Seizing Opportunity – Priorities and Challenges for Canadian Business Leadership in 2005

January 18, 2005

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The earthquake and tsunamis that struck much of South and Southeast Asia on December 26 reminded us that the most devastating events can be completely unexpected.  We all do our best to plan for the possibilities we can imagine.  When the unexpected strikes, we move as quickly as possible, as countries and as a global community, to cope with the results and repair the damage.  But every day, in every sphere of human activity, we cannot escape the risk of the unknown.

When I spoke to you a year ago, Canada had endured a series of unexpected shocks including SARS and BSE, a major blackout, forest fires and a hurricane.  As severe as these seemed to us at the time, we dealt with the consequences and by the beginning of 2004, our economy seemed poised for a welcome rebound.  A new prime minister had just taken office, brimming with ambitious ideas for what he called “the politics of achievement”.  And a newly-merged Conservative party was poised to reinvigorate the democratic dialogue.

At the same time, I warned that despite having an alumnus of the Canadian Council of Chief Executives as Prime Minister, we as business leaders should not expect an easy ride in 2004.  Good policy would take a back seat to the necessities of politics.  The focus of fiscal policy would be on social spending rather than on tax cuts. The business community would have to work hard simply to hold on to past policy gains, and progress on big ideas such as our North American strategy would require extraordinary effort and determination.

On the economic front, 2004 produced the most rapid global growth in almost three decades.  From the United States, Japan and the United Kingdom to China, India, Brazil and Russia, economies grew at an impressive pace.  This strong global growth drove up commodity prices, producing a bonanza for Canadian resource industries.

These gains, however, were offset by a continued plunge in the American dollar.  The two-year rise in the Canadian dollar against the currency of our major customer reached some 30 percent.  Companies with most of their costs in Canada and revenues coming from the United States were especially hard hit by this abrupt swing.  While exports on the whole remained surprisingly strong, recent months have seen a distinct moderation in the pace of Canadian growth. 

On the political front, the short-term jockeying of the pre-election period never ended.  The spring election campaign produced a minority government, with an inherent risk of another election at any time.  This in turn has caused social spending to swell.  The $41 billion health care accord in September 2004 was followed quickly by an expansion of equalization payments.  Promises of billions more for child care and for transfers to communities are waiting in the wings.  At the federal level, the trend toward lower taxes has stalled; in some provinces, taxes have begun to move up again.

This presents us with an extraordinarily complex web of challenges for 2005.  Some of these challenges are global; some are home grown.  Some are economic; some are political.  Together, they pose real risks to Canada’s future, but they also create potential opportunities — if political leaders are daring enough to seize them and if we in the business community do our part in making the case for bold action.

THE GLOBAL ECONOMIC OUTLOOK

In laying out these challenges, let me begin with the state of the global economy.  While the short-term outlook remains fairly buoyant, risks abound: volatile oil prices; the huge United States fiscal and trade deficits; the impact of a possible resurgence in American inflation on interest rates, housing prices and consumer demand; stalled multilateral trade talks and a potential resurgence in protectionism; and of course the constant threat of disruption by international terrorism.

The greatest danger to Canada flows from the huge deficit in the United States current account.  Our country’s biggest export market cannot continue indefinitely to consume far more than it produces without some serious consequences.  This imbalance can be resolved in two ways, but either path could create serious difficulties for Canada.

The more likely path would see a further major realignment of global currencies.  If this realignment is limited to freely floating currencies like the Canadian dollar, these currencies will continue to rise significantly against the American dollar.  If the realignment includes pegged currencies, notably the Chinese yuan, the upward pressure on the Canadian dollar and other floating currencies will be less severe.

In either case, however, a major currency realignment would lead to inflationary pressures and higher interest rates in the United States, which in turn would drive down public, business and consumer demand for Canadian exports even as the Canadian dollar continued to rise against its American counterpart.

Another path depends on stronger growth in the rest of the global economy, one that would enable other countries to buy more from the United States.  At the same time, governments in the United States would have to chop their deficits while households significantly boosted their savings.  This combination could reduce demand in the United States even more dramatically than in the currency realignment scenario.  Either way, Canadian exporters face a major challenge that could combine a growing currency disadvantage with lower demand from our biggest customer.

