BUSINESS

GOVERNMENTS AS SAVIORS

AS THE RECESSION DEEPENS, VOTERS TURN TO CENTRAL GOVERNMENTS FOR NEW ECONOMIC DIRECTION

DEIRDRE McMURDY December 7 1992
BUSINESS

GOVERNMENTS AS SAVIORS

AS THE RECESSION DEEPENS, VOTERS TURN TO CENTRAL GOVERNMENTS FOR NEW ECONOMIC DIRECTION

DEIRDRE McMURDY December 7 1992

GOVERNMENTS AS SAVIORS

BUSINESS

AS THE RECESSION DEEPENS, VOTERS TURN TO CENTRAL GOVERNMENTS FOR NEW ECONOMIC DIRECTION

DEIRDRE McMURDY

Marcel Tremblay’s experience of knocking around in the Canadian oilfields finally seems to be paying off. The 51-year-old veteran Calgary executive, like most others in his industry, is used to operating a company in a climate of extreme volatility, where an event halfway around the world can cause wild swings in crude-oil prices on commodity markets. But years of being buffeted by global forces has prepared businesses like Tremblay’s Enerplus Energy Services Ltd. for the current period of acute domestic economic turbulence. To limit the potentially disastrous impact of abruptly soaring interest rates or a depressed dollar, Tremblay says that he, and a growing number of his oilfield colleagues, have now adopted sophisticated new “financial engineering” products. Those tools, which foreign-owned banks are aggressively marketing, allow oil companies to minimize operating risks by fixing interest rates, currency or crude-oil prices through complex manoeuvres called hedges and swaps. Said Tremblay: “We have learned the hard way how important it is to sidestep uncertainty. This time around, we’re ready for it.”

But most Canadians, facing a weakened dollar that fell to 77.73 cents (U.S.) last week, and prime lending rates that soared to their two-year high of 9.75 per cent, are less optimistic.

In fact, many businesses find that long-term

planning during the current uncertainty is extremely difficult. Said Richard Woodward, a professor of finance at the University of Calgary: “Such volatility is incredibly corrosive. Businesses have problems making plans, and people generally feel that national government has been disempowered and that things are sliding out of control.” Indeed, against a backdrop of domestic disarray, chaos over global trade issues and the fragile future of the European economic union, the role of governments in directing national economies may be about to change dramatically.

After a decade of decentralization, deregulation and free-market rhetoric in Britain, the United States and Canada, some experts say that there is a growing need for strong central government and for government intervention in the economy. Recent polling by Maclean’s strongly supports the fact that such a trend is becoming an entrenched pattern among Canadian voters. Said Robert Both well, an economic historian based at the University of Toronto: “People are fed up with the policy of drift and the subjection to untrammeled market forces. Governments are slowly starting to realize that they cannot just abandon the responsibility of providing direction and stability.”

That was underscored last week when the federal government, which began deregulating the airline industry in 1985, threatened to “recalibrate” it again if the two feuding domestic air carriers do not voluntarily adjust their overcapacity. Just one day before Transport Minister Jean Corbeil issued that warning, the Conservative cabinet finally approved a $50million cash infusion to keep faltering Canadian Airlines International Ltd. of Calgary temporarily aloft. The government’s grudging intervention in the domestic airline sector, however, was a double blow to its already chipped credibility: since they were elected to office in ■■■■ 1984, the Conserva-

tives have repeatedly denounced both regulation and government bailouts of troubled industries. Said Barry Prentice, acting director of the transportation institute at the University of Manitoba: “The underlying assumption was always that deregulation promotes efficiency by letting the market find its own level. But the government didn’t seem to take into account that you buy efficiency at the price of stability.”

The rekindling of popular enthusiasm for an active central government is clearly demon-

strated in the recent election of Democrat Bill Clinton as President of the United States. The defeat of the incumbent Republican, George Bush, also marked the end of support for the concept of “new federalism,” which Bush’s predecessor, Ronald Reagan, first put forward. While Reagan and Bush wanted to allocate greater authority to the individual states, the equivalent of political deregulation, recessionbattered Americans were increasingly interested in a strong federal government with take-charge economic policies.

In fact, Clinton’s stated desire to spur economic growth and create jobs through increased government spending and higher taxes has had significant appeal both at home and abroad. The strong performance of the greenback on global markets since the election reflects the optimism of international investors, who are eagerly directing their investment capital to the United States, despite its relatively low interest rates.

At the same time, the Canadian rejection of the Charlottetown constitutional accord in the Oct. 26 referendum marked a similar defeat for the concept of political decentralization. Under that proposed agreement, the individual provinces would have received significantly more authority over fiscal and social programs. As well, noted Bothwell, the government-funded

Citizen’s Forum on Canada’s Future, headed by Keith Spicer, reported in 1991 that Canadians across the country clearly wanted a stronger national government rather than greater regional fragmentation.

