Enterprise and the Public Policy Challenge: From Priorities to Action in 2002

January 15, 2002

Council Chairman, Jean Monty, has just reminded us of how Canada’s chief executives managed to make a real difference in most of the great policy challenges that our country faced over the past quarter century. Through our newly re-engineered organization, the Canadian Council of Chief Executives, we will continue to demonstrate the best in policy entrepreneurship –in Canada, in North America and the world.

It is in the context of this three-fold mandate that I wish to share with you this morning what I see as the key issues and challenges that we must be prepared to address in the months ahead. The primary task of moving forward with research, analysis and consultations in these areas will lie with our Council’s three new CEO-based policy committees: the National Policy Committee, co-chaired by Gwyn Morgan and Gordon Nixon, the North American Policy Committee, co-chaired by Derek Burney and Paul Tellier, and the Global Policy Committee, co-chaired by Robert Brown and Dominic D’Alessandro. The response from you, our members, to participate in these committees has been very strong and I look forward to working with you as we pursue a stimulating and dynamic agenda.

Let me begin with the current policy environment. All of you would agree, I am sure, that it is particularly difficult, both within Canada and abroad. For the past several months, we have been understandably preoccupied by the search for security in the wake of the terrible events of September 11. Even as we struggle to ensure the physical security of Canadians and of people around the world, we also have been grappling with our first economic downturn in a decade — a slowdown that was made worse at least temporarily by the terrorist attacks. As a senior official at the Department of Finance in Ottawa put it recently, the last federal budget was planned during the first American recession in 11 years, the first synchronized global downturn in a quarter century and the first security shock to the United States in more than 50 years.

Is the worst over? Shortly, Sherry Cooper of BMO Nesbitt Burns and Ken Courtis of Goldman Sachs will offer their views in detail on the economic outlook both at home and abroad. Certainly the current recession, like all downturns, will pass eventually. But while many economists are convinced that this recession will be both relatively shallow and short-lived, I would suggest that the degree of economic risk remains high, a point of view echoed by Federal Reserve Board Chairman Alan Greenspan in an address in San Francisco last Friday.

The combination of ongoing security concerns and economic uncertainty poses a daunting fiscal challenge to governments. In his December budget, for instance, federal Finance Minister Paul Martin easily avoided going into deficit in the current fiscal year because of the cushion created by the previous year’s huge surplus. But his projections for the next fiscal year lie on much shakier foundations. While he has committed to a balanced budget for the next three years, he has cut his margin for error in half. The modest contingency funds that remain for 2002/03 were made possible only by a deferral of tax installments for small businesses that shifts $2-billion in revenue from this year into next.

The federal government has been able to deal with the immediate imperatives of the war on terrorism without going back into deficit, and for this we commended the Finance Minister following the December budget. To do so, however, the government has given up any pretense of continuing to pay down public debt. Even if the economy does recover quickly, any surplus funds will flow into contingent spending on infrastructure and African development rather than to debt reduction. And Mr. Martin has left himself little room to maneuver if the economy does not resume growth as quickly as expected.

Spending pressures, meanwhile, remain intense. In the next two years alone, the budget projects an increase in spending of 14.5 percent. Expensive plans for new programs linked to the vaunted innovation and skills agenda were put on hold last autumn, but the government will not want to stand still — a sentiment that will be reinforced as the candidates for the next generation of leadership of the Liberal Party jockey for profile through new initiatives. Still more spending pressure will flow from provincial governments as they struggle to cope with the relentlessly rising cost of public health care.

In short, governments at both levels will have little or no money available to meet new or growing priorities. This means that the business community will have to remain extremely vigilant to prevent a deliberate relapse into the deadly cycle of spiraling deficits and rising taxes. On the other hand, this fiscal squeeze could create an important opening for creative ideas that would help governments to meet new needs without additional money.

As the Council said in response to the December budget and in earlier presentations to the standing committees on Finance and Industry, the fact that money is tight need not prevent Canada from making real progress in improving competitiveness, stimulating investment, jobs and economic growth and boosting productivity and incomes. We have already put forward several suggestions along these lines, including:

• Tax reform. Economic evidence shows clearly that Canada could make its tax burden much more competitive internationally without any net revenue loss. In particular, this could be achieved by shifting the tax mix toward a consumption rather than income base.
  

