FAIT Committee Meeting

STANDING COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE

COMITÉ PERMANENT DES AFFAIRES ÉTRANGÈRES ET DU COMMERCE INTERNATIONAL

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 18, 2000

• 0935

[English]

The Chair (Mr. Bill Graham (Toronto Centre—Rosedale, Lib.)): Thank you very much, colleagues. I would like to call this session to order. We're pleased to have with us Minister Martin to talk about the G-20.

Minister, you'll recall that this committee did a report some years ago on the international financial institutions as a lead-up to the G-7 summit in Halifax. Recently we travelled across the country to prepare a report for the government on the World Trade Organization and what Canada's position should be in that, prior to the last Seattle meeting. Some years ago we dealt with the MAI issue, and negotiations here in the committee.

So members of the committee are very much aware of the unease that many Canadians have about the pace of globalization, if we can use that terrible word, and the way in which we're getting integrated in the world, and there's a sense that perhaps we don't have the same control over our future and our destiny as we did before.

We believe the role you're taking as a leader of the G-20 enables us as Canadians to take something back, to take some control back. We know you've been very active in a leadership role in establishing the G-20 as an adjunct to the G-7. So we're very interested in hearing from you.

We appreciate your coming to talk to us. Thank you very much.

We'll turn it over to you. I'm assuming you'll be about 15 to 20 minutes, and then I'm going to go with five-minute rounds so that perhaps more members will have an opportunity to ask you questions. We might try to keep you a few minutes after the technical one-hour break. Thank you very much. Thank you for coming.

Hon. Paul Martin (Minister of Finance, Lib.): Thank you very much, Mr. Chairman. Let me begin by expressing my appreciation to you personally, and certainly to all of the other members of the committee on foreign affairs for this opportunity to speak to you about the challenges of globalization in general and, as you have just said, about the role of the G-20 in particular.

The G-20 brings together finance ministers and central bank governors from a diverse group of countries representing about 87% of the world's gross domestic product and about 65% of its population. The G-20 has a mandate to explore virtually every area of international finance. This includes the devastating effects of financial crises, the growing gap between the rich and the poor, and a system of governance—and on this I would insist—that has not kept pace with the sweeping changes that are taking place in the global economy.

Mr. Chairman, as you have just indicated, this is not the first time this committee has examined the issue of globalization, nor is it the first time that the world has witnessed the phenomenon. That being said, the process we are witnessing now is very different from the globalization of the late 19th century, for instance—different, I would suggest to you, because of two extraordinary developments.

First, technological innovation is advancing on a scale that has never been seen before in human history. It is affecting the very foundations of the world's economy.

Second, with the fall of communism and the end of the Cold War, there is a wide consensus that prosperity can best be achieved by harnessing the enormous capacity of private markets to create a better standard of living for all. Now, these two elements, that is to say cascading technological development on the one hand, and the triumphant free market on the other, are the essential constituents of modern globalization, a phenomenon that has the potential to generate enormous benefits. Indeed, for many, it has already done so.

That's the good news.

There is, however, another side to the ledger, for the new opportunities that have been created by globalization have also brought new challenges. Workers and businesses in Canada and around the world have faced wrenching adjustment in response to the intense competition that has been brought about by globalization. Many, especially in the poorest countries, have not shared at all in the benefits that globalization has brought.

Without the skills to compete in the modern economy, and facing the crippling problems that range from endemic disease to massive environmental degradation, the world's poor are already becoming increasingly marginalized. The result is a morally indefensible and potentially explosive widening of the gap between the rich and poor.

Now, some of these challenges can be addressed at the national level by sovereign governments acting alone. But globalization also poses new and difficult questions that no single government can resolve by itself. This means if we're going to address the challenges that are posed by modern globalization, we will have to find ways to promote cooperative solutions. It is this need, the need for stronger and more effective international cooperation, that makes reform of the international financial institutions so pressing.

• 0940

[Translation]

Mr. Chairman, there is a reason why most of our international financial institutions were established towards the end of the Second World War, a time when the Great Depression was fresh in the minds of policy-makers.

They recognized that the Depression of the 1930s had been made immeasurably worse when governments chose to turn away from global integration by erecting barriers to international trade. The resulting breakdown of international co-operation made the situation even more desperate.

It was for this reason that the major powers of the time established all kinds of institutions that they knew would be needed if countries were to again confidently embrace global integration and the gains that it brings.

The signal economic event here was the Bretton Woods Conference, which in 1944 established the IMF and the World Bank.

[English]

Mr. Chairman, one of the reasons the Bretton Woods institutions have been so effective since 1944 is that they did not remain static after their creation. For example, the IMF, which was originally designed to support a system of fixed exchange rates, adapted itself to assisting countries with flexible exchange rates. The World Bank, for its part, was originally established to finance post-war reconstruction in Europe, and with that job done, it refocused its efforts on promoting development in the world's poorest countries.

Today, in the face of the challenges that are presented by globalization, the capacity to be flexible is more important than ever. New problems require new solutions, and the international institutions must evolve to keep pace with the changing global economy and its mores.

What I'd like to do is speak in particular, Mr. Chairman, about one of the challenges facing the IMF, as an example of what we're dealing with.

As you know, one of the most important of the changes in the global economy is the enormous growth in international movements of capital over the past decade. In the past, only borrowers in rich countries could tap international markets, but today, public and private borrowers alike in many countries in the so-called emerging markets can do so.

Integration with international capital markets, like the other aspects of globalization, is a good thing, for it allows developing countries access to the capital they need to finance investment and growth. Yet there is also clearly something very wrong with the way international financial markets have been working.

Financial crises arise with stunning regularity and severity—more frequent, more virulent, and more contagious than in the past. They have the demonstrated potential to disrupt the entire financial system. Anyone who doubts the magnitude of the risks need look no further than Southeast Asia.

For millions of people, gains in standards of living that had taken years to achieve were suddenly reversed, and the very existence of emerging middle classes was suddenly threatened. The sources of these crises were to be found quite clearly in financial markets, that is to say, shifts in investor confidence and massive flows of capital across borders.

Mr. Chairman, we have for more than 50 years looked to the IMF to help stabilize the international system and help countries in times of crises, but when the IMF was established, crises originated in countries' trade balances, not in international capital markets. These crises usually involved a sharp drop in exports or a surge in imports, leading to an unsustainable balance of payments deficit.

The tools used by the fund to address these crises involved lending a country a rather modest amount of money, subject to the condition that the country implement tough economic measures that addressed the underlying cause of its balance of payments problem.

But modern financial crises are different. They result when massive amounts of capital are withdrawn from a country, and this leads to balance of payments deficits that are much larger than anything that could have been contemplated when the IMF was founded.

The problem is that the tools that are available to the IMF have not kept pace with the massive expansion of private capital flows and the resulting increase in the scale of international crises. The result is that the fund has had to cope with these crises using its existing tools, and this has meant providing much larger amounts of financial assistance to crises countries and requiring more onerous austerity measures from their governments. The consequence of this austerity has been sharp falls in the living standards in the affected countries, and this has understandably led to a chorus of criticism of the fund. Some have gone so far as to demand that it be abolished.

• 0945

Let me assure you, Mr. Chairman, that getting rid of the fund would not be the right response. Rather, the task is to improve the way it operates so that it can better fulfil the mandate of helping countries and their people through crises.

To do this, we must ensure that the fund has the tools to deal with crises stemming from sudden shifts in private capital flows. On the one hand, private investment has been the primary engine of world development for the past decade, and it will remain so for the foreseeable future. On the other hand, the world cannot allow international capital markets to continue to be sources of severe financial crises and indeed to transmit these crises from one country to another. In short, we need well-functioning international capital markets.

Addressing this does not require heavy-handed regulation. Private sector investors must be free to decide where and in what sectors they'll invest internationally, as they do domestically. But allowing private investors to make their own investment decisions doesn't mean abdicating our responsibilities as governments to ensure that the system in which they make these decisions is stable.

Hockey, Mr. Chairman, is a wonderful game. It's fast paced, free wheeling, and sometimes risky. It's the players that make the game, not the referees. But that being said, hockey without rules and referees wouldn't be hockey. It would be high-speed, high-risk, high-stakes anarchy. Unfortunately, without rules and referees, that is what the international financial system all too often resembles.

[Translation]

The point, Mr. Chairman, is that governments and international institutions have an important role to play in establishing and enforcing rules of the game that are predictable, fair and understood by all. These rules include banking and securities regulation, consistent accounting standards, proven corporate governance, and transparent standards for the economic data that allow investors to rationally assess the risks they face in any given country.

One area where progress is particularly urgent is the regime that governs bankruptcy. These rules are needed to minimize the disruptive effects to the whole economy of individual borrowers' financial distress. Their goal is not to relieve borrowers of their obligations. Rather, it is to limit the socially and economically disruptive effects of capital flight.

The international community has recognized the importance of the financial rule book in other areas. But we have made much less progress in developing an international bankruptcy regime that would extend to countries in distress and their borrowers the same protections we give debtors in our own countries.

This is where we need to concentrate our efforts at the international level—on mechanisms to put a temporary halt to the massive capital outflows that are often central to modern financial crises.

[English]

Mr. Chairman, all of this is why some have proposed a formal international bankruptcy court. While this does have some conceptual appeal, it is unlikely, in my opinion, to happen in the near future. Fortunately, however, neither is it necessary.

