The country is divided when different people take different sides in a debate. The country is really divided when different people are having entirely different debates. That’s what’s happening on economic policy.

Many people on the left are having a one-sided debate about how to deal with a cyclical downturn. The main argument you hear from these cyclicalists is that the economy is operating well below capacity. To get it moving at full speed, the government should borrow and spend more. The federal government is now running deficits of about $1 trillion a year. Some of these cyclicalists believe the deficit should be about $1.4 trillion.

The cyclicalists rail against what they see as American austerity-mongers who resist new borrowing. They really rail against the European ones. They see François Hollande’s victory in France as a sign that, in Europe at least, the pendulum might finally be swinging from austerity to growth.

Other people — some on the left but mostly in the center and on the right — look at the cyclicalists and shrug. It’s not that they are necessarily wrong to bash excessive austerity. They’re simply failing to address the core issues.

The diverse people in this camp — and I’m one of them — believe the core problems are structural, not cyclical. The recession grew out of and exposed long-term flaws in the economy. Fixing these structural problems should be the order of the day, not papering over them with more debt.

There are several overlapping structural problems. First, there are those surrounding globalization and technological change. Hyperefficient globalized companies need fewer workers. As a result, unemployment rises, superstar salaries surge while lower-skilled wages stagnate, the middle gets hollowed out and inequality grows.

Then there are the structural issues surrounding the decline in human capital. The United States, once the world’s educational leader, is falling back in the pack. Unemployment is high, but companies still have trouble finding skilled workers.

Then there is political sclerosis. Over the decades, companies and other entities have implanted a growing number of special-interest deals into the tax and regulatory codes, making it harder for politically unconnected, new competitors, making the economy less dynamic.

These and other structural problems have retarded growth and wages for decades. Consumers tried to compensate by borrowing more. Politicians tried to compensate by reducing the tax bill, increasing deficit spending, ensuring easy credit for homebuyers and by helping workers shift out of the hypercompetitive, globalized part of the economy and into the less productive and more sheltered parts of the economy — mostly into health care, government and education.

But you can only mask structural problems for so long. The whole thing has gone kablooey. The current model, in which we try to compensate for structural economic weakness with tax cuts and an unsustainable welfare state, simply cannot last. The old model is broken. The jig is up.

Unlike the cyclicalists, we structuralists do not believe that the level of government spending is the main factor in determining how fast an economy grows. If that were true, then Greece, Britain and France would have the best economies on earth. (The so-called European austerity is partly mythical.) We believe that the creativity, skill and productivity of the work force matter most, and the openness of the system they inhabit.

Running up huge deficits without fixing the underlying structure will not restore growth. As Raghuram Rajan of the University of Chicago writes in the current issue of Foreign Affairs, “Since the growth before the crisis was distorted in fundamental ways, it is hard to imagine that governments could restore demand quickly — or that doing so would be enough to get the global economy back on track. The status quo ante is not a good place to return to because bloated finance, residential construction and government sectors need to shrink, and workers need to move to more productive work.”

Structuralists face a tension: How much should you reduce the pain the unemployed are feeling now, and how much should you devote your resources to long-term reform? There has to be balance. For my taste, the Germans are a bit too willing to impose short-term pain on the diverse national economies in Europe. But they are absolutely right to insist on the sort of structural reforms they themselves passed in the 1990s.

In the United States, there are almost no politicians willing to embrace the cyclicalist agenda, which would mean much larger deficits. Structuralists don’t have a perfect champion either. President Obama is too minimalist. He doesn’t seem to believe America’s structural problems are that big, making his reform ideas small. Mitt Romney and Representative Paul Ryan understand the size of the structural problems, but their reform plans are constrained by the Republican Party’s single-minded devotion to tax cuts.

Make no mistake, the old economic and welfare state model is unsustainable. The cyclicalists want to preserve the status quo, but structural change is coming.

< http://www.nytimes.com/2012/05/08/opinion/brooks-the-structural-revolution.html >

The world has changed, and when it comes to its immigration system, Canada is not changing fast enough to compete in it. It is no longer possible to sit back languidly, as the best and the brightest queue on its doorstep. The global market for human capital is voracious. There may always be migrants wanting to come to Canada, but they may not be the ones that Canada needs. People with options are less and less likely to tolerate hidebound and cumbersome immigration process, waiting as long as eight years to have their applications processed. If you are ambitious, if you are skilled, if you are entrepreneurial, if you are educated, if you are impatient for success, you will look elsewhere. Increasingly, elsewhere is looking better.

Countries like Australia can now fast-track applications for permanent residency in less than a year. Nor is the competition coming only from developed countries. With growing prosperity at home, not every upwardly mobile citizen of China, India and Brazil sees re-locating overseas as the only path to success. In fact, the Chinese and Indian governments are using investment, tax and visa incentives to draw the highly educated children of Chinese and Indian immigrants to their ancestral homelands.

To ensure Canada remains attractive to the sharpest minds, the keenest entrepreneurs and greatest innovators, the country must move beyond an inefficient selection system and long waits. Why should people put their careers on hold, in order to come to Canada? “International competition is starting to heat up for the best immigrants, the Frank Stronachs, the people who will drive the economy,” notes Arthur Sweetman, an economist at McMaster University.