If global demand remains strong, the challenge of a stronger Canadian dollar in time can be overcome.  Last autumn, when we asked members of the Council to describe the impact of the dollar on your businesses, your responses covered a wide range from very positive to very negative. 

What is clear, however, is that businesses that have been negatively affected essentially have three stark options: to invest in new technology and skills upgrading that will boost productivity and restore the competitiveness of Canadian operations; to move production out of Canada; or to go out of business.  This is why we told the House of Commons Standing Committee on Finance that it is urgent for the federal government to launch a new round of tax cuts, with an initial focus on cutting the effective corporate tax burden in ways that will help companies make the investments needed to keep them growing from a Canadian base.

THE CANADIAN POLITICAL ENVIRONMENT

The issue of tax cuts, however, leads me back from global economic risks to domestic political realities.  The enthusiasm and ambition of Prime Minister Paul Martin’s early days was quickly swamped by the morass of the sponsorship scandal.  An election once expected to produce a Liberal triumph of historic proportions turned into a desperate lunge to hang onto a minority.

The legacy of this campaign goes beyond the obvious fact that any legislation now has to win the support of at least two parties.  It has created a curious dynamic in which the two largest parties, the Liberals and Conservatives, have become inward-looking and cautious, leaving room for individual members of parliament across all parties to seize the initiative.

As I predicted last January, the Liberal party swung left in the lead-up to the election, making major promises to spend large sums of money directly and indirectly on social programs.  The minority outcome has effectively locked the government into delivering on these promises.  Indeed, the government’s actions to date suggest that it is hoping that simply ticking off the boxes on its promises will be enough to pave the way back to a majority when the next election is called.

Beyond the sheer scale of the government’s spending promises, there is another troubling aspect to its list.  Almost all of the money is being devoted to increasing the federal presence in areas of provincial jurisdiction: health care, child care, equalization and transfers to municipalities.  All but lost in the shuffle are core federal responsibilities in areas such as economic competitiveness, national defence and international trade and development.

Even the large projected surplus for the current fiscal year does not leave a great deal of room to move beyond the campaign promises on social spending, and the result has been an effective moratorium on big new ideas from the government side of the House. 

This situation has created a policy vacuum, one that creates a clear opportunity for the newly-merged Conservative party to stake out some policy ground and establish an image as a distinct but broadly-based alternative.  However, the success of the Liberals during the last two weeks of the campaign in using negative advertising to tar the Conservatives as extremist has had a lingering impact.  Once bitten, twice shy: many Conservatives seem worried that if they take the initiative in advancing bold policy ideas, the Liberals again will win points and reinforce their image as the party of the moderate middle by attacking them as extreme. 

The result is that Conservative Leader Stephen Harper has kept a remarkably low profile in recent months.  He was forced into last year’s election with little time to articulate a detailed policy platform, and subsequently decided to wait until March of this year to hold the new party’s first policy convention. 

This delay has had the benefit of giving people from both wings of the party time to find common ground, but it also has increased the pressure to produce a compelling vision capable of rallying enough support across the country to propel the party into power.  In the meantime, the absence of such a vision has left partisans in both the former Canadian Alliance and Progressive Conservative camps a bit skittish and has inhibited the ability of the merged party to create a real sense of excitement and dynamism.  With both leading parties thus avoiding risky moves, the House of Commons has been left to grind through a large number of bills but few issues of great substance.

The four-party minority parliament has led to some significant procedural changes.  More bills are now being referred to committee at the draft stage, giving MPs from all parties more room to shape legislation.  The fact that the opposition parties together control a majority of each committee in turn has opened the door to some genuinely constructive debate and freewheeling give-and-take.  But with so few issues of consequence coming to committees, the very forces that are prompting the parties and their leaders to be cautious are driving individual MPs to be more adventurous.

In effect, the American maxim that “all politics is local” has come to Canada with a vengeance.  Individual MPs also know that they could face a new election campaign at any time.  What is more, many seem to feel that they cannot count on the coattails either of their leader or of their party’s brand to propel them to victory.  As a result, they are deliberately seeking greater individual profile by championing issues that matter to their particular constituents. 

