Special Report

What's Right-and Wrong-With Canada

Our future is on the line. How can we preserve our social programs without falling behind our competitors?

Mary Janigan August 16 1999
Special Report

What's Right-and Wrong-With Canada

Our future is on the line. How can we preserve our social programs without falling behind our competitors?

Mary Janigan August 16 1999

What's Right-and Wrong-With Canada

Mary Janigan

Special Report

Our future is on the line. How can we preserve our social programs without falling behind our competitors?

In a midlife gamble with her financial future, Diane Jermyn has just opened a tony restaurant and live blues bar in uptown Toronto. To prepare for the big day, the 49-year-old former retailer took wine and bartending courses, secured a $100,000 bank line of credit and impatiently wound her way through a regulatory maze. Now, as she and her husband, Peter, bustle through their first few weeks on the job, she is praying that wellheeled customers will dig into their pocketbooks for fine wines and Cajun treats. “My big concerns are that the economy remains vibrant and that business and property taxes do not overwhelm me,” she says. “I wouldn’t have done this five years ago, not with the economy still struggling. Now, I’m gambling that people are prepared to spend more. I think Canada is ready to party.”

That’s the optimistic view—and there is much statistical evidence to back it up. According to the Royal Bank of Canada, the nation’s standard of living is finally creeping up again after falling for most of the decade. The number of jobs is increasing. Trade is booming. Only five years ago, an international report on competitiveness by the nonprofit World Economic Forum ranked Canada in 16th place, behind such countries as

New Zealand and Austria. This year, the forum put Canada in fifth place among 59 developed and developing nations, assigning high marks for everything from technological sophistication to the state of government finances. “The very fact that Canada is in a surplus position is remarkable,” says former cabinet minister Donald Johnston, now secretary general of the 29-member Organization for Economic Co-operation and Development. “Canada has been one of the stars in the OECD galaxy.”

But there is plenty of bad news, too. The key to continued prosperity, experts say, is to innovate constantly, producing increasingly sophisticated products and services at competitive prices. Living standards also rise when high numbers of the working-age population have jobs. By both measures— output per worker and per capital input and employment—Canada is falling behind, with the result that living standards have dropped alarmingly below those of the United States. “Unless we can get our living standards rising like we had them rising for the first 100 years of our existence, people are going to be very disappointed,” warns McMaster University economist William Scarth. “We feel less in control of our economic destiny.”

Thomas d’Aquino, president of the Ottawa-based Business Council on National Issues, has launched a series of studies to figure out where Canada is lagging in innovation and competitiveness—and what to do about it. “Unless we are able to go that extra mile, the southern pull on our corporations could be enormous,” says dAquino. Although the BCNI is not among them, some corporate leaders have even suggested that Canada should abandon its own dollar and pursue a common North American currency, an idea that has provoked fierce public debate.

What exactly should be done? Below, Madearis examines the areas where the nation has done well—and where improvements must be made if Canada is to remain competitive.

FOREIGN TRADE

Founded in 1969, MacDonald, Dettwiler and Associates Ltd. began to design sophisticated satellite ground stations in the late 1970s. The Vancouver-based firm is now an international star, marketing high-tech products ranging from robotics to data access systems. In the past four years, revenues have tripled. The Australian government, for one, recently asked the firm to design a system that matches up the flight plans of commercial airlines with available runways and weather reports. “The U.S. economy does not have to export to survive,” says vice-president Bernie Clark. “We do.”

In fact, Canadian trade is booming. Between 1989 and

1998, the value of Canadas exports increased 95 per cent after adjusting for inflation. The value of imports grew 76 per cent. The composition of that trade is also evolving away from its traditional resource base. Exports of machinery and equipment and autos now constitute 45 per cent of merchandise trade, up from 28 per cent in 1980.

The flip side is that Canada is increasingly dependent on the economic health and goodwill of a single customer. More than 85 per cent of exports went to the United States last year, compared with 75 per cent in 1991. Worse, Canadian products are in demand largely because the dollar has fallen, not because Canadians have become more productive. The Conference Board of Canada has calculated that the cost of labour to manufacture a given product has risen steadily during the 1990s. One of the main reasons that those products remain competitive in the U.S. market is that the exchange rate of the Canadian dollar has dropped.

According to the federal industry department, our productivity levels trailed those of our major competitor, the United States, by almost 20 per cent last year. In the manufacturing sector, the gap was about 25 per cent, having widened during the past two decades. At the same time, Canadas investment rate in machinery and equipment that

would improve productivity is about 30 per cent below U.S. levels. Sylvia Ostry, research fellow at the University of Toronto’s Centre for International Studies, warns: “Exposed to that great bracing market of the United States,

Canada should have become more competitive and more productive. Instead, we have a serious problem.”

Still, there are success stories. Clark of MacDonald, Dettwiler vehemently disputes any suggestion that his employer coasted during the 1990s. “It was dog-eat-dog out there and price was king,” he says. “We had to find ways to become cheaper, faster and better. And we did.” The pity is that most manufacturers did not follow that lead.