A new Gallup poll shows that Canada is the third most popular destination for people looking to relocate, with the U.S. first, and the U.K. second. Some might say that top three isn’t bad. But Canada fell a spot from 2010, the global survey of 452,199 adults in 151 countries shows. Despite the recession, the U.S. remains by far the world’s most desired destination for prospective migrants. Why isn’t Canada in first place?

Immigration Minister Jason Kenney has enacted long-overdue reforms to streamline the selection system for economic immigrants. More points will be given for younger people with language proficiency who have prearranged employment.

He also plans to tackle the backlog by closing 100,000 files involving 300,000 people. This is a necessary measure – but one with consequences. It puts a stain on Canada’s credibility, and more reforms are necessary to ensure the problem doesn’t recur.

There is a need for a different kind of immigration officer to be sent to Canada’s missions around the world: not someone with a shiny badge, armed with a long list of bureaucratic time-consuming checks that may end up impeding people with desirable educations, entrepreneurial instincts and in-demand skills from immigrating to Canada. Instead they should be people whose job it is to find and recruit talent. Canada needs headhunters.

Canada needs to open the doors for the right kind of migrant. Faster processing times would enable Canada to take advantage of global cyclical downturns. The current unemployment rate for Spaniards under age 25 is 50 per cent, the overall rate in the country is 25 per cent. Spain has an army of highly literate, technologically savvy people sitting idle, people who could, in some cases, literally walk in and fill vacant jobs here in the hi-tech, telecommunications, mining and petroleum sectors.

Instead of having a system flexible enough to seize on such opportunities, we have immigration lawyers with stories of clients – such as a couple from South Africa with MBAs – who become so frustrated, they simply give up on Canada.

Mr. Kenney is trying. Ottawa has expanded the provincial-nominee category, which favours immigrants with prearranged employment. However, the model has some weaknesses: Newcomers entering through the nominee stream are also less educated, and have lower salaries over the long term, than those who enter through the federal points system. This category of workers remains crucial to Canada’s overall program, but it will not suffice.

Ottawa must do more to ensure newcomers can convert their foreign credentials and job experience. It must address discrimination in the labour market, and gate-keeping by professional associations. But first and foremost, Canada needs to change its mentality around immigration. It should be designed as much around whom Canada wants, as who wants Canada.

It is becoming a seller’s market. As Sergio Karas, a Toronto immigration lawyer, says, “People from developing countries are no longer automatically migrating to Canada.” Canada must learn to compete. Educated professionals, entrepreneurs, leaders, will not waste their most productive years trying just to get through the door. They know where they are wanted, and if they’re not wanted here they will pack up their bags and go to where they are, taking with them all their potential and promise.

< http://www.theglobeandmail.com/news/opinions/editorials/canada-must-actively-recruit-the-best-and-brightest-immigrants/article2423327/ >

The Ontario government has reached its first test in its efforts to curb compensation costs — negotiations with the Ontario Medical Association over physician pay.

The OMA claims that a fee cut will increase wait times. The province’s position is that not raising fees given the budget situation is both necessary and reasonable. A few decades ago, policy-makers were worried that physician compensation in Ontario was out of step with our competition and that we would lose doctors to the U.S. or other jurisdictions that might court our highly trained medical workforce. Policy-makers continue to be concerned about physician compensation being out of step, but this time, in the other direction. Have times changed in Canada relative to the rest of the world? How does physician compensation pay in Canada compare to doctors in other countries?

Comparing doctor salaries across countries can be misleading as the cost of living often differs a lot between countries. Two ways to think about comparing compensation are: 1) converting currencies so that a dollar basically buys the same amount of goods in each (this method is called purchasing power parity or PPP) and 2) compare doctors’ salaries to the average wage earned in that country. Policy analysts use both of these.

A recent paper put out by the OECD suggests that in 2004 Canadian GPs were paid about the same in PPP dollars as doctors in Switzerland and Austria, but less than those in the U.S., U.K. and Germany. Using the comparison to average wages, however, Canadian GPs are among the highest paid in the OECD, just below the United States (3.2 times the average wage versus 3.4 in the U.S.).

Among specialists, Canadian specialists were again among the highest paid in 2004, at almost five times the average salary, although far behind those of the United States, which was 50 per cent higher. There has been substantial growth since these comparisons were recorded in 2004. Over the last 10 years, according to the Canadian Institute for Health Information, physician compensation in Canada has basically doubled.

Canada, as well as every other country in the OECD, has costs that are much lower than those in the United States. So saying that our costs are much lower than theirs doesn’t mean much in the global context. Comparisons with the U.K., however, are potentially more interesting. According to a recent study, while overall health-care spending is much higher in Canada per capita than in the U.K. ($4,079 U.S. versus $3,129 U.S. in 2008), GP physician salaries are considerably lower after expenses ($125,101 U.S. versus $159,000 U.S.). The gap for orthopedic surgeons between Canada and the U.K. is even greater. So the U.K. manages to pay its doctors more while spending less overall. On the other hand, Canada has far fewer physicians per capita than most OECD countries. We’re on par with the U.K. and the U.S. (around 2.4 per thousand in both countries) but below Germany, France, Italy and Spain (3.5 per thousand on average).

How should we think about the relationship between spending on physicians and wait times? It’s difficult to draw absolute conclusions from these spending and price comparisons, but here is what the research reports: countries that spend more tend to report lower wait times. This is perhaps not surprising. Beyond spending more, targeting funds at reducing wait times through activity-based funding is correlated with reduced wait times. Included in this is increased compensation for what physicians do (fee for service) when what they do is aligned with the goals of reducing wait times in specific areas. Simply increasing funding does not. There is little evidence on the relationship between doctors’ salaries and wait times.

