BUSINESS

TRADING FOR SUCCESS

MICHAEL WILSON HAS A TOUGH NEW MANDATE—TO MAKE CANADA’S ECONOMY MORE COMPETITIVE

E. KAYE FULTON May 6 1991
BUSINESS

TRADING FOR SUCCESS

MICHAEL WILSON HAS A TOUGH NEW MANDATE—TO MAKE CANADA’S ECONOMY MORE COMPETITIVE

E. KAYE FULTON May 6 1991

TRADING FOR SUCCESS

BUSINESS

MICHAEL WILSON HAS A TOUGH NEW MANDATE—TO MAKE CANADA’S ECONOMY MORE COMPETITIVE

In the tumultuous summer of 1990, when Canadians were focused on the country’s constitutional crisis and the violence surrounding native demands at Oka, Que., Prime Minister Brian Mulroney and then-Finance Minister Michael Wilson were wrestling with a problem that they regarded as equally important to the future of the country. Since the Tories came to power in 1984, Wilson had persistently badgered Mulroney on one point: his contention that Canada was lagging behind its competitors in the race to secure international markets. Mulroney agreed to make economic competitiveness a government priority, but only when Wilson was free to lead the campaign. The 53-year-old former Bay Street financier did not receive the go-ahead until April 21, when Mulroney appointed him the minister responsible for industry, science and technology, as well as international trade. Last week in Montreal, in his first public appearance since the cabinet shuffle, Wilson began his new job with a dramatic warning. “The world is trading,” he told a conference on North American free trade. “Competition is tough. We did not make it that way, and we cannot wish it away.”

Wilson’s appointment sends a clear signal that the Tories are intent on transforming the country’s economic structure—from the plant gate to strategies for overseas markets. Although many economists say that Canada has fallen dangerously behind other countries in such key areas as productivity and industrial efficiency, they disagree about the specific remedies that are required to address those

shortcomings. As a result, the methods Wilson will employ in an effort to enhance the country’s competitive position are unclear. In the months ahead, he will consider a wide array of domestic options that range from the dismantling of interprovincial trade barriers and agricultural marketing boards to the assertion of a stronger federal voice in the jealously guarded provincial realm of education. Says Judith Maxwell, chairman of the Economic Council of Canada: “It is not a question of pushing buttons or spending some money or changing a tax rate. It involves changing the way people think.” Adds Wilson: “There is not any argument or ideology here. It is reality.”

That task may prove as difficult as the Tories’ other major preoccupation—healing the country’s constitutional divisions. Economists say that Canada has largely failed to make the leap from an economy based mainly on natural resource industries, such as mining and forestry, to one fuelled by the design, engineering and production of sophisticated manufactured goods. Unless that transformation is made, they question whether the country, which generates 30 per cent of its wealth from exports, can maintain the high standard of living that Canadians have come to enjoy. “We don’t just need skills, we need brain skills,” says James Taylor, president of the Canadian Exporters’ Association.

To a large extent, Taylor blames the federal

THE COMPETITORS

TOP INDUSTRIALIZED COUNTRIES, RANKED BY COMPETITIVENESS:

1. JAPAN 2. SWITZERLAND 3. UNITED STATES 4. GERMANY 5. CANADA 6. SWEDEN 7. FINLAND 8. DENMARK 9. NORWAY 10. THE NETHERLANDS

Sources: World Economic Forum, International Management Development Institute

government for the country’s competitive difficulties because Ottawa has raised interest rates in its battle against inflation. That policy has driven up the value of the dollar, making Canadian goods more expensive in foreign markets. Says Taylor: “In his new portfolio, Wilson is going to have to put inflation in its proper perspective.”

Indeed, several studies of Canadian competitiveness suggest that Ottawa has few options other than to change its fiscal and monetary policies. The Economic Council of Canada, for one, recently suggested that Canada’s competitive position would be enhanced by lower interest rates and tighter controls on the budget deficit. Says Maxwell: “We have created a lot of hardship for ourselves by our slow approach to the deficit problem. We should never put ourselves through this kind of wringer again.” And in a sharply critical report, delivered in draft form to Mulroney in November, the National Advisory Board on Science and Technology chided Ottawa for failing to follow up the 1989 Canada-U.S. Free Trade Agreement (FTA) with programs to assist the manufacturing sector. The report said that the poor business climate had undermined the benefits of liberalized trade and increased the danger that Canada’s economy would suffer what it called “de-industrialization.” In addition, the 34-member, federally-appointed advisory board complained that the ability of Canadian manufacturers to compete in the U.S. market was “at an all-time low” because wages in this country tend to be higher, and productivity

levels lower, than in the United States.

