COVER

The economy in crisis

Ian Anderson May 3 1982
COVER

The economy in crisis

Ian Anderson May 3 1982

The economy in crisis

COVER

Ian Anderson

The only limit seemed to be the sky above the 49th parallel when the Royal Commission on Canada’s Economic Prospects issued its landmark report 25 years ago. Gazing bright-eyed ahead to 1982, the commission told Canadians that they had “every reason to look forward with optimism and confidence to continued economic development and to a rising standard of living.”

In 1957, it was “not an inhuman distance” to peer 25 years into the future. But Canada’s decision-makers seem as uncertain about what will happen next week as do the country’s 1,069,000 unemployed. “Frankly, the future is bloody confused,” concludes Thomas Maxwell, chief economist for the Conference Board of Canada. Mike Rygus, for 21 years the Canadian director of the International Association of Machinists and Aerospace Workers, goes even further: “I’ve never seen a time when so much was in the offing and there was so little awareness at all levels— all levels.”

As Pierre Trudeau gathered his cabinet together at a Meach Lake retreat

last Sunday, the economy seemed in a crisis on all fronts. The citizens of a nation whose average income in 1971 ranked third behind Sweden and the United States have seen their earnings drop to 10th place in the world. At the same time, inflation hovers stubbornly at 11.6 per cent, interest rates seem frozen at 15.32 per cent, and productivity remains the lowest in the Western

Automation in the lumber industry and on the auto assembly line has merely meant fewer jobs available

world. Even those Canadians who are waiting for a budget compromise from President Ronald Reagan to spark a U.S. recovery seem destined to be disappointed. Normally, a recovery in the United States would signal an upturn in Canada. But this time a growing number of economists, such as Carl Beigie, president of the C.D. Howe Institute, fear that Canadians will not be rescued by their southern neighbors. In their

view, the current recession is only camouflaging much more serious, deeprooted, made-in-Canada problems. Significantly, while Reagan’s stringent monetarist policies have indeed worked to lower U.S. inflation and wage settlements (story, page 40), Canada has felt all the pain and none of the cure.

Still more alarming, it is becoming increasingly clear that in the vacuum of political options, the Canadian economy is simply not poised to take advantage of the hoped-for recovery when it finally comes.

The reasons for the debacle are as numerous as they are discouraging. For one thing, as politicians in Canada dither, a new economic order is evolving, based on new technologies with which Canadians are too poorly equipped to compete. Indeed, the Economic Council of Canada has begun studying Canada as a less-developed nation, not as an industrial power. The inescapable conclusion being drawn is that Canadians who have already seen cuts in health and education spending face even more difficult times.

Now, the solutions would have to be

radical, and everything from wage and price controls through high tariff walls, to a free-trade zone with the United States are being considered, if not openly discussed. But there is also every indication that Canadians are still unwilling—or perhaps unable—to even discuss making sacrifices. Little wonder that as Trudeau and his Liberals looked back at the 1970s—when so much might have been accomplished—some referred to those years as the “lost decade.”

The current national lament is: where did Canadians go wrong? In 1957, the royal commission forecast a doubling of national resource exports, and the country easily proved it right. Manufacturing continued to rise with a postwar boom. Indeed, in the years leading up to 1973, Canada’s productivity grew nine times faster than in the years since. By the late 1960s, Canadians enjoyed a healthy, secure economic position.

Since then, there has been an almost steady erosion in all sectors. The cornucopia is shrinking. Now, the mining and forest industries hope simply to hang on to their shrunken shares of the world market—and manufacturing is on its knees. While Canada once controlled 80 per

cent of the world nickel market, its share is now less than one-third. Last year’s production of copper, zinc and nickel was actually lower than in 1977— partly because of the recession, partly because of new mines in the Third World. Over the same period, Canada’s

share of world trade in manufactured goods fell to 3.7 per cent from 4.2 per cent. That prompted the Senate committee on foreign affairs to pronounce last March, “Canada appears to be in danger of being pushed out of world markets in manufactured goods.”

But perhaps the biggest blow to Ca-

nadian self-esteem came with the collapse of the auto industry which has seen all three giant motor companies lay off indefinitely a total of 20,000 workers. At the same time that a fully modernized GM plant in Oshawa was laying off 1,750 workers, Japanese vehicle imports topped GM’s Canadian production for the first time ever. And suddenly people started to talk about automobiles and textiles as “sunset” industries. It was like a bad dream. The industry that had come to define industrial superiority now became the symbol of a weakling.

