, including membership from four continents. In North America, its members are Canada, the U.S. and Mexico; in South America, Chile; in Australasia, Australia and New Zealand; and in Asia, which has three groups divided into three subgroups, there are the two superpowers -- and I will call them that because they are bound to be -- Japan and China, and three East Asian success stories, Korea, Taiwan and Hong Kong, and the members of ASEAN, which include Indonesia, Thailand, Philippines, Malaysia, Singapore, Brunei and Vietnam.
It has a longer history than most people seem aware. This is the next point. Much is said about regionalism as though it was a passing phenomenon <#0107> and admit that some regionalism has been a passing phenomenon -- but the bias toward what governments achieve or fail to achieve means few are familiar with the efforts of business and academia to develop links and forms of cooperation ahead of government. These did not start in the 1990s with meetings in Seattle, Bogor and Osaka, but with the establishment of PBEC and PAFTAD, the business and academic groups in 1967-68, and with PECC in 1980, at which two experienced government officials, Dr. Okita from Japan and Sir John Crawford from Australia, brought together representatives of business and academia, mainly those most active in PBEC and in PAFTAD. The contribution of those two groups subsequently has been from the same sources.
Government officials were included in a semi-official capacity. The first Canadian delegation to the PECC in 1980 included Eric Trigg, vice president of Alcan, myself, and Tom Delworth, who was then the Asia-Pacific man in what was then called Foreign Affairs. After that, we continued to be active through the 1980s and were supported by government through a national committee headed for some time by Eric Trigg until the emergence of APEC made it less necessary to maintain a private sector group with public support. I am sad about that. I think that more continuing interaction would have been better.
The potential agenda for APEC has gradually emerged in the 1990s and has been pursued by working groups of government officials primarily. Using my order of mobility framework, the following observations summarize the emerging agenda.
On money flows, the regional approach has been largely avoided, I think appropriately, for the reasons I suggested. On technology transfer, though there is some implications for that because of discussions of the Department of Finance officials at some of these meetings concerning coordination of macro policy, it still is not a big thing in APEC.
On technology transfer, much emphasis has been placed on human resources development. Here Canada's role is limited by the lack of a national perspective in the federal government but, nevertheless, we are in there; we have sent some good talent to those meetings.
More attention should also be devoted to the equity of access to technology, which is hampered by the dominance of developed countries in restrictive intellectual property ways.
Something that we take for granted in the developed world is the restrictions on the passing of intellectual property. Let me just quote a prominent Singapore economist and a graduate of Harvard who, on one occasion in a meeting, pointed out that developing countries should not have to pay as much in royalties on educational material. That is an interesting question.
Of course, it has never been acknowledged as an issue. It was a small "c" conservative economist who made that remark. There are challenges in the intellectual property situation which go beyond the simple question of whether it is a legally valid case. Social challenge is the one I mentioned.
Trade in goods is the main area addressed directly by GATT, including specific attention to the reduction of trade barriers on a regional basis as an alternative. Article 24 was there right from the beginning of GATT serving as recognition by the founders that there was a case for regionalism as well as multilateralism. This was soon clearly linked to European integration.
Efforts to apply Article 24 to developing country groups were hampered by highly protectionist external barriers thus undermining the efficiency of the industries promoted within the regional group. That is one of the main reasons why regionalism failed in Latin America in the 1960s and 1970s. That is not the only reason, but it is one of the main ones. They defeated their own purpose by putting too big a fence around the regional group and thus rendering the investment inefficient.
Regionalism such as that in NAFTA has better prospects, even for Mexico because the Mexican government recognized that it must reduce traditionally protectionist barriers at the same time as it was becoming part of the North American group. That was the great stroke of wisdom in the Mexican decision; they did not just treat it as a chance to climb behind a barrier which would make it possible for them to have inefficient investments.
The same is true of APEC. That is one of its good qualities. There has been a growing realization that it was not to be simply a fence around a large group of countries but an association among them that would make them all more effective internationally.
There are exceptions to that. There are always protectionists in every situation. Sometimes there is some validity to protection. I am not saying there are no cases where one can make a point, but it does not happen often.
The developing countries of the region now recognize that the extra gains that the regional group can achieve must be compatible with continuing efforts through the WTO to reduce barriers to world trade generally, even if the latter cannot be achieved at such a fast pace in many countries in the earlier stages of development or of stability.
So much for great trade in goods. We have a great tradition which is being simply followed in an intelligent way by APEC, though, of course, we cannot say it has yet achieved as much as we would like.
Trade in services is an important special case. I singled it out for a reason which will become apparent. Borders are not as clearly marked in this matter. One problem which must be addressed by such groups as APEC is further harmonization of laws governing temporary entry of workers and professionals involved in the services trade. Another is the need for better information on the extent of such trade which has been seriously understated to date.
Note the recent efforts of Statistics Canada and the service industry companies -- the Silicon Valley North companies -- to get better data. Some of them have said to me that they do not know whether their products, once sold, are being exported. That may not matter to them; they make money on it. However, it does matter to how we assess the value of the exercise. This is a very important point acknowledged by the industry. They sell to someone and they do not know what becomes of the product. The next stage may be export. That will continue to be the way their services are used.