• Regulatory reform. Rethinking Canada’s regulatory regime could make Canada much more effective in attracting business investment and fostering global enterprises without any need for new public spending. For instance, relaxing restrictions on foreign ownership of companies in many key sectors could both attract new investment and help Canadian companies to grow globally by giving them access to more competitively priced capital.

• Labour market reform. In the early 1990s, Canada made significant strides in this area through reforms to the Employment Insurance system. Some of these reforms were rolled back in the run-up to the last federal election, but a resumption of progress in this area could have important benefits to the country by encouraging people to move toward better paying and more stable jobs. Other measures such as faster recognition of the experience and credentials of immigrants also would help Canada to make more effective use of its human capital.

• Program review. Governments already spend a great deal of money, but too rarely review existing programs to ensure that they continue to meet relevant needs in the most cost-effective way possible. If the federal government is to put forward a credible innovation agenda as the centerpiece of its economic policy, the process of innovation must begin at the source by looking at how to make better use of the money it already spends.

Fiscal prudence and creativity therefore must be the first thrust of our national policy work in the months ahead. Limited fiscal capacity and the high degree of economic uncertainty are not excuses for inaction. Rather, they should act as a spur to innovation. As a country, we must be relentless in seeking new ways to improve Canada’s competitiveness by doing better with what we have.

In this vein, the second thrust of our national policy work must come in the area of health care. This was a priority identified by members of the Council last year, and despite all of the time and energy consumed by our re-engineering exercise, David Stewart-Patterson and other members of the Council staff have been hard at work reviewing the immense amount of material published on this subject and consulting with major stakeholders. The issues are as complex as they are compelling, and the real challenge for us is to identify those elements of the debate in which business leaders could make a meaningful contribution. A discussion paper laying out a potential framework for action will be circulated to you shortly.

In the meantime, I will simply note that the rapid escalation of health costs — which rose to more than $100 billion in 2001 — demonstrates the importance of pursuing policies that will accelerate economic growth. To the extent that total health care costs continue to grow faster than the size of the economy, Canadians will have to pay more in real terms, either by paying higher taxes again or by accepting a shift in costs to employers and to individuals. If we want to keep costs under control, we can either limit supply by delisting services or adding to waiting lists, or we can make determined efforts to make better use of the country’s resources.

Measures such as more effective governance, better access to capital for investment in innovation and more efficient use of the time and expertise of health care professionals may not be enough to prevent health care costs from rising altogether, but they represent the most effective avenue for delivering better health outcomes at the lowest possible cost.

The third thrust of our national policy work in the months ahead will be driven less by perceived opportunities to increase Canadian growth than by the need to address potential threats to the country’s competitiveness. Here, I am referring in particular to Canada’s upcoming decision on whether to ratify the Kyoto Protocol on global climate change. The Council has been active on this front for many years, engaged both in international negotiations and in the domestic consultation process. While Canadian companies have been among the world leaders in achieving energy efficiencies, we in the Council always have had strong reservations about the feasibility of the target Canada accepted during the Kyoto negotiations. These concerns were compounded by the decision by the United States last year not to ratify the Protocol.

The Council consistently has adopted the position that Canada should not ratify until there is a clear understanding on the part of all Canadians about how its target would be achieved and who would pay the price. Given that consumers still have no idea of the extent to which their lifestyle choices would be restricted, their job opportunities would be limited and their energy costs would rise, the need for such a national discussion has become overwhelming and urgent.

I am deeply worried about the competitive implications for Canadian workers, enterprises and communities. At the very least, a hasty decision to ratify could have an immediate and severe impact on business investment, from energy production in the West, in the North and in Atlantic Canada to energy-consuming sectors such as transportation and manufacturing from coast to coast. I have gone so far as to write personally to the Prime Minister to urge him not to proceed at this time with a decision that could have such profound consequences — especially given the degree of economic uncertainty that already surrounds business investment decisions today.

I have been encouraged by recent remarks from several Cabinet ministers, including Industry Minister Brian Tobin, Natural Resources Minister Ralph Goodale and International Trade Minister Pierre Pettigrew, all of whom have acknowledged concerns about the potential competitive impact of ratification in the absence of United States participation.

