Another new world order [economic productivity]

TheGlobeandMail.com – Opinion – The planet has been completely reshaped in the first decade of the 21st century, and Canada mustn’t squander its opportunity to reposition
Published on Saturday, Sep. 04, 2010.   David Woodside

As the ballad goes, “the times, they are a-changin’,” and so too is the context that shapes our national interests and our global relationships. In just 20 years we have gone from a bipolar world of two military, if not economic, superpowers, to a single-polar world of an economic, political and military hyper-power to today’s multipolar world with competing centres of economic and political power, and evolving military balances. It has also been an intellectual roller-coaster ride from Francis Fukuyama’s The End of History in the mid-1990s to Fareed Zakaria’s The Post-American World a short decade later.

Clearly, the first decade of the new millennium will cast a long shadow over the 21st century. It was a decade marked by jarring and unsettling events: Y2K; terrorist attacks; Enron and a host of other corporate debacles; horrific natural disasters showcased by the digital information age; the invasion of Iraq and the absence of weapons of mass destruction; the dot-com bust; and the global financial crisis. Cumulatively, these events have sapped public trust in leadership. Overwhelmingly, they have changed the public’s expectations for their governments. Paradoxically, they have created gaping fissures in the body politic about how best to meet these changed public expectations.

And while these very public events naturally captured the headlines, they represent only the tip of the proverbial iceberg of the “global drivers of change” that are now reshaping economies, societies and politics. There are four core structural trends driving this change: globalization, demographics, the information revolution and climate change. These, together with the events of the past decade, are inexorably changing the world order.

So, what shape will this new world order take? Let’s start with globalization. Today’s pervasive globalization has been made possible by the information revolution. It is bound together through global supply chains, global capital markets, the global Internet and unprecedented movements of people. We now inhabit a flatter, more interconnected, more wired and more competitive world than was imaginable just a decade ago.

Without this pervasive globalization, the global financial crisis would have been an American banking crisis. Without this pervasive globalization, the United States would not have been able to live beyond its means at no apparent cost for the past decade, nor would China have been able to export its way to two decades of double-digit growth. Without this globalization, supply chains would still be national rather than worldwide, and costs would be higher.

The global restructuring that globalization has facilitated will see Asia account for 50 per cent of world GDP by the end of this decade, an economic prominence last seen three centuries ago. Indicative of the pace of change is that China became the second-largest economy in the world in 2010, moving another Asian economy, Japan, into third place.

At the same time, the information revolution is reshaping how we work, how we communicate, and how we interact. We are creating a 24/7 global digital universe that is changing our concepts of markets, the value of information, our systems of social networking, political dynamics.

And the revolution is far from having run its course. Twitter will be obsolete before I ever get around to using it. The Internet and blogs are changing political campaigns. Blogs are beginning to lead – not follow – traditional news media. The growth of data on the World Wide Web is an unimaginable order of magnitude greater than trade and investment.

Overlay on this the demographics of aging. While aging has always been a personal reality, it had never been a problem for whole societies. Today, things are different. All industrial countries are aging, with impending declines in the working-age population. The impacts will be profound, affecting not only pensions systems and health care but also education, housing, immigration and economic growth. Aging will put an incredible premium on skilled workers, and will shift the “wealth of nations” to countries with younger, educated populations. The hunt for talent will become more global and more of a preoccupation of companies and countries.

If the impacts of aging are profound, the potential consequences of climate change are uncertain and unsettling. While the answer is obvious – that is, to change behaviour you have to change the price of that behaviour in a market-based system – the way forward is not. Copenhagen didn’t inspire confidence that the multilateral system can manage climate change. And the responses of the major emitters don’t inspire confidence that they are willing and able to tackle climate change domestically, let alone collectively. Climate change may become the litmus test of whether the G20 is effective and durable.

The world economy is now in recovery after the great recession. But just as this was not a typical recession, nor will it be a standard recovery. This global recovery will be remembered for its uncertainty, volatility and overhanging imbalances.

The U.S. recovery will be tepid by comparison with previous cyclical rebounds, constrained by lingering unemployment, too much debt, too little savings and too large government deficits. Canada should outperform the U.S., supported by strong commodity prices and healthy balance sheets, but there are limits to our potential to decouple from U.S. performance. Asia will be a much faster-growing region, buoyed by demographics and low-cost production, but hampered by too much savings, too little consumption and too much reliance on trade-led growth. Europe will be a slow-growth area, weighed down by demographics, unaffordable entitlement programs, and large deficits and debt. Financial markets seem predisposed to react vigorously to each unexpected economic tea leaf, reinforcing the volatility of the recovery.

Fiscal-policy exit strategies are equally challenging. Deficits are high and structural in a number of G7 countries, and higher still in a number of smaller industrial countries. Estimates suggest a doubling of U.S. debt levels over the next five years, with similar projections for Japan and the euro zone. With pervasive globalization, unsustainable fiscal situations in small countries such as Greece can threaten systematic stability, and growing debt burdens – even in reserve currencies – can unsettle markets if there is no clear light at the end of the fiscal tunnel.

With political gridlock in the U.S. and elsewhere, combined with renewed worries about the strength of the recovery, the risk is that deficits will remain large for longer periods. The ensuing debt imbalances will only reinforce the shifting economic centre of gravity away from low-saving, heavily indebted, industrial countries.

To an extent that we had not seen in the postwar period, the Canadian economy outperformed the U.S. in the recession and is continuing to do so in the recovery. Canada’s strengths are impressive and extend well beyond our strong fiscal situation, stable financial sector, bountiful resources, agriculture capacity and proximity to the richest market in the world.

They include our “public infrastructure” of resilient institutions of government and governance: Canada’s professional and non-partisan public services; our social safety nets that reassure in times of turbulence; our values, rule of law and respect for diversity; our largely non-ideological approach to public policy; and our civility and openness in political discourse. Yet some of these strengths of our Westminster model of governance are beginning to fray, and this should be cause for public concern.

While Canada stands out, the shifting global economy presents opportunities and risks. Our challenge will be to leverage Canada’s strengths, tackle its weaknesses and take initiatives to reposition ourselves for the changing world order.

On the economic horizon, a key weakness is Canada’s poor productivity performance. Consider: Canada’s business sector has an average productivity level that is now only 75 per cent of that of the U.S. A dollar near parity and aging demographics place an urgency on improving our productivity performance. This “productivity deficit” relative to the U.S. costs Canadians more than $300-billion a year, or $10,000 per capita. And yet governments are not seriously contemplating how to close it.

The broader challenge is about how well and how quickly Canada will adjust to the global drivers of change affecting all countries: tackling demographics and their wide-ranging impacts from health care to education to pensions; tackling the rise of Asia and its implications for our foreign policy; tackling climate change in all its immense ramifications. But a risk to early and effective action is a political environment in Canada that has shifted to a short-term focus, leaving few forums to discuss and achieve consensus on the broad structural trends that are reshaping our world.

While the world economy is emerging from the great global recession, the global environment is volatile, and global drivers of change are propelling us toward new global alignments. In the midst of this changing world order lies the opportunity for Canada to stake out new markets in emerging-economy giants like China, India and Brazil, to refocus our market presence in the United States toward rapidly growing regions and sectors, and to make Canada more innovative in what we produce and more productive in how we produce it. It is an opportunity we cannot afford to squander.

Kevin Lynch is vice-chair of BMO Financial Group, former clerk of the Privy Council and secretary to the cabinet.

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