Comparing Canada’s doctors with those in other OECD countries suggests that our doctors are paid relatively well compared to most, but less than those in both the U.S. and the U.K. That said, the U.K. manages to spend much less overall than Canada does and, recently at least, fares better in international wait time comparisons. Simply spending more doesn’t seem to solve the wait time problem, but targeted spending on agreed upon targets that increases productivity appears to deliver better results than across-the-board increases to any part of the health-care system.

Mark Stabile is director of the School of Public Policy and Governance and a professor at the Rotman School of Management, U of T.

< http://www.thestar.com/opinion/editorialopinion/article/1172109–paying-doctors-and-wait-times-how-does-canada-compare >

They’re just whispers in the wind, but they’re getting louder and more frequent.

In the beginning, a few isolated voices — left-wing economists, academics, social activists, labour organizers, church leaders and corporate renegades — warned that Canada was becoming a highly inequitable nation.

They wrote earnest policy papers, produced credible statistics and occasionally attracted media attention. But they were ignored, dismissed or ridiculed in the corridors of power.

The volume went up a couple of notches last fall when thousands of young people took to the streets chanting: “We are the 99 per cent.” With one simple slogan, the protesters crystallized the issue: The top 1 per cent of the population was skimming off most of the economy’s gains, leaving everybody else to scramble for the remains.

The Occupy Movement got the nation — including a few corporate executives and public figures — talking about inequality. It convinced Canadians that something was wrong.

But it had no solutions — not even any suggestions — to offer. Gradually it petered out.

There was another flurry of interest in early April when theBroadbent Institute, an Ottawa think-tank devoted to creating a more equal society, released a poll showing 64 per cent of Canadians were willing to pay higher taxes to preserve social programs and reduce poverty.

But the source — a research body created by New Democratic Party — caused many observers, even those sympathetic to the cause, to question the poll’s credibility.

Last week brought two developments that couldn’t be shrugged off or attributed to left-wing agitation.

The first was a shareholders’ revolt at one of Wall Street’s biggest banks. To the surprise — and dread — of corporate America, shareholders rejected the pay package awarded toVikram Pandit, CEO of Citigroup.

The vote was not binding. But it would be folly for the bank’s board to ignore a rebuff from institutional investors (pension and mutual fund managers) whose clients are fed up with excessive executive compensation.

“This is a shot across the bow of every corporate boardroom in America,” said Robert Reich, former U.S. Secretary of Labor.

The reverberations were felt in Canada, too. Pandit’s $15 million pay package is in the same ballpark as those routinely approved by the boards of Canada’s top banks. Ed Clark, CEO of Toronto-Dominion, for instance, took home $11.3 million for the same period. His Scotiabank counterpart, Richard Waugh, pocketed $10.6 million and Gordon Nixon at the Royal Bank got $10.1 million.

Political strategists got a surprise of their own the next day. A survey of 1,084 Ontarians — with no partisan or ideological links — found 78 per cent backed NDP Leader Andrea Horwath’s call to impose a surtax on individuals with incomes above $500,000. “It’s hugely popular,” said Lorne Bozinoff, president of Forum Research, the country’s largest polling firm.

This undermined the long-standing assumption that voters were dead set against any tax increase and would punish any politician who raised the possibility.

None of this means a change of direction is imminent.

There is still strong resistance at all levels of government to raising taxes. Premier Dalton McGuinty, who acquiesced to Horwath’s demand this week to keep his minority alive, made his reluctance clear. He vowed to get rid of the surtax within five years.

Likewise, there is strong resistance in corporate boardrooms to reining in executive compensation. High-flying CEOs and their hitherto compliant boards will be watching nervously to see what shareholders do at the Bank of America’s annual meeting on May 9.

But restive stirring is in the air. Once-passive investors are beginning to challenge the notion that corporate CEOs deserve 300 times as much pay as the average worker. Once-tractable voters are beginning to question the notion that raising taxes is unthinkable.

The pendulum, stuck at the far right for a decade, is beginning to shift.

< http://www.thestar.com/opinion/editorialopinion/article/1167476–greed-loses-its-glamour-even-on-wall-street >

About a decade ago, Canada’s economy began heading in a distinctly different direction. The extraction and export of largely unprocessed natural resources became, not for the first time in our nation’s history, the primary driving force in our economic, political, and even environmental development.

Traditionally, Canadian policy‑makers were preoccupied with escaping our status as a supplier of natural resources and commodities. A series of proactive policy efforts aimed to allow Canada to overcome its role as a “hewer of wood, drawer of water,” and helping us emerge as a full‑fledged, diversified, industrialized economic power in our own right. And in the first decades after World War II, Canada made considerable progress in this regard. By the turn of the century, well over half of our total exports consisted of an increasingly sophisticated portfolio of value‑added products (including automotive, aerospace, and telecommunications equipment); and Canadian firms and tech‑nology were increasingly recognized around the world.