We also were able to point out to the United States, because of Statistics Canada being a good statistical agency, that one-half of the U.S. deficit was matched by a surplus on services. That was a recent contribution of Canadian-to-U.S. knowledge. I may be overstating it, but it certainly contributed to Canadian help.
So much for the services. We see why there is scope for further action under APEC to improve what we know about that important sector. That is a particularly important sector for this city and for other parts of Canada.
Although the multilateral system has made some progress in harmonization of national policy constraints, voluntary codes and systems of mediation remain largely untried where relations between countries at different stages of development are involved. This refers primarily to the point I have just made about services trade but also to the role of investment.
Regarding movement of labour, European Union experience and that of NAFTA can be relevant; however, the variety of issues in APEC is much more likely to address the range of issues. APEC is more likely to cover more of the range of labour market issues and the necessary areas of policy harmonization than other regional groups or the multilateral system. Of course, this is Professor Mehmet's specialty and I will leave the rest to him.
Canadian interests and strategies and, therefore, the contribution that our role in APEC can contribute to Canada's sense of unity and purpose can be summarized as follows: APEC affords the best opportunity to Canada to be in the forefront of the search for the solutions to two of the challenges involved in relationships between countries at different stages of development. One is the difference in skills and other resource endowments. The other is the difference in the political and other governmental practice of the recent past which prevails and is typified in the Pacific, most obviously by China and Vietnam but also by North Korea, although the nature of those links have certainly not been settled.
We have an opportunity to be relevant to those two different situations and to be attentive to the needs.
Second, Canada's opportunity to play a distinctive role in APEC is also enhanced because, unlike NAFTA, APEC is not dominated by one major power. The presence of Japan and China in the group means that Canada can contribute more in cooperation with the other middle powers in the region and can seek to identify and promote positions which can adequately accommodate the priorities and constructive roles of the three largest economies of APEC.
Of these, Japan is the most dependent on international economic links, both for resources and for markets. An example of the kind of objective that may be worthy of Canadian priority attention would be initiatives to define a priority policy agenda embodying elements of the issues listed earlier.
Such efforts to form a policy agenda for APEC which would do credit to Canada could probably best be pursued by consultation and cooperation with the two leading middle powers of East Asia, Korea and Indonesia. One is the most important Northeast Asian country, other than the superpowers; the other is the most important Southeast Asian country and the one that is now more courageously moving toward leadership in this enterprise.
Let us assume we are able, by bilateral action and collective action through the meetings of the APEC groups, to develop agendas that would, we feel, serve the purposes of the region generally -- because these are leading countries with different emphases. Indonesia is a resource-rich country. Korea depends almost entirely on manufacturing as a trader.
Such agendas, following initial testing of other opinions in the region -- and hopefully more consensus -- might be offered to Japan as a country with the biggest stake in promoting and financing the elaboration of related programs. In other words, we say to Japan, "You have followers -- now lead!" They will not respond overnight, especially under present political conditions in Japan. However, there is every reason to expect, because they are willing to look far ahead, that they would also be willing to take up ideas which are well developed and consensual.
Meanwhile, the U.S. and Chinese views and interests need to be accommodated. However, both should recognize the advantage of accommodating the collective judgment of the other consensus-building groups.
I would only add that that is a dream, but some dreams are worth pursuing. Thank you very much.
The Chairman: Honourable senators, I think we should turn directly to Mr. Mehmet so that we have the full array of testimony before us before we start asking questions.
Mr. Ozay Mehmet, Professor of International Affairs, Norman Paterson School of International Affairs, Carleton University: Mr. Chairman, I feel privileged to be invited to appear before your committee and submit for your consideration a paper regarding Asia-Pacific dynamism.
My paper has been printed and translated into French and rather than bore you by reading it, I shall highlight some of the main points in it.
The basic theme which I would like to bring to your attention is that it is my sense, based on some 30 years of field work in Southeast Asia, as well as academic work at various universities, that the economic centre of gravity, if you like, is shifting. It is shifting to the Asia-Pacific region and it is, therefore, exigent for Canada to be interested in this fundamental shift in international trade.
Fortunately, Canada happens to be not only an Atlantic country, but also a Pacific country. Therefore, we are naturally involved in Asia-Pacific dynamism.
My paper, which is quite brief, is organized around six brief sections. At the risk of over-generalization, I draw your attention to income convergence between Canada and the United States on the one hand, and the dynamic tigers or dragons, as they are popularly referred to, on the other.
Second, I focus on the sources of growth or the determinants of this dynamism, particularly in terms of the rise of labour intensive export-led trade, which has been the engine of growth in these dynamic economies.
Third, I critically discuss the sustainability of the Asia-Pacific region by looking at some of the views of celebrated economists such as Paul Krugman who has recently been writing on this subject.
I also present a very brief overview of Asian values in the particular context of overseas Chinese capitalism.
I then focus attention on some problem areas, particularly giving rise to unfair labour practices, not only involving migrant workers in underground economies and quasi-illegal situations, but also children working in sweat shops and women in export processing zones and other specialized economic zones that are really driving much of the Asia-Pacific dynamism.