MPs therefore are bringing forward private member’s bills, motions and amendments that are politically attractive on the surface and are capable of winning the support of a majority of a committee or of the House as a whole.  What is worrying is that such motions are coming to a vote without the background research and thinking about possible unintended consequences that go into government-driven legislation. 

This situation is particularly dangerous to the business community because such individual initiatives can have complex legislative or regulatory consequences with the potential to do serious economic damage in ways their well-meaning proponents may never have considered.  This has made it imperative for business associations such as ours to keep close tabs on the legislative and committee agenda and to be ready to step in quickly with expert advice.

I do not want to leave the impression that minority government is inherently either unstable or unhealthy.  But after decades without practice in managing the dynamics of minority government and in the absence of forceful leadership from party heads, there is a real risk that the benefits of more open debate and creative crafting of legislation could be undermined by a perception that minorities lead to impulsive decisions and poor policy choices.

How this federal parliament evolves will in turn have an impact in another national debate, that over electoral reform.  British Columbia is the first province to have developed a specific proposal for changing the current “first past the post” method of electing representatives.  The idea of changing to a “single transferable ballot” goes to a referendum this spring.  Other provinces also are considering possible changes to voting rules, all of which would involve some shift toward more proportional representation.

In the course of the Throne Speech debate in October, the government accepted an opposition amendment that requires examination of electoral reform at the federal level as well, but Prime Minister Martin has said he would like to see what happens at the provincial level before deciding whether to follow suit.  Canadians also will be considering the extent to which the current minority parliament meets their expectations in deciding whether they want to adopt new electoral rules that would make minorities more likely.

What does all this mean for us as an organization of business leaders?  It means that whatever policy priorities we adopt, we will have to work harder than ever if we want to see meaningful progress.  It means that we must put forward ideas, as our Council always has done, that serve the interests of the country as a whole, not just those of business.  And it means that we must frame our arguments in ways that can build a consensus for action across party lines, even in an environment where any moment could see a resumption of partisan warfare.

POLICY PRIORITIES FOR 2005

Let me address more specifically how both the global economy and domestic politics will affect our work on the Council’s four key priorities for 2005: fiscal policy; innovation and competitiveness; North American security and prosperity; and Canada’s role in the world.

Fiscal policy

In his economic and fiscal update of November 2004, Finance Minister Ralph Goodale rightly pointed out that the fiscal recipe followed by the federal government in recent years — running surpluses, paying down debt and cutting taxes — has been instrumental in giving Canada the best economic performance among the G-7 nations.

In the CCCE’s pre-budget submission to the Standing Committee on Finance of the House of Commons, we emphasized that the current period of healthy economic growth in Canada and globally represents an important window of opportunity. While hoping for the best, the government must take active measures to plan for the worst. To address the global economic risks I have discussed and to keep Canada on a path of sustainable growth, the government’s fiscal strategy must include three elements:

• First, the government must maintain prudence in fiscal planning, to ensure that Canada does not follow the United States back into the deadly cycle of repeated deficits, rising inflation and high interest rates.  The budget surpluses that flow from such prudence reduce Canada’s public debt, enabling billions of dollars now being spent on paying interest to be reallocated to more useful purposes.
  
  
• Second, the government must make rigorous spending review an essential part of each year’s budget cycle.   The needs of Canadians change over time and the government has a duty to look constantly for ways to make better use of taxpayers’ money. 
  
  In 2003, the CCCE proposed a “five percent solution”, a requirement that each department each year identify the least effective five percent of its spending for potential reallocation to new or growing needs.  The current spending review, with a target of reallocating $12 billion over five years, includes a five percent target for departmental programs.
  
  In December, the CCCE wrote to Prime Minister Martin urging him both to ensure that the current exercise delivers the intended results and to give his cabinet’s Expenditure Review Committee a mandate to develop a system for ongoing program review as part of the annual budget cycle.  We also emphasized the importance of using the reallocation exercise both to fund further tax cuts and to reinforce core federal responsibilities rather than to expand federal spending in areas of provincial jurisdiction.
  
