Transcript: Stephen Harper interview

Stephen Harper, Canada’s prime ­minister, was interviewed in the Financial Times office in New York on March 30 by Chrystia Freeland, US Managing Editor, and a panel of FT journalists.

You can also listen to audio of the interview here.

FT: As you may have seen from Tuesday’s FT, we spoke to President Obama on Friday and our main line of questioning was about the G20. And one of the things, obviously, that we pressed him on a little bit was this apparent division between the Europeans and the Americans on how much fiscal stimulus is necessary. What we were wondering was whether Canada might find itself playing a little bit of a mediating role, understanding as it does the American position but finding itself maybe in terms of its own financial health a little bit more similar to the Europeans and maybe not needing to step on the gas quite so heavily.

SH: Well, first of all, I think it is important that we do reach a consensus on these issues. My discussions to this point have convinced me that the gaps aren’t nearly so wide as has been suggested in some media. Canada’s own fiscal stimulus is bigger than most European countries, but not as big as the Americans. Obviously we’ve in a different position. Our financial position, from which we’re obviously executing this fiscal stimulus, is much stronger. We can execute a considerable fiscal stimulus and as long as we keep the spending temporary, we shouldn’t have any kind of structural deficit problem. I would say though, what I would emphasise in this discussion when we get to it in London is less the size of the fiscal stimulus. I do think it’s important that everyone do at least the 2 per cent that the IMF as talking about.

FT: At least 2 per cent or 1.8 per cent?

SH: 2 per cent is the number we’ve been throwing around, but I think everyone should do what the IMF has been suggesting, and do it in a way that’s not protectionist. That’s also important. But probably the most important thing about stimulus as we have been looking at ours is that it actually be delivered in a timely manner. A concern I have with some stimulus programs is that if you’re out there conceiving whole new spending initiatives it’s going to be a considerable time before that gets out the door. We actually do need the fiscal stimulus right away, we don’t need it a year from now or two years from now.

What we’ve done in Canada to try and achieve that is we have actually for the most part – I mean, we have a range of stimulus initiatives. But for the most part what we’ve done on infrastructure is we have simply accelerated and moved forward existing capital spending plans. And we have done that in coordination with other levels of government. The advantage of doing a coordination with other levels of government – besides it’s more effective – is that it actually will help us make this a time-limited initiative as well, because if they’re all putting their skin in the game they have every incentive at the end of this to also come out of it and go back to more normal spending levels. So I hope we’ll find a consensus on this issue, I’m optimistic we will. And as I say, I’m also hopeful that consensus will involve doing at least what the IMF has asked for.

FT: Some people have talked about how this summit might not be enough and that already attention is turning to the next G20 meeting and that might be the one where there’s a breakthrough.

SH: Well, I think there will be another G20 meeting. I really do hope we make significant progress here. I think it’s important though to point out that a lot has actually occurred since the last G20 summit. You know, most countries have undertaken fiscal stimulus measures. There has been somewhat better coordination on the monetary policy side. The trade standstill hasn’t been fully respected, but nevertheless we haven’t seen any kind of massive drift yet towards protectionism. That remains a danger. And certainly, although the financial sector problem is not fixed, the situation is much more stabilised than it was in November. So I think there’s been considerable progress.

There have been a bunch of working groups set up. As you know, Canada has co-chaired with India the working group on future financial regulatory reform. We have a very good report which I think will gain consensus. Essentially, we did come down on that one in kind of a middle-ground position we hope will get the support of both the United States and Europeans and others. And that is, that we actually think it is important that you have strengthened system of national regulation as opposed to an international system of regulation. Canada’s own case is proof that a strong system of national regulation can in fact work.

At the same time, we do think in a global market where global instruments are being traded what we need is some kind of peer review mechanism so that without impinging on national sovereignty there can be some kind of international assessment and review of financial national regulatory system and then countries can respond to those recommendations.

FT: And would that be through the IMF or a new body?

SH: I think it’s done. I should have checked this before I came. There is such a thing done now. I believe it’s done through the IMF now. Canada has subjected itself to those and has always found those to be very useful. So no reason it couldn’t continue to be done through the IMF. The Americans and others, some of the emerging countries, have been resistant to the idea.

FT: You think they might give in this time?

SH: Well, you know, I see certain indications they will. Look, we’re in a global market with global problems, there has to be some significant level of global cooperation in place in these things. If we simply make policy solutions and respect borders then that’s not going to be sufficient to deal with the problems we’ve got in front of us.

FT: All right, just to follow up on this question of follow-ups to this summit, which obviously has had a fair amount of achievement as far as we can see so far, but presumably you’re going to have to decide when you’re there where you go with this group next and what is, where are you in the agenda.

SH: My sense is there’s probably momentum to another meeting, but I’m always reluctant to get into that because I’d like to see how much we can accomplish at this one first.