Finally, I conclude with a brief analysis of labour standards in international trade and why I believe it is appropriate for Canada to assume a leadership role in the promotion of international labour standards. Such participation on the part of Canada is timely and essential because free trade now runs the risk of becoming "unfair trade", a vehicle for what has been referred to as social dumping. We can go into these specific issues later on.
My first transparency is an important table which shows Canadian income per capita in relation to that of Japan, Singapore and a number of other dynamic economies from the Asia-Pacific region. The table covers trends in income per capita over the period 1970 to 1993. Two points are really striking.
The first is that, in 1973, Japan's income per capita was only about 60 per cent of the Canadian average. By 1993, the positions had been reversed, such that Canadian income per capita, which is only an average, represented about 60 per cent of the Japanese average.
Even more striking is the comparison between incomes in Singapore and Canada. I went to Singapore in 1967, when it was very much an underdeveloped economy in dire straits. The biggest employer on the islands happened to be the British military base which was about to close down. Everyone was wondering what on earth little Singapore, recently kicked out of the federation with Malaysia, would be doing.
Singapore has now become an example for the rest of the world. Comparing Canada's per capita income with Singapore's in 1973, we see that Singaporean income was one-third of the Canadian income. By 1993, it had achieved virtual parity.
That gives us a sense of where they have come from and where they are going. That is the point I wanted to stress with the aid of Table I.
In the last two columns, the first ratio is for 1973. Canada equals 100 and Japan is 59.3 per cent of the Canadian average. The last column is the ratio for 1993. Canada equals 100 and Japan is 157.7. This is practically 60 per cent higher than the Canadian average. You can see the GNP per capita in American dollar terms in the first and second columns.
Canadian income per capita in 1993 was just under $20,000. Japanese income per capita was $31,000. Singapore, again, was virtually the same as Canada's.
Senator Carney: During that period there were huge swings, of course, in the value of the U.S. dollar versus the Yen. Is that taken into account there or is there another proxy that we could use that might be more accurate?
Mr. Mehmet: I am sure these are taken into account, senator. These are figures computed by the World Bank and these are comparable figures over this period.
If we look at the shifts that are taking place in world trade, I have used one data source which is summarized in Table II. This is a Japanese study. Let me describe the table. The first lines refers to Japan. The second refers to Asian new industrializing economies, which include Korea, Taiwan and Hong Kong. The third line is ASEAN 4, which refer to Indonesia, Malaysia, Thailand and Singapore. The next three lines are China, U.S.A. and the world. The percentages should add up to 100 because these are trade shares. It is like slicing the pie.
In 1970, Japan's share in world trade as a whole was 6 per cent. By 1987, it had risen to 9 per cent, and it is projected to remain basically the same to the year 2000.
The remarkable change took place in the case of ASEAN new industrialized economies, which in 1970 had a share of 1.5 per cent of world trade, increasing to 6 per cent by 1987, and projected to rise to 7 per cent by the year 2000. ASEAN 4 registered an increase in trade share from 2 per cent to 3 per cent. China went up from 1 per cent to 1.6 per cent, and by the year 2000 it is expected to almost double its share to 3 per cent.
It is important to note that if you combine the four groups -- Japan, East Asian NIEs, ASEAN 4 and China -- in 1970 they collectively accounted for 10.5 per cent of world trade. By 1987, they had virtually doubled their trade share to 19.6 per cent and by the year 2000 they are expected to account for 22 per cent of world trade.
Against this impressive gain, who are the losers? The losers are essentially Europe and, to a greater extent, Canada and the United States. I show in the second last line of the chart the trade share of the U.S.A. In 1970, it accounted for 14 per cent of world trade, declining to 10 per cent by 1987, and further declining to 9 per cent by the year 2000.
There is a restructuring in world trade with Asia-Pacific emerging as an increasingly significant trade bloc. This is only the beginning. With China continuing its liberalization and trading orientation, it is expected to emerge as the single largest economy in the world in absolute terms.
By the year 2005, Asia-Pacific economies collectively are expected to be twice as big as the United States economy.
These are some trends and projections. I have to say, of course, as with any projection or any statistical analysis, that there are always weaknesses or limitations behind the assumptions and the data. In particular, of course, the future can never be predicted, so this has to be borne in mind.
I should now like to move along to an explanation of what is behind this dynamism. At the risk of generalizing too much in what has become a very controversial and complex field, I should like to emphasize the importance of investment in education and people, or what we call human resource development. These countries -- these tigers, dragons, whichever label we choose to use for them -- did a number of things correctly from the beginning. Not only did they get their prices right, they got much more right. In particular, they recognized very early in the development process the importance of investing in people.
I have seen this myself in Malaysia, Singapore and other countries. I have been involved as an economist working in this process over the last 25 or 30 years. It gives me a great deal of satisfaction now to see the acceptance of this work in the profession in which I have personally been involved. I am afraid, however, that American economists like Paul Krugman are late-comers to this. Some of us have been watching this happen and have contributed to the formation of policies dealing with it over the last three decades.
Table III summarizes some of what I call the key HRD indicators that lie behind the East Asian economic miracle.