A fundamental purpose of a bankruptcy court is to create an environment in which debtors and creditors can cooperatively resolve their problems. Recently, Canada has put forward two ideas that would do this at the international level. The first of those suggestions is a collective action clause. The second is a standstill.

A collective action clause is simply wording in a debt contract that says that bondholders, who often number in the thousands, should appoint a single representative to negotiate on their behalf if a debtor runs into problems. Clearly, this would make negotiation and cooperation much easier.

The second suggestion is a standstill provision. This is a temporary halt on the repayment of debt. It creates a breathing space during which a country could negotiate with its creditors and devise a solution to its underlying problems.

• 0950

There are a number of ways one can do this. One way is what is called a UDROP, that is to say, a universal debt rollover with a penalty. A second possibility would take the form of a mandatory clause in all international debt contracts giving the debtor the right to suspend payments for a specified period in the event of an emergency. Another version of this would be for the IMF to endorse a country's sovereign decision to suspend payments for a period of time. The point here is that the endorsement by the IMF could prevent financial contagion from spreading when an individual country runs into difficulties.

Mr. Chairman, reforming international financial institutions and putting in place the right framework for private sector capital flows, as I have just described, will go a long way to ensuring that the global financial system works to improve people's lives and does not pose a threat to their economic security.

That being said, the heaviest responsibility, and rightly so, lies with national governments. Governments are accountable to their populations in a way that international institutions and private sector players are not. The IMF can recommend policies, but it is national parliaments that hold the sovereign right to implement those policies and that must answer to their populations for the consequences.

In the past two years, governments have responded to the sometimes conflicting need for cooperation on the one hand and accountability on the other by creating two virtual institutions, institutions whose existence is not a brick-and-mortar building staffed by international bureaucrats but a network of national capitals.

The first institution is the Financial Stability Forum, which the G-7 created in 1999. It brings together finance ministries, central banks, and financial supervisors. The forum is working to strengthen financial systems in both industrial countries and emerging markets. The work is critically important, because, as we have just discussed, all too often financial crises have originated in poorly supervised and badly managed financial institutions. Indeed, the first principle when looking for the roots of a financial crisis often is cherchez la banque. That passes for humour in the Department of Finance, Mr. Chairman.

The Chair: I'm glad there's some humour over there, Minister. That's a relief to all of us.

Mr. Paul Martin: The Financial Stability Forum has already looked in detail at the implication of five issues for international financial stability. This includes capital flows, offshore financial centres, hedge funds, the standards that underline the financial rule book, and deposit insurance. Incidentally, John Palmer, who is Canada's Superintendent of Financial Institutions, headed up the work on offshore financial institutions. Another Canadian, J.-P. Sabourin, chaired the group looking at deposit insurance, his responsibility here in Canada.

The second virtual institution, which you mentioned in your introduction, is the G-20. It represents a major step forward in global economic governance. Experience in international aid, which I'm sure you have discussed at this committee, has shown that even the most well-intentioned programs are likely to fail unless the countries that are involved are given ownership of their development agenda. The same reasoning applies to sophisticated reforms of the international financial structure. Best practices will not be implemented and standards and codes will not be observed if the countries that must adopt them have not had a voice in their development.

That's why the G-20 is such an important step forward. In many ways it is modelled on the G-7. The latter has no secretariat and no formal rules, yet most would agree that it has been a highly effective, if not always loved, virtual institution. Like the G-7, the G-20 is informal, face to face, and driven by the needs of capitals, not international bureaucrats. It gives finance ministers and central bank governors from the major industrial and emerging markets the opportunity to agree first of all on a joint agenda and then, most importantly, to implement it.

The first G-20 ministerial meeting was held last December in Berlin. The second will be held in Montreal in October. We have agreed that the first task of the group is to identify financial vulnerabilities and find the ways to address them.

• 0955

Considerable work has gone on to fulfil this mandate, and real progress is being made. For example, each of the G-20 countries has now agreed that it will ask the IMF and the World Bank to look at how its—that is to say, each country's—financial rules stack up against international standards and how they can be improved. This represents an important breakthrough in the establishment of generally accepted principles of global governance.

To get the ball rolling, Canada was among the first countries to undergo this evaluation so far as the regulation of our financial institutions was concerned. With this work well underway, Canada believes it is time now for the G-20 to tackle the broader problems associated with globalization and finding solutions to them. An important aspect of this broader agenda must involve consultation with civil society.

Ever since entering public life, I have found dialogue with the NGOs and the other members of civil society to be incredibly and extremely beneficial and important. If anything, this process of consultation and dialogue must be enhanced, and I intend, in my role as the G-20 chair, to ensure this happens.

[Translation]

Finally, Mr. Chairman, let me conclude by explaining why the international financial issues we have been talking about matter to Canadians.

First, Canadians traditionally have shown great compassion concerning the plight of the world's poorest. But the poor countries suffer not only to lack of income, but also because they are often most vulnerable to external events that can have a devastating impact on their already fragile existence. A well- functioning global economy is therefore a crucial part of our poverty reduction efforts.

Second, a well-functioning global economy matters directly to the prosperity of Canadians. Secure in North America, surely we are immune to overseas economic catastrophes. This would be reassuring if it were true. But unfortunately it is not.

Even though more than 80% of our exports are destined for the United States, the prices of the commodities we export depend on global economic conditions. Anyone involved in forestry, mining or agriculture can tell you from direct experience about the impact of the Asian financial crisis on the economic well-being of Canadians.

The view that Canada is immune to developments elsewhere is wrong for another equally fundamental reason. In the autumn of 1998, Russia's debt default led to a flight of capital to so-called safe havens—particularly the United States. This led borrowing costs to shoot up everywhere else in the world—including Canada. Anyone renewing a mortgage or depending on a line of credit to get a business off the ground experienced the impact immediately and directly.

[English]

Global financial crises affect us all. Collapsing commodity prices mean a pork farmer in Manitoba will lose the work of a lifetime. A secretary in Montreal isn't able to qualify for a mortgage because interest rates have risen.

International financial issues are complex, but they are not abstract. The stability of the international financial system is a bottom-line pocketbook issue for us all. And there's another reason as well that these issues matter to Canadians. There is a deep and lasting relationship between security and prosperity, and it follows that if Canadians want a world free of armed conflict, as we surely do, we need to ensure the foundations for international prosperity have been established.

Furthermore, security in a globalized economy is not only a matter of limiting armed conflict. A generation ago the tragedy of tropical disease may have been a humanitarian concern, but it was unlikely to affect the daily lives of many of us in Canada. No longer. One need only look at the spread of AIDS to understand the true meaning of the global village.

Finally, Canada is a country that is globally respected for its honesty and its integrity. We naturally bridge the gap between the largest economies in the world and the emerging markets in Asia, Latin America, and Africa. Quite simply, Canada has the unique capacity to lead efforts to achieve a better world and to improve the international financial system to ensure it is a source of opportunity and not a threat. More to the point, we have the responsibility to ensure this is the case.

• 1000

Thank you, Mr. Chairman.

The Chair: Thank you very much, Minister.

I take it from your comments that your experience as a hockey player at St. Mike's makes you a perfect chairman for the G-20.

Voices: Oh, oh!

The Chair: Do you get to play and also be the referee?

Voices: Oh, oh!

The Chair: We're trying to keep it to five minutes each.

Mr. Obhrai.

Mr. Deepak Obhrai (Calgary East, Canadian Alliance): Thank you, Minister, for coming and giving us your perspective on the G-20. I would like to congratulate you on being the chairman of the G-20.

I have two questions. In your brief you talk about the IMF as well as the World Bank, but I'm sure you know the export credit agencies, such as Canada's Export Development Corporation, hold more debt of developing countries than the World Bank and the IMF combined. As the IMF noted, after the Mexican debt crisis, where commercial banks did not want to go, ECAs now hold 56% of the debt of third world countries.

The level of external debt of highly indebted poor countries is now widely recognized as the key impediment to their social and economic progress. The poorest people in the world owe Canada, through EDC, approximately $2.5 billion. These are the poorest 55 countries of the world. That debt is unpayable by these countries and is uncollectable by EDC. The corporation has written off commercial debts that it can't collect, and yet you and the Minister for International Trade keep signing off Canada account loans.

Do you factor in foreign debt before you give loans from the Canada account to third world countries, putting them in more debt? The issue here is the ECAs. Is that taken into account?

My second question is, since I have the time—

The Chair: The more time you take to ask the question, the less time you have to hear the answer.

Mr. Deepak Obhrai: Yes, but I'd like to get to this one. This is quite important.

We've been signing trade agreements with countries. We have free trade with Costa Rica and Chile, and now we are talking about signing free trade with Japan. But one of the biggest impediments is the high taxation our companies face in this country, and they are the final people who will take advantage of these free trade deals. So if our own house here is not in order and companies are impeded from taking advantage of the globalization because of your high taxation policy, then what's the point in going out and signing all these trade deals and talking about globalization?

Mr. Paul Martin: In terms of third world debt generally, Canada has in fact been one of the leaders in pushing for the forgiveness of third world debt, both on a bilateral basis—that is to say, Canada itself—where we are well ahead of most of the rest of the world, and in terms of the debt owed to international institutions, where Canada has pushed very strongly and has been one of the leaders in the whole HIPC initiative, which as you know is the question of debt relief for the 41 most heavily indebted poor countries.