FT: What I was going to ask is on the basis of what you see as the outcome of this summit, what issues do you think need further work? I’ve been very struck by the recent discussion particularly led by the Chinese on the future of the international reserve system, the role of the SDR in that context, and it’s all linked of course with the whole question of burden of balances. There also seem to be quite a few issues on the regulatory side. Do you see this as an agenda that still has to be addressed or not?

SH: It’s an agenda that is going to be addressed. And I’m not trying to dismiss the importance of any of those things, I just think it is critical at this summit that our number one priority be restarting global growth, dealing with the lingering causes of this slowdown, and having the will to take coordinated action to deal with that. That’s not to say that all these other issues aren’t important, won’t form part of this or a future discussion. But I do think one of the big risks at these kinds of summits is that they become about the process, they become about structures, about institutions, about arrangements, instead of about the problem at hand. Now, I’m not saying they’re unrelated, but we could have a lot of meetings to discuss these institutional issues. That’s actually not why we’re meeting in the first place, so that’s kind of my concern.

FT: There is some difference between – there seems to be a consensus that the IMF’s resources should one way or another be increased. Partly to deal with problems of emerging economies and what to do with the problems, and some difference on scale. Where do you think you’ll come out?

SH: Well, we definitely support doubling it and our minds are open in terms of going higher than that. We certainly recognise there has to be some kind of reconstitution of the shares. We’ve been supportive of steps in that direction in the past, even though we’ve been one of the ones hardest hit in terms of our own share coming down, but we view these developments as inevitable.

I would just say this: I would hope that if we get into that kind of discussion that we talk about the other side of it, which isn’t just the desire or even the ”right” of emerging economies to play a bigger share in these things according to their growing power, but also their responsibilities. I am concerned, I was vocal at the last G20 although I was in a minority. I remained vocal about the fact that underlying systems of global imbalances cannot be perpetuated.

You know, I do think it’s certainly in a sense not the most burning issue, but I do think it’s an underlying cause of this problem when there are policies that are dependent on some countries accumulating significant imbalances in one direction balanced off by other countries being heavy borrowers and spenders. And I don’t think that kind of system can continue in the long term, so we need more balance in the global system and I would suggest that those emerging economies that want to have a greater role in the international dialogue are going to have to take the responsibilities that go with that. And that’s, I think, moving away from a system of global imbalances that is problematic.

FT: Has Canada thought about this issue of SDR allocations? Seems to have floated up over the last two weeks or so. An idea, if you have one, what’s your position on it?

SH: We haven’t taken a firm position. I think it is true to start with Chrystia’s initial question that on some of these things we do try and act as a bit of a conciliator on some of these issues. We’re maybe not a central player or a central debater.

FT: Okay, can I ask one more thing about G20? It’s just the story that we carried not so long ago about your hosts in London separating the G20 into two different groups and Canada being in the lower half as it were and a second rate G20 country. What did you think of that, what do you make of that?

SH: Well, I won’t comment on it. I’ll just say that at the last G20 all countries were treated equally around the table. We’re not under any illusion that by the very nature of their size some voices are louder than other. I expect it’ll be the same at this, I don’t expect there will be anything that will distinguish a tier 1 from a tier 2 country. Canada’s position at these kinds of summits is interesting in that we are often in a position where we’re big enough to matter but not big enough to be a threat to anybody, so we are often in a position of being able to express opinions that can be seen as genuine best interest opinions as opposed to a kind of a vested interest or a camp. And that’s an advantage we have.

Of course the other advantage we have is that among the developed countries we’re in a different situation. We’re not one of the developed countries that is in any way a cause of this problem. We have a strong banking system, we’re not a source of any contagion for anyone else. And we have, as you know, a number of other strong attributes, strong balance sheet, strong record on monetary policy, strong public pension plan. So, you know, it gives us a unique voice in the debate we’re having today. We’re not one of the developed countries everyone points at and says, you caused the problem.

FT: Is that issue looming large? I mean, we had the Brazilian president talking about blue-eyed people causing the crisis.

SH: Let’s face it, in the last couple of decades the developed world, through international institutions, have imposed real, serious constraints on a lot of developing economies, particularly when they’ve had financial crises of their own. And now the shoe is on the other foot, and now when a lot of developed countries get up and say, as we normally do, here’s how we believe it should be fixed, others are saying, well, hold on, this time you’re the case. So this is a different kind of debate. So yeah, I think there’s that underlying tension, absolutely.

FT: Do you think that’s kind of weakening the Americans’ sort of bully pulpit?

SH: Well, there’s no doubt that the American bully pulpit has been weakened by this development, I do think somewhat unfairly, in that in some circles you would think this was an entirely American-created problem. That is, of course, not true. There are other countries who had very similar policy to the United States and have compounded this enormously. But there’s no doubt that American economic and financial prestige has been damaged.