The first row refers to mean years of schooling. Again, these are figures taken from the UNDP human development report which we all know has placed Canada as number one in terms of the human development index. The microdetail, shows some other fascinating explanations in favour of East Asia. In terms of mean years of schooling, Canada, with an average of 12.2 years of schooling, is ahead of Japan, which has an average of 10.8 per cent. However, in terms of HRD expenditures, Canada lags well behind Japan.
I have taken Japan as a model because Japan has, in fact, played the role of a leading model. These countries have developed, we might say, because they looked east, to use a motto of Malaysian Prime Minister Mohamed Mahathir, who is famous for his policy of looking east. He has patterned the Malaysian development model on those of Japan and South Korea.
R&D expenditures in Canada, as a percentage of GNP, add up to 1.4 per cent, well behind that of U.S.A., which is 2.9 per cent, but also well behind Japan, which is 2.8 per cent. I can tell you that the Canadian ratio of R&D expenditures is not significantly different from, for example, Malaysia, which has a population of about 18 million and does not consider itself as an NIC.
What is really important in terms of educational policies, though, is the importance that the Asian tigers, following the Japanese model, have placed on science, professional and technical education. This is shown in the third row of the table which indicates science graduates as a percentage of total graduates. Canada had a 16 per cent share of science graduates compared with 26 per cent in the case of Japan. The U.S.A. had a 15 per cent share of science graduates. In Japan, there has been much more emphasis on a technical scientific level of education.
To shed more light on this, I refer you to the next row which shows the percentage of graduates from the upper-secondary level of schooling to highlight the fact that in Japan 91.1 per cent of the normal graduate had upper-secondary education. In other words, Japan and these Asian countries gave top priority to secondary level education, leaving tertiary education or university education either to the private sector or keeping it on a limited scale.
This is captured in the last row which shows that Canada has a much higher percentage of graduates at the tertiary level than does the United States compared to Japan. One reason we have so many Asian students in Canada is precisely because of the lack of opportunity at the university level in Asia. This has been a deliberate policy in the human resources development policies of these countries. They have given top priority in their educational policies to secondary level expansion. Furthermore, they have emphasized technical, scientific and professional skill development education. This is a sharp difference between the North American experience and the Asian experience.
The next part of my paper deals with what is referred to in the literature as the debate over Asian values. Essentially, there are two dimensions of this Asian values debate which I would like to bring to your attention. One is the good side; the other is the not-so-good side or the problematic side of Asian values.
I discuss the Asian concept of family and the importance that is put upon solidarity and cohesion as a source of building trust and networking, not only within the family but within business relations. I refer to the role that overseas Chinese networks are now playing. I want to emphasize the fact that much of the dynamism we see in Asia-Pacific is driven by trade surpluses and savings concentrated in places such as Taiwan, Hong Kong and Singapore; i.e., in the hands of overseas Chinese enterprises. In the 1970s and 1980s, these funds were fuelling the emergence of countries such as Malaysia, Thailand and Indonesia. Now, increasingly, these funds are being channelled into mainland China. The importance of the overseas Chinese in the Asia-Pacific dynamism is, I believe, of the utmost importance.
There are then sections in my paper which deal with the Asian ideal of power and governance which we can go into if you would like. I discuss the questions of accountability and transparency, gift giving and corruption, and rent seeking, which are all part and parcel of doing business in this dynamic world.
Finally, I would like to emphasize the importance of unfair trade practices. In the context of Asia-Pacific dynamism, one hears a lot about industrial perks, industrial estates, export processing zones and all kinds of other policies to encourage and promote export-oriented industrialization. However, what is not generally heard is the increasing institutionalization of child labour, the subordination of women, limitations on worker rights and the lack of collective bargaining. In effect, there is a lack or absence of international labour standards or codes.
The social aspects of international trade are becoming increasingly recognized as an important aspect of multilateral trade negotiations. There is all kinds of work going on in the OECD, the WTO, the ILO and the World Bank on all these issues. However, the net result of the unfair trade practices that lie behind Asia-Pacific dynamism is that it ends up increasing the welfare costs in northern countries such as Canada because we have free labour mobility. Increasingly, multilateral corporations are locating down south because not only are there low wages, but there are also no strikes and no workers' rights. In effect, free trade -- which in my opinion should not mean freedom for capital movements alone -- now runs the risk of becoming unfair trade and taking advantage of the absence of decent working conditions.
I conclude, Mr. Chairman, by making a very strong plea that there is room here for Canada to get involved in international fora to encourage the promotion of international labour standards and to make the international trade playing field not only more efficient but also more fair.
The last table in my paper relates to international labour conventions in Indonesia, Malaysia, Korea, the Philippines, Singapore, Thailand, Canada and the U.S.A. Six ILO conventions are summarized in this table. These six are freedom of association, right to collective bargaining, forced labour, abolition of forced labour, non-discrimination and minimum wage. These six are referred to as the core labour standards in the current debate on social policy aspects.
It is notable that Korea, for example, which is undoubtedly a success story on macro-economic terms, has not ratified one single convention from the core list.
Senator Bolduc: They want to keep their comparative advantages. It is as simple as that.