As far as EDC debt itself is concerned, again, Canada has been pushing very strongly for all the international credit agencies, the equivalents of the EDC in other countries, to do the same thing. I can tell you that for the poorest countries, the negotiations to accomplish that very thing with EDC debt are well underway, and Canada is leading in that area.

On the issue of free trade and the taxation of our companies, your point is very well taken. That is why in the last budget Canada introduced a major reduction in corporate taxation, which applies to two kinds of companies.

• 1005

First of all, as far as our large companies are concerned, we have stated that we will reduce the taxation threshold of 28% down to 21%. The net result, when coupled with those provinces that do likewise, will be to give Canada a corporate tax structure that is lower than that of most of our competitive countries. We've also stated in the budget that the process, which we said would take five years at the longest, we will be able to accelerate substantially, and we intend to do that.

As far as our smaller corporations are concerned—which are very important, by the way, in terms of building tomorrow's multinationals—they have a corporate tax rate that is substantially lower than the corporate tax rates of almost any of our competitors, and in the last budget we stated that for revenues of between $200,000 and $300,000 we would reduce their rate immediately.

In fact, the point of competitive taxation is one that is valid and it is why the government has taken such immediate steps to deal with it.

[Translation]

The Chairman: Mr. Tremblay.

Mr. Stéphan Tremblay (Lac-Saint-Jean, BQ): Mr. Chairman, the Minister has already mentioned that a market economy generates wealth, but it is a system that, by its very nature, creates a growing gap between the rich and the poor, and globalization accelerates this process.

The chairman of the G-20 also mentioned that the work of the G-20 should convert the benefits of globalization into higher revenues and better opportunities for people everywhere, and I am happy to hear that.

You also said that all the major aspects of the global economy and the international financial system will be tackled by the G-20. During an interview with Michel Vastel, you even said that the G-20 would be a true board of directors for the global economy. I think that is a lot of responsibility.

Fortunately, you also said, during an interview with Le Journal de Montréal, on April 18, that world leaders could not afford to turn a deaf ear to messages coming from the street. I think that is where the problem lies.

You know that people are currently worried, not because of globalization but because of the direction that globalization is going in and the way it is unfolding. The people who recently took to the streets in Seattle, Washington—and I am sure that will continue to increase—want to know who is at the helm?.

Like them, I think in your action at the G-20 and within international institutions there is currently a serious lack of democracy and I wonder where you get the democratic legitimacy to back up your actions.

You say in a communiqué, and it was in your text, that you want to broaden consultations. What do you plan to do so that the people, civil society and experts can be heard? Do you foresee putting in place a permanent mechanism so that civil society can be heard and so that we too, the parliamentarians around this table, can have a say in the direction that globalization takes?

I sent you a letter concerning the need for this Parliament to set up a committee to study the social impacts of globalization, and you answered that the government feels that the issue is being studied effectively as part of the Policy Research Project, which was launched in July 1996 and called upon the expertise of more than 30 departments.

I have a problem with that. I wonder who these experts are and how they perceive the issues. Is it consistent with what the people think?

We are experiencing a kind of revolution, and I think that it can be beneficial for all people, but the people must be heard. What do you plan to do to create this forum and respond to the petition that I tabled in Parliament, in which 50,000 citizens are asking you to set up such a committee, and also to respond to a proposal that the Liberals made during their last convention? How do you plan to broaden this societal debate?

Mr. Paul Martin: You will not be surprised if I tell you that I share most of your analysis. I do not share the opinion of the demonstrators in Washington, who wanted to abolish the IMF and the World Bank, but the demonstrators, and I talked to several of them, had concerns with respect to democracy. That is undoubtedly a topic that we must debate.

• 1010

As I just said, I share your analysis in part. Having said that, the G-20 is part of the answer. Before the G-20, with the G- 7, only industrialized countries were involved. Now with the G-20, there are not only emerging economies, but also representatives from each region in the world, like Africa, and South Africa. In Asia, there is not only Japan, but also Indonesia, for example. And there is Latin America, Brazil and China. That means that when it comes time to make decisions, the consensus is much broader than it was in the past.

The second part of your question deals with civil society and democracy within a country. There again you are right. Since I was appointed Minister of Finance, I have been meeting on a yearly basis with NGOs that, in part, represent civil society. I have also met with unions for the same reason, to discuss these issues. As I said in my remarks, as chairman of the G-20, I plan to meet with them again this summer or this fall. Just prior to the meeting in Washington, I had met with the NGOs that were going to be demonstrating there, as well as with others to discuss all of these topics.

As regards democracy, it is also at play here. It is at play in Parliament, and here in committee. That is why we are here.

You are asking me questions because you represent not only your riding, but also many people who have the same point of view as you and me. Democracy is at play through you, me and the chair of this committee. That is the reason why I quickly accepted the chairman's invitation to speak to you.

The real question revolves around democracy at the World Bank and the IMF. Are these institutions on the fringe of democracy? We discussed that at length in Washington last time, and I think that it is part of democracy, because we are here.

I am a governor. I represent our country. I am elected. The best way to share a point of view on the future of these institutions is by making representations as you are doing.

The Chairman: Ms. Marleau, you have the floor.

[English]

Ms. Diane Marleau (Sudbury, Lib.): In this new era of cooperation and effective international banking issues, have you discussed the issue of corruption? As you know, corruption is by far one of the big problems, especially in certain parts of the world. Have you looked at mechanisms whereby you can highlight either the unusual amount of financial movement within certain areas or those banking institutions that facilitate corruption in many ways? As well, have you looked at a way to reward those particular areas where there is transparency, openness, and very good governance in the financial institutions?

Mr. Paul Martin: Yes, we have. Actually, we've done so quite extensively in a number of ways. The money-laundering bill that is now before the Senate is an example of one country, Canada, responding to the need of making sure the profits of crime are not able to be translated into the honest economy and therefore laundered. At the same time, that money-laundering bill will give Canadians the ability to trace the proceeds of crime outside our country to the best of our ability.

Furthermore, a number of international studies have been done. There is the study being done by the OECD on offshore tax havens. There is the Financial Action Task Force, which is looking at the whole issue of international crime, money-laundering, and corruption, cronyism. There is work being done by the Financial Stability Forum, which I mentioned earlier, addressing this very issue. Essentially, a great deal of effort is going on in the international community to deal with the issue you have raised.

• 1015

The second part of your question had to do with corruption within an individual country, and essentially corruption at the very senior levels within an individual country. Again, a great deal of work has been done on this. This is much more judgmental, as you can understand, than is the first part of my answer.

In a way, it is part of a very important debate that is taking place in terms of debt relief, and that is unconditional debt relief versus conditional debt relief. Unconditional debt relief refers to whether there is corruption in the country at the senior levels. Conditional debt relief is the money going for arms as opposed to education. In terms of the first, I think the world community is really coming to grips with it. In terms of the second, it's much more difficult, and I think the debate is much more fluid.

The Chair: Thank you, Minister.

We'll go to Mr. Grewal.

Mr. Gurmant Grewal (Surrey Central, Canadian Alliance): Thank you, Mr. Chairman.

I would like to begin by thanking the minister for including Parliament and elected representatives in the Berlin meeting process. The minister's appearance before the committee is a step in the right direction in terms of democracy, I hope. Usually the government conducts and completes foreign policy matters before consulting the elected officials.

I have two questions, Mr. Minister. Canada has undergone a financial system stability assessment. I take it we passed. Did the assessment include the $30-billion public pension surplus grab by the Liberal government and the $3-billion grab from the employment insurance account? Did the assessment cover this government's claim for the money they spent on the Millennium Scholarship Endowment Fund two years before the money was actually spent? What does the minister see as the effect the creative bookkeeping incidents have had on the assessment and on Canada's private sector?

I would also include this. What is the minister telling the G-20 colleagues about the government's debt management strategy, since the official opposition maintains that this government balanced the budget on the backs of the Canadian taxpayers and it will be virtually impossible to raise any further taxes? Is the minister concerned about Canada's short-term debt relative to our foreign exchange reserves? How will the acceptable risk be defined? Does the minister foresee any problems with Canada adapting to the prudent external debt management measures?

Mr. Chairman, this is my last question. How much interference, in terms of red tape and new regulations, does the minister foresee in some of the areas the G-20 is tackling in terms of the Berlin meetings?

Mr. Paul Martin: Mr. Chairman, first of all, the results of the assessment that has been performed have not been made public. This was a pilot project, and one of the debates that are taking place is whether these assessments should be made public or not. I can tell you that Canada believes they should be made public. That is our view. In fact, Canada's position is that the more openness and the more transparency we have in all of these issues, the better off the world community will be. But there are countries that don't want to see these things made public on the basis that the advice that would be given might well be hindered if these things had to be made public. This is a debate that has to be held.

Let me tell you simply that I do know the results of the study and that Canada has passed with flying colours. In fact, the Canadian regulatory system is really one that can be held up as a model for all. That is one of the reasons we think these things should be made public and that we were quite prepared to volunteer at the beginning.

