Tuesday, June 30, 2009

Issue Search 2009: The Economy (Domestic)

If you missed my introduction to this series of posts, scroll down or click here. The first two issues on my list are vaguely put, the future of the Canadian economy. With a couple of possible exceptions, I'm trying to look at issues that will be with us not only today but for the medium to long term as well. Today, I am going to go through some of the issues confronting the Canadian economy at home. I put domestic in parenthesis in the title because I want to differentiate this post from a discussion of trade which will follow at some point in the future. I'm going to try to set up a basic form for these posts here. I'll try to follow it as much as possible. The plan is to delineate the challenges first, the potential solutions second and then if there's a need the political implications or limitations. Without further ado...

The Challenge: The challenge to the Canadian economy put simply is that we are heavily dependent on a series of industries with poor medium to long term prospects. The current decline in demand for Canadian exports simply exxagerrates this problem. Whether that's forestry in British Columbia, the automotive sector in Ontario and, yes, the commercial fishery out east. The underlying issues here diverge although cheaper foreign competition is a theme. The fishery is being hurt by declines in fish stocks. The forestry industry is being hurt by decline in global demand and foreign competition. Finally, the automotive industry which for so long served as major parts of the Ontarian heart of the Canadian economy is suffering from low global demand for cars and an historical relationship with the struggling big three auto makers. The challenge in all cases is to find new industries to replace the old.

A secondary challenge is the so-called productivity gap which Jeffery Simpson harps about endlessly. I'll discuss that briefly. Basically, the amount of money generated in relationship number of hours Canadians put in is shrinking. Put simply, Canadians are generating less GDP per hour. Economists this is a bad thing.

The Solution: There is a fair amount of debate as to whether or not government can really lead the way on the economic transformation that may be necessary in certain areas. There are two overlapping directions which are generally considered as "the way forward": go green or go tech. Tech has the stronger roots in this country. The failure of Nortel's management should not disguise its success for many years as a world leader. Research In Motion is the new big kid on the block and regardless of whether co-founder Jim Balsillie ever gets himself a hockey team, Balsillie and his partner Mike Laziridis have led a tech boom in Southwestern Ontario. They're beating Bay St. and Wall St. estimates even in the teeth of this recession. What makes RIM such a positive story is the amount that they've given back to the community of Kitchener-Waterloo in funding for the University of Waterloo and other major projects. Tech makes some sense as a way forward in Ontario. Ontario has a network of high quality, tech savvy universities and colleges within close proximity. In other words, there is the intellectual density to make this work. Governments can really only help push the train forward. The traditional government remedy is research grants which have shown some results in producing good research. Exactly what is needed to turn research into entrepreneurship in the tech sector is less clear but programs to support entrepreneurs and small business generally, certainly can't hurt.

The green solution is less evident in the current landscape. My problem with "green jobs" is they seem self-limiting. I'll explain. Most businesses which sell a product rely on that product either breaking down or becoming obsolete in some fashion be it technologically or just style. If you're selling windmills and solar panels, where do you go after everyone has a solar panel on their roof. While I generally agree that there is a large boom in the offing, I wonder how quickly that would be followed by a large bust. Solar panels are sold as long term investments that will pay off over time. Even if there's an advance I don't see people taking an old functioning solar panel down to replace it with the latest model. I'm not sure you can sustain an industry on something someone buys maybe once every twenty years if not less. Solar panels are probably the most sustainable of the green energy technologies. Things like wind mills are really only built once and require too few people to maintain them to be considered a significant industry. If we're talking about an industry that will keep Canadians working fifty from years from now, I'm not sure green is the answer.

The other solutions are less dramatic and perhaps less effective. The growing percentage of Ontario auto jobs that rely on non-big three auto companies is a positive sign. Magna's purchase of Opel may provide some jobs down the road. I'm not sure you can get the auto industry back to where it was on the strength of Magna, Toyota and Honda but it may be a way to keep something alive. There are a whole host of new uses such as wood based ethanol and it is possible that some of the failing pulp and paper mills in the country could retrofitted to new purposes.

It isn't entirely clear that the Canadian government can play a major role in shaping the ecnomic future of this country. This means to me, that there won't be a lot of contentious domestic economic plans as such in the next election. Tax cuts versus spending on research and development may be the extent of the debate. Productivity is not really the problem people think it is. Canadians aren't lazier than they were or even less efficient. More of them are working in less value-added industries. In other words, you're going to have higher productivity in manufacturing than you do in primary industries like energy extraction or in the majority of the service sector. As the Canadian economy has shed manufacturing jobs and added primary industry jobs, productivity has declined. I'd say its symptom and not a disease.

Political Implications: As I noted above, this isn't really an issue that political strategists are going to excited about. There just aren't enough wedges to drive here. It's a major almost existential question but it makes poor politics. Don't expect these kinds of questions to consume question period any time soon. Thus, the market will proabably decide the fate of the Canadian economy whether we want it to or not.

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