BUSINESS WATCH

Sliding down the path to Third World status

If the executives running Canadian steel mills were Japanese, they would have committed hara-kiri long ago

Peter C. Newman February 25 1991
BUSINESS WATCH

Sliding down the path to Third World status

If the executives running Canadian steel mills were Japanese, they would have committed hara-kiri long ago

Peter C. Newman February 25 1991

Sliding down the path to Third World status

If the executives running Canadian steel mills were Japanese, they would have committed hara-kiri long ago

BUSINESS WATCH

PETER C. NEWMAN

As a member of the G7, Canada still qualifies as one of the world’s leading industrial states. But the reality is disturbingly different: the accelerating pace of deindustrialization which the Canadian economy has suffered in the past five years threatens to turn us into a Third World country by the end of this decade.

Unless current trends are reversed, the number of Canadian factory jobs will follow the downward curve of agriculture, so that by 1999, fewer than 10 per cent of working Canadians will be employed in manufacturing. The Science Council of Japan dubbed Canada a Third World country with an artificially high standard of living back in 1986, and every available indicator since has continued to point downward.

The chronic mismanagement of the economy by free-spending politicians has placed what remains of our once-powerful manufacturing sector in jeopardy. (Incidentally, fellow columnist Diane Francis is off base in her oftenrepeated accusation that Ottawa politicians “spend money like drunken sailors.” It’s not true. Sailors spend their own money.)

Manufacturing’s other agency of destruction has been the Bank of Canada, whose governor, John Crow, obsessed with killing inflation even if it means killing the economy, has made the cure far worse than the disease. His misguided monetarism and currency juggling to protect the Canadian dollar’s artificially high exchange rate have all but killed the manufacturing sector’s ability to compete.

The prime example of the damage inflicted by these policies was last week’s report that Stelco Inc., our second-largest steel producer, lost $197 million in 1990, compared with a $94-million profit in 1989. The loss would have been $350 million, except for a $ 145-million tax recovery, and this year’s prospects are even bleaker. Says investment analyst David McCracken at Sanwa McCarthy Securities Ltd. in Toronto: “People are under the opinion that the Steel Co. of Canada is big and it can’t

go under. But those guys are on the road to disaster.” The steel firm has never recovered from the departure of Peter Gordon as chief executive officer in 1984. Its management since has been mediocre at best, investing heavily in such dubious outfits as Jannock Steel Fabricating and Continuous Colour Coat Ltd., both of which have turned sour, causing $46 million in pretax losses.

Still, that’s better than Stelco’s main competitor, Dofasco Inc., which last week announced that it lost $679.2 million in 1990, largely because it had to write off the entire $713-million investment in Algoma Steel Corp. it made only 2Vt years ago. The rocket scientists who made that investment decision are still presiding over what’s left of the company’s treasury. If the executives running our steel mills were Japanese, they would have committed hara-kiri long ago.

The steel operation at Cape Breton has lived off federal and Nova Scotia subventions and bailouts for generations; Stelco and Dofasco will no doubt start lobbying for federal rescue packages any day now. But even if Ottawa had the money, which it doesn’t, it couldn’t subsidize the steel mills under terms of the Free Trade Agreement.

So, most of our steel mills—which form the country’s essential industrial base—are caught in a trap. Free trade was supposed to grant them access to the American market, which Ottawa’s high exchange rates promptly cut off. At the same time, high domestic interest rates have reduced capital spending in Canada to the lowest level in a decade, decimating their domestic markets.

Laurent Thibault, who resigned last week as president of the Canadian Manufacturers’ Association, estimated that the current recession will continue into the summer and cost $30 billion in lost manufacturing output, with at least 180,000 jobs eliminated, half of them permanently. He pointed out that Canadian firms have invested $52 billion in new plants and equipment to take advantage of free trade with the United States, only to have the federal government’s policies defeat their efforts. “The high interest rates needed to attract foreign money into Canada to finance the deficit,” he complained, “mean that Canadian industry is paying one of the highest real costs of capital in the world.” Andrew Jackson of the Canadian Labour Congress calculates that 152,000 Canadians working in the manufacturing sector lost their jobs between June, 1989, and June, 1990.

When Canadian manufacturing does succeed, it’s almost always despite government policy, not because of it. Laurent Beaudoin, whose Bombardier Inc. is probably this country’s most successful manufacturer, has bitterly attacked Ottawa’s high dollar and “unacceptable” interest rates. All of Bombardier’s recent expansion has taken place outside Canada. Of the company’s labor force of 25,000, only 9,400 are in this country.

Apart from harmful federal policies, the trouble with our manufacturing sector is the lack of basic research. In a 1989 National Forum of Science and Technology Advisory Councils comparative ranking of research expenditure categories by the eight most industrialized countries, Canada ranks lowest in five classifications, and second lowest in three others. (Only in the number of advanced degrees granted by universities and the amount of government-performed research do we attain even a middle ranking.)

Canada’s private sector finances only 42 per cent of research-and-development expenditures, compared with 61 per cent in Germany and 71 per cent in Japan. All sectors of the Canadian economy, including universities, spent 1.32 per cent of our gross domestic product on R&D in 1988, the last year for which figures are available—that’s less than half as much as most of Canada’s industrial competitors. As one of the forum members put it: “Canada is exporting yesterday’s goods and importing tomorrow’s products.”

While the country’s attention is rivetted on the impossible dream of trying to keep Quebec happy, the country’s industrial base is being eroded beyond redemption. Canada is well on the way to becoming an economic backwater. It will be the first time in history any nation has evolved backwards—from being a member of the First World to joining the Third.