BUSINESS

Making Canada work

The search for an industrial strategy

Gillian MacKay December 15 1980
BUSINESS

Making Canada work

The search for an industrial strategy

Gillian MacKay December 15 1980

Making Canada work

BUSINESS

The search for an industrial strategy

Gillian MacKay

A pungent grainy odor seeps in from the dimly lit warehouse. Inside the adjoining coffee room, workers sporting blue caps with red maple leaf emblems are seated at wooden benches, talking and playing cards. A nearby notice board reads: ON THE JOB ON TIME EVERY TIME. It’s an ironic reminder that Friday, Feb. 13, is less than two months away. On that unlucky day Maple Leaf Mills will close its an-

tiquated 75-yearold flour mill in St. Boniface, Man., putting 123 people out of work. Phil Stempnick, a 27year-old millwright with two children and a mortgage, is angry: “Sure they

have a committee to help find jobs, but where will they find them? I know people at Swift who lost their jobs a year ago and still don’t have one.”

Stempnick wants an investigation.

But what would it prove? That $9-anhour Canadian

workers cannot compete with $5-a-day Third World labor, or with grain exports subsidized by the European Economic Community. Canada now exports only 10 per cent of the world’s flour, compared with 30 per cent in 1954. Five mills have closed in the past seven years. Their fate is not a series of isolated incidents, nor does the problem have an easy resolution. It is another sad chapter in the deindustrialization of the country.

The Chryslers and the Massey-Fergusons make the headlines, but deindustrialization does not commonly announce itself with a big bang. More typically, it is a slow erosion, a dying of the old without a corresponding birth of the new. Like most industrialized nations, Canada is facing what Maclean's Panel of Economists member Abraham Rotstein calls a “low-growth tunnel,”

characterized by high inflation and little improvement in demand or productivity. During the panel’s semiannual meeting, Rotstein called it “an economic virus that no one fully understands.” The resulting cry for action is one that Canada’s federal Industry, Trade and Commerce Minister Herb Gray would love to answer—and yet the ambitious plans endorsed by Prime Minister Pierre Trudeau just before his February election victory are now stalled. At stake is nothing less than the industrial future of Canada—in

short, whether and where its citizens will be working 10 or 20 years from now. Says Gray: “I feel we are at a vital crossroads for the Canadian economy. The opportunities of the 1980s are there for us, if we are ready to take advantage of them.”

8 If Canada sufijo fers from a general £ economic disease, 2 it has also manI aged to develop a I peculiar strain of I its own. Some say * the problem began 100 years ago when Sir John A. Mac-

donald succumbed to pressure from central Canadian manufacturers and erected the high tariff barriers that rankle in the western and eastern provinces to this day. Once the walls were up, a continued colonial mentality lured in foreign manufacturers, leaving Canada with a mere 46-per-cent ownership of its own manufacturing, the lowest of any industrialized nation in the world.

Worse, the same protective walls are now starting to come down, hastened by the General Agreement on Tariffs and Trade (GATT) meetings of 1979, to expose an industrial structure that still bears the imprint of a century agofragmented, inefficient and inwardlooking. Employment is concentrated in low-technology industries such as textiles and clothing, footwear, furniture, appliances and food processing, many of which are crumbling under aggressive

import competition from low-wage Third World countries. In the electrical and electronics industry, hard hit by declining production of Canadian-made televisions and radios, employment has fallen to 135,000 in 1980 from 155,000 in 1974. In Ontario, 25,430 jobs were lost because of plant closings in the first nine months of 1980. Lost jobs, in combination with declining productivity and insufficient investment in new plants and machines, is a sure recipe for industrial decline. That decline is best illustrated in the upward surge in the trading deficit for fully manufactured goods to $17 billion in 1979. The loss of share of both domestic and foreign markets, despite the advantage of a declining dollar after 1976, are particularly disturbing at a time when Canada must compete more vigorously in a world of slower growth, increased protectionism, and the possible shrinkage of a key employer, the automobile industry.

The difficulties are enormous, but so are the opportunities for reindustrialization. In the energy sector, investment through the 1980s is conservatively estimated to be $210 billion—triple that of the past 20. Further selective strengths in telecommunications and transportation, for example, can be capitalized on, and the emergence of a petrochemical industry in Alberta, and the beginnings of an ocean industry in the Atlantic provinces, also represent a muchneeded industrial decentralization.