• 1020

As for the issue you raise in terms of the whole question of short-term debt and the restructuring, as you may know, over the course of the last five years Canada has in fact lengthened its maturities substantially. The lengthening of those maturities has meant that we are now in a much better position to withstand any kind of interest rate swings, along with the fact that of course we are one of the very few countries that are actually paying down the debt on an absolute basis.

There is one other question that I think you raised. Perhaps I'm a little unclear, but I thought you talked about the unfunded liabilities in the Canada Pension Plan—

Mr. Gurmant Grewal: It was about the government's $3-billion grab from the employment insurance account and their $30-billion grab from the public pensions.

Mr. Paul Martin: Mr. Chairman, I think this is quite an important committee. I don't think we should engage in a lot of partisan rhetoric. The honourable member, whom I respect greatly, knows it was not a grab. He knows that in fact what we are doing is following the accounting principles that have been established since the beginning of the fund and certainly established by the Auditor General. So I won't get into that.

But in terms of the Canada Pension Plan, the honourable member raises an important question. We do believe that as a result of the measures that were taken by the Canadian government and all of the provinces about four or five years ago in order to protect the Canada Pension Plan, we and the Brits are the two countries that have put their public pension plans on a sound financial basis. We still have a very large unfunded liability, and we believe, Mr. Chairman, that when the IMF calculates its numbers they should look at the unfunded liabilities of national pension plans, because they would provide a very different perspective. But I can tell you, again just to summarize, that while there is an unfunded liability, we have acted probably more quickly than almost any other country outside of the United Kingdom to deal with that.

The Chair: Thank you, Mr. Minister.

We're well over the time. We'll move to Mr. Assadourian.

Mr. Sarkis Assadourian (Brampton Centre, Lib.): Again, welcome to the committee, Mr. Minister.

I have a few short questions, so you have more time to answer them. First, on page one of your remarks, you mention that G-20 countries represent 87% of the world's GDP. That represents what percent of the population as a whole?

Mr. Paul Martin: That's 65%.

Mr. Sarkis Assadourian: That includes both China and India, for example?

Mr. Paul Martin: Yes.

Mr. Sarkis Assadourian: The input of these third world countries or developing countries, how do you balance that with the need of donor countries or rich countries to adjust their needs? Our committee travelled—although I was not there—to the south Russia republics and the Caucasus. After this experience they came back very enlightened in terms of how they operate.

I'm sure they were told—I was told many times in the past—that IMF and World Bank put conditions on these countries that they cannot meet. They are forced to change the rules of the game on their own, on paper, so on the surface they can meet what we think they need, and this ends up fuelling corruption within the countries. I think we should work in a way in which we know exactly what they need, and our expectations should be easier, because they would say “Listen, I don't want your money, I don't want your conditions.”

How do you balance that with your presentation?

Mr. Paul Martin: Mr. Chairman, the fact is that Mr. Assadourian is raising one of the very important issues that both the fund and the bank have to deal with. To put it one way, these institutions either impose a cookie-cutter, one-size-fits-all approach on a country regardless of its problems, or in fact they are unrealistic in the demands they place when they go in.

To a certain extent, I think there is some validity to that claim. But the answer, as I tried to outline in my remarks, is not simply to look to what the fund does or what the bank does, but it's to look at the entire international financial system and its architecture. One of the reasons these institutions sometimes use a cookie-cutter approach is that they should evolve. So your point there is well taken.

But I think an even more important reason is that you cannot ask these institutions to change their way of operating unless you're prepared to take a look at the way the international financial system as a whole operates. We may be asking them to do things they can't do. The best example is that if you're not going to have some way of putting a standstill on capital flows, then the only tool the fund will have is to recommend to those countries that they hike interest rates to stop capital flows. And that sometimes is exactly the wrong response, because it drives a country into recession.

So, number one, essentially, give us an international bankruptcy regime of some kind, along the lines that I described.

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Another question you've raised is this. When the bank goes in, it imposes conditionality. Is it sufficiently cognizant of the needs of some of those countries? I will tell you that at the meeting in Washington, because I am the governor for the Caribbean nations as well as Canada, I raised that very point, that in fact I believed certain demands were being placed on the Caribbean countries that were not realistic.

So, again, I think there is something to your point.

Mr. Sarkis Assadourian: Can I make another point?

The Chair: We have to move on, because we only have about another 15 minutes.

[Translation]

Ms. Lalonde.

Ms. Francine Lalonde (Mercier, BQ): Welcome, Mr. Minister.

First of all, only 10% of international transactions contribute to increasing the wealth of the people. The rest is simply speculative and is largely due to what you call sudden shifts in the flow of private capital.

Why not try and deal with the source of these volatile outflows of private capital by setting aside, from the outset, the idea of the Tobin tax?

You talk about poverty in terms of what is experienced. However, in the project that is emerging there are only minor not major, adjustments to current operations. There is no way that that can help reduce poverty.

There is also the makeup of the group. Let me point out that Indonesia was invited to be a member of the G-20 at the same time as it was accused of quasi-genocide in East Timor. There are not really any poor countries in the G-20. It includes rich countries and countries that are on the road to getting rich. They are not developing countries, but countries that are getting rich.

With globalization and the widening gap between the rich and the poor, how can anyone consider that the project involves anything more than a very modest attempt at improving a system that, moreover, allows current trends to continue?

Mr. Paul Martin: It might be speculation on the part of companies that want to protect themselves from these fluctuations, but it is not pure and simple speculation.

Having said that, whether it be 10, 20 or 30%, you raise a valid point. I am among those who support the Tobin tax. I don't think it can put an end to speculation, but it could be a source of money for the international community, which truly needs the money, be it for environmental reasons or to decrease poverty.

I do not think that the Tobin tax could stop speculation. For one thing, it wouldn't be enough to accomplish that.

All it takes is for one industrialized country to say no. The fact that the majority of industrialized countries do not want to go ahead with it means that it would not work. Germany, Great Britain, France—France sometimes changes it mind—and Switzerland have openly spoken out against it and refuse to accept it. That means that it is certainly not the solution that we will put in force in the short-term.

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I am convinced that the recommendation I just made to put in place open and transparent regulation will give us a better solution to these volatile exchanges than a Tobin tax. We can proceed with it immediately, because I think that there is consensus in that area.

You mention poverty. In my opinion, we should not say that poverty is caused by globalization, because it is not. Take the problem of poverty in Africa. Africa is not participating in globalization; it is on the sidelines.

What is globalization? It is, in part, this cascade of new technology. It is also the international free market in which Africa, the poorest continent, is not participating. So that is where the focus will have to be.

How can we give Africa the ability to participate in the new economy and this new technology? How can we give Africa the ability to participate in this international trade at a time when it is grappling with disease and war? In my opinion, poverty is much larger, and it must be the focus of our efforts.

That leads me to your question on the fact that the poorest countries are not participating in the G-20. You are right. When the G-20 was set up, emerging economies were the ones that were at the source of certain problems that existed internationally. There was Indonesia, for example. We knew full well that we could not impose any solutions on those countries, but that they had to participate.

Should the group eventually be broadened? That remains to be seen. We know from experience that when membership goes beyond 20 it gets difficult. One of the reasons we asked the World Bank to participate was to represent those countries. I agree with you that it is something that needs to be examined.

Now, in the case of Indonesia, it was impossible for Indonesia not to be part of the G-20. In terms of population, it is the fourth largest country in the world. In the beginning, it was not a member. It was only after Indonesia held a democratic election that we invited it to participate in the G-20.

The Chairman: Thank you.

[English]

Minister, I understand you can stay a few minutes more. I know that technically—

Mr. Paul Martin: I think this is really important. I'm prepared to stay as long as members will put up with me.

The Chair: Be very careful about that sort of thinking. It is a serious slippery slope you're on.

Madam Augustine.

Ms. Jean Augustine (Etobicoke—Lakeshore, Lib.): Thank you, Minister. I want to ask a couple of questions, and they might be simplistic but I'm trying to put it all together.

First of all, you talked about looking for international standards and codes, etc. At the same time, you said there was no secretariat. Where are all these decisions going to be made, and who does what, and how does it all fit together? It might be a simplistic question, but at the same time, it's the nuts and bolts of how this will all happen.

You talked also about the international movement of capital, etc., and reform of the system. Yet I did not get from your discussion the separation between the role of, say, the IMF and the World Bank. Is there a difference in terms of what the World Bank does and what the IMF does and how those two relate in any kind of reform discussion?

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Third, I want to ask a little bit about early warning systems. I was out with an NGO group after the Asian crisis. The question that was kind of circling around was whether we saw that coming. Why didn't we see that coming? What could have been done? What are the early warning systems? In that G-7 discourse, are there things around this early warning? How is that operational?

So many countries do not involve NGOs and civil society at that level of discussion, for various reasons. There's either distrust of civil society's actions, or they feel that civil society does not have the knowledge base to converse effectively in that domain. How do you see the involvement of civil society working in that process?

Mr. Paul Martin: Good questions are not simplistic at all; they're very much to the point.

The first question is standards of codes versus no secretariat. Essentially I talked of the two new virtual institutions: the Financial Stability Forum and the G-20. The Financial Stability Forum, which essentially uses the Bank for International Settlements as its secretariat but reaches out into the individual countries for its expertise, is developing the standards and codes.