Mr. Mehmet: On the other hand, Canada has ratified three, but the United States has only ratified the abolition of forced labour convention.
This area of labour standards does not mean that we have a monopoly on what is good and what is right. There are all kinds of controversies with strong positions on both sides of the issue. However, I cannot overemphasize the point that Canada should get involved not only in ways to increase business in the conventional sense but, equally as important, in the promotion of labour standards for our own interests as well as those of workers in Asia-Pacific.
The Chairman: Thank you very much, Mr. Mehmet.
Senator Grafstein: I have a technical question with respect to that last chart. I thought Canada had signed all the ILO core conventions. Have we not signed the right to collective bargaining convention, the non-discriminatory or the minimum wage conventions? I thought the United States had signed the minimum wage convention.
Mr. Mehmet: Canada has signed three of the six core conventions.
Senator Stollery: Is there a story behind this that we should know?
Senator Corbin: There is a difference between ratification and practice.
The Chairman: I do not think we ought to go too deeply into the Canadian rationale. However, perhaps if you would say a few words in answer to the question, it might shed light on what is happening in the Asia-Pacific.
Mr. Mehmet: The information I have clearly shows that Canada has not signed every single ILO convention. There is no doubt about that. Canada, as a federal state, of course, can only ratify at the federal level, whereas a number of the issues relate to provincial jurisdiction. That is one major explanation, although not the only one.
Senator Grafstein: I did not quite understand the witness's conclusion based on this table. If we correlate this table with the table he previously showed us about growth in real wages, Singapore seems to have signed three conventions -- more than most -- and seems to have had the highest increase in its wage levels of any country in terms of absolute growth. Singapore is obviously doing something right, while at the same time establishing standards for its labour forces.
However, you mentioned that Korea is doing very well and Korea has not signed any conventions. I am, therefore, having difficulty in coming to a conclusion on these charts. Should we be promoting the ILO conventions as a foreign policy item in order to establish a competitive platform with these other emerging countries? I just do not understand where we are going on this.
Mr. Mehmet: Mr. Chairman, ratification does not guarantee compliance and does not constitute good behaviour. There are all kinds of enforcement problems and difficulties. If we go simply on the basis of ratifications, some of the best countries often turn out to be the worst offenders in terms of actual working conditions. I do not want to give the impression that ratification is all we should be after; far from it. That is only a first step.
The reason Singapore has done so well in terms of income growth as well as distribution is that Singapore is a country which really grew out of the trade union movement, you might say. Lee Kuan Yew was a trade union leader and his party grew out of the labour movement but, even more important, Singapore followed the policy of growth with equity, which I described in the paper, as have a number of other countries. It followed, in the early phase of its development from 1966 to 1978, a low-wage policy. In fact, there was hardly any movement in money wages.
At the same time, however, income distribution improved impressively because workers were provided with low-cost housing, with cheap public transit and with manpower training. Therefore, real wages improved even though money wages stayed the same. The reason money wages remained constant over this period in the early phase of Singapore's development was precisely in order to attract foreign investment.
What is really remarkable in this experience, and the lesson that I and others have drawn from the Singapore model, is that they cleverly balanced the objectives of rapid growth with equitable distribution to benefit their workers. It is a small country -- it is indeed a city state -- but the trick lies in how they crafted their economic development policy, which has now been replicated elsewhere. The lesson to be drawn from the successful Singapore experience lies in how they put together public policy, not in the size of the country.
The Chairman: You say "they crafted". You spoke of what "they" did two or three times. Are you suggesting that this was not a free enterprise development? Who are "they"?
Mr. Mehmet: Let me read from the relevant page. These were all developmental states, in other words, led by a leadership committed to the idea of economic development. On page 8 of my paper I say:
In the East Asian development state, policy governs the market and directs endogenous growth...
I reject the free enterprise model as myth. This was interventionist development guided by the state for the good of its citizens. As I said, the intervention in the case of Singapore in the first decade of development was in the form of public housing; manpower development; development of education, with emphasis on technical skill development at the secondary level in particular; and controlled wages. It was very much a case of governing the market.
Mr. English: Mr. Chairman, one must say, however, that Singapore was unique amongst most of those countries in that it operated on a free-trade basis with respect to the rest of the world. So the discipline of the world market was imposed on them at all times.
I take a middle position on role of government. I think there is an optimum role of government -- the question is how to define it -- and it differs from country to country. In the case of Singapore, government certainly played a role, but it was a role in reinforcing the advantages they could already perceive of themselves as a port and as a market that could not afford to be shut off from the rest of the world. So the discipline of the market was there and they had the sense to respond to it with constructive government.
The difference, of course, between Singapore and Hong Kong is interesting in this respect. For a long while, Hong Kong relied entirely on the private sector. I have a paper on that which I will not distribute today, but you can see it if you like. They have now moved toward government intervention in the Hong Kong economy because they know what they will be a part of in the next while and they better have the right kind of government perspective in order to fit and plug into China.
You must take account of different forces of party discipline. In this case, the external forces were important in Singapore.
