The Global Economic Hurricane: The Challenge to Canadian and International Business

November 20, 1998

Chairman, Ladies and Gentlemen.

En route to Beijing this week, I visited a number of East Asian economies and I also attended the APEC Business Summit in Kuala Lumpur. Everywhere, two words came up time and time again — change and opportunity. It is most fitting, therefore, that the Canada China Business Council should choose as this year’s Annual General Meeting theme — Opportunity in Times of Change. In no economy in the world do these two words complement each other more aptly than in China.

This morning I will share my thoughts with you on the state of the global economy as I see it and outline the challenges that lie ahead for business leaders in Canada and throughout the world. Before doing so, I wish to salute the Canada China Business Council (CCBC) on its 20th anniversary and the leadership of Chairman André Desmarais and President Jack Austin for making this organization such an effective bridge between Canada and China. My Business Council on National Issues (BCNI) colleagues throughout Canada join with me in congratulating the CCBC for a job extraordinarily well done.

GLOBAL ECONOMIC PROSPECTS

In the short term, I regret to say that global economic prospects remain quite gloomy. In East Asia, while there has been some positive activity in stock markets and the rebuilding of healthy current account balances in several countries, most of the economies here continue to be saddled with negative growth, bad debts estimated in total to exceed US$1.7 trillion, and declines in exports and foreign direct investment.

Japan, which my BCNI colleagues and I visited last week on an organized mission, increasingly is showing the effects of recession. Corporate profits continue to plummet, retail sales are depressed, bankruptcies are up and price levels reflect an ever-widening deflation. In the twenty years that I have been travelling to Japan, I have never seen business leaders so dispirited or pessimistic.

The government at long last has taken steps to repair the badly damaged banking sector and this week it tabled a fresh stimulus package promising trillions of yen in new spending and tax cuts. But the consensus in Japan and in international markets appears to be that the country’s return to financial health and positive economic growth will take some time. I agree with the assessment of economist Ken Courtis yesterday that Japanese economic growth in the foreseeable future will be modest. Given Japan’s importance as a key global economic power and its regional pre-eminence, I wish the prognosis could be much brighter.

China has not been immune to the global downturn. President Jiang Zemin clearly acknowledged this in his address to APEC leaders in Kuala Lumpur on Wednesday.

But what I have seen and heard in Shanghai and Beijing this week is encouraging. China’s commitment to structural reforms appears to be unshakeable. The resolve announced by President Jiang at the APEC leaders meeting this week and reaffirmed by Premier Zhu Rongii and Bank of China Governor Dai to us today not to devalue the renbimbi is reassuring. Foreign direct investment into China continues to be robust, financial regulation is being strengthened and China’s currency reserves are large. Notably, Chinese leaders are still predicting that growth levels in 1998 will exceed seven percent.

All of this is welcome news in an otherwise bleak economic Asian landscape. Still, we cannot underestimate the difficulty of pushing ahead with complex structural reforms in China and the high costs of readjustment. Rising unemployment is a major concern of the Chinese leadership and strong growth levels are essential to meet the needs and ever expanding expectations of the citizenry.

As we look ahead, China’s human and physical infrastructure requirements are vast and the opportunities almost limitless. In this regard, I could not help but share in the excitement of our various Heads of Mission from key Chinese cities that spoke to us this morning.

Latin American prospects remain a question mark pending the degree to which Brazil is successful in dealing with its fiscal and structural reforms. The US$41 billion financing package unveiled several days ago by Brazil, the International Monetary Fund (IMF), the United States Treasury and other agencies is meant to reassure financial markets that the giant of South America has the means to cope with further financial turbulence. The jury on Brazil is still out. In the meantime, three countries which have worked very hard to strengthen their economic fundamentals — Argentina, Chile and Mexico — hold their breath in the hope that Brazil will succeed in implementing its promised reforms.

Russia, tragically, is in a state of chaos. As if the effects of financial collapse were not enough, the country has had its worst harvest in 45 years and now faces a long, cold winter. Russia’s future looks bleak and its democratic institutions remain fragile.

The countries of the European Union, until recently seemingly in a state of denial about the impact of Asian financial contagion, have now accepted that they are not immune. Growth prospects throughout Europe are being revised downward just as member governments nervously prepare for the introduction of the Euro. To complicate matters, the decidedly leftward tilt of the governments of most member countries is raising uncomfortable questions about whether the drive to make Europe a more competitive global player is likely to stall.

And what about the United States? Can the world count on the resilience of this economic superpower to hold global recession at bay? The United States has its own problems. Growth is slowing and so is corporate investment as earnings begin to weaken. More ominous, the household savings rate of Americans has entered negative territory for the first time in 60 years. Companies too are over extended as they have borrowed heavily to finance capital investment. To add to these concerns, Wall Street share prices continue to be significantly overvalued by historic benchmarks.