  
• Third, the time has come for a second major round of tax reduction, this one with an initial focus on corporate taxation.  The government is depending on a strong economy to sustain the huge commitments it is making on social programs.  Dollar for dollar, no fiscal measure would be more effective in helping Canadian communities to attract new investment and companies to boost competitiveness and create jobs than a further significant cut in corporate tax rates.
  
  The sharp rise in the Canadian dollar is putting immense pressure on exporters, especially in the manufacturing sector. The sheer speed of this rise is squeezing profits just as it adds to the urgency of investing in new machinery and equipment to boost productivity. The choices that Canada makes on corporate tax policy will have a huge impact on how quickly Canadian enterprises adapt to a higher dollar, and on the extent to which their responses maintain and add to employment in Canadian communities. Low corporate tax rates do more than accelerate growth by encouraging business investment. They also attract more companies that make more money and at the end of the day generate more revenue for governments.

The idea of further tax cuts has received mixed responses from senior Liberals.  Minister Goodale has hinted that his next budget could include some tax cuts, and the Commons Finance Committee offered limited support as well, but the Prime Minister has said that tax cuts will come only after the government has delivered on all of its social spending commitments.

In the end, much will depend on the political strategy behind the next budget.  If the government plans to go to the polls again before the 2006 budget, it probably will include some significant tax measures.  These are unlikely to be as sweeping as those of the October 2000 pre-election package, but the government will want to use its last budget before an election to undermine what has to be a key plank in the Conservative platform. 

Innovation and competitiveness

Tax policy is not the only way for government to create a business climate that fosters innovation and provides a significant competitive edge for Canadian enterprises and communities.  The most promising opportunity for immediate action lies in the field of regulatory reform. 

As the CCCE said in a recent submission to the Standing Committee on Industry, Natural Resources, Science and Technology, the September 2004 report of the External Advisory Committee on Smart Regulation provides a compelling blueprint for making Canada’s regulatory system more effective, responsive, cost-efficient, transparent and accountable.  The Council put forward five reasons for making smart regulation the centrepiece of industrial strategy.

1. Smart regulation serves social as well as economic goals.  Smart regulation is not deregulation.  It links the concepts of opportunity and sustainability, enabling citizens to feel safe while encouraging a more dynamic economy that can sustain Canada’s well-being into the future.
   
   
2. Smart regulation cuts costs without cutting protection.  Canada’s regulatory standards are part of our competitive advantage, but its processes take too long and are too complex, too costly and too unpredictable. Better rules backed up by more effective and transparent processes would reduce administrative costs for governments and compliance costs for businesses.
   
   
3. Smart regulation reduces duplication and delay.    Many areas of regulation are shared between different levels of government, leading to duplication, delay and uncertainty.  The Advisory Committee highlighted the advantages that would flow from a single-window approach to environmental assessments.  At the CCCE, we have focused over the past year on the need for a single Canadian regulator for securities markets.
   
   
4. Smart regulation strengthens Canada’s competitiveness within North America.  Canada and our biggest trading partner share similar regulatory goals and the desire for high standards and consistent enforcement.  But what has been called “the tyranny of small differences” penalizes both consumers and manufacturers.  Why does the United States allow the additives BHA, BHT and caramel colour in frozen pepperoni pizzas, while Canada approves these additives anywhere in the pizza except in the pepperoni?  Is the health of Canadians better protected because we define “cheddar-flavoured popcorn” as having less than 49 percent real cheese instead of 53 percent as in the United States?
   
   
5. Smart regulation enhances Canadian leadership globally.  International cooperation is increasingly necessary to provide high levels of consumer, social and environmental protection.  Canada should be a leader in encouraging better regulation worldwide and in bringing Canadian rules into line with global standards as they evolve. The Advisory Committee has recommended that regulatory policy be a fundamental pillar of Canada’s foreign policy, and we agree.

While regulatory reform holds out considerable promise as a way for the government to foster a more competitive economy without adding to its fiscal challenge, it also represents an area of major policy risk in the context of the current parliamentary dynamic.

For instance, the government has introduced a bill to update the Competition Act and referred it to the Industry Committee for review.  In an appearance before the committee in December 2004, we said that on the whole, Canada’s competition laws are working quite well, but added that the time has come to consider whether the existing act is doing a good enough job in helping Canadian firms to grow into dynamic enterprises capable of competing on the world stage.

