Canada’s Economy on a Knife Edge

by John West, Asian Century Institute

Discussions led by business leaders at the recent Toronto Global Forum suggest that Canada’s economy is sitting on a knife edge.

Prospects for the world economy are gloomy and fragile, something Canada cannot insulate itself from. Europe’s economy is on the verge of falling back into recession. Growth is slowing in China, Brazil and India. Economic uncertainty is rising due to the feared spread of Ebola, sanctions against Russia, and turmoil in the Middle East.

The US may be a bright spot in the global economy, with steady growth since 2010, but this is its weakest post-war recovery. And as the US normalizes monetary policy after six years of quantitative easing, global financial markets will experience increased volatility.

It was suggested that the conference banner of “rethinking growth” should be re-formulated as “remembering growth“.

These past few years, Canada has been a success story, according to Minister of State for Finance, Kevin Sorenson, thanks to the government’s timely stimulus to minimize the effects of the global financial crisis. Canada has achieved steady growth, with low debt and a good employment record, and has outperformed the G7.

Canada has been an island of stability in an unstable world, said Sorenson. Its middle class incomes are better than America’s. It is also the best place to raise a family.

Despite its success, however, it seems clear that Canada faces many challenges, going forward.

Michael Sabia of the Caisse de depot et placement du Quebec made a strong case for infrastructure spending to boost the global economy. There is potential to generate $4-5 trillion dollars annually in global infrastructure spending.

But Canada itself is in desperate need of infrastructure investment to get its natural gas and oil to Asian export markets. Pipeline and other projects are bogged down by opposition from aboriginal and local communities, and environmentalists. A number of accidents have also raised public concerns about safety.

To strengthen the foundations for Canada’s natural resource development, companies need a more constructive engagement with aboriginal communities, civil society and the public said David Collyer of the Canadian Association of Petroleum Producers. He called on the government to foster such dialogue and cooperation.

Canada’s energy futures are also threatened by the boom in US oil and gas production, given its reliance on exports to the US market. US oil production is up 70% from 2008. Canada is also exposed to the recent weakening in global energy prices, given that it is a high cost energy producer. And the availability of cheaper energy in the US is also giving its manufacturing sector an edge.

Small and medium enterprises, the backbone of Canada’s economy, are also behind the curve, according to Pierre Cleroux of the Business Development Bank of Canada. While some 84% of Canadians are online, only 41% of Canada’s SMEs have a website, while a mere 13% do business online.

Canada also lacks an innovation and risk-taking culture, said Jean-Rene Halde of the Business Development Bank of Canada. It is important to feel comfortable with change, rather than the status quo. Canada has many “lifestyle entrepreneurs”, who lack a burning urge to expand to global markets.

Halde argued that Canada needs to boost innovation. Canada has world-class research institutions and provides strong public support to business investment in research and development (R&D). However, the business sector devotes only about 1% of GDP to R&D, compared with 2% in the U.S. and more than 2.5% in Japan, Korea and some of the Nordic countries.

Canada does not invest enough in equipment, technology and training, said Robert Hardt of Siemens. Canada should invest further to improve both quality and access to tertiary education, to maintain the supply of highly skilled workers as the population ages.

Canada has concluded some 38 free trade agreements in recent years, but only one of those has been with Asia (Korea), the fastest growing part of the world economy. The Canadian government also took a long while to ratify an investment agreement with China. And while Canada endeavors to open up to the global economy, it is lumbered with far too many inter-provincial barriers which prevent it from having a single market at home.

Somewhat surprisingly, one important issue not discussed at the Forum was migration. Canada appears to be a migration success story, with its emphasis on skilled migrants, many coming from Asia. Super-rich Indo-Canadian business stand out as emblems of the Canadian migration story, people like Steve Gupta, Surjit Babra, Ramesh Chotai, Vasu Chanchlani, and Barj S. Dhahan.

But overall, Canada’s migration experience is one of wasted talent. Too many skilled migrants are unable to find jobs corresponding to their skills, and are vastly overqualified for the jobs they do secure. Engineers become taxi drivers. Doctors become nurses, etc.

Why? There are a number of reasons. Qualifications may not be recognized in Canada. Or when they are officially recognized, they may not be accepted by potential employers. Sometimes a lack of local experience or insufficient English language capacity may be perceived problems.

One issue in the business sector is the “bamboo ceiling”. Some of the barriers locking out Asian talent in Canadian organizations are: cultural bias and stereotyping; Westernised leadership models; lack of relationship capital; and a lack of understanding of the value of cultural diversity.

Canada’s greatest challenge today may be complacency. It is a country blessed with abundant natural resources. It is very prosperous, with a comfortable standard of living. But Canada’s overall productivity has actually fallen since 2002, while that of the US has grown substantially.

Canada needs to become more productive to sustain its high standard of living. It also needs to do more to develop the manufacturing and services sectors, not just natural resources, if it is to maintain a high level of employment and an equitable distribution of the fruits of growth.

But history shows that while the going is good, countries rarely see any urgency in taking the future seriously. O Canada, it would be a great shame if you fail to grasp the nettle!