However, I still sense a strong desire in other quarters for a rapid decision. This means that we and other business organizations must work vigorously in the coming weeks to highlight our analysis of the risks, to encourage provincial governments and the economic ministries in Ottawa to raise these concerns as well, and to reach out through the media and other means to foster a more active public debate about the consequences of moving ahead precipitously with ratification of the Kyoto Protocol.

To summarize what I see as the central challenges for the national agenda, there is much that Canada can and must do to improve its competitiveness and lay the foundation for future growth despite today’s economic uncertainty and the resulting fiscal constraints on governments. At the same time, we must be especially careful not to pursue policies that will cause further harm to our economy or undermine Canada’s ability to attract investment and to foster growing enterprises.

This brings me to arguably the most complex challenge we face as a country, the management of Canada’s role within North America, and in particular of our relationship with the United States. One of the conclusions that the Council reached in the course of the Canada Global Leadership Initiative two years ago was the need to begin work on the next stage of this relationship. We built on our extensive research, analysis and consultations by forming a high-level ginger group of Canadians and Americans to consider strategies for moving forward on this agenda. In a meeting on September 10 last year, this group concluded that the major barrier to progress was a sense of complacency on both sides of the border.

On September 11, that complacency was swept away. Managing the border to ensure the security of Canadians and Americans without interrupting the smooth flow of people and goods has become the dominant concern of business leaders and governments alike. We were delighted with the speed at which the Canadian government and the United States Administration were able to agree on a sweeping Smart Border Declaration, signed in December by Foreign Affairs Minister John Manley and Governor Tom Ridge, United States Director of the Office of Homeland Security.

This Declaration covers a wide swath of measures essential to expediting the legitimate flow of people and goods across our shared border, and our immediate challenge is to ensure that these measures are put in place without delay. I emphasize that we must not take the Declaration for granted. If we do not keep pushing hard, there remains a real risk that we could lose momentum and that vital pieces of the puzzle could fall by the wayside.

The measures included in the Smart Border Declaration, however, cover what I might call the meat and potatoes of the relationship. While our newly formed CEO Action Group on Canada-United States Co-operation will do its part in encouraging rapid implementation of these measures, we also will be considering Canada’s longer-term position within North America.

In this context, Canada must not forget its important relationship with Mexico, a North American partner with very significant potential. We have a shared interest in continued collaboration within the context of the North American Free Trade Agreement and strong incentives to work together bilaterally and trilaterally in sectors such as energy. At the same time, we have to recognize that the most urgent issues Canada must address today can only be handled on a bilateral basis with the United States, at least initially. The window of opportunity with the Americans is open now, and we must act without delay.

The need to enhance security without inhibiting the flow of people and goods across the Canada-United States border has highlighted the importance of moving well beyond the terms of our current trade arrangements. Some options, such as a common external tariff, could enhance the flow of goods and services, and could conceivably lead as far as a full customs union, inclusive, perhaps, of improved labour mobility between our two countries. A less ambitious, but still very significant step forward, would involve expanding the free trade agenda to include more comprehensive agreements in areas such as dispute settlement, competition policy, procurement, standards and regulations.

The various options and the specific mechanisms that must guide us are well known. What is lacking is a grand, made-in-Canada vision — a clear, bold, confident affirmation of who we are and who we want to be in North America.

When thinking about Canada’s place in North America and the world, it is important that we move quickly to come to terms with the growing debate on monetary policy. The steady decline of the Canadian dollar in relationship to its American counterpart over the past quarter century has led to a growing number of suggestions that we move toward monetary union with the United States. In practical terms, this would mean abandoning our independent monetary policy and simply adopting the United States dollar. The Council is on record over many years in its support of a floating exchange rate, an independent monetary policy and a hard currency. I believe that in the foreseeable future, the country’s best interests will continue to be served by such a course.

Like many of you, I am greatly troubled by the relative decline in our currency’s value. But I also know there are no easy fixes. The road back to a hard currency lies in vastly improved national competitiveness — a conclusion affirmed by the Canada Global Leadership Initiative. This having been said, we will not retreat from debating the question and it is high on the agenda of our newly-formed North American Committee. In my view, it is important that we be very clear on this issue prior to finalizing our vision of a 21st century Canada-United States partnership.

