British Columbia

Foreign control ‘dictates interest rates’

Foreign ownership of Canadian financial
assets has effectively placed a strait jacket
around the Bank of Canada’s ability to
react to domestic events when it sets its
monetary policy.

Having to take outsiders into account is
not a new problem for bank governors, but
foreign finance has never before possessed
such clout.

Foreign capital is now estimated at 20 per
cent of all funds driving Canadian capital
markets. Foreign ownership in bond
markets, where long term interest rates are
set, is even higher.

The magnitude of the problem can be
seen when foreigners own twice as many
Canadian bonds as all the Canadian trus-
teed pension funds put together. The
numbers are unprecedented. Foreigners
hold about 30 per cent of all federal bonds,
36 per cent of all provincial bonds, 20 per
cent of all municipal bonds and 50 per cent
of all corporate bonds.

Finance Minister Michael Wilson is
therefore right when he says Canada would
pay a heavy price for lowering interest rates.
What he doesn’t say is that an even higher
price will be paid if rates are not lowered.

Traditionally, when short term interest
rates are lowered the market rallied to
longer maturities. Now foreigners who con-
trol our bond markets get worried when
lower rates cause the Canadian dollar to fall
and they sell off their bonds. That puts a
upward pressure on long term interest rates.

For example, in mid-January when Bank
of Canada governor John Crow allowed a
slight decrease in the rate in order to deal
with ‘ta weakening Canadian economy,”
the very hint of a drop, led to a three per
cent fall in the dollar and the bank backed

off.

_ Unlike in the past when imports of for-
eign capital were sought to help finance
capital projects, since the 1980s this inflow
has gone to budget deficits. Here, interest
charges to service the deficit takes up to 30
per cent of all government revenues.

Lowering interest rates has to be a top
priority for the government. But lowering
the rates — as has been clearly demon-
strated over the past three years — hurts
the Canadian dollar and endangers the
inflow of foreign capital needed to finance
the debt. Canada could find herself in the
same situation as Australia which is forced
to do its foreign borrowing in currencies
other than its own.

High rates do shore up the Canadian
dollar, keep imported inflation down,
reduce economic growth, employment and
productivity, but even froma corporate sec-
tor view this is no panacea.

An economy in deep recession demands
the lowering of interest rates and the cur-
rency again becomes vulnerable to specula-
tive attack on each new sign of economic
weakness.

High interest rates are premised on the
notion that a high Canadian dollar is the
most desirable of goals. But a high dollar
benefits a very narrow section of capital.

Raw materials, our major exports, are
priced on the world market in U.S. dollars
and have little to do with the value of the
Canadian currency,

A high dollar does assist Canadian capi-
tal in moving into the U.S. market under
free trade, but a higher dollar shrinks profits
and production of Canadian manufactured

» goods that would otherwise displace

imports.
This Current account deficit has to be
financed with a larger net capital inflow. If

MICHAEL WILSON

the economy were allowed to expand, such
a capital inflow would be forthcoming from
a larger demand for Canadian stocks and
goods.

As real output is being depressed with
high interest rates and an artificially high
exchange rate, Canada is forced into the
futile strategy of trying to attract and retain
more hot money with an ever increasing
interest rate.

High interest rates bring long term prob-
lems by making investment and improve-
ments to Canadian business impossible.
This erodes the long term productivity of
business and results in permanent high long
term unemployment.

In addition, high interest rates add to the
budget deficit which in turn the government
attempts to off set with higher taxes. That
reduced purchasing power leads to an
increased number of jobless, further drain-
ing the budget through welfare and other

social payments.

Canada is the only major industrial capi-
talist economy that is currently increasing
marginal tax rates, placing a surtax on mid-
dle incomes and instituting a consumption
tax.

Under a regime of lower tax rates and
lower interest rates, the exchange rate on the
dollar would not decline as much as it even-
tually would because of current economic
policy. Instead Canada would be able to
break its addicted dependence on this prec-
arious flow of hot money.

“We have no choice but to fight this
corporate agenda,” he declared to
applause.

One union or group is not enough to
fight this corporate agenda, said Parrot,
urging greater unity between labour and
other groups and stronger local labour
councils.

The CUPW president praised organiza-
tions like the National Action Caucus for
the Status of Women, Rural Dignity, and
the Pro-Canada Network, the latter
organization being the key force behind
the national protest last April that saw 2.2
million Canadians vote against the GST.