Even as Canada slipped behind the progress of other nations, new Star Wars technologies were invading the workplace. While Canadian machinery is now older on average than it was 10 years ago, robots are becoming an everyday feature in Japanese factories. The more advanced Canadian companies feel compelled to follow, regardless of the impact on employment. “If you don’t achieve world productivity in an era of free trade, then you’re not going to have any employment,” says Alton Cartwright, chairman of Canadian General Electric. But even the general belief that Canada is a world leader in high technology is a myth. Larkin Kerwin, president of the National Research Council, says that such companies as Mitel, Spar Aerospace and Northern

Telecom are world leaders in their fields, but he estimates that a mere four per cent of Canadian companies could be considered “technologically advanced.” “Countries like Yugoslavia and Belgium are probably around our level,” he says.

At the same time that the economy was plummeting, Canadians watched the spectacle of political, industrial and labor leaders dancing to their own tunes. Neither realism nor consistency typified economic planning in the 1970s. The government seemed to lose opportunities to prepare for the current crisis. The wage and price controls period (1975 to 1977) was supposed to provide a “breathing space” for calm deliberation. In the major policy paper of 1976, The Way Ahead, the government promised that the controls period would be used “to reflect on the economic directions that would be appropriate after controls are removed.”

That was hardly the case. In 1977, an advisory council of “between 30 and 50” representatives from business and labor was officially proposed—and then forgotten. Not only that, but over the past 10 years, Ottawa made four separate attempts to evolve what was loosely termed an “industrial strategy.” All four efforts were deemed inappropriate—economically and politically— and scrapped.

Even basic management seemed to go untended in the lost decade. When he became employment and immigration minister in 1980, Lloyd Axworthy discovered that his department had not conducted a survey of job and skill requirements in 15 years. “We were so wound up in other debates—national unity, resources jurisdiction, lan-

guage—that we didn’t look at some of the more substantial issues,” Axworthy says.

As a result, the substantial issues are still outstanding. As world economies are being rebuilt around microelectronics technology, not one of the 36 federal ministers has science or engineering training. But there are 19 lawyers in the cabinet, perhaps a fitting ratio in a country that graduates two lawyers for every electronics engineer. At the same time, the targets for national spending on research have been pushed back two years to 1985.

But it is just such investment that holds the key to increasing exports and regaining a toehold for Canadian industry in a home market that last year spent an incredible $18 billion more for imported manufactured products

than for Canadian-pro-

duced ones. Canadian industry, says Kerwin, is “in danger of being buried.” The national spending target for research—1.5 per cent of the gross national product—is indeed modest. For their part, university administrators have warned Ottawa that a decline in PhD students through the 1970s may imperil the research targets more than a lack of money. That is not all. An even more intractable problem faces politicians who, because of lack of leadership, now find that when they need the goodwill of their voters to bring about tough changes they have the least support. In a spring poll by Decima Re-

search of Toronto, eight out of 10 Canadians said they were dissatisfied with the direction the country is taking. “There is a kind of me-first economics developing in the absence of a clear consensus on how to solve long-term problems,” says Kristin Shannon, chairman of TransCanada Social Policy Research Ltd.

Against that backdrop of distrust, it is not surprising that any proposed solutions quickly produce disagreement. So far the option of arbitrarily ignoring American monetary policies and simply lowering interest rates has not found favor in government circles. The greatest fear in that respect is that lower rates would force a devaluation of the dollar, and this, in turn, would result in higher import costs which might add to inflation. Another radical idea—one

proposed last month by the Senate foreign affairs committee—is to abolish all tariffs between Canada and the United States in order to form a kind of continental economy. Opponents argue that Canada’s already weakened industry would be wiped out by unrestrained American competition.

At the opposite end of the debate, economist Beigie suggests that the ultimate solution might be to rebuild the tariff walls Sir John A. Macdonald first erected around the infant nation in;

1879. This notion is supported by University of Manitoba economist Paul Phillips. “Pm not sure it does mean a lower standard of living, particularly in the long run,” he says. “We have to support the people unemployed anyway. Perhaps it would be a fair method of redistribution to pay high prices.”