Another cloud hangs over the United States — its trade deficit is high and rising. Protectionist sentiment is surging and American leaders are warning that the United States cannot continue to be the importer of first and last resort. In the months ahead, trade tensions will increasingly dominate the agendas of the world’s largest exporters and importers.

Taken together, what do these country and regional assessments tell us about overall global economic prospects? At best, they suggest that global growth over the next 12 to 24 months will be weak. At worst, they suggest that a global recession is on its way due in large measure to a simple equation — too much supply is chasing falling demand. Excess supply is cutting prices, is causing profits to evaporate and is undermining capacity utilization.

The optimists are pinning their hopes on the expectation that the current crisis will force long overdue reforms to the way business is done in many parts of the world, ushering in a new era of openness, transparency, accountability and prudential regulation. The crisis, they argue, will force companies to downsize and restructure their debts and expose domestic banks to greater foreign competition. Japan, they hope, will move from recession to growth; the United States economy will manage a soft landing; central bankers will continue to cut interest rates; and the G-7 and the G-22 will make good on promises to reform the world’s financial architecture.

Much of this could come to pass and I fervently hope that it will. But of one thing we can be sure — it will not happen quickly. In the meantime, there are legitimate concerns that massive reflation will postpone or nullify the vital restructuring that is urgently required in many parts of the world.

THE CHALLENGE TO CANADA

How then in the face of this uncertainty should we in Canada be positioning ourselves to weather the storm and benefit from the opportunities that might arise?

First and foremost, we must ensure that Canada, the home base to our enterprises large and small, strives incessantly for self-improvement as a global economic competitor.

Let’s begin by reviewing our strengths.

• Canada’s inflation rate is one of the lowest in the world and is likely to remain low.
  
• Nominal interest rates are low and are likely to fall further.
  
• Canadian growth rates in the past two years have been among the strongest in the G-7.
  
• The country’s overall fiscal position has improved dramatically. The federal government and the majority of provinces are registering fiscal surpluses. Ontario and Quebec plan to balance their budgets within the year.
  
• At the national level, the debt-to-GDP ratio is falling quite rapidly.
  
• Export performance over the past five years has been strong. Canada’s exports as a share of GDP are twice the G-7 average.
  
• Canada continues to have the largest share of the import market of the United States, the world’s most robust economy by far.
  
• Strong investment in plant and machinery continues unabated.
  
• Canada ranks sixth highest in the world in the stock of foreign investment, Canadian outward-bound foreign investment has doubled in the past ten years.
  
• Canadian locational costs are lower than those in the United States and among the lowest in the G-7. Our distribution systems and road, rail, water and air transportation systems are world class.
  
• The availability and quality of our human resources are second to none. Our education expenditures as a percentage of GDP are among the highest in the G-7. Our rate of enrolment of 20-24 year olds in post-secondary education is the highest in the G-7.
  
• We are first in the world in telephone lines per capita and among world leaders in computer ownership, usage and interconnectedness.
  
  
• Canada moved from 16^th place in 1994 to 5th place in 1998 in the global competitiveness ranking of the World Economic Forum.
  
• And when it comes to overall quality of life, Canada is number one — the United Nations has ranked us at the top of its human development index the last five years in a row.

But lest our Chinese friends think us immodest or boastful, let me say that Canada too has its share of problems. I will mention the most important ones that stand in the way of Canada becoming a leading global economic competitor.

The first is the size of Canada’s public debt. It is dangerously high and the country’s greatest liability and source of vulnerability, especially in the face of the current global uncertainty and turmoil. It has started to decline as a percentage of GDP but our federal government must accelerate its drive to reduce its size in real terms as well as in relation to GDP.

The second of Canada’s major obstacles to becoming a leading global economic competitor is the burden of personal income taxes. It is the most onerous among the G-7 countries and a disincentive for work, savings and investment. It hurts our ability to attract and retain skilled citizens who prefer instead to seek opportunities in the United States or in other parts of Asia-Pacific. Political and public support for tax relief is growing and both the Prime Minister and the federal Minister of Finance have promised action in the next budget. Significant reductions are a must.

The third of Canada’s major economic weaknesses is lacklustre productivity growth. Canada has had the lowest rate of total factor productivity growth among the G-7 countries over the past fifteen years. The BCNI prescription for dealing with this weakness combines a strategy of low inflation, debt reduction, tax cuts, trade liberalization and aggressive trade development, continued strength in business investment, stable and more effective government, judicious investments in health and education, and improved corporate governance. This restorative cocktail has yet to reach full strength, but we are making progress. Productivity growth last year was very strong and much higher than the United States. But we have a long way to go.