That historic trend was reversed, however, beginning around the turn of the century. Since then, driven by various factors (some global, some national), resource industries have become ascendant once again in setting Canada’s overall economic and policy direction.  Resource industries have grown (led by enormous expansion in the petroleum sector, centred on Alberta’s oil sands), and most of their output is exported in raw or barely processed form. Other export‑oriented sectors of the economy have contracted in both relative and absolute terms. In part, they have been “squeezed out” by the macroeconomic side‑effects of the resource boom. (Some economists call this “Dutch disease,” named after a similar reorientation that occurred in the Netherlands following the discovery and exploi‑tation of that country’s North Sea petroleum resources in the 1960s and 1970s.)

This structural shift is profoundly remaking Canada’s economy, our role in the world, and indeed our very federation. Yet apart from occasional bursts of rhetoric (such as followed the recent public exchange between the Premiers of Alberta and Ontario), it has been the subject of relatively little careful analysis. Moreover, while powerful market forces have certainly contributed to Canada’s increasing resource‑dependence, this remaking of the national economy is by no means inevitable or “natural.” Canadians should think carefully about the costs and benefits of this historic shift in our national economic direction, and make the most of our ability to influence the course of our own economic destiny.

A number of key economic indicators testify to this conclusion that Canada’s economy has been heading in a very different structural direction:

* Natural resource production and export has expanded strongly ‑ especially petroleum, and especially from Alberta’s oil sands.

* Manufacturing output and employment has sharply declined.  Some 600,000 Canadian manufacturing jobs have disappeared since the turn of the century.

* Canada’s currency has appreciated dramatically, rising 60 percent in value against its U.S. counterpart over the last decade.

* Canada’s overall trade balance has deteriorated. The growth of resource exports has been inadequate to offset the decline in other exports (such as manufacturing, tourism, and services).

* The economy has experienced a broad shift from tradable to non‑tradable sectors, so that exports in general constitute a significantly smaller share of total production than a decade ago.[1]  This both reflects, and reinforces, the deterioration in national trade performance.

* The shift to non‑tradable sectors, the loss of high‑productivity manufacturing jobs, and the structural deterioration in our exports have all contributed to the worst decade of productivity growth in Canada’s postwar history.

* Economic and fiscal gaps within Canada have widened considerably. In 2005, Newfoundland’s GDP per capita exceeded the Canadian average for the first time in history ‑ and the next year, Ontario’s fell below the national average, also for the first time in history. Since 2006, then, there have been three “have” provinces: those which produce oil (Alberta, Saskatchewan, and Newfoundland & Labrador).

All other provinces are “have‑not” provinces, and the erosion of national fiscal federalism (due to simultaneous reductions in federal social programs, transfers, and taxes) has meant that those interprovincial gaps are showing up increasingly in major differences in economic and social conditions.

The appreciation of the currency is both a consequence of this resource‑led reorientation of Canada’s economy, and rein‑forces the broad structural trend. International organizations (like the Organization for Economic Cooperation and Development [2]) estimate that the “fair value” of Canada’s currency is about 81 cents U.S. (according to purchasing power parity, or PPP, standards). In the 1990s, Canada’s currency traded for well under this level, making Canadian costs and the prices of Canadian‑made products and services seem highly attractive to international consumers and investors. As currency traders came to associate Canada’s currency with the price of oil (rightly or wrongly), however, this advantage was lost. The dollar began to rise quickly, shooting through its PPP benchmark, and reached par with the U.S. dollar by 2007, where it has fluctuated since. At that level, our currency trades at about 25% more than its PPP fair value ‑ which means that Canadian‑made products and services seem 25% “too expensive” relative to their actual value. This has negatively impacted manufacturing, but also every other non‑resource traded industry (including tourism, and tradable services like transportation and business servic‑es). Indeed, some non‑manufacturing export‑oriented sectors (like tourism) have been harder‑hit by the dollar’s overvaluation than manufacturing. Claims that the effect of overvaluation will disappear over time as companies ”adjust” (including by investing in more capital equipment) have not been borne out. Only resource industries have been largely insulated from the impacts of the dollar’s overvaluation. The dollar is the most important channel through which “Dutch disease” symptoms are felt, but it is not the only channel.[3]

Obviously, significant economic opportunities have been generated by the surge in resource extraction and export industries in Canada. The petroleum extraction industry directly employed 54,000 Canadians in 2011 ‑ up 18,000 since 2000. Directly, then, the oil and gas sector’s expansion offset only 3 percent of the net jobs lost in manufacturing in the same period. Indirectly, of course, there are other spin‑off opportunities ‑ concentrated most visibly in oil‑producing regions, but some of which are experienced more broadly across the country. Those opportunities, however, must be measured against the costs and consequences of the resource boom, including its economic, social, and environ‑mental side‑effects. Given the overall deterioration in labour market, productivity, and international trade indicators that has been associated with the resource‑driven restructuring of the national economy since the turn of the century, it is hard to avoid the conclusion that this overall trend has been negative for Canada as a whole.

The challenge facing policy‑makers is to maximize the long‑run, sustainable benefits to Canadians of resource development, and minimize its costs. This means leaning into the winds unleashed by powerful and profitable resource extraction op‑portunities, to ensure that these developments are managed in a manner consistent with Canadians’ long‑run economic, social, and environmental well‑being ‑ rather than simply endorsing the present, largely unmanaged trajectory as somehow optimal (and loudly condemning any critics of that trajectory as “unpatriotic”!). Many policy tools are available to tackle this task of managing the structural changes in Canada’s economy, in order to avoid Dutch disease symptoms, maximize the benefits of resource developments, and minimize their costs.

