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Friday, March 25, 2005

Economic issues which need to be addressed.

Title: Economic Prospects for Canada – Part One: Issues

by StFerdIII

Canada has performed reasonably ‘well’ in the last 15 years economically. Compared to its OECD peer group Canada’s relative performance has been above average and this has given rise to a certain egotistical complacency in Canada about its future economic prospects. Such complacency manifests itself in the nature of very little real economic policy reform in Canada as far as the larger issues are concerned: real tax reductions, spending reforms, subsidy reforms, investment reforms and deregulation as well as massive reform which is needed in health, pensions and energy management.

Further of the 23 OECD nations most are European. The EU is an underperforming, high tax, high debt and over regulated common market area. I would not compare the economic performance of Canada with a group of underperforming socialist countries. This makes little sense. This is like stating ‘Canada is a better country to live in than Bhutan.’ It is meaningless unless you are trying to temporize and justify a silly set of policy initiatives through false comparisons. The only needed comparison for Canada is with the US – the nation that accounts for 80 % of Canada’s exports and almost half of its GDP.

While Canada has made good progress in the past 15 years, the gap with the USA continues to widen on almost every important economic matter from tax levels to standard of living measurements. Both global competition and regional competition continue to intensify but for all the government of Canada’s rhetoric – Canada is a nation in competition with, and dependent upon the US. It is NOT an international trader. It is a cross border trader and the central fact of Canadian life is that its economy and standard of living are in competition with US centers and regions. The internationalization of the Canadian economy is a quaint falsehood erected by a government that propagandizes at every instance Canada’s ‘internationalism’. The gap between reality and rhetoric is yawning.

Canada and Trade

GDP [real adjusted $]

Exports / Imports with USA, % of GDP

Exports / Imports Rest of the World as % of GDP


$1056 Billion

85 % [$749 billion]

15% [$112 billion]

Issues with Future Economic Growth:
There are three main issues that will hobble the Canadian economy in its competitive position with the
1. Productivity
2. Weak Canadian dollar
3. High tax regime and debt regime
Each of these issues are covered in other articles and I present only a summary of the implications each has for
Canada’s economic future. Each is inter-related and reinforces the weaknesses apparent in Canada’s economic regime.

Many liberals argue that economics is not the end goal in life. A strong economy according to ‘statists’ is not as important as a ‘compassionate’, ‘friendly’ and ‘tolerant’ society. There is some truth in this, but only some. In general left – liberal positions on social matters are not only inconsistent morally and intellectually they are devastating in their economic impact. After all only a strong economic base will allow
Canada to fund its socialization and keep its standard of living on a rising plane. I have met very few people who wish to see their living standards decline and have heard little sensible argumentation from the left on how to organize a society to achieve economic growth.

Canada’s economic prospects versus the USA which is the only comparison that matters are not that positive. The Canadian dollar which is another topic entirely will continue to fall in 2004 and beyond once interest rates are normalized in the US and US dollar assets are bought by investors. The Canadian dollar highlights the difficulties facing the Canadian economy in the coming years. The declining dollar is a hidden tax – it erodes the standard of living and makes imports from the US more expensive. Imports from the US account for about 18 % of Canadian GDP. This in turns impacts productivity – firms are unable to buy US sourced assets and equipment and technology to improve their productivity. A vicious cycle erupts and impacts policy – basically ensuring that Canadian job creation is in lower paying export oriented jobs premised upon a cheap currency.

During the 1990s and until 2003 the productivity gap with the
US has been almost 1% point per annum. This equates directly into lost jobs and investment. The US enjoyed during the 1995-2003 period, about a 2.5 % per annum productivity level. Canada lagged with a productivity level that oscillated between 1.5 -2.0 %. In late 2003 the productivity gap has widened with US firms on average enjoying 9 % productivity growth and Canadians seeing a rate of only 2 %. Put another way between 1990 and 2003 Canadians only had a level of productivity that was 80 % of their US counterparts.

The productivity problem shows up in GDP per capita and living standards. GDP per capita which is the main rubric for how well a society is doing – was likewise only at 85 % of US levels from 1990-2003.
Lower GDP per capita levels are reflected in a lower amount of hours worked in Canada vs. the US [90 % of the US level in fact], a higher unemployment rate [7.2 % vs. 4.7 %], and a lower employment rate [70 % vs. 72 %]. In fact in GDP per capita levels and standard of living levels Canada is approximately 12 years behind the US. As US growth and productivity continue to accelerate, this gap will only widen.

As the levels of productivity and GDP per capita decline relative to the
US, Canada’s standard of living will continue to fall relative to US levels. The only way to arrest GDP per capita – and therefore real wealth – decline, is to increase productivity. Considering the lowering dollar, poorer investment climate, protectionism and monopolies in key sectors, artificially higher interest rate regime [in order to ephemerally boost the C$], and regulatory encumbrances that tax away profits, which exists in Canada, an increase or investment in productivity is not to be expected.

The result ? Unless economic reforms at all levels of government are better than those in the US Canada’s 20 % standard of living gap with the
US, will only continue to fall.

· International Productivity Monitor – various issues 2003.
· The Sources of Economic Growth in OECD Countries – 2003.
· P.J. Nicholson,
Canada’s Long Run Economic Prospects, 2003
· Statistics Canada
· OECD Accounts 2003
· Centre for the Study of Living Standards

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