STANDARD OF LIVING AND PRODUCTIVITY

The 1990s have been tough for many Canadians. In most years, real per capita income drifted downward. Finally, last year, real after-tax income rose by almost one per cent. The Royal Bank says incomes will likely rise another quarter of a percentage point this year, but even if that happens Canadians will remain poorer than they were when the decade began. Adjusted for inflation, the average per capita income after taxes was $ 17,292 in 1990. If the economy grows as projected, it will hit $16,538 this year.

Canada is falling behind other nations. Late last year, the OECD calculated 1996 per capita GDP in U.S. dollars for its 29 members, then adjusted those figures to reflect what each dollar could purchase in those countries. Canada was in ninth place, at levels almost 30 per cent lower than second-place United States. (Tiny Luxembourg was first.) U.S. real income per person has been increasing at double the Canadian rate during the 1990s. A recent internal federal report says that Canada’s poor productivity is to blame for about 85 per cent of that gap.

Canada is so far behind that it will be hard to catch up: simply to halve the gap over the next decade, Canada’s productivity would have to grow twice as fast as it has in the past 20 years.

TAXES

Cindy Hart says that she and her family “live frugally, from paycheque to paycheque.” Husband Jeff, 42, is a backhoe operator, relying on seasonal work in the summer and Employment Insurance and odd jobs in the winter. Cindy, also 42, is a homemaker. The family owns a

Productivity

GDP per capita in 1996 (U.S. dollars)

Luxembour United States 27,821 Switzerland 25,402 Norwa Iceland mm. 22,418 Canada 21,529 France 20,533 Sweden 19,258

bungalow with a sprawling vegetable garden on the outskirts of Margaree Centre in Cape Breton. Their income has hovered around $25,000—including about $230 per month in federal Child Tax Benefit payments. But those payments were halved last month when the elder of their two children, Lindsey, turned 18. They don’t pay much income tax, but property taxes are almost $1,100 and the combined federal and provincial sales tax in Nova Scotia is 15 per cent, which applies to both goods and services. “If we had more tax breaks,” says Cindy, “we would use it to help our daughter go to university. She is going to have to get student loans—$10,000 a year—and that does not even cover most personal expenses. Our taxes are simply too high for us.”

There is no mystery about winy Canada’s taxes are as high as they are. In the late 1980s and early 1990s, the federal government raised its tax take and slashed transfers to the provinces in order to balance its books. The deficit is now only a memory, but the federal debt—the unpaid balance of past deficits—stands at $573 billion, and interest payments on it consume 27 cents of every dollar taken in by government. As a share of the overall economy, Canada’s total tax burden hit a record 36.8 per cent in 1996, the most recent year for which figures are available. That’s more than three percentage points lower than the European average, but more than eight percentage points higher than in the United States.

Cindy Hart doesn’t need an economist to tell her how taxes affect her family’s standard of living. Her goals are modest, yet there is rarely any money left after paying for necessities. If she and her husband do manage to put some money aside after helping to pay for their children’s education, they hope to purchase a small trailer. “We have always wanted to go camping,” she says wistfully.

Next to Portugal, we have the lowest percentage of graduates in science, mathematics and engineering in the OECD

JOBS

i § During the first seven months of this year,

I' I the economy generated a net gain of 185,000 I new full-time jobs. This months rate displays I a heartening increase of 39,500 new jobs—

I? and all of them are full-time. Yet the jobless rate now hovers at 7.7 per cent—almost twice as high as in the United States. In part, that’s because people who had given up looking for work have ventured back into the labour force: 65.4 per cent of the working-age population now have jobs or are actively looking for employment, up from 65.1 last year— and 64.8 per cent in 1997. But that is still well below the 1989 “participation rate” of 67.5 per cent. And there are still 1.2 million people out of a labour force of 15.9 million people who are looking for work.

Among those who have paid the price for that disparity is Calgary biologist John Railton, 55, who was laid off last fall from his job at a major environmental consulting firm even though he has a doctorate and has worked on industrial and mining projects throughout Canada, Europe and South America. Since last October, Railton has been living off his severance pay and sporadic private contracts. But with two children in university and a pressing need to save for his retirement, he is seeking a longer-term contract or another permanent position. “I don’t believe anybody owes me anything,” he says. “But it is a shame to have this level of education and demonstrable skills and society doesn’t use me.”

The problem does not appear to be a skills gap. With the exception of areas such as high tech, Canada is turning out enough educated workers to meet the job market’s requirements. Nor is there a major mismatch between the available jobs and the skills that job seekers have to offer. Instead, domestic demand, although picking up, has not yet been strong enough to generate major employment gains.