One especially promising set of policy measures includes proactive efforts to support investment, employment, innovation, and exports in targeted high‑value sectors of the economy. This broad policy envelope is best described as “Sector Development Policy.”[4] The purpose of this paper is to consider the sorts of sector development policies that could be invoked in order to reduce the symptoms of Dutch disease which have become increasingly visible over the past, resource‑led decade.

The general goal of sector development policy is to attain a more desirable sectoral mix in the economy, winning a greater share of output and employment in identified high‑value or “strategic” sectors than would otherwise be the case. Sector development policy has been historically important in Canada, given our ongoing national challenge to escape the “staples trap,” and become more than just a resource‑supplier to other countries. We need more industries that add value to our resources (rather than exporting them in raw form); that generate more high‑income, high‑quality jobs; that embody technology and innovation; and that contribute to greater suc‑cess in world markets.

These policies, and the fiscal tools that could fund them, formed part of the 2012 Alternative Federal Budget (published in March by the Canadian Centre for Policy Alternatives). A stand‑alone paper describing the rationale for sector development policy, and the AFB’s proposals in that area, is available at http://www.policyalternatives.ca/publications/reports/cure-dutch-disease.

JS/kvcope343

________________________________

[1] Measured as a share of GDP, total exports of goods and services have declined by about one‑third: from 45 percent in 2000, to under 30 percent ten years later. This is an imperfect measure of export intensity (since exports are a gross measure, and GDP is a value‑added measure, hence exports double‑count the value of imported inputs embodied in them), but it is nevertheless a useful indicator of the broad trend.

[2] “Purchasing power parities for GDP: National Currency Units per U.S. Dollar,” Economics: Key Tables from the OECD, Table 11, January 2012,
< http://www.oecd-ilibrary.org.libaccess.lib.mcmaster.ca/docserver/download/fulltext/190200031x1t004.xls?expires=1331138560&id=id&accname=guest&checksum=F1BF43AD3605C62AF48C80A582B24CC2 >.

[3] Even without a fluctuating currency, a country could experience Dutch disease symptoms resulting from the rapid development of resource exports, through the workings of factor markets, price differentials (especially prices for traded and non‑traded output), and other mechanisms.

[4] In previous times it was called “industrial policy,” but that term implies an undue focus on heavy manufacturing industry, whereas the sorts of policies described here (and the sectors where they can be productively applied) cover a broader range of sectors, including some tradable services industries.

< http://www.caw.ca/en/10869.htm >

For Stephen Harper, Dalton McGuinty, Jean Charest and our other first ministers, the temptation when public finances are bad is to think small.

Let’s cut a little here, trim back our vision there, and eventually things will be okay.

But Confederation provides a stirring example of why thinking big is exactly what we need to do in the face of public debt.

The 1860s were a stomach-churning time for Canadian colonialists, one of the most unsettled and exciting periods in our existence. The world was bending into shapes previously unimagined, and British colonists in North America needed to think bravely or collapse.

Forcing our hand, the British were changing from doting imperial parents to neglect.

Canada’s early colonies grew up with the privilege of British mercantile policy. In other words, Canadians had privileged access for our goods to the largest, wealthiest market in the world: the United Kingdom. Just about everyone else on the planet – American, French, Argentina – faced steep taxes on their products if they were sold in London.

With the advent of free trade and responsible government, the age of infant Canada ended and our colonial forbearers had to face the cold hard world on their own.

Losing our privileged access to Britain, Canada entered into a free trade agreement with the United States beginning in 1854. We wanted access to the American market, now that the British one no longer gave us preference.

However, the American Civil War exposed Canadians to the full terror of total war to their south, and the growing American imperialism of the 19th century was no longer aimed at Mexico but squarely at subsuming the vast territory of the North-West between the tiny British Columbia colony and those in the East.

Free trade with the Americans was a dangerous game, and one that the Americans were increasingly unwilling to play.

British footsie with the Confederates turned Northern attitudes against Canada, and calls for invasion were not rare. Irish-American raiders were marauding across the border to wreck and plunder. The Americans began to erect tariff walls against Canadian goods, ending free trade for a hundred years.

Worst of all, Canada lost the race to open the new markets in the American Midwest, and practically went bankrupt in the attempt.

As Rotman lecturer and colleague J.C. Bourque recently noted, the Rowell-Sirois Report from 1940 includes a fascinating chapter on Canada’s pre-Confederation economic origin as a collection of over-extended debtor colonies.

Commercial interests in Montreal pressed to create a seaway along the St. Lawrence River that would allow the Great Lakes to serve as the highway to the American interior. With free trade, our passageway would become the transit point on the future North American economy, creating vast wealth and opening up our own landlocked farmers to the global economy.

It would be Montreal, they thought, not New York that would be the new port to the world, a glittering financial capital growing fat on cargo and credit.

Instead of this vision, New York beat them to the punch. First the Erie Canal from Buffalo to the Hudson River opened up the Midwest to the port of New York. Then the railways consolidated the Empire State’s hold on global trade from the American interior even further.

As Rowell-Sirois state: “Successive colonial governments had been inspired by this dream with the result that government policy and public finance had been harnessed to the grandiose conception of the St. Lawrence as a trade route. In ambitious but always futile efforts to realize this great plan, the Province [of Canada] had accumulated a set of public works and a crushing public debt, both too massive for an economy limited by its own boundaries.”

Compounding the problem were a succession of expensive railway failures in the Maritimes and Upper and Lower Canada that spread this financial catastrophe across the British colonies in the East.