But I don’t think that changes an underlying calculation which is when that’s all said and done, there’s still very little in the world that can be done without American leadership. It’s true that the United States is less able to set the agenda and particularly set it unilaterally than it has been able to do for some time, but at the same time there’s no one else out there who can set the agenda and lead it without the United States playing a predominant if not the leading role. That still remains the case.

And by the way, Canada sees that as a good thing. Nobody should be under any misunderstanding for the differences we sometimes have with the United Sates. We view American leadership in the world as an overwhelmingly positive feature of the global system and one we would not want to see lost.

FT: Do you feel that there are some emerging countries, particularly the bigger ones, who have actually contributed intellectually to this particular process, this summit, in a significant way?

SH: I’ll know better the answer to that when we get there. At the last summit, and I’m not trying to criticise the contribution of anyone, certainly the focus of the developing countries tended to be on their own issues combined with institutional reform type issues. You know, what we hope to see at a summit like this – and you know, I understand it’s difficult to do – is for people to put their own national interests a little bit to the side. We really, as I keep repeating and I know it’s a trite thing to say, but it is a global system with a global problem and there has to be some ability to think globally to solve it.

The issue of imbalances that I gather you’ve written about that I just spoke about is an example that we had a lot of trouble getting a good discussion of that last time. I don’t think, frankly, we did get a good discussion of it. It is an underlying problem that has to be addressed. It is an example of a number of countries undertaking national strategies that may be popular or desirable from their own short-term interests, but that in total are not desirable for the system as a whole. And on some of these things, we do have to look back and I do hope other leaders will look at what is the greater problem here that has to be fixed, which is the problem of the global economy, not simply our national interests in the global economy. I’m going to move that out of the way, it’s now looming there, threatening me...

FT: Just returning to this point of American leadership, President Obama visited Canada first and had really euphoric reception. What do you think the impact of the Obama factor will be at this meeting? Can his global popularity make a difference?

SH: Well, as you all know, the simple word is hope. Obama has brought a sense of hope to the debate. Some of that’s the nature of his campaign and his personality, some of it is just the fact of change. One of the great difficulties, and I felt for him, one of the great difficulties President Bush had at the last G20 summit was that when everybody knows his world ends on January 20, there’s not much way of bringing a hopeful perspective to things. In a sense, we were in a holding pattern and that wasn’t President Bush’s fault, it’s just the nature of the American system of government.

President Obama has brought a considerable hope to the United States, there’s by extension considerable hope about what he’ll bring to the world scene and there’s a lot of expectation about, as you know, a more multilateral or consensual approach to American leadership. I’m hopeful too. The only caution I would have, on both sides, both to the Americans and to the others, is that in the end nothing displaces American leadership. I do think it’s important that President Obama fulfill his promise to provide a more consensual approach to this and other issues. That said, Americans must lead in the end. And I say that to the other side, in the end, once you get this consensual approach, you have to respond to it.

FT: Would that apply, the more consensual approach apply to bilateral negotiation as well? I’m thinking especially about the border and the concerns that Canada has about border security, you know, that’s a major, major problem for you.

SH: Well, look, since President Obama came up to see me we’ve had no less than eight of our cabinet ministers come down here and have bilaterals with their equivalents. And in most of these areas, there are no joint work plans that are concrete. On the border, the border has been problematic for Canadians because this is a big historic shift. We had essentially an unguarded border and we’re moving towards, for lack of a better term, a guarded border. Of course, passports really present what you would call a guard, but in a sense we’re moving towards a more traditional or a more typical border arrangement.

I think that’s unfortunate in some ways, maybe inevitable but unfortunate. Our position has been in Canada – and we’ve certainly worked on it in the past administration and we’re working on it in this one – our position is that be under no misunderstanding that national security concerns of the United States are shared by Canada. In fact, it’s more fundamental than that. Any threat to American national security is by definition a threat to Canada. Not just because it would have immediate impacts on trade flows and everything else to Canada, but because the targets are approximate and an attack on the United States could easily become an attack on Canada.

And in fact, the people who threaten the American people and the American government make the same threats towards Canada. It’s unfortunately well known that the kinds of people who plot to assassinate the US president also today plot to assassinate the Canadian prime minister. This is a reality of the world, so we share these concerns.

What’s important as we go forward is that we try and work with this administration, this is where we would hope to have a change, work with this administration to produce what we call a risk-management approach to the border – that we try and develop systems that are effective at identifying and deterring and preventing real risks as opposed to being large bureaucratic systems that are simply an encumbrance on all types of border activity or border traffic.

I use as an example, it may not be one that appeals to this group, but I certainly used with the last administration, the analogy of some of the gun controls Canada brought in in the 1990s. We’ve always had a strong system of gun control, but in the 1990s we added this additional element which was requiring every single hunter and farmer in the country to register every single shotgun. This has cost us a couple of billion dollars and doesn’t do a thing to identify likely perpetrators of crime.