The marble floors of the West Block of the Parliament buildings were wet with slush from the blizzard outdoors. On his way from a caucus meeting to his office last Wednesday morning, Herb Gray slipped and cracked his kneecap, an accident that has landed him in the hospital for a week and in a full-leg cast for five more. Gray’s immobilized condition is an apt, if sorry, metaphor for his position within the cabinet. Dogged, principled and disciplined to patience, Gray has a sense of urgency about his mission. “Depending on the sector, we have anywhere from several months to several years to put the right policies in operation,” he says.

But Gray’s vision is not shared by his colleagues. He is isolated within the cabinet, flanked on one side by the indifferents, chief among them Trudeau, and on the other by free-enterprisers, such as Treasury Board President Donald Johnston and Minister of State for Economic Development Bud Olson, who oppose his nationalism and interventionism. Gray says a “framework document” on industrial strategy should appear by early next year. Certain programs, such as research and development incentives or aid for auto industry restructuring, could be announced sooner. Richard French, a professor of public policy at McGill University and author of How Ottawa Decides, says “the cabinet is very much preoccupied with the constitution and energy. I doubt that there will be any movement on Gray’s major proposals for another 12 to 18 months—and even then he may not get what he wants.”

What Gray has asked for is a massive increase in funds—an additional $1.75 billion over the next four years, on top

of the $1 billion already budgeted—to nurture industries picked by government as high-growth winners—nuclear generation, aerospace, oil and gas equipment, urban transit, electronics and health-care products. Also advocated in a leaked document presented to cabinet in July were export assistance, stricter performance standards for foreign corporations and a phasing out of protective measures for the textile, clothing and footwear industries. Gray’s hopes of directing a Cecil B. De Mille-scale production, however, were given no specific endorsement in the

budget. A Western Development Fund of $4 billion was announced for infrastructural improvements to railroads, parts and pipelines. Although it is not explicitly targeted yet, Gray says there is also “several billion in there for industrial development.” Insiders are skeptical, saying that if this film gets made at all it will be on a very low budget.

Gray’s so-called “winners and losers” slant on industrial policy is modelled after the planned economies of Japan and Western Europe. Of course, the federal government has always picked winners and losers in allocating grants and development funds, but in dribs and drabs rather than broad strokes. Gray argues that the broad strokes are necessary to compete in a world where, for example, Britain puts $500 billion into developing its microelectronics industry compared with Canada’s $50 million. The notion of designated industries has worked best in Japan, where there is a strong consensus among business, government and labor combined with a killer instinct for weak or dying industries. A similar strategy in Britain, on the other hand, where there is neither such consensus nor ruthlessness, has tended to produce what some call “lemon socialism”—leading to such disasters as British Steel and British Leyland.

The problem of picking is compounded by a failure to let the losers go. Says panelist and Montreal economist Marie-Josée Drouin: “Everyone wants growth without pain and that is not possible.” In Canada, industrial support has often made more political than economic sense as seen in the Quebec-based textile industry (see box), or the willingness to bail out Chrysler and Massey. Now that loss-ridden Sydney Steel in Nova Scotia is pleading for further subsidies of $350 million over the next 10 years, in addition to forgiveness of $300 million in governmentbacked loans, it will be hard to say no. The federal government has shown some aptitude for picking winners. Canadair and de Havilland are two examples (see box, page 40). Extreme intervention to nurture a homegrown satellite industry under a state-owned monopoly, Telesat, has also fostered weak money-losing companies like Spar Aerospace. Despite such flaws, if Gray’s theory of the need for intervention is correct, perhaps it is better to have winners and propped-up losers, than no winners at all.

The favorite winners in industrialized countries today are high-technology firms with their fast growth, zero pollution and employment of highly skilled people. High-tech buffs argue that low-cost imports and technological advances will gradually kill off much of Canada’s low-technology industry, which in 1975 accounted for 40 per cent of employment, compared with less than 10 per cent for high technology. Says Charles Millar, operations vicepresident of Northern Telecom: “We are crazy to sit while jobs are disappearing. Unless we do something, we will be taking in one another’s washing for a living.”

Canada’s spending on research and development (R&D) has dropped from a peak of 1.28 per cent of Gross National Product in 1967 to .9 per cent, a performance “slightly better than that of Egypt,” says John Shepherd, a former vice-chairman of the Science Council of Canada. The poor performance is commonly blamed on the branch plant structure, although this could be changing (see box page 43). Government support for research is only 11 per cent in Canada, compared with 25 per cent in France and 37 per cent in the United States. Gray therefore favors a massive boost for R&D in the form of direct grants and loans, modelled after the highly successful Defence Industries Productivity program. Business generally prefers the less bureaucratic approach of tax incentives.

