CIGI PAPERS NO. 28 — MARCH 2014 BOXING WITH ELEPHANTS: CAN CANADA PUNCH ABOVE ITS WEIGHT IN GLOBAL FINANCIAL GOVERNANCE? JAMES M. BOUGHTON BOXING WITH ELEPHANTS: CAN CANADA PUNCH ABOVE ITS WEIGHT IN GLOBAL FINANCIAL GOVERNANCE? James M. Boughton Copyright © 2014 by the Centre for International Governance Innovation The opinions expressed in this publication are those of the author and do not necessarily reflect the views of the Centre for International Governance Innovation or its Operating Board of Directors or International Board of Governors. This work is licensed under a Creative Commons Attribution — Non-commercial — No Derivatives License. To view this license, visit (www.creativecommons.org/ licenses/by-nc-nd/3.0/). For re-use or distribution, please include this copyright notice. AUTHOR’S NOTE I am grateful to Malcolm Knight, Domenico Lombardi, Douglas Smee and three referees for helpful suggestions and to Skylar Brooks for excellent research and editorial assistance. Any errors are mine alone. 57 Erb Street West Waterloo, Ontario N2L 6C2 Canada tel +1 519 885 2444 fax +1 519 885 5450 www.cigionline.org TABLE OF CONTENTS 4 About the Author 4 Acronyms 5 Executive Summary 5 Introduction 5 Intellectual Leadership 6 Founding the IMF 8 Floating the Exchange Rate 10 Designing the SDR 11 Financial Sector Oversight 11 Institutional Leadership 11 Representation 12 Management 14 Financial Leadership 14 Quota Size 15 Lending to the IMF 15 Assessment 17 Works Cited 19 About CIGI 19 CIGI Masthead CIGI PAPERS NO. 28 — MARCH 2014 ACRONYMS ABOUT THE AUTHOR BIS Bank for International Settlements BoC Bank of Canada FSAP Financial Sector Assessment Program G7 Group of Seven G10 Group of Ten G20 Group of Twenty GAB General Arrangements to Borrow CIGI Senior Fellow James M. Boughton is a former historian of the International Monetary Fund IMF International Monetary Fund (IMF), a role he held from 1992 to 2012. From 2001 to 2010, he also served as assistant director in the IMFC International Monetary and Financial Strategy, Policy, and Review Department at the Committee IMF. From 1981 until he was appointed historian, NAB New Arrangements to Borrow he held various positions in the IMF’s Research Department. Before joining the IMF, James was ODA official development assistance an economist in the Monetary Division at the Organisation for Economic Co-operation and OECD Organisation for Economic Co-operation Development in Paris. and Development James is the author of two volumes of IMF history: SDR Special Drawing Right Silent Revolution, covering 1979–1989; and Tearing Down Walls, covering 1990–1999. His other SFF Supplementary Financing Facility publications include a textbook on money and banking, a book on the US Federal funds market, three books on IMF topics that he co-edited, and articles in professional journals on international finance, monetary theory and policy, international policy coordination and the history of economic thought. 4 • THE CENTRE FOR INTERNATIONAL GOVERNANCE INNOVATION BOXING WITH ELEPHANTS: CAN CANADA PUNCH ABOVE ITS WEIGHT IN GLOBAL FINANCIAL GOVERNANCE? EXECUTIVE SUMMARY United Kingdom had responded to Nasser’s unilateral act by blocking Egypt’s sterling balances and was making Canadians have long harboured a desire to “punch preparations to work with France and Israel to engineer above their weight” in international diplomacy, an an invasion of Egypt and a retaking of the canal. The aspiration justified by Canada’s position in the world usual financial resources that Egypt could have acquired both geographically and culturally. This paper examines through the IMF — US dollars or pounds sterling — were one aspect of that effort: Canada’s role in international effectively precluded from being of any use. The Canadian financial governance, particularly within the International dollar offered a convenient alternative.1 Monetary Fund (IMF). For its part, Canada was caught between its two great Leadership in international diplomacy has three key alliances, and its officials were determined to stay out of the dimensions: intellectual, institutional and financial. fray. The problem was that the Eisenhower administration Canada’s record on intellectual leadership has been in the United States was opposing (and would ultimately impressive, starting with its contributions to the design of block) the British plan to retake the canal by force. the IMF at the Bretton Woods conference in 1944. From the Canadian officials generally were sympathetic to the US 1950s through the early 1970s, Canada led the way toward position, but given Canada’s position as a member of the the eventual adoption of floating exchange rates by major Commonwealth they did not want to actively oppose the industrial countries. Among more