And you know, our concern with border management is that it has descended into a gun registry approach – let’s create paper trails and registries and processes for every person and every business that goes across the border, but this is not actually doing much to proactively identify high risk. And that’s what we need to do. And as I said, we share the security concern, let’s do it intelligently. We don’t want systems – I’m trying to remember the line once said to me – that are burdensome to the law-abiding and of no effect to the larcenous, right? I mean, we don’t want systems like that.

FT: We saw a pretty significant change just on Monday in the US government being much more open about its plans for GM, and for Chrysler in particular. Do you worry about the fallout given that there are a lot of Canadian suppliers as well and the potential of letting the disintegrate?

SH: First of all, you have to understand the industry here is completely integrated. And what I mean by that is not just that it’s the same manufacturers and the same companies on both sides of the border, and not just that they manufacture within each country for the market on both sides of the border, they actually manufacture simultaneously on both sides of the border. A car can cross the border up to seven times in the process of being put together. That’s how integrated this industry is. That’s why with the previous administration we made the commitment that we wanted to work together with the United States on whatever rescue package they’re putting together. We have 20 per cent of the Detroit three manufacturing in North America, we’re prepared to put our 20 per cent skin in the game. And with the previous administration and this administration we have been in daily contact on what their plans are.

FT: Did they talk to you on Monday before they took the steps with Wagoner?

SH: We’ve been talking to them over the last several weeks. Now, that’s not to say we will do something identical to what the United States will do, but in the end we will do something fairly similar.

FT: And can we expect that 20 per cent ratio to be abided by?

SH: Yes, absolutely.

FT: 20 per cent of the funds that the US –

SH: Whatever we do will be 20 per cent of the total package. As I say, ours could be different, but it will be different in the detail, not different in the general direction. We said that when the US put up its initial sustainer loans, I forget what they’re calling them, but the initial short term loan facility, we created a similar facility at 20 per cent of the size for the Canadian industry.

FT: 20 per cent of the size of the US package or 20 per cent of the total?

SH: I think it’s 20 per cent of the total. These things get confusing because one’s in Canadian dollars and one’s in American dollars, but it amounts to 20 per cent of the total. This is a huge concern to us because first of all what’s going on here, we might as well call it what it is. It’s essentially a politically directed restructuring and we want to make sure that in the course of that it isn’t moved out of our country. That would be a risk if we didn’t participate.

FT: Is that a risk even now? I mean, we see US taxpayers really stepping up and we’ve seen US taxpayers have very strong views about what government money should be used to do. Is there a risk that GM might be pressed to close its Canadian facilities to keep the US ones running?

SH: Well, they may be, but that’s precisely why we’re putting our 20 per cent in.

FT: I mean, you’ve got an immediate problem right now with Chrysler, don’t you? And the Canadian auto workers, where they’re saying they’re going to pull out of the country if they don’t get the concessions that they need.

SH: Can I get to that in a second? Let me just maybe finish the other answer and I’ll talk about that. So this is why we’re doing this and it’s a huge issue in Canada. I should know off the top of my head what the percentage of the auto industry is in Ontario, but almost all the Canadian auto industry is in Ontario and it’s a huge part of the economy and the Canadian economy as a whole – something like nine per cent of our GDP. So in Ontario it would have to be 15, 16, 17 per cent. It’s a huge, huge part of the economy. So this is obviously a very central concern to us.

First of all, let me just say about what the Obama administration is doing that we are extremely supportive of it. I think the message sent today is that the Obama administration is going to force the industry to make the tough decisions, to swallow the bitter pills. Whatever taxpayer money goes into this must lead to a successful outcome. Yes, it will be a smaller industry. Yes, there will be job losses. But in the end, we must produce viable companies. If we throw a bunch of money in and it fails anyway or we have to do it over again in a year and half, this is an absolute disaster. And all the signs based on what the Obama administration is doing today is they are not prepared to take that risk, and I think that is very positive.

Now, you asked me about...

FT: Can I just, before you get to Chrysler, sorry, was it the right thing to require Rick Wagoner to step down?

SH: I’m not going to comment on that. What’s the right thing is to force this industry, all of the stakeholders in the industry and in these companies, to take the tough decisions necessary.

FT: And how about bankruptcy? Could that be in the offing and would that be a good approach?

SH: There’s a range of options and I’m not going to comment on those specifically. Obviously, I have a lot of confidential information on this and I don’t want to betray any of it.

On Chrysler, there are two issues in Canada. First of all, just on the more general question of are you worried they might close their plants there and not here? I think because we’ve got our skin in the game, those decisions will be made based on the state of the plant, the profitability of individual plants, and we’re confident we’ll end up with our share. That’s why we’re doing this.

On Chrysler, you’re right, there are two specific issues in the case of Chrysler. One is that Chrysler has an ongoing dispute with the governments in Canada and the United States on taxes on transfer pricing and the tax implications of that. I can’t comment on that obviously. It’s a legal matter and the government of Canada must ensure that these things are settled in a way that respects the law.