And many of the people affected by those bleak statistics can become demoralized. “You lose your drive after a couple of rejections,” says Lethbridge resident George Linhart, 48, an engineer specializing in water resources who lost his job in 1996. “Since childhood, we are preprogrammed to get up at 7 a.m. and do something.” To his relief, Linhart has managed to find some contract work. In the dry spells, he takes pleasure in a good book or a scenic hike. But he is still seeking a full-time position. “This is,” he adds, “a big, big shock to the system.”

EDUCATION

Patricia Wickham, 39, completed elementary school in 1975 in her native Barbados—but her family could not afford to send her to high school. When she immigrated in 1982, her dream of further education remained elusive. Unmarried, she had to work hard to support herself—first as a nanny, then as a housekeeper, a factory worker and a mail-room clerk at a bank. Lour years ago, the bank laid her off. A year later, the single mother of a seven-year-old

daughter told her welfare worker that she wanted to go back to school “to make something out of my life because I don’t want to stay on welfare forever.” She graduated with honours from a Montreal high school two months ago and has been accepted into a nursing program at a local college. “Without a high-school diploma, you cannot achieve anything,” she says. Lew Canadians would disagree.

In total, the OECD estimates that Canada devoted seven per cent of its gross domestic product to education in 1995—which puts it among the top spenders. But the

Dropout rates

Percentage of students who drop out without completing secondary school

United States Mexico

results remain mixed. On the plus side, 19 per cent of the labour force now have a university degree—up from 10 per cent in 1976. Despite cutbacks, the Association of Universities and Colleges of Canada calculates that the number of students entering biomedical and computer engineering programs rose more than 60 per cent between 1994 and 1997. In computer science, the increase was more than 30 per cent.

But there are worrisome signs. In 1995 mathematics tests, Canadian elementary school students hovered near the middle of the OECD pack, behind such nations as the Netherlands and Korea. The OECD calculates that 27 per cent of young Canadians drop out of high school—almost 14 times the dropout rate in Finland. (About one-third later return to the classroom to complete their secondary school education.) And even a high-school education does not guarantee results: about 25 per cent of graduates aged 16 to 25 have low literacy skills, according to the 1996 International Adult Literacy Survey. (Graduates are considered to have low literacy skills when they have difficulty in reading and evaluating basic texts such as official forms and timetables.) There are more looming problems at the postsecondary level. Between 1980 and 1998, public sector support rose 20 per cent per student in the United States. In Canada, over the same period, governments pared their spending per student by 30 per cent. Among OECD countries, Canada has the highest percentage of humanities graduates—and with the exception of Portugal, the lowest percentage of graduates in science, mathematics and engineering, areas that will be increasingly vital in the economy of the future. The shortage is already apparent in high tech. “The skills gap in information technology is huge— about 20,000 to 30,000 workers in software alone,” says Janice Schellenberger, senior partner at the Ottawa-based consulting firm Personnel Systems. “Universities are not pumping out enough new grads.”

R and D spending

Total research and development spending as a percentage of GDP

KUSS 2.98% United States 2.55 Finland 2.37 MidSTi! 2.3 United Kingdom 2.05 Canada 1.65 Kím 1.14

INNOVATION

Brock University nestles amid the vineyards of Ontario’s Niagara region, making it a logical choice as the site of a Cool Climate Oenology and Viticulture Institute. Opened in 1996, the institute offers Canadas only undergraduate degree in the science of wine production. Working with wine-industry and farm groups, the institute presents courses in everything from fermentation to tourism. Its research and development, which focuses on such issues as grape quality and soil composition, aims to boost Canadian wines in a tough world market.

The worrisome reality is that Canada does not have enough research programs like Brock’s to assist local industry.

Canada’s total spending on R and D was about 1.7 per cent of GDP in 1995—compared with 2.6 per cent in the United States, 2.4 per cent in Finland and two per cent in the United Kingdom. Grants from federal research institutes to Canadian universities are, on average, about one-third of the size of comparable U.S. grants. “Many of our best people—the innovators—are going off to the United States where the opportunities to do research are better,” complains former University of Waterloo president James Downey.

The federal government offers generous tax breaks for research and development, yet many businesses, especially small and midsized ones, are slow to innovate. Proportionately, in 1995, Canada had the lowest level of private sector spending on Rand D among the Group of Seven industrialized nations. And Canadas high-tech industry is the smallest in the G-7 as a proportion of the overall manufacturing sector.

Canadians have a lot on the line. Surveys show that they want to preserve their cherished social programs, while reducing the tax burden, ensuring good jobs for coming generations and improving the standard of living in comparison with the United States. “Canadians believe that it is dangerous to fall behind the Americans—and they are increasingly beginning to think that we should be able to do as well or better than them,” says former tax lawyer William A. Macdonald, who is now an industry consultant on public policy issues. “This will be the new political batdeground of the next decade—whether we fall behind, keep up or get ahead.” The debate has just begun.

John DeMont

Brenda Branswell

Montreal, Michelle Harries

Chris Wood