Foreign Affairs Committee on April 26th, 2007

[The Chair, Conservative, Kevin Sorenson]

Thank you, Madame Lalonde, for that closing statement.

Mr. Goldring, please.

[Peter Goldring, Conservative, Edmonton East, AB]

Thank you, Mr. Chair. I'll be sharing my time with Mr. Casey.

Thank you for appearing here today, gentlemen.

I'm looking at the report, at the preliminary conclusions of the IMF, and it goes into some detail on the tax burden and taxation, even to the point of discussing the GST and the appropriateness of further reductions or cuts to that. If a report is done like this on various countries—and I would imagine that it is on all countries—then an essential ingredient included in that might be for commentary on some of the countries that are classified as tax havens, and that could impact Canada itself just by the fact that it's well known that a major shipping company is based in Barbados for the sheer purpose of taxation. The flagging can really be from any country.

Would it not be appropriate to have some commentary in there on how that affects countries that engage too heavily in those kinds of endeavours because it impacts what we are able to do with our taxation?

Second, many of the countries that are the tax havens--or the tax-free countries, as they claim to be--have fees upon fees. A country like Turks and Caicos, for example, which says it's tax free, really isn't. You pay an annual fee for your property, which in effect is really a tax.

So in the combination of the two, I think it's important to know, what really is impacted by tax-free tax havens and the offshore locating of businesses for taxation benefits?

[The Chair, Conservative, Kevin Sorenson]

Mr. Dillon.

[John Dillon]

I would agree with you; commentary on the issue of tax havens would be a very welcome addition to the report. By the very nature of the problem, we don't always have sufficient data to evaluate where the money is going and who is hiding what from whom. Since September 11 there has been some more transparency in the global system, but I still think we have a ways to go.

On the issue of taxation within developing countries, one of the problems is that the kind of policy advice the IMF gives is that they favour value-added taxes, such as our own GST. In my opinion, those are more regressive taxes when we need progressive tax regimes, where the wealthy will pay their fair share.

Here's another area where I'm quite critical of the IMF's advice.

[The Chair, Conservative, Kevin Sorenson]

Thank you.

Mr. Culpeper.

[Roy Culpeper]

To add to that, Mr. Chairman, I think this is a very important and legitimate issue that needs a lot more attention. I think it's worth pointing out that since September 11 there has been a lot of activity among tax authorities and revenue authorities to monitor the flow of funding to terrorist countries. In other words, there is already an infrastructure, so to speak, among revenue and tax officials to track the money. The question is, why can't this be expanded to include the leakage, as it were, of tax revenue to tax havens?

There is an increasing body of opinion among civil society organizations that the leakage of tax revenue because of tax havens and other leakages in tax systems is really undermining the revenue base of governments around the world and reducing their ability to do things, to be good governments. You can't have good governance without governments that have a revenue base that is dependable.

So I think the point you're making is absolutely right on. It points in the direction of encouraging not only the international organizations, such as the IMF and the OECD, to take this issue far more seriously, but also departments of finance in each member country, including our own.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Culpeper.

Mr. Casey.

[Bill Casey, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

Mr. Dillon, I wanted to ask you questions about the IMF, and it just struck me, wasn't John Dillon the famous bank robber?

[John Dillon]

It must have been another branch of the family.

[Voices]

Oh, oh!

[A voice]

It was Dillinger.

[Bill Casey, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

Dillinger, right. I knew it didn't sound right. He was the man who, when asked why he robbed banks, said, “Because that's where the money is.” I always thought that was a good answer.

Moving right along, you said in your paper that many countries have said they will not borrow again from the IMF. Where do they turn now for money? Who do they turn to?

I understand there are countries that loan money with very little in the way of terms and requirements in order to gain access to resource and influence. Where do countries turn now for the replacement of the IMF money?

[John Dillon]

Most of the borrowing is from the private sector, for the middle-income countries.

I want to come back to the example I gave of the Latin American countries that are setting up their own bank of the south with an initial capitalization of about $7 billion U.S. This kind of initiative I think is quite laudable because then they will be able to set their own priorities.

A little known fact is how enormous are the foreign currency reserves that are held by developing countries, particularly in Asia. They outweigh in total the foreign debt. What we have now is most of these foreign exchange reserves are in safe investments, like U.S. treasury bonds.

We're beginning to see a trend away from that, where countries are choosing to lend their foreign exchange reserves to each other. This is a model of financing that I think we need to approach with caution, but welcome it. There are some questions, then, about what political leverage might come with those loans. I think models where countries pool their reserves and through peer review ensure that they're well used are to be welcomed.

[Bill Casey, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

My researcher has noted that Matt Dillon was the sheriff on Gunsmoke.

I understand that China provides money with very little strings attached in order to access resources and political influence, especially in Africa. Am I correct in that?

[John Dillon]

That's correct, and there's a huge debate around that.

[Bill Casey, Conservative, Cumberland—Colchester—Musquodoboit Valley, NS]

Do you support that approach?

[John Dillon]

I think we have to listen to some of the African voices. Some of them are cautious because they're not naive to think that the present regime in China is doing this totally as a charitable endeavour. As you alluded in your question, they're doing it because they want access to resources.

There are some disconcerting stories. For example, there was one out of Mozambique about practices that were not ecologically responsible that were being sponsored. We should look with some caution on a case-by-case basis about what that is doing. However, in principle, who are we to say that the people of China, the Government of China, should not make investments abroad when we make investments abroad?