On the issue of CAW, I’d just say what I said about the Obama plan and the position of the government of Canada is no different. Every stakeholder in this industry is going to have to take the difficult decisions necessary to ensure long-term viability or they will not get support. That’s that simple. It’s a tough decision to put taxpayers’ money into these companies, it is not a popular decision. I know that hundreds of thousands of jobs are dependent on it, but we must make good decisions that will work. And the government of Canada, like the government of the United States, is not going to put money into companies unless all the stakeholders in these companies have taken the decisions necessary to ensure long-term viability.

FT: Is it problematic to you that the Canadian auto industry is so closely intertwined with the industry in the US? Would you be interested in diversifying, working more with European or Chinese automakers or...?

SH: Well, we have good presence of Japanese automakers, like they are in the United States. They are in Canada and in fact have been growing very quickly in Canada. I forget the figure, but my recollection is they’re something like 40 per cent of car production now, so it’s a very large and growing part. But let’s be frank, normally having the big Detroit three automakers present and integrated into Canada is a good thing when they’re making money. When they’re not making money, it’s not a good thing.

It’s the same thing if you ask me that question, in a sense, about is the global economy a good thing for Canada? Are we happy about the fact that even though our banks are strong, our balance sheets are strong, our monetary policy is strong, even though I think we’ve done everything on the public sector side we need to do, am I upset about the fact that all of a sudden we have catastrophic drops in our export markets and commodity prices and that this is affecting our economy? Well, obviously on days like this it’s not a good thing, but it’s still the lifeblood in the long term.

Look, it’s tough for governments to accept that whether it’s the auto industry or more broadly the nature of the global economy, it’s tough for governments to accept that the resolution of individual problems are beyond our control, at least beyond our control acting alone. What that tells us is not that we should give up, it tells us that we should coordinate our efforts where we need to. That’s what we’re doing on the auto sector with the US, that’s what we’re trying to do through the G20, and certainly within Canada in terms of our own stimulus package. We’re working with other levels of government to ensure our actions are effective within the country.

FT: Just one question on stakeholders in the auto industry. What are your thoughts on what should be done with health benefits south of the border and what advice would you give to people thinking about that?

SH: I wouldn’t give advice on that.

FT: You wouldn’t say just set up a national healthcare system, it’ll take care of everything?

SH: Not going to get involved in that decision. As you know, we have a system of universal public health insurance in Canada. It’s supported across the political spectrum. It’s a system not without its problems, but it’s not one that Canadians want to trade for any other system. The American healthcare debate, I know enough about it to know it’s extremely complicated and it’s a controversy I don’t need to get into.

FT: Just one point on the car industry. Given that you have been in consultation with this administration and the previous administration, would you have done anything differently? I mean, critics would say that they waited too long to act and then were forced to act, doing things they could have done six months ago. Do you share that view or do you have a different one?

SH: I actually don’t. It’s easy to say that, but I do think in the modern age, a good, thoughtful, long-term government tries to let the market operate. And the first responsibility for creating viable care companies is with the management of car companies themselves, it’s not with the government. It’s not with the government, and I think we have to be very careful here. As I say, we have to force them to make the tough decisions, but should we as government start saying you should be building this kind of car and not that kind of car and we think the market’s going to look like this and not like that? In the end, these companies, even with our assistance, have to discover the secrets of their own success or they will not be successful. They’ve got to run their own business. So I think government gets involved in something like this as a last resort.

FT: Just before we get to pensions, I just wanted to ask one more car thing. You’ve talked about the Big Three, how worried are you about Ford? Are they going to make it?

SH: Certainly all the indications are that Ford is stronger, but it is a sector as a whole under significant stress. As you know, even some of the Japanese automakers are seeing some significant stress at least in the short term. But certainly of the three, Ford is the one that is banging on our door significantly less. That’s got to say something.

FT: What’s happening in Canada with pensions is quite similar to what’s happening here which is that corporate funds are now running into problems with their funding and they’re asking for legislative suspension, and so on and so forth. And the state funds which obviously had a problem even before the financial crisis are now starting to say they need loans and possibly a bail-out. What’s your view as to what could or should happen there?

SH: Well, there are two issues. I think I heard two issues in the question. On the issue of state pension plans, we have an actuarially sound public pension plan in Canada. Several years ago, governments proactively and preemptively raised contribution rates on our national public pension plans on the Canada Pension Plan, CPP/QPP. And as a consequence, we created a long-term rate that was sufficient to create an investment fund that we’re not managing. And the plan is actuarially sound, it may be expensive but it’s actuarially sound. So we don’t have that problem, and it’s one integrated national pension plan across federal and provincial governments.