Senator Carney: First, I do not want Ted English to think we are ignoring him because he gave a very interesting paper, but I am so familiar with his work that I should like to move on to our second witness, Mr. Mehmet. We should like to have a copy of anything you have written on this, Mr. English. You have a wealth of experience in this field.
I would like clarification on two areas of your presentation. First, in these comparative rankings of Canada, in terms of GNP per capita, and in your comments about the non-competitiveness of Canada in the face of migrant workers and what you call "social dumping", I suggest that if you use the concept of purchasing power, Canada would not necessarily be ranked as low as you have ranked it. In your paper, you show that Canada has fallen from second place to third or fourth.
Second, in terms of productivity, we are more competitive than your paper would indicate. I want to clarify this. You cannot say everything in one paper. I want to ensure that you do not disagree with those concepts; namely, that productivity and purchasing power would improve our Canadian ranking here.
Mr. Mehmet: I agree with that.
Senator Carney: On page 9 of your brief, you talk about the Asian idea of power and governance. This is something we never hear about in this committee. I am surprised that Senator Andreychuk did not beat me to the post on this one. I will send the committee the two current pieces of literature to which I am about to refer.
In the current Economist, there is an article which states that China is not as rich as we are being told and that it is a lot poorer if you look at the real numbers. The second article, the cover story in Asia Week, states that the growth of the human rights movement in China outside politics is phenomenal. Those are two things about which we do not hear.
You have made some very provocative statements. You have also done a lot of work in this area. You stated on page 9:
Asian idea of power is non-ethical...
and that:
Legitimacy does not issue from popular will, nor from ethics.
You also say:
In short, the Asian idea of power is completely independent of ethics.
Further down you state:
This system makes democratic institutions and governance, as understood in the West, foreign and inapplicable, at least until and unless fundamental change in Asian Values are effected.
Since a lot of our foreign affairs policy under the current and the last administration is based on human rights and the democratization of these countries, would you like to elaborate on that?
You have defined "ethics" in our terms and you are suggesting that, perhaps, Asian ethics will have to change in order to meet our objectives. Is that what you meant, or would you like to talk more about this value-loaded word?
Mr. Mehmet: No, that is not what I meant. First, you said that I made some provocative statements. In a sense, you are absolutely right. I am making provocative statements.
Having spent a considerable length of time in these societies, I believe that a trade relationship is not simply dollars and cents. We must open the black box and look at the values with the Asian trading partners. When we look behind or inside the black box, we find surprises. I certainly discovered that when I worked in Jakarta for two years. I have also done considerable reading and research in this area.
Senator Carney: But you say it is "unethical". Do you mean that it is not in our culture?
Mr. Mehmet: I did not say "unethical".
Senator Carney: You say it is non-ethical.
Mr. Mehmet: Yes. It is of neutral ethics. There is the idea of neutrality here. It is neither good nor bad; that is the way it is. In other words, power is determined supernaturally.
Senator Carney: Do you think that we are wrong, when making some of our value judgments on things such as human rights and democratization, to include political power?
Mr. Mehmet: To Asians, it comes across as either arrogant or misinformed. I do not want to be judgmental in this respect. I am trying to be descriptive. I am trying to make a link between the Asian idea of "power" and what occurs, for example, on the export processing zones. In turn, that is reflected in the way in which comparative advantage is generated.
If workers accept, fatalistically, their inferior economic and social position -- that is, if decision makers and politicians in Indonesia accept as natural that gate-keeping is, in an intrinsic way, related to gift giving and taking, and rent seeking and corruption -- then is that not part of the trade relationship agenda? That is the kind of question I am raising.
Senator Carney: But in Japan, gift giving is extremely extensive.
Mr. Mehmet: It is a way of life.
Senator Carney: It is also democratic. I would argue that your argument of being non-ethical does not apply in Japan. I may be wrong. If it does not apply in Japan, then why does it apply in Indonesia and why should our foreign policy accept these distinctions? We want to deal with what Canada's relationship should be.
Mr. Mehmet: I am not making a judgment call; I am not trying to get into the question of what is ethical and what is not. I am simply attempting to describe the way it is. You are correct that in Japan gift giving is as extensive as it is in Indonesia. But whether it is in Japan, Hong Kong or Indonesia, it ends up as a transaction cost or as a cost of doing business. There is no getting away from it, whether you are in Japan or in Indonesia.
Senator Carney: But you have not answered my fundamental question; namely, should it be reflected in our foreign policy or not. If you say that they consider it irrelevant or beside the point, should our emphasis on democratization and other rights be part of our foreign policy?
Mr. Mehmet: Of course it should. I have no doubt that it should be part of our foreign policy. That is my whole argument. First, we should try to understand the social dimensions of trade.
Senator Grafstein: We are obviously all having difficulty with your paper and trying to grasp this in Canadian terms, through Canadian interests and so on. This is an excellent description of feudalism in the 20th century. We did not like feudalism in the 15th century; we certainly did not like it in the 16th century; we hated it in the 17th century; and we abhorred it in the 19th century. Why should we like it in the 20th century, unless people say it is so important in your national interest to ignore feudalism, which might be a valid choice for this committee, or see if there are other options.