So you have two sets of standards and codes. There are those that have already been developed by the international community through the IMF, the G-7, and the World Bank, and which we're in the processing of putting into place. Then you have a whole new set on a highly sophisticated basis, trying to duplicate internationally what we have nationally. They are being developed by the Financial Stability Forum.

The role of the G-20 is essentially to take the standards and codes that are developed in that way, debate them, and see them implemented. Often some of those codes were practised in Canada and the United States but not in other countries. They were not acceptable in those other countries because they felt they never had the opportunity to sit around the table to discuss them. That's what the G-20 is going to do.

I happen to think, for example, the Financial Stability Forum has a flaw because its membership is very narrow. It will have to expand its membership. Canada was really one of the initiators of the Financial Stability Forum, but we were not able to get a wider membership. I think we have to get that.

We at the G-20 do not want a secretariat, because if you get a secretariat, all of a sudden the agenda is established by others. We think it's really important that the success of the G-7 be the ability for ministers and central bank governors to get around a table like this, argue the point out, and then go to implementation.

On your second point, as you know, the separation of the roles of the IMF and the World Bank is the big debate that is taking place. It's certainly the debate that's taking place in Congress at the present time. I think we would all agree there must be a clearer demarcation between the IMF on the one hand and the World Bank on the other.

But I am not one of those who would say, as many do, that the IMF should have nothing to do with poverty reduction. If that were the case, I would be very worried about the quality of advice the IMF was able to provide, if it did not need to have that other arrow in its quiver. That being said, I think the longer-term structural changes toward poverty reduction properly belong to the bank.

On the early warning systems, you're absolutely right that's what this is all about. If there had been early warning systems in place, the problems in the Thai banking system, as an example—the excessive borrowing by Thai banks, the excessive lending by western banks—would have been apparent, and I really believe the Asian crisis would not have been nearly as severe as it was. So all of what I'm trying to present here is exactly directed toward those early warning systems you've requested. That's why I think they're so important.

Your last question was on the NGOs and civil society not being involved. I can tell you that the quality of advice I have received from the NGOs on environmental matters, third world debt, and the whole perspective of what we're dealing with has been incredibly invaluable. There is great expertise in the NGOs, and any government that does not avail itself of that expertise is making a mistake. That is why I meet with them, probably not enough, but certainly on a regular basis, and I will continue to do so.

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Let me just give you one example. Jubilee 2000, the debt forgiveness campaign, was a tremendous success. The churches from around the world got together to put pressure on their governments, and their governments responded. I simply cannot emphasize enough the importance of the dialogue with civil society. It's certainly one we intend to pursue.

The Chair: Okay. I think if we can fit in another two questioners, that'll be wonderful, Minister.

First is Mr. Obhrai, and then Mr. Patry.

Mr. Deepak Obhrai: Thank you.

I see you're having a great time enjoying yourself there.

Mr. Paul Martin: Just don't tell Monte Solberg I'm having a good time.

Mr. Gurmant Grewal: He'd love to see you.

Mr. Deepak Obhrai: I think you should, as the chairman of the G-20, go back to the G-20 and look at the roles of the ECAs. Since ECAs now hold 56% of the debt of the third world countries, I would venture to say that if they are not checked, they will put more poor countries into debt, and then we'll have to bail them out. So I think that needs a review.

My main question goes back to the taxation rate. You said you were reducing taxes, but I say you're reducing taxes at a very slow pace. The business world and everybody else are moving rapidly into globalization, international trade, and free markets. They are curtailed by your high taxation and slow-moving train in reducing taxation to provide increased productivity so Canadian companies can take advantage of that.

I think you're moving too slowly, which is very great for the Canadian Alliance because it will help us in the next election. But I think that's the chorus coming out of there. You're welcome to comment. It's going to be part of the next election platform.

Mr. Paul Martin: First of all, I'd be delighted to comment, and I'd be delighted to have it be part of the next election campaign.

On your first point, I think it is valid that the international community should look at the whole question of export credits going to third world countries, in the way they're applied. As I indicated earlier, Canada has taken a lead in this area, and the world community is looking at it.

Canada shares the view that export credits available to heavily indebted countries—some of which, historically, have not done the best thing for those countries—are something the international community should be concerned about. This has been Canada's position for some time, so I would not disagree with you in that area.

On the second point, let me simply say that in the last budget we introduced the largest corporate tax reduction program this country has seen, certainly in my memory. Two, we have said we are going to accelerate it.

I would like to talk in terms of taxation. Corporate taxation is very important, but so is personal taxation.

Since you raised the issue of the Canadian Alliance—I would not have done so, but since you did—you might want to go back to one of the candidates from your province, Mr. Day, and point out to him that the Canadian government has lowered taxes more than the Alberta government, and our personal tax reductions for the middle class are greater than his tax reductions for the middle class. In fact, we believe those personal tax reductions for the middle class are very important in this country, and he has his priorities skewed in the way he is doing his taxation. In other words, to reduce taxes—

Mr. Deepak Obhrai: That's an election thing.

Mr. Paul Martin: —for the rich and not reduce them proportionately for the middle class is wrong.

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Mr. Deepak Obhrai: We'll fight that on the election platform to see who is doing what.

Mr. Paul Martin: That's why I say I'm delighted to campaign on it, Deepak.

The Chair: The problem when you open these doors, Mr. Obhrai, is people tend to go through them.

Voices: Oh, oh!

The Chair: Dr. Patry, and then that's the last one.

[Translation]

Mr. Bernard Patry (Pierrefonds—Dollard, Lib.): Mr. Minister, in the study that you are conducting, is it possible to develop guidelines to govern the participation of private lenders in bailout operations and, possibly, for the United States, the European Union and Japan to develop new co-ordinated steps to take in the event of an extended misalignment of their currencies?

Mr. Paul. Martin: Is it possible to put guidelines in place for lenders? Secondly, is it possible to take into account gaps in currencies?

You raise two very important questions. I can say that to date, the debate at the international level has not progressed enough for us to be able to talk about a consensus.

As regards guidelines, we can develop them within our own banking systems and, in the majority of cases, we are doing so. Where the shoe pinches is in the area of offshore hedge funds.

After the long-term capital debacle, the Financial Stability Forum came out with a report in this area, and the European countries said that offshore hedge funds needed to be regulated. The United States did not agree. They claim that it is impossible and that the hedge funds that are already in the United States will end up somewhere on an island and will operate from there.

In our view, it is possible that offshore hedge funds cannot be regulated, but that we can regulate the lending institutions. We should take this position, but I must say that there are two distinct points of view being debated internationally.

In answer to your second question, as to whether it is possible given the discrepancy between currencies, I would say that the fact that a currency is over or undervalued is not necessarily a problem for big countries or countries which borrow with their own currency.

For instance, the vast majority of Canada's debts are in Canadian funds. Therefore, we can control the situation. That is incidentally the main reason why I would not support a single currency. Countries which borrow with a foreign currency, which may be worth more than their own, have huge problems. That is what happened in Asia.

Thailand, for instance, had an American dollar debt and, when the baht fell, the country had a big problem on its hands. Many countries borrowed in yen and faced the same problem.

• 1050

Is there a solution? We believe there are two.

First, you have to have open books. Second, you have to encourage countries to borrow with their own currency. It might cost them more in interest, but we believe it's worth it.

In fact, this was a recommendation made by the American Commission chaired by Paul Volcker, the former President of the Federal Reserve Bank. The only solution to the problem you raised is to encourage countries to borrow with their own currency.

[English]

The Chair: Minister, I wonder if I could take advantage and ask you a couple of questions, and then we'll go, because we're well over time.

Some hon. members: Oh, oh!

The Chair: Well, occasionally the chairman does get a chance to ask questions around here.

Many of the things you talked about were reflections of what we wrestled with a few years ago, particularly as we steered this committee through the IFI report, and we see an evolution taking place.

I was curious. During your talk, I thought you were starting to talk a little bit like Mr. Mahathir in Malaysia, because when you talked of internal controls—and you'll recall Chile had controls of capital flows as well—you did say it is the violent flows of capital that have to be regulated if we're going to get controls.

Did I understand you to say one of the purposes of the G-20 would be to examine this question and then decide which types of internal controls would be appropriate so that the members would have an ability to control—because as you said, it's a sovereign issue—but under the sanction of the international regime so that they function properly in the regime? I'd just like to know if that's an appropriate appreciation on my part.

The second question I had was, how do you see the role of the United States and particularly Congress in all this? Our experience has been that they are extremely reluctant, particularly in international financial measures, to concede in any way a loss of sovereignty of the United States. Mr. Greenspan is not about to enter into any arrangement that doesn't allow him to make the decisions about what's going to be good or bad for the U.S. dollar, the greenback economy, or anything else. So how welcoming are they to these notions and how willing are they to participate in a true system of international disciplines that will apply not only to others but to them?

Mr. Paul Martin: On the first question, is the G-20 going to be looking at capital flows, the answer is absolutely yes.

You then asked the question, are we prepared to embrace restrictions on capital flows? We have to distinguish. In my own personal opinion, and I think this would reflect now the international financial community, the kinds of restrictions that were established beforehand—and they were restrictions on inflows that Chile imposed—would be perfectly acceptable. Chile, as you know, has abandoned those, but essentially what Chile did was to put a tax on inflows in order to be able to control them.