We have the same problem you do on the issue of the private plans. We’re obviously moving to create more flexibility for private-sector actors who are trying to juggle those pension obligations in the short term. What we’ve obviously got to do is we simply have to provide – I don’t think it’s 100 per cent clear how we’re doing it all – we have to provide more flexibility in the short term. In the longer term, we have to move obviously to a more counter-cyclical nature of management of those plans.

FT: When you say you’re not quite sure how you would do it, then there is a possibility of suspension?

SH: I can’t give you the details, my office could provide them. We’ve already provided some short-term relief and suspensions and we have ongoing negotiations with the sector. We’re certainly going to avoid a crisis. But you know, obviously as we do that we create risks of longer term mismanagement that are going to have to be addressed.

FT: Can I ask you briefly about the Arctic?

SH: Yeah.

FT: You’ve made a quite a thing about the Arctic. I think last time I saw you, you were opening a diamond mine which subsequently went bust, unfortunately.

SH: It did actually, unfortunately.

FT: You know, the Russians lately seem to be flexing their muscles in that part of the world. What’s Canada’s response to that? That’s obviously an important area.

SH: As you mentioned, our government’s made that a high priority. Canada owns a significant chunk of the world’s Arctic, as you know. And historically, we have been fairly neglectful of what is a very large portion of our territory. Our government is making significant investments in the Arctic, and they range from military to scientific to social to the creation of a new economic development agency.

We believe two things. We believe that Arctic resources which are abundant will become more economically viable and certainly a larger issue in the years to come. And we also just believe that as a mission of national sovereignty it’s our responsibility in all dimensions to more greatly assert our presence in the Arctic. I make a point of going, not just north, but going to the Arctic regions at least once a year. I’ve been to a lot of the communities.

FT: It’s the nicest part of Canada, anyway?

SH: It’s a fascinating place to go. I have to admit that I’ve gone very far north but I’ve never gone to the true Arctic in the dead of winter. I’ve never experienced and I can’t even imagine the 24 hours of darkness in the cold, but I can tell you a couple of stories. I remember going to Resolute Bay, which is one of our most northern communities, north of the Northwest Passage, in August, where my flight had to be delayed for a day because the winds were so strong, a sudden Arctic storm in August, were so strong that my advance guy was being blown off his feet on the runway, literally blown down like a tumbleweed. That’s how bad it was. So it’s a fascinating part of a very rugged – in some ways both beautiful and forbidden. As I say, Canada is a northern nation and it’s part of our national mission, and Canadians are very supportive of the investments we’re making.

Obviously, there is concern about Russian activity. I think there’s, as you know, more broadly a concern about Russian aggressiveness generally.

FT: I did want to ask this question because it fits in beautifully. Climate change, which of course will make Canada much more habitable, and open up the Northwest Passage, and therefore you should be strongly in favour of as much climate change as possible –

SH: I’ve been accused of that.

FT: I’m aware of that. President Obama seems to indicate a rather different approach than his predecessor, to put it mildly, on this issue. And in this case, he seems to be really quite serious about this. Where do you think that leaves the world in terms of progress...?

SH: I’m very encouraged by the Obama administration’s approach to climate change on three levels. First, they’re taking it seriously. Second, while taking it seriously, they are establishing realistic objectives. I believe President Obama stated the target in short term is a 14 per cent reduction over 2005 levels by 2020. That’s very close to the government of Canada’s target. We’ve been criticised for having targets that were too soft, but our targets are actually based on what is economically viable in the short term. You can’t have targets that the only way they can be met is simply by shutting down economic activity. So Obama’s administration are looking at targets that we view as fundamentally realistic in terms of negotiations.

And, third, the Obama administration so far has taken a very clear position that all major emitters have to be in. This is another area where we have taken a very firm position and I must admit on this one the environmental groups mystify me because we all know – and I can show you a graph – it is impossible to control the growth of greenhouse gas emissions if only the developed world has targets. It’s simply mathematically impossible. So if we’re serious about this we have to get efforts from everyone. Obviously efforts in the case of a developing country will be of a different magnitude than our own. One wouldn’t expect, necessarily, reductions but one’s got to see a control in the level of growth or we will not reduce emissions, we will not reduce climate change. So I’m encouraged. I wouldn’t want to bet on an agreement being reached this year but I think the fact that we’re having a dialogue from the administration that is both serious about the problem and realistic about the solutions, especially in the short term, is a very healthy thing.

FT: Can I ask some more general questions, flipping back to the corporate sector? Do you think that what’s happening in the financial crisis and government interventions in the US and Europe is similarly a partnership, in the role of government that goes beyond the crisis, that we will see much more government intervention even when the economy recovers or will it retrench back to its old position?

SH: I hope not, in all honesty. Of course I’m a conservative and I do believe that, in the long term, economic growth will be generated from private sector, innovation and entrepreneurship in finance. I think that’s the only real long-term viable path to economic development. Why are we doing what we’re doing now? We’re doing a set of things because we know we’re in a situation that requires a certain type of government intervention. I’m generally not a Keynesian but we’re in Keynesian times, when interest rates go to zero and nobody’s investing. The only solution is for the government to borrow funds at low rates of interest and put them to work in the economy. That’s the only solution.