Let me come at the same question in a different way. Quite frankly, I look at this from a business investment trade perspective, and based on my experience, when we decide from a business standpoint where to go, you start with a country risk assessment. You analyse the risk assessment, the stability of the government, and a whole raft of normal things. Perhaps this is something we should incorporate in our study, things which are done with global businesses all the time. Global businessmen make country assessments or risk assessments from a business standpoint.
However, one of the key elements is not human rights as defined by Senator Carney --
Senator Carney: I did not define it.
Senator Grafstein: Not human rights as previously discussed, but essentially rule of law as it applies to business investments. Rule of law means that if you make a Canadian investment in a foreign country, if you are a private firm, you would expect that you do not have to depend on your foreign partners who are tied into families and feudalism and all the rest of it and that you can protect your investment by means of an external call to private law. I am troubled here because there is no reference to the quality of private law that businessmen count on when they make trade or foreign investment related decisions.
As an example, although this may be a bad one, from looking at this paper, from a risk assessment standpoint I would invest in Singapore because I am satisfied, based on what I have heard -- not based on my study but on what I have heard -- that my investment would be secure. If I have a dispute with my local partner, I do not have to depend upon family or triads or corruption. I can go to the private law. It is the same in Hong Kong. I know in Hong Kong you can go to the private law. It has an independent judiciary.
My focus from a trade investment standpoint starts with that, and then you move into the larger important questions about labour rights and so on. You start with the investment right, the right of capital, the right of a private investment to ensure that its rights are fairly protected.
Absent that in this paper, it is of concern to me, Mr. Chairman, how we come at this very complex topic. Perhaps both Professor English and Professor Mehmet could give me their comments on that. That is my understanding of how international business operates today. They decide "not China but perhaps India" based on their ability to access local law. They do not want to be tied up in triads which all of a sudden appear or disappear.
The Chairman: It may well be that we need to ask for a paper on this.
Mr. English: Mr. Chairman, I agree that there are differences in culture. However, when you relate this to history, you omit one thing, and that is that in most parts of history, communications were not what they are now. You find out things, and if you do not like them on either political or economic grounds, you register your feelings. That can happen through political systems, too.
How much do these differences in culture matter in the economic comparative advantages that govern the behaviour of each of these countries? There is enormous variety. I have spent time in several of these Asian countries and there are enormous differences among them. The differences are partly the result of their current or past political differences, but they are partly fundamentally the result of their cultures.
I agree with what Senator Carney has said about the Japanese. The gift thing gets carried away, but then what about the gifts that are made by business to American politicians? It is notorious. The point is not unusual, at any rate. That would not happen in Canada, of course.
The important point is that some of these things are significant and should be of concern, but they are not easily separated and related to the differences and other aspects of culture.
Another thing that is extremely important is that many of these countries are agricultural. You used the word "feudalism"; I would use the word "agricultural". Their comparative advantages have long been in the resource sectors where the effect of such practices would not be nearly as important as the wealth of resources you generate if you have oil or other agricultural products such as Indonesia has which determine their comparative advantages historically. When they move from that to a more industrial society, some of these other things become relatively more important.
We really have to link the different sources of advantage with these social practices. We need not accept those we do not like, but we must not make too much of them as the basis of economic decisions.
Senator Stollery: Mr. Chairman, I found the testimony here today very interesting.
As a traveling student, I spent some time in the Far East, but in colonial times, before all of this. In those days, there was an interesting phenomena that you do not hear of now. You spoke of the overseas Chinese. "Asians" to us meant Indians, and they ran equatorial Africa. Where the Portuguese left off, the Asians took over. Then you have the Ismailis. If you wanted to do a certain kind of deal, you went to an Ismaili. If you were in Burma or Indochina, you would go to a Chinese trader because you knew that he would do the deal right away. We do not talk like that any more because now gentilism has stuck its head in and you cannot say that different kinds of people do different kinds of things.
Personally, I consider Singapore to be the capital of the overseas Chinese. Some of those whom people like myself ran into just before the period of independence are the founders of the great fortunes of today in the Far East.
I understand the ethic exactly. What are ethics? We leave those to the philosophers. It is a different system. To imagine that it is not a different system is to dream in technicolour.
Senator Grafstein made an important point. How do you deal with this in large sums of money where there is actual continuing investment involved in a system that has possibly no independent judiciary? That is a very good question, and I would like to know if you have any recommendations in this respect. It is an important point, and the committee might be able to come up with an idea or two about this idealist atmosphere. Do you have any thoughts on that?
Mr. Mehmet: Mr. Chairman, to first go back to the point about risk analysis, I was arguing that the issue is not simply a matter of how to protect our investments. Important though that is to the investor, there is, if I may say so, a new ball game. Obviously, the investor has to have security in his investment. There are laws and rules about that but my paper does not go into the legal aspects. I would be glad to supply you with that kind of information.
I wanted to bring to your attention, Mr. Chairman, the economic and trade implications of cultural differences. With technology and liberalization, capital is now freely mobile. There is, however, joblessness in Canada -- not only in Mexico -- as opposed to regimes in Asia-Pacific, for a number of reasons. One reason which I would submit for your consideration is the lack of social or labour standards, labour rights which we take for granted in Canada.
