The Global Economy and National Imperatives The Challenge to Canada’s Business Leadership

November 3, 1998

Mr. Chairman, Special Guests, Fellow Members.

It is my task this morning to set the scene for this Economic Summit, to help prepare ourselves for our deliberations which are certain to inform and to provoke, and which will involve, in a very direct way, more than 100 chief executives — all committed members of our BCNI family, all of us dedicated to building a stronger Canada in a more prosperous world.

Let’s begin by taking measure of the world as we see it today. While the Cold War is increasingly a fading memory, new threats have emerged — the threat of globally co-ordinated terrorism, of rogue states that ignore the rule of law, of civil conflict arising in states incapable of holding themselves together or of preventing the spread of hostilities beyond their borders.

But a potentially more destructive threat has now emerged — the threat of global disorder arising from a sharp contraction in economic growth in many parts of the world. This contraction, if it persists, could have devastating social consequences for vast numbers of people.

Let’s take the pulse of the global economy.

Most of the economies of Asia continue to face severe difficulties. The two giants of the region, Japan and China, give special cause for concern. Saddled by recession, Japan’s economic prospects are not bright despite the long overdue passage by the Japanese Parliament of a ¥ 60 trillion package aimed at repairing the badly damaged banking system.

Economic growth in China has fallen sharply and in the next 12 months is likely to register well below the eight percent target set by the Chinese leadership as minimal and essential. China is experiencing a decline in investment and exports and, ominously, rising unemployment — today estimated at 20 million or more. Not surprisingly, China’s four largest state banks are groaning under the strain and the prospects of a currency devaluation sometime in the next twelve months are real.

Turning to other parts of the world, the Russian economy has virtually collapsed and President Yeltsin for all practical purposes has yielded day-to-day decision-making to Prime Minister Primakov. Russia’s future in the short term is bleak, its political direction uncertain and its democratic institutions fragile.

Brazil, Latin Americas’ most important economy, is facing serious difficulties despite the welcome election this month of President Henrique Cardozo. Nervous investors await the details of a "rescue Brazil" support package from the International Monetary Fund, the United States Treasury, multilateral development banks and other lenders. Central to the credibility of Brazilian reform efforts is President Cardozo’s commitment to cut US$23.5 billion from the 1999 government deficit. Can he deliver on this promise? It remains to be seen.

The countries of the European Union until recently appear to have been in a state of denial about the global reach of the Asian contagion. But they too are now feeling the pinch and have started to revise their growth prospects downwards. Their prospects will not be helped by the decidedly leftward tilt of the European Union. Thirteen of 15 member countries now are led by socialist governments and some of them, notably that of recently elected Chancellor Schröder of Germany and his Finance Minister, Oskar Lafontaine, are not so keen on the pro-market approaches of their predecessors.

The European picture is further clouded by the growing tension between the recently created European Central Bank and the member country finance ministers wanting to exercise their fiscal muscle to deal with slower than expected economic growth and chronic unemployment. Is this an ideal environment in which to introduce the Euro? I think not.

What about the United States? Will its extraordinary economic strength and sustainability save the day? We cannot make this assumption and here is why. Growth is slowing in the United States and corporate earnings are weakening. Credit is harder to come by and business confidence levels are in retreat. Despite the fact that last week’s rally in American stocks was one of the most impressive in recent years, share prices on Wall Street remain substantially overvalued by historic measures.

Add to this the exploding size of the United States trade deficit, which could surpass $300 billion in the next 12 months. This could trigger powerful protectionist sentiment and already seems to have undermined the commitment of the Americans towards further global trade liberalization.

What does this sombre prognosis of global economic conditions mean for the world as a whole? The OECD is predicting two percent growth in 1999. Given what I have described, this is likely too optimistic. Indeed, some forecasters in the United States are no longer dismissing the possibility of a sharp slowdown in the United States and of a global economic recession.