Canada itself has shown that if you have a reasonable system of regulation there is no need for governments to be nationalising banks and directing executive compensation and trying to micromanage economic activity. I don’t think we need to go there.

I think the problem has been, and obviously what happened in some places, that, unfortunately, in the name of conservatism or free markets in some cases, governments ignored very fundamental lessons we knew from history about the institutional structures that markets require to operate properly. We think of markets as spontaneous orders, and there’s some truth in that, but markets do have real institutional frameworks to operate properly. We know that unless financial systems are regulated in a way that encourage transparency and encourage reasonable leverage ratios and knowledge about what’s being traded, there will be asset bubbles leading to recessions. We know this from history. Every major recession has been like that. We already knew this lesson. That’s what I find so frustrating. So, in Canada, we didn’t get away from a reasonable… Five, six years ago I’m sure there’d be lots of people saying, well, look at Canada, you’re over-regulated.

FT: Especially Bay Street, right?

SH: Some were. There may be some types of regulations they were correct to complain about, others not so correct. But the fact of the matter is that one could say we were over-regulated but our solution is going to lead us to having the most free enterprise financial sector in the world because we’re the only one not nationalising or partly nationalising or de facto nationalising our financial sector.

Now, let’s just say, our regulations are not perfect. There are gaps in our own system. There are areas where we probably over-regulate but, by and large, we didn’t lose sight of the fundamental institutional structures that some markets require. So I think as long as a market is regulated, as long as the market economy is managed in a way that you create sufficient knowledge and transparency about transactions and that, as well, you have systems of social support that don’t allow market outcomes to create vast gaps of social injustice or social displacement, which is also part of a modern market economy, then the market, with those caveats, will be the engine of growth.

FT: On the financial system again, are you worried that you might end up being uncompetitive vis-a-vis nationalised banks around the world, that your relatively good capital position might end up being far inferior of other banks? Your banks are raising pref shares. Other banks are raising true dividend capital. That you’ll end up having the worst capitalised banks on the planet simply because they’ve done reasonably well?

SH: This is a very real worry. We have intervened in financial markets beyond monetary policy actions. Some of that intervention has been principally because of what has happened elsewhere. You know we’ve done some market transactions. We’ve swapped mortgage assets with banks. We’ve done that primarily because banks couldn’t acquire the liquidity. That problem seems to be abating now but we’ve also provided guarantees to wholesale lending. I should tell you, in all these things, I was talked into these things very reluctantly but we did that principally because in the absence of that kind of government guarantee in Canada, our banks were facing an increasingly competitive disadvantage where other national governments are a de facto underwriter of their banks’ activities.

I guess my short answer would be I worry about in the short term. In the longer term I think the opposite will be true. I do think in the longer term this government intervention in the financial sector, if it’s not unwound, will lead to politicisation of the sector and poor management. I just don’t think government-run or government partially-run banks are going to be very effective institutions over time. I actually think this is an opportunity. I think as long as we take note and respond to the possible competitive disadvantages we keep our sector as close as we can to a true private…

FT: I guess you keep your capital by keeping it very arm’s length, unlike what they’re doing here in the US?

SH: I think the best thing is still that they be genuine private institutions responsible for their own decisions within a regulatory framework. If we can do that then I actually think there’s an opportunity for Canada to actually expand its role in the world financial sector.

FT: Are they going to come shopping south of the border?

SH: As you know, some of our banks already have significant presence outside of Canada, and some will be looking to expand that. I will say this; one of the things that I’ll be taking to the G20 is obviously ongoing concerns about protectionism. I can assure you that the steps we’re taking in the financial sector will not be designed to promote greater protectionism. In fact, I do want to see our banks obviously not abandoning the domestic market. I do want to see them use this opportunity to increase their access to opportunities elsewhere and that’s part of what we can get out of this crisis.

FT: It’s just the size.

SH: We always keep forgetting that outside of Canada nobody knows our statistics but our four biggest banks are now in the top 20.

FT: Top ten in North America.

SH: The top five are in the top 50 globally now. Obviously a lot of that’s because others have fallen. I’m not going to try run in banks but I hope our banks will see this as an opportunity to build the brand, the country’s brand, their own brand, and to expand their scope and profitability over time. I think there are great opportunities for them.

FT: How do you feel about Canadian investors, whether it’s the banks or private investors, participating as public and private partnerships and maybe buying up toxic assets that come out of US banks?

SH: I’d go back. As long as we could be convinced that any such participation – and I don’t know whether they’re even considering it – would be a good business decision and obviously within things that we think in a regulatory sense should be allowed then I think they should look for opportunities.

FT: Maybe it’s even a good thing to have US taxpayers help fund Ontario teachers’ pensions.