“We have to accept April 7 and 9 (the
balloting days of the anti-GST campaign)
as just the beginning,” said Parrot in cal-
ling for a program of escalating actions
including national days of protest.

And the protest must also table a pro-
gram that includes converting arms pro-
duction to peacetime use, improving
public services and ending privatization,
he said.

Turning to the situation at Canada
Post, Parrot slammed the federal govern-
ment for ignoring a special committee’s
recommendations against plans to privat-
ize the Crown corporation.

“If postal workers have to go out on
strike on the issue of privatization, we will
make it clear that we’re on strike for ser-
vice, but we’re also on strike against cheap
labour,” he asserted.

African National Congress representa-
tive Peter Mahlangu, speaking for the
South African Congress of Trade Unions,
said workers in his country forced a kind
of recognition from the apartheid govern-
ment of the international workers’ holiday
by striking in increasing numbers each

against GST.

May Day.

Thanks to people’s struggles the State of ©
Emergency has been partially lifted, some
people are beginning to return from exile,
and talks are beginning with the govern-
ment, which is part of the struggle, he
noted.

“For us to be talking to the government
is not a compromise because we've said
the bottom line is one person, one vote,”
Mahlangu declared.

The ANC is talking about nationalizing
key industries in a free South Africa, and
Mahlangu characterized the fight of one as
capitalism versus socialism. Some critics

JEAN-CLAUDE PARROT ... April 7, 9 should be just beginning of campaign

Parrot marks May Day with unity call

say socialism is a dying system, but
“maybe we want to experience for our-
selves some of the new system,” he said to
appreciative laughter.

Mahlangu urged trade unionists to con-
tinue supporting sanctions against the
racist regime “until you get the word from
our organizations.”

The cabaret, organized by the Van-
couver Trade Union Mayday Committee
and presented as a part of Mayworks fes-
tivities, included performances by singers
Holly Arntzen, Linda Chobotuck and
Pierre Fournier, and poet Lindsay
Kenyon.

Union hits
health care
privatizing

The Hospital Employees Union last week
demanded that the provincial government
review its policy of privatization in the
health care field following revelations of
conflict-of-interest in contract bidding and
an admission by the provincial auditor-
general that the government does not get
enough information to assess the cost-
effectiveness of private versus public con-
tracts.

HEU secretary-business manager Car-
mela Allevato said that the health ministry
is forcing hospitals to contract-out laundry
facilities to the private sector by refusing the
necessary funding to upgrade existing facili-
ties, many of which are aging.

But “hospitals are going into privatiza-
tion without proper assessments of the costs
and benefits,” she charged.

Ina letter to the union April 5, Auditor-
General George Morfitt acknowledged that
his own department’s annual report for
1989 stated: “‘Our audits assessed whether
the ministry has suitable processes to ensure
it is getting value for the funds spent on
health ... (and) concluded ... the Ministry
does not collect enough information to
know how cost-effective the hospital servi-
ces it pays for are.”

At the same time, however, Morfitt
declined the union’s request that he investi-
gate allegations of conflict-of-interest in the
awarding of hospital laundry contracts at
Vancouver General Hospital and Comox-
Strathcona Regional Hospital to K-Bro
Linen Systems Ltd. Provincial Ombuds-
man Stephen Owen also turned down the
union’s request for a probe.

The allegations were raised in an article in
the March issue of Equity magazine which
revealed that K-Bro was awarded the con-
tract to build the $7-million off-site laundry
facility at VGH even though it was finally
the only company bidding on the contract
and many of the contract tender documents
were based on the design of an already-
existing K-Bro plant in Edmonton.

Even Little Mountain Socred MLAs
Doug Mowat and Grace McCarthy had
warned in a letter to former health minister
Peter Dueck that the contract could prove
to be a political embarrassment.

“Surely, it should be government policy
that all government contractors be pre-
cluded from bidding on their own recom-
mendations,” the letter stated.

K-Bro also has a construction-manage-
ment contract to build a laundry in Cum-
berland for the Comox-Strathcona Regional
District and is reportedly slated to build a
laundry adjacent to Kamloops’ Royal
Inland Hospital.

But all of that scheduled privatization
should be put up to public scrutiny. said
Allevato.

“Our experience at VGH and elsewhere
shows that taxpayers: gain nothing from
privatizations,” she said.

Pacific Tribune, May 7, 1990 « 3

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