Special support of a different kind may be needed for fledgling ventures. Michael Cowpland, president of Mitel Corp., an Ottawa telecommunications firm, says tax incentives similar to those offered to film investors would do wonders for high-tech entrepreneurs. “Some drive and imagination could really put Canada on the map. Otherwise it will remain a bit of a backwater.” Montreal economist and Maclean's panelist Bernard Bonin cautions against a faddish pursuit of high technology in industries where Canada has no comparative advantage, arguing rather that we should build on resource strengths—for example, doing more fish processing, building more mining machinery and developing cold-climate technology.

There are, however, technological developments that Canada cannot afford to ignore. One is the micro-processor, the tiny electronic brain that is revolutionizing everything from fish trawlers to office equipment. Although chips could wipe out entire industries and cut employment in clerical jobs, Canada has only one commercial producer, Mitel, and has taken mere “baby steps” to support the industry, says Ontario Minister of Industry and Tourism Larry Grossman. “The technological revolution will happen. It’s really a question of where we will be—out in front or dragging behind.”

Inadequate R&D spending goes hand in hand with Canada’s poor export performance of fully manufactured goods. Technological superiority will play an increased role in capturing the world markets that domestic manufacturers will need to survive.

One such company that has made the switch is Kitchener-based Electrohome Limited, which almost folded in the mid-1970s when Far Eastern imports toppled its domestic radio and television business. Drawing on its knowledge of television sets, Electrohome developed video display systems for airports, and is one of the suppliers to Telidon, the federally developed twoway video system. Exports of consumer products have grown from three per cent of sales in 1975 to 20 per cent in 1980. Says Chairman John Pollock: “Those companies that aren’t trying to export are courting disaster.”

The frequent complaint that government does not do enough to help was echoed in the 1979 Hatch Commission report on exports. Canada ranked near the bottom in terms of support given to exports by industrialized countries. As a result of that commission’s recommendations, a federal export review committee is now being formed. Says Paul Soubry, president of Winnipegbased Versatile Manufacturing, a successful exporter of four-wheel-drive tractors: “We are on the way to having an export policy.”

But before Canada can marshal its forces in world markets, it must mend the divisions at home. Examples of the balkanization of the economy—where each province pursues a beggar-thyneighbor policy—abound: each province has explicit or implicit preferential procurement policies for its own goods; Nova Scotia and Newfoundland enact preferential hiring policies in oil and gas; Quebec refuses to allow an out-ofprovince firm to purchase Credit Foncier; Alberta tries to reduce imports from Ontario. Some progress was made last summer when provinces agreed to form a common market in medical and health care supplies. The aim is to find sources for as much as possible within the country in an attempt to reduce the

70-per-cent share of imports in a $1.2billion annual market. But Larry Grossman’s approaches this year to the Alberta government on behalf of Ontario manufacturers for a greater share of supplying the oil and gas industry has been sharply rebuffed. Says Alberta Minister of Economic Development Hugh Planche: “For him to come out here and announce his big ideas is. . . . We’re already doing all the things he thinks magical. We have an open market.”

Balkanization has arisen partly from a vacuum at the level of federal industrial policy. The heightened antagonism between Ottawa and the West over energy policy makes it imperative that what may be Canada’s first strong industrial strategy does not divide the country even further. Gray argues that his proposed industrial benefits legislation will ensure maximum Canadian participation in the energy boom and will reward all regions. But much of the Gray medicine is aimed at curing dein-

dustrialization, which is primarily a central Canadian disease. Even talk of a common market smacks to westerners of the hated century-old tariff system. Gray retorts that “there is no benefit to the West, in spite of all its wealth, if Ontario and Quebec decline.” Nice logic from the minister from Windsor, Ont., but it has not penetrated the West. One B.C. trade official summed up the mood when he said: “Look, people in the heartland, are the ones who are going to make the big adjustments—they’re going to have to work damn hard just to stay where they are.” Sir John A.’s protectionist ghost still walks. If there was ever a time to lay him to rest, it is now.

With files from Thomas Hopkins in Vancouver, Suzanne Zwarun in Calgary, Peter Carlyle-Gordge in Winnipeg and Sue Calhoun in Halifax.