[The Chair, Conservative, Kevin Sorenson]

We're a little short on time here, but you should have an opportunity to answer that, Mr. Culpeper.

[Roy Culpeper]

I just have a couple of points to make, in addition to what John said.

First of all, the international imbalance that John is alluding to is the more than $2 trillion worth of foreign exchange reserves being held in Asian banks. Those are being generated by something, and that something is the huge and growing balance of payments deficits by the United States.

Here is a problem where the IMF could play a role, and there's been some discussion of that under the rubric of multilateral surveillance. In other words, the IMF should find ways of engaging with the key partners to these imbalances—the Americans on the one side and the Asians and the Europeans on the other side—to stop this careening toward a financial crisis of huge magnitude.

The problem is that the IMF doesn't have the leverage this would take. You could almost say that the IMF is now too large to handle the small problems it's looking at, and it's too small to handle the really large problems it should be looking at concerning international financial crises and instability. There's a good piece on that in today's Globe and Mail by Eric Helleiner, who has written a book and just won a prize on this.

On the China issue, I would add that the Chinese aren't just giving money away; quite often they're lending it. So we've come out of a period of debt forgiveness for the poorest countries, we've come out of the tunnel, and, all of a sudden, they're starting to borrow again. And who are they borrowing from? Well, among others, they're borrowing from the Chinese and the Indians. So in addition to all of the other concerns that John mentioned, there's also the issue of the rebuilding debt, which is recreating the problem we thought we had resolved. But I would also say that it's actually important for developing countries to have some competition in the field when it comes to looking for resources for development. That's a factor I wouldn't dismiss lightly.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Culpeper.

Madame McDonough.

[Alexa McDonough, NDP, Halifax, NS]

Thank you, Mr. Chair.

Thank you very much for sharing your expertise and experience today on this immensely complex subject. Of course, the time is too short to get to the heart of the problem.

I'm sure committee members welcome your favourable comments about the better aid legislation, which has been driven very much by the many civil society spokespersons who've come before the committee and by the committee in moving it to what is nearly the final stage of adoption.

I think your comments added to the excellent report card done by Halifax Initiative, and they really do pose a challenge to us to try to think through what kinds of public accountability mechanisms and processes could actually get at some of these problems. I'm sure the Halifax Initiative report is welcomed by the government, and probably the previous government as well. Fair enough. There have been some complimentary references to some improvements. But it remains a serious, serious problem that the very countries most in need of the Bretton Woods institutions serving them are actually dropping out—and the perverse results of that are astounding, really. They're accelerating their repayments, which is probably a killer thing for them to be doing, in order not to come under the heavy heel of the punishing policies required of them.

I'm wondering if we can ask you to turn your attention a little bit to the question of what accountability mechanisms...and here, I'm really asking you to focus on Canada and our responsibilities as parliamentarians. Clearly, there are the big issues of needed reforms at the Bretton Woods institutional level, but it's also clear that we have very extensive public accountability processes, and so on, through the Auditor General, with respect to our domestic operations. But it seems that when it comes to the Bretton Woods institutions—which involve a lot of money, but also have a massive impact on the lives of the most vulnerable people on the planet—our institutions and processes are very, very frail and very weak.

I'm wondering if you can talk a little bit about two things, really. What would these mechanisms look like, ideally, and how do you see us as a committee engaged with civil society in moving through a process to get us to where we need to be to actually do the job?

[The Chair, Conservative, Kevin Sorenson]

Thank you, Madam McDonough.

Mr. Culpeper.

[Alexa McDonough, NDP, Halifax, NS]

I know those are easy questions with easy answers.

[Roy Culpeper]

Well, perhaps I can start. As the excellent Halifax Initiative report points out, it's been about 15 years since the Auditor General had a look at Canada's involvement in the IFIs. So one can begin there by saying it's time for the Auditor General, who has resources to bring to bear on this, to have a look again and to do this as a more regular activity. I think that would be one mechanism that should seriously be considered.

Other than that, as I mentioned in my remarks, there's no substitute for continuity. You can't solve this in one swoop. There has to be continuous engagement and dialogue. I would suggest re-forming the subcommittee that existed in the 1990s to look at the IFIs, and perhaps broadening that to look at multilateral organizations dealing with economic and social cooperation, because there is an issue of how the IFIs and the UN cooperate. Minister Flaherty himself made an appeal for better coordination among the UN and the World Bank and the IMF.

Now, how you do that is actually more difficult than it sounds, but it requires focus and constant debate. To have a subcommittee that looks at these issues and calls witnesses from academia and from the private sector, as well as from civil society, cannot but help.

The final thing I would say is that one hears that many people think of money going into a black hole when they think about the World Bank, or the IMF, or multilaterals. Well, it's actually more to the point to say that the multilateral organizations have some pretty good mechanisms of oversight. The independent evaluation office at the IMF and the independent evaluation group at the World Bank produce some excellent reports. Those reports need more dissemination and reading, and if we had an IFI or a multilateral subcommittee of this committee that would afford time for committee staff and witnesses to engage in the debate using that material, which is out there....

In many ways, I would like to say that there's much more material available to feed this debate on the oversight than we often give credit to the institutions for.

[The Chair, Conservative, Kevin Sorenson]

Go ahead, Madam McDonough. We'll give you more time.