We have supported some of the proposed changes and questioned others.  Our major concern, however, is the extent to which individual MPs from all parties may seek to introduce amendments that go well beyond the intended scope of the bill and that could prove highly detrimental to the goals of sound competition policy.  This is an example of a parliamentary exercise that requires constant effort not to achieve a particular outcome but to prevent intentional or inadvertent harm.

An even more potent example of the potential for event-driven policy decisions may come next month, when the Kyoto Protocol on global climate change is scheduled to come into force.  Recent media reports have made it clear that a major debate is raging within the government, with some players hoping to use this event as a platform for introducing dramatic new initiatives that apparently could include large new spending commitments, changes to emissions reduction targets and possibly new regulatory initiatives such as mandatory fuel efficiency requirements for automotive manufacturers. 

My point is not to take issue with any specific element of a plan that has not yet been finalized, but to highlight the fact that policy decisions are being driven by optics and short-term political considerations rather than detailed analysis about what would be most effective in promoting sustained improvement in Canada’s environmental performance and economic growth.

This leads me to what should be the fundamental issue in terms of federal strategy for encouraging innovation and increasing Canada’s competitiveness in the global economy.  The structural challenge we face is to decide what we want our economy to look like, not in 2005, but five and ten years from now.  How do we want Canada to be positioned in the sectors that are key strengths today, including financial services, information and communications technologies, aerospace, automotive and other manufacturing as well as the resource sector?  How will we use public policy to shape a business environment that will enable us to achieve this vision?  Canada faces a real risk of losing ground in core sectors, and only a carefully crafted long-term strategy will enable us to overcome these risks and build an even stronger presence in the global economy.

North American Security and Prosperity

The CCCE launched its North American Security and Prosperity Initiative in 2003.  The initial research phase led to publication of our discussion paper, New Frontiers: Building a 21st Century Canada-United States Partnership in North America, in April 2004.  In recent months, the emphasis of our work has shifted from policy development to advocacy, especially as visits to Canada by United States President George W. Bush and Mexican President Vicente Fox brought North American issues to the political fore. 

The Canada-Mexico Business Retreat held in Montreal and Ottawa in October was highly productive and led directly to a formal agreement with our Mexican counterparts, the Consejo Mexicano de Hombres de Negocios, to work closely both in pursuing an ambitious bilateral and North American agenda and in helping the Consejo to become even more effective in influencing public policy within Mexico.

The Retreat culminated in a lunch with both President Fox and Prime Minister Martin, who held a lively and frank joint question-and-answer session with participants in the Retreat and Council members.  Earlier that day, the two leaders signed a Canada-Mexico Partnership agreement that calls for development of a detailed bilateral action plan by June 2005 through a process involving government and business in both countries.  We had a direct hand in the drafting of this agreement, and we have offered to convene a working group on competitiveness within this process.

The visit to Ottawa and Halifax by President Bush in December was noted publicly more for its friendly tone than its substance, but more was accomplished than meets the eye.  The joint statement issued by the two leaders under the title Common security, common prosperity: A new partnership in North America went well beyond the Smart Border Accord in laying out a broad economic and security agenda that includes many of the elements in our Council’s strategy, such as reducing the burden of rules of origin on bilateral trade, joint approaches to smart regulation and expansion of the North American Aerospace Defence Command (NORAD).

The inauguration of President Bush for his second term opens an 18-month window for building political support in that country.  To this end, we continue to seize every opportunity to expand our relationships with key players in government, business and academia.  In this context, I am sure that you share my enthusiasm for the appointment of Frank McKenna as Canada’s next ambassador to the United States.

I am exploring the possibility of joint activities with our United States counterparts in The Business Roundtable as well as other means of recruiting key business leaders in the United States to the cause.  In addition, I will be undertaking an extensive campaign of meetings and speaking engagements in the United States.  My goal is to travel to at least ten major centres during the first half of the year, beginning with visits to New York, Washington, Atlanta, Dallas, Tucson, Phoenix, Cleveland and Buffalo in February and March.