Where Ottawa does play a pronounced role, however, it usually attracts sharp criticism. The widespread sense that post-referendum Canada is now stalled in an economic and political deadlock—a message that was clearly reinforced by the weak performance of the dollar on international markets—was emphasized last week when the United States reported surprisingly strong growth of 3.9 per cent for the third quarter of 1992. Despite the fact that an upturn in the U.S. economy has historically been beneficial for Canada, many economists remain unconvinced. Instead, they said that flawed economic policies were impeding Canada’s participation.

The fierce fight waged by Bank of Canada governor John Crow to control inflation by supporting the besieged Canadian dollar with higher interest rates is having a destructive effect, several economists argue. Said Ernest Stokes, managing director of the economic forecasting firm the WEFA Group in Toronto: “As long as Ottawa cuts its spending and keeps interest rates high during an economic downturn, it won’t matter to Canada what happens

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in the United States.” Michael McCracken, president of Informetrica Ltd. in Ottawa, added that because “policy management in Canada is so much worse” than in the United States, the recession will be “much deeper and longer.” Declared McCracken: “The obsession with inflation is shared only by Canada and Germany. There is no sign to date that sanity will prevail.”

Although a lower Canadian dollar is expected to boost export volumes in the near term as well as lowering imports, experts caution that high interest rates are damaging over the long term. And while some optimistic projections, including those of the Paris-based Organization for Economic Co-operation and Development, show a three-per-cent average growth figure for Canada by 1993, high interest rates could easily undermine any recovery.

The trend to endorse strong central governments with clear national agendas may be causing a political and economic realignment in North America. In Europe, however, it is clearly threatening the survival of the nascent economic union. This was the year that Europe was supposed to take its final steps towards a single market with a shared currency. Instead, it has turned out to be a year riddled with bitter nationalistic recriminations and with failed attempts to achieve a closer union. Last week, the European Community finally acknowledged that it will miss its own January, 1993, deadline for effectively eliminating all internal borders within the group, a fundamental common-market objective.

Next week’s economic summit meeting of EC leaders in Edinburgh, which coincides with the one-year anniversary of their signature of the Maastricht Treaty, is unlikely to resolve the heightened tensions among members or their growing list of grievances. The past year has been marked by increasingly intense disputes and outbursts of frustration among EC members, many of them focused on the intractable Helmut Schlesinger, president of the German central bank, who has repeatedly rebuffed requests to ease an anti-inflationary domestic monetary policy. More recently, however, it is the violent French reaction against an agricultural agreement concluded under the General Agreement on Tariffs and Trade (GATT) that has driven member countries apart. “A transcending supergovernment is great in theory,” noted U of T’s Bothwell, “but in practice, it doesn’t work when it’s time to implement decisions.”

Although the French are striving to keep the franc pegged to the German mark under the EC’s exchange rate mechanism (ERM), domestic concerns clearly dominate that country’s current agenda. French farmers have vocally and physically expressed their outrage against the recent GATT agreement that proposes a 21-per-cent cut in subsidized EC farm exports over the next six years.

The government has supported their opposition,

threatening to veto the accord, in part because it faces crucial national elections in March. Under French electoral rules, which date back to its agrarian past, rural voters still elect more government seats than urban ones. Meanwhile, protesters filling the streets of Paris have burned stacks of wheat, the American and British flags and threatened to storm parliament.

The problem of dealing with national sovereignty in the context of a supranational EC government has also emerged in disagreements over currency issues. Although Britain was exempt from adopting the proposed joint European Monetary Unit when it signed the Maastricht Treaty, it did agree to fix the value of sterling against the mark under the ERM. But since September, when Britain succumbed to interestrate pressure and devalued its currency, abandoning the ERM, several other countries have followed its example and floated their currency. Italy, Finland and Sweden no longer peg their currencies to the ERM, while Spain and Portugal, although remaining in the exchange-rate structure, recently devalued their currencies by six per cent to ease interest-rate pressure on their domestic economies.

Among the eight nations that still adhere to the ERM, four have recently been forced to significantly increase their interest rates. Domestically, that action has been extremely unpopular. As a result of those unforeseen complications, the EC now seems to be devolving rapidly into a two-tier system, with pegged and floating exchange rates, rather than the single, united group envisioned just a year ago. Noted Andrew Spence, an international economist with the Royal Bank of Canada: “A two-speed Europe is already a reality because of all the fluctuation within the ERM.”

But even economies where strong central authorities have traditionally dictated clear national agendas have been vulnerable to the gathering global force of the economic recession. Major German companies, including Daimler-Benz and BASF, have reported sharply lower thirdquarter earnings, while unemployment levels and sluggish overall economic growth have become issues of increasing concern. After an

average annual growth rate of four per cent in real gross national product for the past two years, Germany is now expected to grow by about one per cent in 1992 and even less in 1993.

As well, a similar economic contraction is expected to take place in Japan, which also has a tradition of active government involvement, over the next year. There, despite recent production cuts, inventories are mounting as both domestic and export sales fall off sharply. Already, the Japanese manufacturing sector has cut spending by 11 per cent this year, including such previously sacrosanct areas as research and technology. Clearly, there are some economic problems that no amount of financial—or political—engineering can solve quickly.

DEIRDRE McMURDY