Any country that does not have deep capital markets should be entitled to do that. For a country like Canada, it would not be appropriate, but for countries that don't have deep capital markets, it's perfectly applicable. What Chile did I think would be acceptable.

I don't think what Malaysia did, in the way they did it, would be acceptable. In other words, Malaysia changed the rules of the game after the fact. That I don't think is acceptable. But I do think it would be acceptable for a country to say “Look, under certain circumstances of deep crisis, we may well stop money from our country leaving the country.” But that has to be established ahead of time.

The reason I think it's acceptable is that what happens in some of these countries is in fact as domestic money flows out of the country, international money, which is taxpayers' money, is flowing in to compensate for it. I don't think that makes sense. But the difference is you have to establish the rules beforehand. You can't change the rules in the middle of the game.

On your second question about Congress, you're absolutely right. The United States is very reluctant in this area. But in the end, the reality of the world is going to impinge even on the major economic power in the world.

• 1055

As for loss of sovereignty, the best example I can give you is conjecture on my part. I don't know this for a fact, but it's interesting. Central banks always look to their own domestic situation when they determine monetary policy, when they raise or lower interest rates. Many countries have to look to the outside despite that statement of principle. But the U.S. Fed has always been able to say, and it's always said, they will only look to domestic conditions when they set interest rates.

The United States had a very strong economy, and it was going to continue to be strong, at the time of the Asian crisis. It was very clear that if the Fed continued with a high interest rate policy through the crisis, which would be a reflection of its own internal situation, the resolution of the Asia crisis might have been a long time coming. The U.S. Fed, for reasons they can explain—I'm not going to explain—lowered its interest rates three times. One could opine that that was in fact a reflection that for the first time, events outside United States borders determined how the Fed was going to react.

So the point I would simply make is that we all have to redefine sovereignty, and that sovereignty has to take into account the absolute necessity, if we're going to be able to maintain our sovereignty, of cooperating as a world. That applies even to the United States.

The Chair: Thank you very much, Minister. That's a good note to leave on.

I hope you believe, when you talk about civil society, that the members around this table represent to some extent civil society as well.

We appreciate your taking the time to speak to us.

Colleagues, we have to take a two-minute break, and then we have General Henault coming to complete our Kosovo study. We're suspended for two minutes.

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• 1105

The Chair: Colleagues, I call the meeting to order. This is a continuation of our Kosovo hearings. I hope this is the last time we will have to have witnesses come before us on Kosovo, so that we can deal with the report before the House rises in June.

We're very grateful to General Henault and Rear Admiral MacLean for coming back to the committee. We appreciate it very much. We know you're extremely busy.

There were some questions, however, that arose out of the previous testimony, which Mr. Robinson in particular was anxious to ask. Unfortunately he's not here this morning, but he did write a letter.

General, I know you didn't come this morning with a prepared statement. You just came to answer members' questions, so we may be able to be quite quick about this. Members, if you'll permit me, I'll ask a couple of the questions in Mr. Robinson's letter, and then we can move on, if anybody else has any questions.

Of the questions in the letter, General, he did ask about the number of sorties flown and what percentage were considered successful in hitting intended targets. Do we have that sort of statistic? Can you help the committee with that?

Lieutenant-General Raymond R. Henault (Deputy Chief of Defence Staff, Department of National Defence): Thank you, Mr. Chairman. Again, thank you very much for giving us an opportunity to clarify some of the issues that are still outstanding. It was a pleasure for me to appear on February 10, and, if you remember, a vote didn't allow for a question period. Unfortunately I was out of the city on February 29 when Mr. Wright and others appeared, but I am very happy to be here this morning.

I'm also very happy to have with me Rear Admiral Bruce MacLean, from our policy group. He's our director general for international security policy. We hope that with the combination of the two of us, we can answer all of your questions.

[Translation]

I would be pleased to answer your questions. I believe the first question you asked dealt with the number of missions and their success rate during the aerial campaign.

The Chairman: Yes, exactly.

[English]

LGen Raymond Henault: I can tell you, Mr. Chairman, that during the air campaign itself we flew a total of 678 combat sorties with our CF-18s. That included a total of 2,547 flying hours for our F-18s during the mission itself. Of those, the majority of the missions were what we call battlefield air interdiction missions. About 500 of those sorties were missions of that nature against preplanned targets throughout Kosovo and Serbia, and 58 of those missions, the balance of the majority of the missions, were close air support missions, that is, targets of opportunity. In addition to that, we had the balance of those missions dedicated to what we call combat air patrol, that is, escorting other aircraft into the target areas and providing air superiority or air cover for the missions themselves, for a total of 678 missions.

Mr. Chairman, were you looking for some specifics on the number of bombs dropped or on the success of the missions themselves?

The Chair: No. His written question, as I understand it, is directed toward how many hit the intended target. Then there is a question about the civilian targets that were hit, what was referred to as collateral damage. I don't know if you have any further information on that point that would help us.

LGen Raymond Henault: I can say to you that in total 358 laser-guided bombs were dropped during the missions I just described to you. Of those, the vast majority, 70% of them, were direct hits on their targets, and 30% were either misses or misfires. The objective of our campaign, and the objective of all of our missions, was to ensure not only that there was a certain level of security provided to the air crew and the pilots involved, but also that we minimized collateral damage wherever possible.

We can't categorically say that there was absolutely no collateral damage, because some of the bombs did in fact miss their targets. But I can say to you that as part of the planning process for the dropping of laser-guided bombs or non-precision munitions, which we also did during the campaign, a templating is done prior to every mission based on the target itself and the area surrounding the target, whether it's a built-up area or an open field and whether there is the potential for damage to infrastructure, such as a bridge or a building, or to whatever happens to be around the target area. We take all of that into consideration as we're planning the mission itself. The pilot has a template, which is based on historical knowledge of what happens with a laser-guided or non-precision munition when it's dropped.

• 1110

In the vast majority of cases, if a laser-guided munition is not going to actually achieve final target acquisition, it will normally drop somewhat short of the target. Very seldom do the laser-guided munitions go long, that is, beyond the actual target itself. Therefore, the templating that's done takes into account a certain amount of dispersion, and primarily it takes into account a bomb dropping short of its target. In every case our pilots were involved in—and I would say that this is undoubtedly the case with other NATO pilots as well—the templating was done to minimize the chance of collateral damage if in fact any of those weapons fell short or fell within that template we just talked about.

We do not know of any significant incidents of collateral damage. We can't categorically say that there was none whatsoever because there were some bombs that dropped short or where we were not aware of their final impact point. Those were very small numbers. But we do know there was no involvement, from a Canadian Forces point of view, in any of the major incidents that we did see during the campaign.

The Chair: Thank you.

I'll ask another question from Mr. Robinson, and I see Mr. Grewal would also like to ask some questions.

In his letter he asked why there was no warning to the FRY authorities prior to the bombing of the radio-TV building. This came up quite a bit in discussions, and it has been referred to a lot in the literature. Can you help us with that? Is that something that would be within your knowledge?

LGen Raymond Henault: Yes, I think I could, Mr. Chairman. We were not involved specifically in that engagement. However, I do know that in the targeting process a certain amount of operational security goes along with the actual targeting of specific buildings or specific infrastructure, such as bridges and radio-TV stations. In this case the building you're talking about was considered to be a legitimate military target because of its use by the Milosevic regime as a propaganda tool. So in the same vein as many of the other broadcast stations or radio rebroadcast sites that were targeted by NATO aircraft, this one was in fact targeted to minimize Milosevic's ability to conduct the propaganda campaign he was executing.

In the case of the disclosure of targets, that is not done during a conflict situation such as this, for a couple of reasons, the primary one being that we do not want to give to the adversary prior knowledge of the targets themselves. If you give the adversary prior knowledge of what you're going to be attacking, you put your pilots at risk, and there is an opportunity for the adversary perhaps to concentrate his air defence capabilities around that particular target with surface-to-air missiles or fighter aircraft. Also, there is a certain amount of operational security that goes along with each one of these missions.

I would add, though, that in any of those types of targets that were engaged, every consideration was given to the minimization of collateral damage. In this case the engagement of a building such as a radio rebroadcast site was done during silent hours when the possibility of injury and so on would be minimized wherever possible.

That's about as much light as I can shed on it for you, Mr. Chairman. Those were the reasons, from my point of view, that it was done the way it was.

The Chair: Thank you. That's very helpful.

Mr. Grewal.

Mr. Gurmant Grewal: Thank you, Mr. Chairman.

I would like to follow up on your question. When the radio and TV station was targeted, I understand that the objective was to curtail the propaganda approach of Milosevic. But many civilians died in this incident. The Chinese embassy target was later on renounced as a mistake, but the deliberate targets that were chosen included, for example, bridges and some civilian buses, which were shown on TV. Were those accidents, or were they planned to be like that? When attacking the radio and TV station, if the civilians who were shown on the TV, those workers, had been given a warning, they could have escaped, and we could have minimized the loss further.

• 1115

LGen Raymond Henault: Yes, and of course we always regret the loss of life in a situation such as that, especially when they are civilian casualties.

I guess I could also say, in the case of this particular engagement, the objective was to take out, as much as anything else, the actual transmission tower itself. A warning would have done what you've just described, but again I go back to the original comment, which was that in a conflict situation there are a certain number of imperatives you have in terms of providing safety and security to your own people, and those were the overriding factors, again trying to minimize the collateral damage as much as possible.

