Canada’s economy can teach the U.S. a thing or two

Posted on July 13, 2010 in Governance Policy Context

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LATimes.com – Business – The United States will probably take years to recover from the global recession and credit crunch, economists say, but its northern neighbor is back in fine shape.
July 11, 2010.   By Don Lee, Los Angeles Times, Reporting from Washington

Whatever else they’ve thought about their much smaller neighbor to the north, Americans have almost never looked to Canada as a role model.

Indeed, during the long, bitter push to revamp the U.S. healthcare system, opponents repeatedly warned that, if we weren’t careful, we could end up with a medical system like Canada’s.

But on healthcare, as well as on such critical issues as the deficit, unemployment, immigration and prospering in the global economy, Canada seems to be outperforming the United States. And in doing so, it is offering examples of successful strategies that Americans might consider.

While the United States, Japan and much of Europe are struggling with massive fiscal deficits, Canada’s financial house is tidy and secure. Most economists say it will take years for the United States to make up the 8 million-plus jobs lost during the recession, but Canada — despite its historic role as a major supplier for the still-troubled U.S. auto industry — already has recovered essentially all of the jobs it lost.

Meanwhile, as Americans continue their grueling battle over immigration, Canadians have united behind a policy that emphasizes opening the door to tens of thousands of skilled professionals, entrepreneurs and other productive workers who have played an important role in strengthening the Canadian economy.

Granted, Canada’s problem with illegal immigration is smaller, and its economy does not match the scale and dynamic productivity of the world’s largest. But on the most troubling issues of the day, the U.S. is locked in near-paralyzing political and ideological debates, while those same issues are hardly raising eyebrows in Canada.

“We did a lot of things right going into the financial crisis,” said Glen Hodgson, senior vice president at the Conference Board of Canada, a business-membership and research group in Ottawa.

One of the most important, he said: Back in the 1990s, it cleaned up the fiscal mess that most every developed nation is now facing.

Earlier that decade, Canada too was straining from years of excessive government spending that bloated the nation’s total debts, to 70% of annual economic output — a figure the U.S. is projected to approach in two years.

As with Greece, Portugal and Spain this year, Canada’s credit rating was downgraded in the early 1990s, sharply raising its borrowing costs. With its economy suffering and pressure mounting from international investors — Wall Street bankers in particular — Canadian officials slashed spending for social programs and shifted more of the cost burden to provincial governments, which almost everyone in Canada felt.

“I had to share a phone line with another professor. Can you believe it?” recalled Wenran Jiang, who joined the University of Alberta’s political science faculty in 1993. Professors there and elsewhere also took salary cuts.

It would take several years of such tough medicine, but as Canada headed into the new millennium, the government’s total debts were shaved nearly in half, and then whittled down to a little more than 20% of gross domestic product just before the global recession began in 2008 — by far the lowest ratio among major developed countries.

With the economic downturn, Canada pumped up public spending to stimulate growth, as other nations did. Even so, its fiscal shortfall this year is projected at $33 billion, comfortably below the 3%-of-GDP threshold that economists consider a manageable level of debt.

Washington’s deficit this fiscal year is estimated by the Congressional Budget Office at $1.35 trillion — or 9.2% of projected GDP.

The United States’ larger size — its population and economy are roughly 10 times those of Canada — makes direct comparisons difficult. And many Canadians readily acknowledge that American entrepreneurship and productivity are enviably stronger.

But having learned to tighten their belts in the 1990s, Canadians such as Michael Gregory have little sympathy for U.S. consumers who pile debt onto their credit cards and homes.

“We’ve been taught: You don’t buy what you can’t afford,” said Gregory, a senior economist at the Bank of Montreal.

Similarly, Canadian banks have been more conservative than American ones. So they made few subprime loans, and home equity lines are relatively recent offerings in Canada.

Yet their solid if unexciting product lines and financial results mean Canadian firms can now expand lending. This as U.S. banks continue to refrain from extending credit, thus restraining spending, investment and job growth.

Canada’s stricter banking regulations and bankruptcy rules certainly have played a role too, but Gregory attributes part of the difference to cultural factors. When he worked for now-defunct Lehman Bros. Holdings Inc. in New York in the late 1990s, Gregory drove a Ford minivan or a Toyota Camry, while many of his colleagues tooled around in BMWs and other luxury brands.

“It was consumerism. People spent more money, ate out more, bought more stuff,” Gregory said. “I felt awkward.”

Canadian firms weren’t unscathed by the credit debacle and the global economic retreat. And Canada’s strong currency — the loonie is worth just a few cents less than the U.S. dollar — is sure to pinch Canadian exports, much of which head south.

But unlike the United States, where the financial crisis turned into the worst economic disaster since the Great Depression, the hit to Canada was fairly mild.

In the final quarter of last year, Canada’s GDP surged nearly 5%, rising even higher in this year’s first quarter. Growth in the U.S. slowed sharply early this year, heightening fears of a double-dip recession.

“U.S. businesses are certainly looking at lessons learned from Canada,” said Bart van Ark, chief economist at the Conference Board in New York. “In a nutshell, Canada has been very pragmatic in dealing with the economy.”

Its approach to immigration is one example. With one of the highest immigration rates in the world, Canada has been receiving about 250,000 permanent residents annually. About one-fourth of the new arrivals gain entry through family relations, but more than 60% are admitted as “economic immigrants” — that is, skilled workers, entrepreneurs and investors.

In the U.S., it’s basically the reverse: Most of the 1 million-plus permanent residents received annually have been family-sponsored; only about one in seven are admitted on the basis of employment preferences.

That is, Washington emphasizes bringing in family members of immigrants already in the United States. Ottawa put the emphasis on admitting those who can contribute to the economy.

Many Americans, of course, don’t see that as the key difference. The estimated 11 million illegal immigrants in the U.S. are what dominate public discussions of immigration policy.

“The thing about the U.S. is you have a border with Mexico, which Canada doesn’t,” said Jeffrey Reitz, a sociologist and immigration expert at the University of Toronto.

He figures that as many as 300,000 illegal immigrants reside in Canada, not a small number for a country of its size. But there’s no really good estimate, which Reitz views as a reflection of just how little the subject weighs on the nation.

“The big issue is how immigrants, though highly skilled, aren’t getting jobs as easily,” Reitz said.

As for most Canadians’ attitude toward immigration, he said, they seem to know that their country needs new arrivals because of Canada’s small population and a birth rate that is lower than in the U.S.

“The vast majority of Canadians accept that immigration is essential to the economic and demographic future of the country, and that openness is a Canadian value,” said Demetrios Papademetriou, president of the Migration Policy Institute, a nonpartisan think tank in Washington. “I know that sounds terribly crazy to us.”

Even as some economists in the U.S. have pushed for a Canadian-style system that gives points for higher education, work skills and experience, the policy discussion almost always seems to hinge on illegal immigrants.

“That sucks all the oxygen from the debate,” Papademetriou said. As a result, he said, not much policy attention is given to important concerns — increasing visas for skilled workers, enabling people with advanced degrees to obtain residency, adding greater flexibility to the system to better compete in a global economy.

Over the years, Canada in fact has adapted some of the strengths of the U.S. immigration policy, such as the H1B work visa program, to shore up its weaknesses, he said. The H1B program allows employers to bring in foreign workers in specialty occupations on a temporary basis. The U.S., on the other hand, has dealt with its immigration policy like a political hot potato.

“Canada has really outshone the United States,” he said. “That’s a reality.”

< http://www.latimes.com/business/la-fi-econ-canada-20100711,0,1992377.story >

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