“The attempt at commercial integration with the interior of the continent had irretrievably failed and left behind it a burden of debt which weighed oppressively on the economy.”

The colonies were stuck.

Saddled by debt, they could have thought small and pulled back into their individual interests, allowing the Americans to open up the lands of the Hudson’s Bay colony and leaving BC an isolated naval outpost of the British Empire.

Instead, Canadians made a bold leap.

They doubled-down in betting on themselves and united the British colonies in North America into one country with the financial strength to beat the Americans into the North-West.

The decision was financially risky and not without its costs. Confederation and the National Policy of high tariffs and East-West trade increased prices and lowered our ability to compete. But it was the crucial decision that developed a new nation, separate from the United States and eventually wealthy beyond the dreams of our founders.

Now is not the time for a new National Policy, per se. Canadians have built the infrastructure that links us together and are willing and able to take on the world.

But our current financial challenges should be viewed as an opportunity to think that big.

Canada needs an Asia strategy, both to hedge our economic bets with the Americans and leverage our own cultural ties to Asia to find new markets.

We need a coherent pan-Canadian foreign direct investment strategy to maximize our attractiveness as a job creation and investment hub for global capital, involving the federal government, provinces, municipalities and business.

We need to encourage entrepreneurialism and venture among Canadians, find ways to bridge the investment gulf between start-ups and lenders, and get our corporations to put less cash on their balance sheets and more into productivity enhancement.

We need to confront the pockets of hopeless poverty in our cities, rural areas and reserves, collapsing outdated social programs that aren’t working and finding new ways to end intergenerational privation.

We need an innovation strategy that promotes excellence in our universities, investment in R&D by our companies, and makes rock stars of our leading researchers.

Canada has proven in the past it can buck the odds and build despite debt.

Let’s follow the example from Sir John A. Macdonald, George Brown and Etienne Cartier and take a gamble on ourselves again.

< http://www.theglobeandmail.com/news/politics/second-reading/andrew-steele/harper-and-mcguinty-should-look-to-sir-john-a-on-debt/article2399576/singlepage/#articlecontent >

The Canadian government’s March 29 budget will be Ottawa’s latest crack at boosting the country’s middling record on innovation.

Prime Minister Stephen Harper has indicated he wants a better return on the $7-billion that Ottawa spends to support research and development, and is expected to revamp the business tax credits that make up most of that funding, so they’re aimed at R&D that leads to successful products.

Finance Department officials might be wise to look to innovation guru Vijay Vaitheeswaran, a globe-trotting writer for The Economist, for insight on what works, what doesn’t and why. Mr. Vaitheeswaran is in Toronto next week to promote his new book Need, Speed and Greed: How the New Rules of Innovation Can transform Businesses, Propel Nations to Greatness, and Tame the World’s Most Wicked Problems, including a stop at the Munk Centre March 19.

The Globe’s Jeremy Torobin caught up with Mr. Vaitheeswaran Tuesday just after his book was released. Here is an edited transcript of their conversation:

JT: I was struck by your fairly simple definition of innovation, as ‘fresh thinking that creates market value.’ It seems so obvious, yet countries with millions of really smart people and a lot at stake in finding ways to innovate have problems doing so.

VV: Everyone agrees they’re in favour of innovation, and yet we mean different things and part of the problem is it can be used as a cloak to justify all manner of unproductive, or even distorting and frivolous, investments. That’s a big reason why a lot of economies, especially developed economies that have proud economic achievements, scientific prowess and money to invest, have trouble with this. That’s part of what animated me. People in the middle class are feeling left behind by an innovation revolution that’s helping the very poorest on Earth – with mobile phones, micro-banking and so on – and which is helping the very great elites. But we’re increasingly out of touch with the ‘Ideas Economy’ in North America, and how to capture that was one of the animating factors for me in writing the book.

JT: Policy makers in Canada say businesses need to invest more on innovation and productivity. Businesses, meanwhile, say government should provide more incentives for them to innovate. Does needing an incentive kind of miss the point?

VV: Innovation is the only reason we don’t still live in the Stone Age, or why life today is better than it was 200 years ago. Think of the age of invention, the great Victorian era 120 years ago, which produced a lot of the breakthrough that led the foundation for the 20th century – electricity, the motor car, modern chemistry and so on. Providing incentives, such as the patent system, provided great impetus for all of what made modern life possible. So I think we do need incentives, and we actually need more incentives for socially useful innovation. The ‘greed’ part of my title is not about voraciousness, it’s about using incentives to harness the power of self-interest. In terms of money and profit, yes, but also more broadly, when we talk about social entrepreneurs, things like purpose, community, social goods are also motivations. So I want to harness the desire of entrepreneurs and innovators in companies and organizations, and give them ample rewards – more than we do now – but for innovation that tackles socially difficult problems. Where I think you’re right, though, is in sniffing out corporate welfare, companies wanting more government money to invest. The biggest prize of all is market success, right? Come up with products that sell well, and you don’t need subsidies.

JT: High-risk loans and venture capital for startups are severely lacking here, which impairs companies’ commitment to innovation, according to a recent report by the Conference Board of Canada. How can countries ensure this is not the case?