Mr. Gurmant Grewal: Do I understand correctly that almost one-third of the bombs missed their target or failed their target? Was it about one-third of the total bombs dropped?

LGen. Raymond Henault: No. The percentage of bombs that did not attain their targets for whatever reason—and there were several reasons—was about 30%. That's in the Canadian context.

About 70%—in fact, the exact figure was 72%—of our laser-guided munitions struck the target; 28% of them in fact did not strike the target. Some of them fell short. As for some of them, we're not absolutely sure where they fell because of other reasons.

In fact, in the numbers of bombs we dropped, there were also three that were jettisoned for non-combat reasons. One was because the weapon was hung up on the wing of the aircraft and had to be jettisoned into a drop area for the safety of the pilot on landing; otherwise it could drop off when the aircraft touched down. In another case, two of the laser-guided munitions were dropped off the wing while a pilot was doing evasive manoeuvring after being fired upon by Serbian air defence missile batteries on the ground.

So, yes, there were some misses. We try wherever possible when there is a miss or when we know there are short drops, as we call them, to determine whether or not there was any collateral damage. Where we did have forward-looking infrared images of that, we were able to confirm that there was no collateral damage in the majority of those cases.

There were some cases, though, where for obvious reasons we did not see the impact of the bombs even after laser-guiding right to the target. There was obscuration by cloud at the last moment, or something like that.

But to answer your question, the actual number was 28%.

Mr. Gurmant Grewal: Okay.

To follow up on another issue, did DND find out the cost of operation and cost of rebuilding afterwards? Do you have any figures on the cost part?

My final question is, would you make any recommendations on our military intervention so that we learn any lessons from the mistakes made during the Kosovo crisis?

LGen. Raymond Henault: I can answer your first question. The cost of the campaign was just over $26 million—actually it was closer to $27 million—of which about $18 million was expended on munitions.

Could you repeat your second question, please?

Mr. Gurmant Grewal: Before I repeat the second question, what was the cost of rebuilding the damaged areas? Do you have any assessment of that?

LGen. Raymond Henault: Do you mean rebuilding in Kosovo?

Mr. Gurmant Grewal: Yes.

LGen. Raymond Henault: No, I don't have those figures. There's a very large international effort, of course, which is ongoing—

Mr. Gurmant Grewal: But we don't know Canada's share in it. You don't have any figures on Canada's share in the rebuilding process.

LGen. Raymond Henault: No. I do remember that Canada has offered somewhere in the neighbourhood of $200 million for the rebuilding, and so on.

Mr. Gurmant Grewal: Okay.

The Chair: I think it's $220 million, but I can't remember exactly—

LGen. Raymond Henault: That's right, Mr. Chairman.

Mr. Gurmant Grewal: The question you want me to repeat is about any lessons learned from our military intervention in Kosovo. Would you make any recommendations to the committee so that we can be aware of what we should be looking for in the future if any unfortunate situation like that happens?

LGen. Raymond Henault: Thank you for that question, because that is a good one.

We do have a very rigorous lessons-learned process that we go through in all our missions, including Kosovo. We go through a compilation process that tries to bring together for us all the issues surrounding a deployment implementation phase and redeployment phase.

In the case of the Kosovo mission, the air campaign specifically, we do have a set of lessons learned that are currently being staffed in the headquarters and in fact have taught us a number of lessons. I don't have all of the lessons learned at the tip of my fingers, but I can tell you that there were some good lessons and some not so good lessons learned in terms of what we can do and how we do business.

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Primarily, I think, on the positive side, we determined that we do have a very strong interoperability with our NATO allies, and particularly with our U.S. allies. We're able to operate very closely with them not only on the exercise front, which we knew we could do, but also in an operational context.

We do know that we have some challenges, though, in terms of our deployability, our globalization, if you like, our ability to project our forces beyond Canadian shores.

We also know that there are some challenges we now have to face in terms of the actual mission equipment on board the CF-18, for example, to maintain its relevance in the wider scope of things.

We also know that we need to perhaps better define how we deploy forces, how we can deploy them more rapidly. I think the air campaign was a fairly good example of our ability to react quickly, but we did have to depend a fair amount on support from outside agencies, whether they were contracted support or allied air force support.

We do have a number of lessons learned from an air campaign-specific context on operational capability provided by night vision equipment, for example, by the upgraded equipment that the CF-18 has been waiting for in the whole long-term capital upgrade process.

So those lessons are all now being staffed in the headquarters and will hopefully be put to good use in the follow-up. In fact, we have already started some of the upgrade processes that the CF-18 requires.

Rear Admiral M. Bruce MacLean (Director General, International Security Policy, Department of National Defence): If I could add to that, I think one of the important lessons from a strategic point of view is, again, the predictability of conflict.

Although we always appreciate that the Balkans were a particularly difficult and challenging area, if you had asked folks several years ago whether or not we would be doing peacekeeping in the context of Kosovo, I think you would have got a wide variety of answers in terms of whether Canadian aircraft would indeed be bombing into Serbia.

I think that's important from an overall capabilities perspective in the Canadian Forces, which is that we simply cannot predict where a conflict is going to occur. But it still represents an important instrument of government, and if the government chooses to use that instrument, then we have to be absolutely capable of delivering the goods. I think that's again a lesson that Kosovo brought out to us.

If I could also back up on one important point that was raised earlier regarding the issue of precision-strike weapons, I think to some extent all of us—the media, the military, the policy-makers—have put far too much emphasis on the issue of precision.

The reality is that precision weapons, as the general has indicated, do not give us that definitive capability that perhaps some of us wish they would give us in the sense of a cleanness, a surgical capability. The reality is that conflict is and always will be very dirty and very ugly, and there will always be accidents and miscues, but that's the nature of the business we are in. I think it's important for this committee to understand that point in the context of radio stations and bridges, and all those things. We'll never get things done to the extent of the 100% probability that some of us would like to see.

Thank you.

Mr. Deepak Obhrai: May I request that the general provide us a copy of what he said he has in the office but didn't bring along, on the lessons learned from Kosovo. That will be helpful to the committee in knowing what happened.

The Chair: As long as it's not an internal or secret document. Is it a restricted document?

LGen Raymond Henault: It's a combination of classified and unclassified, but I would be more than happy to provide to the committee the unclassified portion.

Mr. Deepak Obhrai: That would be helpful.

The Chair: That would help our researchers when we're doing our report.

LGen Raymond Henault: Absolutely. That would be my pleasure.

The Chair: Thank you very much. We appreciate that.

[Translation]

Madame Lalonde, do you have any questions?

Ms. Francine Lalonde: Yes, Mr. Chairman.

Brigadier-General Maisonneuve testified before the committee, which was highly appreciated. He said that from a certain point on, it had become too dangerous for OSCE observers to continue with their work, but that they had, indeed, done an excellent job.

Once that realization had been made, and given the continuing exodus of Kosovars from Kosovo, something had to be done. It was time for a military solution. Until then, our position was fairly clear.

But the question remained: What to do? We were not given the opportunity to consider the possibility of targeted air strikes. NATO decided on that solution.

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We heard from some witnesses that because of the air strikes, Milosevic decided to postpone the peace, if I can put it that way, and that only the threat of a ground troop invasion would get him to stop. The witness who said this was a former Canadian Ambassador to Croatia, Graham Green. He now writes for the Ottawa Citizen.

I would like to know how you would respond to this, since it is an extremely important issue. We are reviewing the entire situation. What would you do?

LGen Raymond Henault: That certainly is a question of politics and diplomacy, Ms. Lalonde, but you are absolutely right. Until it was decided by the North Atlantic Council to proceed with the air strikes, the process focussed on diplomacy and trying to avoid armed intervention.

However, NATO member countries and the North Atlantic Council, that is, the 19 member countries, including Canada, then decided together to become involved in the conflict. Our duty is to serve the Canadian government and so we began with the air strikes.

Ms. Francine Lalonde: Were you involved in making the decision?

LGen Raymond Henault: Canada was involved in the decision through its Ambassador, Mr. Wright. We were involved from the very beginning, since we are members of the OSCE and of the KVM through General Maisonneuve. We were in continuous contact with the Department of Foreign Affairs and, through the department, with our NATO representatives

I was not personally involved in the decision to initiate the campaign, but we knew that our representatives, that is, our three- star admiral who was a member of the military committee in Brussels, carried a lot of weight. Ambassador Wright was directly involved. He made Canada's clear position known during the decision-making process.

So, yes, we were involved and we were kept abreast of the events as they unfolded.

Ms. Francine Lalonde: What do you have to say now that it is over? No one would choose to initiate air strikes again in the face of that kind of threat.

LGen Raymond Henault: I will answer your question and then I will let my colleague, Admiral MacLean, respond, since he was also very closely involved in the process.

The North Atlantic Council and every country involved had hoped that the air strikes would convince Mr. Milosevic to come back to the table and, if necessary, to isolate his forces in Kosovo, as well as to convince him to put an end to his ethnic cleansing campaign. The objective was to bring him back to the table and this objective was met.

Not every country wanted to wage a battle on the ground. Each country had already established how many troops it could commit, but we did not believe that a ground intervention was necessary after the air strikes ceased.

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[English]

Bruce, do you have anything to add to that?