recent examples, British. By remaining neutral, they could try to broker Canadians have taken the lead in promoting multilateral a settlement. Making their currency available to Egypt cooperation on financial policies through the Group through the IMF played a small part in furthering that of Twenty (G20). plan, which culminated successfully in a path-breaking Canadian proposal to send in a large peacekeeping force Institutional leadership has been more elusive, as through the United Nations.2 Europeans and US officials have dominated the landscape. Canada missed an opportunity to have its own As this story illustrates, Canada’s unique position in officials named to head the IMF in its early days after global diplomacy, as a strategic partner to both of the great World War II. Nonetheless, Canadians have begun to take anglophone powers, has given it an influence that in some on other important leadership positions in multilateral dimensions outstrips its relative population, its economic institutions. size and its modest history. Using that influence well — “punching above our weight” in the common parlance — Financial leadership requires a willingness to invest more has long been a Canadian aspiration. This paper explores than proportionally in the operations of the IMF and other one key element: Canada’s role in multilateral financial agencies. Canada has a respectable but not outstanding diplomacy, focussing on the IMF as a prominent case study. record in that dimension. Influence over the financial system can take one of three The key issue for the future is whether Canada will forms: intellectual leadership, in particular by advising on continue to have the capacity and the will to take leading structural or intellectual innovations; formal institutional positions and actions in the face of increasing competition leadership, by having Canadians selected to serve in from the rapidly growing emerging market countries. senior management positions; and financial leadership, by contributing relatively heavily or prominently in support INTRODUCTION of institutional development or operations. How has Canada performed in these three dimensions? On September 22, 1956, Egypt borrowed just over CDN$15 million from the IMF. This seemingly INTELLECTUAL LEADERSHIP unremarkable act was the first instance in which a country borrowed a currency with a floating exchange rate from the Over the past several decades, Canada has earned a IMF. It also placed Canada in the position of being only the reputation for strong intellectual leadership in international second country — after the United States — with a creditor financial governance. In recent years, Paul Martin’s efforts, position in the Fund. More generally, it illustrates the both as finance minister and later as prime minister, to important role that Canada has played at critical junctures establish the G20 and to elevate it to the apex of financial in the world’s premier multilateral financial institution. policy advice constitute a standout example. Mark Why Canada, and to what effect? Egypt was in financial trouble because of the Suez crisis. 1 The financial aspects of the Suez crisis and the effect on the IMF are Egyptian President Gamal Abdel Nasser had precipitated covered in Boughton (2001a). the crisis by nationalizing the strategically important canal 2 Lester Pearson, then Canada’s secretary of state for external affairs after the United States had undermined a multilateral (later prime minister), conceived the peacekeeping proposal and plan to finance construction of the Aswan High Dam. The negotiated its passage through the United Nations. In 1957, he was awarded the Nobel Peace Prize in recognition of his efforts. JAMES M. BOUGHTON • 5 CIGI PAPERS NO. 28 — MARCH 2014 Carney’s work, as governor of the Bank of Canada (BoC), and other indebted countries and that would allow the to persuade the leading countries to support the reform of British to preserve the trade and financial preferences the governance structure of the IMF is another. Outside the inherent in its colonial relationships. The United States was official sector, the early contributions of Robert Mundell to the ascendant power, fully recovered from the Depression the analysis of international financial policy, for which he of the 1930s, largely unscathed economically by the war, was later awarded the Nobel Prize in economics, are justly and the holder of a sizeable majority of the world’s gold celebrated. Within the IMF, the record of Canadian officials and other financial resources. What White envisaged was a and economists is less well known but no less important. system that would open up international trade and finance so that the United States could prosper within a growing The IMF was and