Women and children workers are now working in special purpose economic zones for wages that are perhaps one dollar a day or less, with no protection. I discuss briefly some of these issues in my paper and elsewhere.
It is, therefore, in Canada's interest as a matter of economic policy management to understand how competitive advantages are now being created in this region of economic dynamism.
The classical trade model explains much of this situation on the basis of high savings ratio and giving importance to productivity and competitiveness. We are all familiar with many of these terms and criteria. However, I suggest there is another dimension to it and we ought to begin to get interested and concerned about the other side linked to cultural differences.
Bureaucracy operates on what I call gate-keeping. Licences and permits are issued not on the basis of open systems, but on the basis of maximization of personal gain. This gets translated into transaction costs. If a fertilizer plant will cost $1 billion, it can easily escalate to $3 billion. Of that, $2 billion will go into rents.
On the flip side of the coin are substandard wages and substandard working conditions. Workers are working without an employment contract because workers in export-processing zones are supplied by a labour contractor located in the capital city many thousands of miles away. These are the kind of conditions which exist.
On plantations, much of the labour is supplied by illegal or quasi-legal migrants who are paid wages at or below poverty level. Every six months, these migrant workers are kicked out of the country in order to maintain competitiveness. Should we not get involved in this kind of issue? This has to be decided.
Senator Andreychuk: Sometimes human rights are defined too narrowly into political and civil action. However, I think human rights encompass fair trade practices and the rest.
You say that we should address these issues. However, on the other hand, we want to trade with these nations. As we address them, we keep hearing that we should do it subtly and diplomatically and that change will inevitably come.
How do we make the change so that we do not lose what little competitive advantage we have in some of our fields?
Professor English, you say there is a problem of technology transfer and the so-called Third World has always said to us that they should not pay for the technology transfer, that they should have some competitive edge. If we start trading with them, sharing by partnership all our technologies, and if we are then invited to leave these countries, or we are marginalized in some way, how do we protect ourselves against that if we do not take into account the cultural differences and start working on them to maximize global trade practices to our advantage? Inevitably, they will resort to global trade practices by power and might, whether it is through the dollar or world trade structures. Their cultural biases will win and our cultural biases will lose.
Mr. English: You asked the question: What are the sources of economic inefficiency? If a system works only on the basis of some social bias that has been produced by anything that has been mentioned today, then you have a problem of the economics not coming out the way they would if that social bias were not there.
When I cited the conservative lady economist from Singapore on the question of whether the cost to developing countries ought to be as high for using a textbook as it is in a rich country, I was referring to a monopoly element. Ultimately, all patents and trademarks have a monopoly element in them. The question then is how much monopoly should be given in order to encourage invention?
I also believe that there is some optimum level of support. How many years should a patent be in effect? Trademarks and patents tend to go on forever and some of those are biasing the system as much if not more than the patents.
I am talking only about what is an optimum level of reward for different kinds of property. I do not want to dwell on that, because that was not the main issue.
I think the main issue is related to what I have already said; that is to say, to what extent in the much more open world economy, with all these things being brought to our attention, are the biases related to culture really significant in determining the way things have turned out?
If you start looking at the particular exports of the Asian countries, to what do you attribute them? In many cases, export decisions are due to the resources a particular country either has or has not. Korea had to be a manufacturing country because it did not produce enough food for its own needs, and even though they biased the system by protection of agriculture, the way the Japanese have done, that was a cost they imposed on themselves, unlike the Taiwanese, which gave them some advantage.
You have to look at these different policy and social interventions in terms of how much effect they have on the way in which their comparative advantages have worked out. I am not saying they do not have any, but we have to look at it case by case. I would not generalize throughout East Asia at all, but look in detail at the cases where you think these things may be more important. Indonesia might be an important case but it is overwhelmed in many respects by the heavy resource comparative advantage that Indonesia has always had in its exports. It is only now that Indonesia is beginning to look seriously at how to be an efficient exporter of manufacturers. How they behave in that context is much more related to what Professor Mehmet says than to anything previous.
Senator Andreychuk: We have often heard that the rules of the World Trade Organization will determine how well we do anywhere in the world, particularly in the Asia-Pacific region. I gather from what you are saying that, while you think it is an influence, you do not think it has quite the same degree of importance. Is that right?
Mr. English: I think the basic rules of the World Trade Organization must be part of the system. The places where it needs to be complemented relate to the differences, some of which are not based upon basic comparative advantage, in the access of investment and other things that are not covered very fully by the World Trade Organization. Transfer of technology is not covered very well by the World Trade Organization. It may be covered better in the future but much of that area needs to be dealt with both at a regional and a multilateral level. I have no great objection to the basic limits of the WTO, but I do have scepticism about how much the ILO does in this respect, or the other elements of the international system. Even the WTO has not gone as far as it might in the areas other than direct trade restriction.
The Chairman: Thank you very much. This has been a very interesting introduction to an extremely complicated set of problems. It is not one problem but a set. We are greatly indebted to both our witnesses this afternoon.
Honourable senators, the hour is advanced, yet there are two or three things which I should like to take up with regard to the future work of the committee.
The committee proceeded in camera.