I want to emphasize that we should not be considering any new arrangement simply to please the Americans or anyone else. The objective of pursuing options for managing continental and global economic integration is to serve Canada’s interests: to build distinctive competitive advantages, to boost the incomes of Canadians and to increase our collective influence in the world. In short, we should be discussing big ideas for managing integration not because we have lost hope in our country’s ability to go it alone, but because we believe in Canada’s potential to be an increasingly important player in North America and on the global stage.

This brings me to the third group of challenges that face us — the rapidly changing global arena and our place in it. At a ministerial retreat hosted by Foreign Affairs Minister John Manley in Ottawa last week, I said that the key to the success of Canada’s citizens, governments and corporations in a globalized world lay in the pursuit of excellence – at home and abroad.

But I also warned that we could not take globalization for granted. As we entered 2001, the backlash against the effects of the freer flow of goods, services, capital and ideas intensified. Every major multilateral meeting linked to trade was attracting protesters who felt that for one reason or another, globalization was the work of the devil. More serious than the media fixation on the shows being staged outside these events was the loss of momentum by the representatives of national governments meeting inside the fences.

It was only at the meeting of the World Trade Organization (WTO) in Doha, after the terrorist attacks of September 11, that governments in industrialized and developing nations alike seemed to regain a sense of perspective. While the Doha meeting produced the important decision to move forward with a new round of multilateral negotiations, it also made it clear that the future progress of trade liberalization is inextricably linked to the success of freer trade in bringing visible benefits to people across the developing world.

In addition to launching the "development" round at Doha — a major step forward toward inclusiveness, transparency and co-operation — the WTO also has welcomed China into membership. China’s accession brought an additional 25 percent of the world’s population into the global rules-based trading system. As a major beneficiary of globalization, China’s example is proof-positive that economic opening leads to increased prosperity. As the World Bank noted in a recent landmark study, globalization is a powerful force for economic growth and poverty reduction. It found that citizens of 24 developing countries that embraced open market policies enjoyed average growth in per capita income of five percent a year through the 1990s, compared with just two percent for people in the industrialized world.

For Canada, the continued progress of trade liberalization globally will be an important complement to the increasing integration of the North American economy. As an organization, the Council will therefore be monitoring a wide range of regional developments and participating wherever beneficial in both multilateral and bilateral initiatives. Opportunities within the European Union are high on our list of priorities. Our long-standing dialogue with Japanese business leaders will continue. The Council also will continue to explore the potential for stronger Canadian linkages to developing countries with significant long-term potential such as China, India and Brazil.

More broadly, the events of September 11 have reinforced the need for greater collaboration among sovereign nations around the world. Each citizen, each enterprise and each country clearly must be prepared to make a real contribution to building a better world. As enterprises, Canadian companies are actively engaged in the process of innovation, bringing new products to market, serving peoples’ needs and raising the standard of living of their customers, suppliers, employees and shareholders wherever they may live.

But as a country, Canada must be more than just an effective economic player. We also must contribute our fair share to the development, security and stability of the global community. Our deployment of combat-ready soldiers to Afghanistan and of naval resources is admirable. But we must honestly face up to the fact that the overall capacity and sustainability of our armed forces have been in long-term decline. The time has come to reverse this situation and in this regard the Council strongly endorses the idea of a comprehensive review of our country’s military needs in terms both of domestic security and of our contribution to global stability.

This brings me back to the mission of the Canadian Council of Chief Executives. Under our former name, we had significant influence in helping Canada to meet the great policy challenges of the last quarter century precisely because member chief executives were willing to step beyond their day-to-day business responsibilities and devote time and resources to the interests of the country. Today, under our new name and with our broader mandate, we continue to serve the country’s interests as citizens of Canada, but we know that to do our best for our country, we must act in every respect as citizens of the world.

The challenges that face our enterprises, our country and the world are complex and daunting, but together, I am convinced that we can continue to make a real difference abroad as well as at home. Thank you, and I look forward to pursuing our shared mission in the months and years ahead.