RAdm Bruce MacLean: Yes. In terms of going into the campaign, there will certainly always be a number of questions about whether or not the appropriate military force was used. I think that's a legitimate and very important question. I guess the problem you always face, particularly in the context of having 19 nations around the table, is achieving the degree of consensus.

Also, we're looking at it in the context that we want a diplomatic solution to this. But how far can we go in achieving that? What kind of force must we show we're prepared to use? When the menu of all those factors together was put in front of the council in NATO, the air campaign option was viewed as being the best option for that particular event. As time went on, however, there was a sense in NATO that it was going to be a much more challenging issue because Milosevic did not seem to bend as quickly as some folks had thought he was going to.

The other element that comes in is that once you start a military campaign, you really need to bring it through to its logical conclusion. Consequently, if the air campaign had been unsuccessful, then there would have been a point reached where something else had to be put on the table. We didn't reach that point. There will always be speculation as to what in fact stimulated Milosevic to finally stop, whether it was the bombing of the infrastructure, whether it was the threat of ground forces coming in the future. I don't know the answer to that, and we'll continue to speculate.

There is no question that from a strictly military perspective, we always prefer to have the full menu, the full opportunity, to deal with a particular issue. But that's not always the way it's going to be. In fact, that's very rarely the way it is, because so many other issues come into play that will affect the military in being able to deal with a particular issue. I think that's right and proper. That's just the way it is.

The Chair: As far as you're able to help us, you can tell us, in terms of the military analysis, what type of campaign might or might not have been optimal in the circumstances. But ultimately there was a political decision as well. There's an optimal military campaign viewed from a purely military perspective, and then there's the optimal campaign viewed from the diplomatic and political context in which it has to be fitted, in terms of 19 member countries sitting around a table discussing it from their own domestic, political, and international policy perspectives. So it becomes a very complicated mix of military and political analyses going into the final decision.

RAdm Bruce MacLean: Mr. Chairman, you're absolutely right. It very much is that. It's a very fluid and dynamic case.

The Chair: Yes.

[Translation]

Do you have a question, Madame Lalonde?

Ms. Francine Lalonde: Yes. That was my general question. I have more specific ones.

The Chairman: You have more specific questions? I had hoped to finish before noon.

Ms. Francine Lalonde: Yes, we have to leave, but I would still like to ask a question about the targets, Mr. Chairman.

I read several articles which stated that NATO was unprepared. They say that NATO had enough targets for a few days, but when it realized that the air strikes would last longer, NATO had to find new targets. That's how the Chinese Embassy came to be bombed, which caused a huge political fall-out.

Did you have a say on which targets should be bombed and did you choose those targets?

LGen Raymond Henault: The air strike targets were chosen by the North Atlantic Council and the Secretary General on recommendation of the Supreme Commander, General Clark. Member countries were not directly involved in determining the overall targets. But every country had to agree to them.

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Once the overall targets were chosen, if you will, and depending on the stage of the campaign and how it was unfolding, the targets were given to the Chief Air Commander, General Smith, who was based in Vicenza. He chose the targets depending on the stage the campaign was in and he chose them from the approved list submitted by the North Atlantic Council.

Specific targets were determined by a joint targeting board which made recommendations to General Smith. He transmitted these recommendations to the Supreme Commander, General Clark, who once again submitted them to the North Atlantic Council, which had final approval. Then, the whole thing went back to the operations centre where an operation order was put out to assign targets to each nation, depending on fighter capacity, available munitions and other factors.

At that point we were directly involved in bombing the targets. We agreed to full participation in the operation. We had been reassured. In fact, we were confident about the choice of targets because the North Atlantic Council, which had a Canadian representative, was involved in the decision-making process.

When a target was assigned to a pilot or to the Canadian contingent, we double-checked it by assessing the military capacity of the target and our ability to engage it, from both a legal and operational point of view. Once that was done, the contingent commander, who was the representative of the Chief of Defence, took the final decision.

We were also involved nationally. All of the targets assigned to Canadians were confirmed here, at the national level. Even though we did not make decisions in the field with regard to engagement or the assignment of individual targets, we helped the commander in his decision-making process. When he was unsure or needed additional information and images, we were the ones who provided them to him.

Therefore, there was international involvement, on the part of the Council, as well as national involvement; we helped, on the ground, the people who were carrying out the mission. Consequently, yes, we were involved.

Ms. Francine Lalonde: You said that war is a dirty business and that there can be no war without damage. Even if we use the term "collateral damage", which seems to sanitize everything, this means that there is loss of human life.

Was there a great deal of so-called collateral damage, that is, were many human lives lost, on Canadian sorties?

LGen Raymond Henault: Not to our knowledge, Ms. Lalonde. We received reports that were as detailed as possible on the attacks led by Canadian aircraft, but you must remember that, at the time, there was absolutely no possibility of our going in on the ground.

We did not have feedback from someone who could have gone to the site itself in order to determine whether there had been any impact adjacent to the target or anything of that nature. To our knowledge, we were not involved in any significant collateral damage.

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Was there any impact on houses or bridges? The answer is likely yes. We cannot say that there was absolutely no collateral damage but, as I said, our goal, at all times, was to minimize this damage as much as possible.

Ms. Francine Lalonde: Thank you, Mr. Chairman.

The Chairman: Thank you.

[English]

I hate to do this, but I just want to come back very briefly to the radio and TV station bombing. I wonder if you could confirm at least the understanding I have that while they didn't give an announcement, “Tonight we're going to bomb the TV station”, there was at the time a clear indication by the NATO spokesman to the Serbian government that this and other propaganda communication vehicles were legitimate targets.

It's also my understanding that those running the TV station and radio station specifically refused authority to any of their employees to leave. They were told they would lose their jobs. I read in the press that they said every day they went there, they knew there was a possibility it could be bombed, because it was clearly known in the community that it was going to be bombed, but they weren't allowed to leave anyway.

[Editor's Note: Inaudible]

An hon. member: —

The Chair: Yes, I can show you the press to that extent.

Is that your understanding?

LGen Raymond Henault: Mr. Chairman, I think you're absolutely right. Obviously I can't confirm what kind of direction was given to the employees themselves, but that is out in a certain amount of open press. But yes, there was absolutely no doubt in the minds of those who were in Serbia and Kosovo proper that the mechanisms through which the Milosevic regime was transmitting its propaganda were an object of targeting for the NATO forces. So in that sense a certain amount of warning was given, although there was not a specific warning on each of the targets.

The Chair: Mr. Grewal, make it short.

Mr. Gurmant Grewal: Thank you, General, for the information you have given us.

In the spirit of knowing and looking forward to improve our military capabilities, I would like to know something. Recently, due to the cuts in the military budget, the equipment our armed forces personnel were using was affected, and the morale of the brave men and women was also affected. Can you highlight to what extent you feel the cuts in the budget affected the quality of the equipment or the type of equipment we should have used and the morale of the personnel?

LGen Raymond Henault: Yes. Thank you.

Despite the fact that we do need to modernize the F-18 fleet, as we do other fleets of aircraft, ships, and land force equipment in the Canadian Forces, I can confirm that we were very effective in the air campaign. In fact we were considered amongst the best-trained and the most capable air forces in the region. General Short did give me that confirmation when I met with him personally. He was very effusive in his praise of Canadian capabilities, Canadian aircrew capabilities, and the capabilities of the aircraft.

The aircraft were comparable with those of other NATO nations, with a number of limitations in the context of communications equipment, upgraded computer systems, and ability to link by data link, for example, with other nations' aircraft or the airborne warning and control systems aircraft. We need to redress these limitations to remain relevant with our forces, but they were not limitations that detracted from our ability to actually prosecute the mission in Kosovo.

What was perhaps the most impressive from my point of view and what pointed to the value of our initiatives towards interoperability with our NATO allies, specifically the U.S., was that we were seen as part of the first team, as the minister said many times during the campaign. Our pilots, when they flew their missions with the F-18s, which are multi-purpose, all-weather, day-night aircraft that can deliver both precision and non-precision munitions—which was not the case, by the way, for all of the NATO nations involved—were considered capable of not only flying the aircraft but also leading the missions. In fully 50% of the battlefield air interdiction missions—that is, the deep-strike missions we did—we were actually leading the packages of aircraft, with as many as 60 to 80 aircraft involved in each package. So Canadians were seen right at the front edge of capability.

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That all comes back to the type of training we do and the exercises we conduct with our NATO allies, and more particularly with our U.S. allies; the mutual confidence we've established between our two nations; and to a very large degree as well the comparability in equipment we have, because the American air force and many other NATO air forces fly F-18s or F-15s or aircraft with similar capabilities.

So despite the fact that we had some limitations, the ability to prosecute the mission was very high.

Mr. Gurmant Grewal: Thank you.

The Chair: Once again, General, we really appreciate your taking the time to come. Perhaps you'll come back a second time.

Admiral, we appreciate your attendance as well and the frankness with which you answered the questions. It's been very helpful to us.

Thank you.

Colleagues, I want to draw to your attention that the government's response to the EEC report was tabled in the House today. There's an article in the Ottawa Citizen in respect of the environmental audit issue that was raised in the report. You might want to have a look at that. We have copies here if anybody wants it.

We're adjourned until 30 May, when we return after the break, and we will then continue with Bill C-19.

Thank you very much.