The Council’s current activities also include a partnership with the Council on Foreign Relations in New York and with the Mexican Council on Foreign Relations as sponsors of an independent Task Force on the Future of North America.  This Task Force, co-chaired by former deputy prime minister John Manley, former Massachusetts governor Bill Weld and former Mexican finance minister Pedro Aspe, held its first meeting in Toronto in October and its second in New York in December.  Discussions to date have been highly productive.  The next meeting will be held in Monterrey on February 4 and 5, and the goal of the Task Force is to produce a final report this spring.

Most recently, I have heard that President Bush is interested in holding a trilateral summit with Prime Minister Martin and President Fox as early as this spring.  Such a summit could prove critical in establishing the scope and extent of a major initiative to forge a new economic and security partnership within North America.

All told, we have a very intensive schedule ahead of us as we attempt to build a critical mass of political support for our North American agenda across Canada, Mexico and the United States.  Parts of this agenda will face stiff resistance in each country, but I am confident that the core elements of New Frontiers — reinventing borders, regulatory reform, resource security, the defence and security alliance and development of new institutions — can win support both across party lines within Canada and across borders within North America.

Canada’s role in the world

This year also will bring to a head a broader policy discussion about Canada’s global influence and impact.  The federal government has underway a sweeping International Policy Review, covering all of its activities in the areas of trade and investment, diplomacy, development and defence.  Canada’s response to the tsunami disaster has illustrated vividly how all of these elements of international policy must work together, but the policy review process already has taken considerably longer than anticipated as a result of numerous disagreements both over substantive policy issues and departmental turf.  A policy review document is currently scheduled for public release during the month of February.

The CCCE always has devoted a considerable share of our time and resources to global issues, most notably with respect to trade and investment liberalization through the World Trade Organization and through regional fora such as the Asia Pacific Economic Cooperation (APEC) meetings and the discussions concerning a possible Free Trade Area of the Americas (FTAA). 

Over the past year, with the multilateral negotiating process stalled, we have given more attention to bilateral initiatives with major trading partners.  We have strongly supported the process leading to current negotiations with respect to a Trade and Investment Enhancement Agreement (TIEA) with the European Union. 

We have worked intensively over the past year with our counterparts in Japan, the Nippon Keidanren, to lay the foundation for a broad economic framework agreement between Canada and Japan.  Potential elements of a Canada-Japan economic framework agreement include: a resolution to bilateral social security matters and taxation issues; greater regulatory convergence; trade facilitation and investment promotion; and sector-based trade liberalization in areas such as information and communications technology, air transportation, e-commerce, food safety, energy and natural resources, the environment and tourism.  We are hoping that discussions and negotiations toward such an agreement will be launched tomorrow when Prime Minister Martin meets Japanese Prime Minister Junichiro Koizumi in Tokyo as part of his extensive trip across Asia this month.

China is another top priority for the Canadian business community and the CCCE intends to mount a CEO mission to several Chinese cities later this year. One of the key objectives of this mission will be to explore the possibility of a stronger, more formalized Canada-China economic partnership.  Also on the CCCE’s agenda for 2005 are efforts to strengthen ties with other key emerging markets such as India and Brazil.

To integrate our work on trade and investment issues with those of Canada’s role in international development and in global peace and security, we are preparing a comprehensive statement on international policy that will be our contribution to the public debate over the federal International Policy Review.  Our statement will address in particular how we see the goals of our North American initiative supporting and reinforcing an ambitious strategy for strengthening Canada’s role in the world, and a draft document will be circulated to members in the coming weeks. 

SEIZING OPPORTUNITY IN 2005

Taken together, the economic and political circumstances we face as 2005 dawns will require us to be more creative and determined than ever before.  The economic unknowns ahead will test our skills as leaders of enterprise, but also will challenge our country’s ability to adapt to new global realities.  As Canadian business leaders try to do our part in helping our country prosper in this rapidly evolving environment, we too will have to adapt to new political realities at home.

As I look ahead, I believe that Canadian enterprises and communities alike face some daunting challenges, but I also see exciting opportunities to reinforce the economic strength Canada has been enjoying and to set the stage for sustained growth in the years ahead.  I look forward to continuing to work closely with each of you as we confront these challenges and make the most of these opportunities.