VV: A willingness to embrace failure is a cultural value, as it is expressed through political, regulatory and legal norms. The old joke is entrepreneurs have to rely on friends, families and fools, because banks often don’t want to talk to you. In Canada, conservative traditions and tough regulations held the country in good stead during the crisis, but in the area of startup capital, you need to learn from some of the more innovative economies. You could look at Israel, Taiwan, parts of the Indian venture capital community in Bangalore, and in China there’s a wonderful community of so-called sea turtles, the Chinese that have gone back from overseas experiences and are now funding a lot of the startup work in Shanghai and Shenzhen.

JT: Does the plodding global recovery suggest that innovation-friendly steps like reducing protectionism or increasing labour mobility are harder to achieve? Aren’t governments everywhere showing they’ll err on the side of national self-interest?

VV: One of the great risks is of a trade war, because when economies turn down it is too tempting to point the finger at the other guy, rather than take difficult decisions at home. I worry, for example, about the ‘blame China brigade,’ which is still quite vocal, especially among politicians. A lot of problems that we have in North America are home-grown, and blaming a rising power like China is very tempting but in fact, most of the solutions to what ails North American economies can be found here.

JT: Are there any other key points of your book that you would stress?

VV: I think there is a real problem with the education systems that are prevalent in OECD countries. Canada is no exception to this argument. They were developed at a time when they were training people for the industrial model of production, so we tend to have one-size-fits-all schools, and the mode of education is fundamentally the ‘tiger mom’ mentality. Look at the debate that started about why China is eating everybody’s lunch, it was discipline over play, deference to authority over dissent, memorization and standardization over creativity. I think that’s exactly the wrong way to think about education. Every increase in value added in Canada will come from the Ideas Economy, and if you’re going to have an educational system that’s suited to that and prepares people, you have to train original thinkers, people who are willing to challenge authority, not follow hierarchy or teach to the test. Memorization, harmonization, standardization; these make an easier job for educational bureaucrats and teachers, but what we need to do is teach our children, and teach ourselves throughout our careers, to keep re-learning how to learn.

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How refreshing it was to open Monday’s Globe and Mail and actually see good news from the Canadian manufacturing heartland. Greg Keenan reported on the expansion of Hitachi’s factory in Guelph, Ont., that makes enormous trucks for mining operations; the plant is doubling output and employment.

Ironically, while the Ontario-made trucks are sold to mining operations across the Americas, Europe and Africa, it doesn’t supply trucks to the biggest mining project in the world, right here in Canada: Alberta’s oil sands. Those super-sized trucks, unfortunately, are imported – from companies such as U.S. heavy equipment maker Caterpillar. It’s a lucrative business: Caterpillar’s Alberta distributor, Finning International Inc., reported record Canadian revenue of almost $3-billion last year (up 30 per cent).

But while Caterpillar makes billions from Canadian resources, the company just closed its only Canadian manufacturing facility: a locomotive factory in London, Ont., that it bought in 2010 from Electro-Motive Canada. Caterpillar is shifting the work to plants in Mexico and right-to-work Indiana. Apart from slashing labour costs, another factor in Caterpillar’s location decisions is the “Buy American” policy, which requires high U.S.-made content in federally funded projects (including rail transport).

Now, adding insult to injury, the United States will actually subsidize sales of Caterpillar’s American-made locomotives back to Canada. The U.S. Export-Import Bank (owned by the U.S. government) is providing preferential financing for the purchase of Caterpillar locomotives for an iron ore mine in Labrador.

The irony is painful. Canada is an increasingly important resource producer. Companies such as Caterpillar, which profit immensely from those resource developments, are under no compulsion to manufacture anything here. Fuelled by oil prices, our loonie trades 25 per cent above its fair value in purchasing power terms – making it all the more expensive to buy Canadian-made machinery for our own mines.

Our government, meanwhile, stands idly by while preferential policies in the U.S. and elsewhere reinforce the exodus of manufacturing jobs from Canada – including jobs in the production of high-tech equipment to extract our own resources.

So the faster we develop our resources, the more equipment we import to do the job. Canada’s trade deficit in specialized construction and mining equipment almost doubled over the past two years, reaching $7.3-billion in 2011. Canada should be a leader in mining equipment and technology, given our direct interest in that line of work. But, instead, we let others handle all that innovation and production. The resulting trade deficit represents a massive leakage of income and jobs, squandering much of the value of our non-renewable resources.

We need a national strategy to maximize Canadian content in Canadian resource developments. Canada, for example, could impose a “Buy Canadian” requirement on future mining projects, similar in spirit to the Buy American rules.

Companies wishing to extract Canadian resources would need to give something back to our national productive capacity: through direct purchases of Canadian-made machinery or inputs, or through “offsets” that met equivalent value-added targets. The federal and provincial governments have ample authority to implement such policies, using their powers over development, environment and transportation approvals as leverage. We’d also need a strategy to expand our own machinery industry at the same time.

Would this kind of strategy violate trade rules? That never stops the Americans from supporting their own industries. But, at any rate, trade agreements have loopholes for energy and environmental issues big enough to drive a Hitachi truck through – but only if governments are willing to use them.

If we limit our national economic ambitions to digging stuff out of the ground, all we’ll ultimately have left is a big hole in the ground. But if we’re thoughtful and pro-active about leveraging our resource wealth into all-round economic and industrial development, we’ll have much more to show after the resources are gone.

Jim Stanford is an economist with the Canadian Auto Workers union, which represents both the workers at the Hitachi factory in Guelph and the closed Caterpillar factory in London.