This is a worst-case outcome. But some people are not so pessimistic. They believe that Japan will begin to heal itself more quickly than expected, that the beginnings of a recovery in Asia more generally are already underway, that confidence will return to Brazil and ease fears of further contraction in Latin America, that the United States economy, with some additional encouragement from Alan Greenspan, will experience a soft landing, that co-ordinated action on the part of the G-7 will turn the tide.

All of this could come to pass and I fervently hope that it will. But it may not. How then in the face of this uncertainty should we in Canada be positioning ourselves to both weather the storm and benefit from the opportunities that might arise?

First, let’s review 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 quite robust by G-7 standards.
  
• The country’s overall fiscal position has improved dramatically. The federal government and six provinces are now in balance or 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 business investment in plant and machinery continues unabated.
  
• Canada ranks sixth highest in the world in the stock of foreign direct investment. Canadian outward bound foreign direct 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. More important, 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 the world leaders in computer ownership, usage and interconnectedness.

Now let’s review our most serious weaknesses.

The first is the size of Canada’s public debt. It is dangerously high and the country’s greatest liability and source of vulnerability. The BCNI continues to target debt reduction as the country’s foremost economic priority and as having first call on federal surpluses.

The second of Canada’s major economic weaknesses is the high 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. As you know, the BCNI has launched a major initiative to bring personal income taxes down in an affordable and sustainable way. Political and public support for tax relief is growing and both the Prime Minister and the federal Minister of Finance have promised that they will move in this direction in the next budget.

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 education and health, 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 in the United States. But we have a long way to go.

The fourth of Canada’s major economic weaknesses 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 in 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. Success will depend in large measure on the willingness of business leaders such as yourselves to continue investing at a competitive pace.

I have identified four major economic weaknesses plaguing Canada: high levels of public debt, high levels of personal taxation, weak productivity growth and the innovation gap. At this Economic Summit today, I expect that we will address each of these problems and I look forward to hearing your views — especially as they concern how we as business leaders can make a difference.

Prior to concluding my remarks, however, let me briefly address several other concerns that I hope will be part of our deliberations.

The first 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.

The second is the challenge of global climate change. As you know, last December in Kyoto the federal government committed Canada to a reduction in greenhouse gas emissions which could have serious consequences for the Canadian economy. The stakes are high, not only because we rely on the production and export of energy-intensive goods for a significant portion of our GDP, but also because many of our producers face competition from countries which have no commitments under the Kyoto Protocol. The federal and provincial governments have launched a national consultation designed to examine the options for Canada. We will be following these discussions carefully, to ensure that cost-effective opportunities for business are identified and promoted while also safeguarding Canadian competitiveness, and to caution the government against getting out of step with our largest trading partner, the United States.

Let me conclude with a few thoughts about the issue of political stability. As we meet here this morning an extraordinary contest is underway in Quebec with two competing visions about the province’s future. The Charest vision offers Quebecers growth, social progress, self-reliance and the stability and promise of one of the world’s most successful countries. Premier Bouchard’s vision, and that of his Parti Québécois, if fulfilled, will carry a heavy price — for Quebecers and for all Canadians.

The uncertainty linked with the great divide in Quebec has been a source of economic weakness in the past. Unresolved, it will remain a source of weakness in the future. I appeal to my Quebec colleagues here today to speak out in the coming days as you have done so eloquently in the past for what you know is in the best interests of both Quebec and Canada. A decisive victory by Jean Charest, I am convinced, will open the door for further changes to the Canadian federation — changes that the BCNI has long championed and that are the spirit behind our efforts that helped give birth to the Calgary Declaration.

To conclude, Mr. Chairman, I have offered these brief comments this morning to set the scene for our deliberations at this important and timely Economic Summit. I have offered a perspective on global economic conditions as I see them and on Canada’s strengths and weaknesses in the face of profound uncertainty all around us.

This uncertainty and its potential for crisis should not paralyze us with fear. On the contrary, it should motivate us to work harder than ever at curing our weaknesses and in so doing providing Canadians with more and better jobs, higher incomes, stronger and more effective social programs, and the certainty that Canada will continue to be an important economic leader well into the 21st century. This is the challenge that we should seek to address this morning. This is the challenge.