SH: [Laughing] It’s a decision for US taxpayers.

FT: On a totally different subject, Canada has been involved for a long time, and at really pretty great human cost, in Afghanistan. Are you happy about the stepped up US involvement? Is it coming too late?

SH: We’re very happy about it. As you may recall, when we extended the Afghan mission last year to 2011, one of the conditions was that we would find a partner. The US has stepped up to that. In fact, now the US is stepping up with far more than we requested. This remains, as you know, an extremely difficult mission. My caution in all this has been I do think we need greater and sustained American and allied engagement. We just have to be realistic about what our objectives are here. I actually do think that the plan President Obama put out last week is very close to the plan we constructed in Canada. I do think, as I read it, the objectives are realistic. Afghanistan has always had some kind of an insurgency. You’re not going to entirely eliminate the insurgency or every insurgent. You’re not going to create, as someone said, Switzerland in Central Asia in my lifetime but we can produce a viable state, a state that is capable of handling its own day-to-day security, and an insurgency that’s reduced to the point, certainly, where it does not, by its nature, create a global threat or a threat beyond the areas it actually operates in Afghanistan. I think those are realistic objectives. I noticed, watching some of Secretary Gates’ comments, he’s very distinguishing between al-Qaeda and the Taliban. I’m not quoting him directly but, clearly, the elimination of one threat is essential. The control of another is a different matter. The Taliban is primarily a domestic force, not to say that it isn’t a source of significant instability and one that the Afghan government currently can’t manage on its own, but that is very different than al-Qaeda, whose target is the United States and the developed world.

FT: Is there enough focus on Pakistan?

SH: As you know, the new strategy involves a significant focus on Pakistan. This is also a welcome development. Our own bipartisan taskforce, a year and a half ago, had said that we had to see this as not just an Afghan problem but an Afghan/Pakistani problem. The problem with that is there’s very little Canada operating in Kandahar can do about the greater problem. This is an example of an issue that does require an American and allied leadership. So I’m encouraged to see they have that focus. I don’t think the solutions to that are very easy though, obviously. It’s a very difficult problem.

FT: Are you worried that you’ll face irresistible political pressure to pull back in Afghanistan?

SH: We’ve already said that our military mission will end at the end of 2011. We are already in the process not just of training Afghan forces but of increasing our civilian presence to make a transition to greater emphasis on governance and development. We are already, by the way, in the top five donors to Afghanistan in absolute terms. It’s our largest aid mission besides being our largest military mission. We’re already looking at making that transition. Canada, as you all know, has paid a very heavy price in Afghanistan, and I’ve been encouraged by the fact that the Canadian public has been patient as long as it has. The morale of our people remains very high there despite the casualties we’ve taken.

FT: Recruitment’s never been higher.

SH: Recruitment has never been higher and the military morale has never been higher but it has been a very difficult mission and we are in the heartland of the insurgency.

FT: Canada’s situation is similar to Australia, my country, where many people would argue that the trend of growth rates would be higher and we would be a much more civilised place if our population was triple. What’s the macro view on population growth in Canada?

SH: We certainly have lots of space, let me tell you that. It’s a big empty country. We don’t really have a debate on population policy per se. What we do recognise is that we have a very big looming problem of labour shortage. We were seeing it before this recession kicked in. We were seeing it in certain parts of the country and in certain sectors. As soon as this recession ends, Canada will be confronted with growing labour shortages across the economy.

As you know, we probably have per capita the largest immigration programme in the world, and it is also relatively non-controversial. Not to say there aren’t problems in the immigration system – there are all kinds – but there’s no ideological opposition to immigration on any part of the spectrum. There’s a recognition that we will need greater immigration. The shift that I don’t think the country has come to terms with is that the nature of our immigration policy is going to have to change with other countries increasingly accepting immigrants and with growth in developing economies.

It will not be sufficient for Canada, as we go forward, to run what is essentially a passive immigration policy, where essentially people apply. We are going to have to adopt a policy that is driven by recruitment efforts, active recruitment efforts, by the government of Canada. Now, we have started to shift in that direction. We’ve put much more emphasis on the recruitment of skilled workers on transforming temporary worker flows or student flows into longer-term immigration flows. So we are putting more emphasis on that but, nevertheless, on balance the system remains essentially an applicant process and it’s going to have to become a recruitment process. That is going to have to change. It’s going to take vast amounts of resources and, unfortunately, since our government does recognise you can only have so many priorities at a time, my major priority right now is not transformation of the immigration system but stabilisation of employment and growth. It is a growth issue but it’s not a recession issue.

One thing that’s very different though; we have no plans in Canada, nor are we under any pressure, to reduce immigration flows in any way during the recession. In the last few recessions, especially in the 80s but also in the 90s, the then government did significantly curtail immigration intake. We’re not doing that this time because, as I say, that would become a problem very quickly if we did that.