< http://www.theglobeandmail.com/news/opinions/opinion/how-about-buy-canadian-for-resource-projects/article2368348/ >

EVERY so often someone asks me: “What’s your favorite country, other than your own?”

I’ve always had the same answer: Taiwan. “Taiwan? Why Taiwan?” people ask.

Very simple: Because Taiwan is a barren rock in a typhoon-laden sea with no natural resources to live off of — it even has to import sand and gravel from China for construction — yet it has the fourth-largest financial reserves in the world. Because rather than digging in the ground and mining whatever comes up, Taiwan has mined its 23 million people, their talent, energy and intelligence — men and women. I always tell my friends in Taiwan: “You’re the luckiest people in the world. How did you get so lucky? You have no oil, no iron ore, no forests, no diamonds, no gold, just a few small deposits of coal and natural gas — and because of that you developed the habits and culture of honing your people’s skills, which turns out to be the most valuable and only truly renewable resource in the world today. How did you get so lucky?”

That, at least, was my gut instinct. But now we have proof.

A team from the Organization for Economic Cooperation and Development, or O.E.C.D., has just come out with a fascinating little study mapping the correlation between performance on the Program for International Student Assessment, or PISA, exam — which every two years tests math, science and reading comprehension skills of 15-year-olds in 65 countries — and the total earnings on natural resources as a percentage of G.D.P. for each participating country. In short, how well do your high school kids do on math compared with how much oil you pump or how many diamonds you dig?

The results indicated that there was a “a significant negative relationship between the money countries extract from national resources and the knowledge and skills of their high school population,” said Andreas Schleicher, who oversees the PISA exams for the O.E.C.D. “This is a global pattern that holds across 65 countries that took part in the latest PISA assessment.” Oil and PISA don’t mix. (See the data map at: http://www.oecd.org/dataoecd/43/9/49881940.pdf.)

As the Bible notes, added Schleicher, “Moses arduously led the Jews for 40 years through the desert — just to bring them to the only country in the Middle East that had no oil. But Moses may have gotten it right, after all. Today, Israel has one of the most innovative economies, and its population enjoys a standard of living most of the oil-rich countries in the region are not able to offer.”

So hold the oil, and pass the books. According to Schleicher, in the latest PISA results, students in Singapore, Finland, South Korea, Hong Kong and Japan stand out as having high PISA scores and few natural resources, while Qatar and Kazakhstan stand out as having the highest oil rents and the lowest PISA scores. (Saudi Arabia, Kuwait, Oman, Algeria, Bahrain, Iran and Syria stood out the same way in a similar 2007 Trends in International Mathematics and Science Study, or Timss, test, while, interestingly, students from Lebanon, Jordan and Turkey — also Middle East states with few natural resources — scored better.) Also lagging in recent PISA scores, though, were students in many of the resource-rich countries of Latin America, like Brazil, Mexico and Argentina. Africa was not tested. Canada, Australia and Norway, also countries with high levels of natural resources, still score well on PISA, in large part, argues Schleicher, because all three countries have established deliberate policies of saving and investing these resource rents, and not just consuming them.

Add it all up and the numbers say that if you really want to know how a country is going to do in the 21st century, don’t count its oil reserves or gold mines, count its highly effective teachers, involved parents and committed students. “Today’s learning outcomes at school,” says Schleicher, “are a powerful predictor for the wealth and social outcomes that countries will reap in the long run.”

Economists have long known about “Dutch disease,” which happens when a country becomes so dependent on exporting natural resources that its currency soars in value and, as a result, its domestic manufacturing gets crushed as cheap imports flood in and exports become too expensive. What the PISA team is revealing is a related disease: societies that get addicted to their natural resources seem to develop parents and young people who lose some of the instincts, habits and incentives for doing homework and honing skills.

By, contrast, says Schleicher, “in countries with little in the way of natural resources — Finland, Singapore or Japan — education has strong outcomes and a high status, at least in part because the public at large has understood that the country must live by its knowledge and skills and that these depend on the quality of education. … Every parent and child in these countries knows that skills will decide the life chances of the child and nothing else is going to rescue them, so they build a whole culture and education system around it.”

Or as my Indian-American friend K. R. Sridhar, the founder of the Silicon Valley fuel-cell company Bloom Energy, likes to say, “When you don’t have resources, you become resourceful.”

That’s why the foreign countries with the most companies listed on the Nasdaq are Israel, China/Hong Kong, Taiwan, India, South Korea and Singapore — none of which can live off natural resources.

But there is an important message for the industrialized world in this study, too. In these difficult economic times, it is tempting to buttress our own standards of living today by incurring even greater financial liabilities for the future. To be sure, there is a role for stimulus in a prolonged recession, but “the only sustainable way is to grow our way out by giving more people the knowledge and skills to compete, collaborate and connect in a way that drives our countries forward,” argues Schleicher.

In sum, says Schleicher, “knowledge and skills have become the global currency of 21st-century economies, but there is no central bank that prints this currency. Everyone has to decide on their own how much they will print.” Sure, it’s great to have oil, gas and diamonds; they can buy jobs. But they’ll weaken your society in the long run unless they’re used to build schools and a culture of lifelong learning. “The thing that will keep you moving forward,” says Schleicher, is always “what you bring to the table yourself.”

< http://www.nytimes.com/2012/03/11/opinion/sunday/friedman-pass-the-books-hold-the-oil.html?ref=opinion >