International studies of competitiveness also suggest that Canada is falling behind its major trading partners. The World Competitiveness Report, issued by the Swiss-based World Economic Forum and the International Institute for Management Development, ranked Canada fifth among 23 industrialized nations in 1990 in terms of its ability to compete against foreign companies in the sale of goods and services. In the previous year, Canada was in fourth place. Of particular concern to many Canadian analysts, however, was the country’s position in the 10 categories that the report uses to compare overall competitiveness. In all but two of the criteria, the supply of natural resources and the overall financial climate, Canada ranked lower last year than it did in 1989. In the critical category of industrial efficiency, the country placed fourth in 1989, but fell to 13th place in 1990—in part, the forum said, because Canada’s tax rates are higher than those of many of its competitors. Federal corporate taxes average 38 per cent in Canada, compared with 34 per cent in the United States.

Critics and supporters of Wilson’s policies alike acknowledge that the campaign to improve competitiveness is likely to exact a high price. Union officials complain that the push to increase productivity by lowering trade barriers through the FTA—and a proposed follow-up free trade accord with Mexico—will inevitably result in lower wages and reduced benefits for

their workers. As well, Statistics Canada says that during the past two years, the country has lost 277,000 manufacturing jobs. Many of those jobs fell victim to the worldwide economic slowdown—and may return when the economy begins to recover. But others were in lowtech, labor-intensive industries that analysts say wifi disappear permanently amid heightened competition.

For their part, opposition critics say that a combination of cuts in government grants for research and an easing of regulations against foreign takeovers of Canadian companies are stripping the country of tools that it needs to plan its future. Declared James Peterson, the federal Liberal critic for industry: “We cannot expect to be a world leader in our chosen area when decisions regarding research and development, pricing and reinvestment are being increasingly made outside Canada—and when the best jobs are at a foreign head office.”

Indeed, Canada lags far behind other Western countries—and its own previous standards—in spending on research and development. Although Canadian companies increased their spending on research and development in the 1980s, to 0.7 per cent of the gross domestic product in 1989 from 0.6 per cent in 1981, the World Economic Forum ranked Canada only 15th out of 23 industrial nations in terms of corporate spending on R&D.

Another area that will demand Wilson’s attention is education. According to David

Brown, a senior policy analyst for the Toronto-based C. D.

Howe Institute, the high dropout rate among Canadian students is one of the most serious impediments to Canadian competitiveness. “Only 72 per cent of our young adults are still in school at age 17,” Brown said. “That is dramatically lower than the Japanese, lower even than in the United States—high value-added products depend on a skilled labor force.”

As a result, many economists say that Cana-

At the same time, there is near-unanimous agreement that the country’s deficit represents an obstacle to economic growth. Currently, the federal government’s deficit averages $1,720 per person in Canada. By contrast, in the

United States, where President George Bush has also faced criticism for failing to control the deficit, the figure is $1,475. Despite Wilson’s efforts to control government spending, the national debt has grown from $200 billion when the Tories took office in 1984 to $390 billion now. Interest payments on the debt swallow about 27 per cent of federal government expenditures, compared with just 12 per cent two decades ago.

dians will have to revise their traditional view of the role of government. Says Gordon Ritchie, a private Ottawa-based trade consultant who served as Canada’s deputy chief negotiator in the Canada-U.S. free trade talks: “The truth is that Canadians can no longer afford an attitude of habitual reliance on government.” One political leader echoing that view is Preston Manning, the head of the Alberta-based

Reform party of Canada. Last week, Manning called for a royal commission to study ways of imposing user fees for medical services and reducing access to free health care for people who earn high incomes.

Wilson and other government supporters are unapologetic about the need for wrenching economic reforms. In Montreal last week, the new trade minister dismissed fears that plans to extend the current Free Trade Agreement between Canada and the United States to inelude Mexico will further erode the country’s manufacturing base. Instead, he argued, such an agreement will help Canadian companies by

giving them access to wider markets at a time when the global economy is becoming increasingly interconnected. Declared Wilson: “The stakes are nothing less than the future prosperity of Canada from coast to coast.” The question now is whether Canadians are prepared to pay the price of improved competitiveness.

E. KAYE FULTON

BARBARA WICKENS

NANCY WOOD

ANTHONY WILSON-SMITH