The fourth of Canada’s obstacles to becoming a leading global economic competitor is the innovation gap. We have a smaller critical mass of innovative industries than do the Americans. Despite generous tax treatment and highly competitive research costs, our private sector R&D spending as a percentage of GDP is lower than the United States. And we have a weaker record of technology diffusion and adoption than our counterparts south of the border, in particular among small and medium sized companies. The response to this weakness must in large measure be similar to that of addressing our productivity shortfall.

I have identified four impediments to Canada becoming a leading global economic competitor: high levels of public debt, high levels of personal taxation, weak productivity growth and the innovation gap. A symptom of the collective effect of these problems is the underperformance of Canada’s currency in relation to that of the United States. As a long-time advocate of the virtues of a hard currency, I continue to be disturbed by the steady decline over time of the Canadian dollar. I have attributed this decline to negative spreads, falling commodity prices, high debt and taxes and to fears of political instability. If these in aggregate explain most of the reasons for the fall of our currency, then clearly we have some way to go before we can hope to see a significant appreciation. In the meantime, I am greatly concerned about accepting an exchange rate of US 65 cents as Canada’s benchmark for global competitiveness. We can do better. We should do better.

There you have it, Mr. Chairman — an assessment of Canada’s economic strengths and weaknesses. Based on this assessment, Canadians have good reason to be encouraged about the country’s prospects. But we have no reason to be complacent. We have a great deal of hard work ahead of us.

THE CHALLENGE TO BUSINESS LEADERS GLOBALLY

As Canadian business leaders, working to get our house in order is one priority. Working to build a better world is the other. I will conclude my remarks with six suggestions on how we should be co-operating with political leaders in Canada and with our business colleagues around the world to improve the global economic order.

First, we must strive that openness, transparency and public accountability become the global standard for all trade and investment transactions whether carried out by companies or governments. The global economic crisis can serve as a powerful catalyst in moving us in the right direction. Much improved financial institutions and stronger companies will make a difference.

Second, we must ensure that the momentum in favour of trade and investment liberalization maintains a steady pace. Trade and investment liberalization is the most powerful global force by far in job and wealth creation, the empowerment of consumers, and in the improvement of social standards and quality of life. Sadly, enthusiasm for liberalization has been dampened by the global economic crisis — witness the decision by APEC leaders earlier this week to postpone the planned scheme to speed up the elimination of tariffs in nine important industries. Business leaders must work harder than ever to keep the trade and investment agenda moving and in particular this applies to the World Trade Organization as it prepares for the next round of negotiations — negotiations that I very much hope will include China as a member in good standing.

Third, we should be in the forefront in recognizing that risks and opportunities go hand in hand with globalization and that this demands even closer co-operation among countries with better and swifter assistance for those who need it. The G-7 has pledged to help build a new global financial architecture. The current crisis is helping focus attention on this need. We should press our respective governments not to miss the opportunity to act.

Fourth, we should encourage broader acceptance of the idea that the pace of globalization cannot be absorbed by all countries at the same speed. Different stages of development, different cultures and different systems of government require that countries have some discretion in determining how swiftly liberalization measures will be implemented. In some cases, pushing too fast and too hard runs the risk of failure and backlash.

Fifth, we should champion the imperative of fairness and equity and ensure that the fruits of the economic revolution spawned by globalization are more evenly shared. If equity has little relevance in the new economic order, if knowledge, education, fiscal rewards and improved health standards and social safety nets are not priorities, then the economic revolution that as business leaders we have worked so hard to build ultimately will collapse.

Finally, we must be agents of responsible change in the improvement of the global environment. Currently, there is sharp disagreement among developed and developing countries on the burden and responsibility of dealing with the global climate change problem. China in particular has resisted the invitation of developed countries such as Canada and the United States to play a significant role in curtailing greenhouse gas emissions. While I accept that the developed world must take the lead in confronting the global climate change challenge, it must be understood that the problem such as it is has no chance of remedy without the commitment to action by important emerging economies. Business leaders in all parts of the world must recognize this reality and promote a unified approach.

Mr. Chairman, if political and business leaders alike move resolutely forward in advancing all six of these agendas, then I am certain that we will overcome the current global economic crisis more quickly. But more important, we will ensure that the 21st century will be a more productive, more equitable, more harmonious and more secure place for all of us.

In the new century, I see Canada, arguably the most blessed of all countries, serving as an example to the rest of the world. In this new century, I see a strong, prosperous, peaceful and globally integrated China playing a responsible leadership role. Canada and China, each in our own ways, will make a difference. Together we can make the world a better place to Canada’s business leadership.