But for a trading nation such as Canada, development within a fully protected economy would be even more difficult. In its trade with Japan, for instance, Canada does not hold four aces.

Japan’s desire for Canadian coal is cooling as oil prices fall, despite a policy designed to dilute Tokyo’s reliance on Australian supplies. Japan has already tried to delay development of an Alberta coal project, and even the massive development of coal reserves in northeastern British Columbia offers small leverage. “Only the Japanese can make orders large enough to justify original development,” remarks B.C. coal co-ordinator Ron Basford. In short, Canada needs Japan more than Japan needs Canada.

But the option that is probably being considered most seriously and that Finance Minister Allan MacEachen reportedly broached with business leaders last week in Toronto is the contentious issue of wage and price controls. The idea that wages should be lowered in order to improve competi-

tiveness and productivity goes to the very core of what is perceived to be the country’s industrial weakness. To stay competitive with the United States, wage settlements in Canada would have to be pegged around eight per cent—or well below the inflation rate of 11.6 per cent. That might improve the trade balance with Japan. Currently, because of lower wages and higher productivity, the Japanese can land automobiles in Vancouver at prices from $1,500 to $2,000 cheaper than they can be produced in Windsor, or Oshawa, Ont.

The dilemma is razorsharp. “With falling productivity the only noninflationary wage increase is a wage decrease,” says American economist Lester Thurow. But Ottawa justifiably fears the social eruption that would greet any such enforced cut in living standards. The alternative may be worse if Canada’s competitive position weakens any further. The president of the Canadian Export Association, Thomas Burns, warns of “sharply increased international competition” through the 1980s as industrialized nations try to put their 30 million unemployed back to work. “Rates of growth in the industrialized countries are much lower that anyone would like to see,” declares Burns. “The solution for most countries is to supplement their economies with export-led growth.” As Trade Minister Ed Lumley discovered, it is a singularly bad time to negotiate reductions

in Japanese car exports.

But even the idea of trying to be competitive seems to be up for question. “I would argue that you can’t compete with the Japanese,” says Sam Gindin, the Canadian research director for the UAW. That is a chilling thought for the 20,000 Canadian autoworkers on indefinite layoff. “We would be pessimistic about most of those workers ever getting back,” Gindin adds. As a result, the UAW agrees with the companies and the Ontario government that the industry must be protected. “As long as you leave it to the market, someone is going to do the job cheaper,” says Gindin. “The industry is going to meet the Japanese problem; the question is, what does it mean for jobs? If GM solves its problems by buying engines from Mexico and transmissions from Japan, then GM solves its problem. But where do we wind up?”

And that is the toughest question of all. Where once the industrial nations held a monopoly on the machinery, the circle of technology is widening. The Canadian government responded to the assault on the textiles industry with import quotas and discovered that these only reduced the incentive to modernize after markets had been guaranteed. Every other sector is destined to feel the competitive heat from what American sociologist Daniel Bell describes as “the new international division of labor.” Says Cartwright of CGE: “Over the next three or four years, every product we make will have to be internationally competitive or we’ll get killed by our competition.”

In Daniel Bell’s analysis, the widening circle of new industrial nations that are leaving behind their undevel-

oped status will move irresistibly into markets once held exclusively by the old “core” of developed countries. First it was textiles, then steel and cars and finally—on a plateau Canada has yet to achieve—computers and electronics. The old industrial elite is forced to innovate constantly in order to protect its high standards of living. The ultimate resource became brainpower, as the Japanese have demonstrated. While the average Canadian autoworker earns $12.52 an hour, his counterpart in Japan makes $7.76—and he is looking over his shoulder at workers in Mexico making $4.84 and in South Korea $1.39. For the Japanese, the key to keeping above the fray is ceaseless technological advance, as a small cadre of Canadian companies understands. “Price is important, but if you have the technological edge you can probably export even if your price is higher,” says James Carman, Westinghouse Canada’s vice-president for strategic resources. PierrePaul Proulx takes it a step further: “If you’re always concerned about costcompetitiveness, then you’re at the wrong end of the product cycle—you’re too late.”

Productivity is a dark angel. Northern Telecom, for one, increased its sales by 500 per cent in the past 10 years, but its work force grew by only 75 per cent. MacMillan Bloedel Ltd. modernized its Port Alberni, B.C., sawmill and boosted production—but cut its employment. James McNiven, Nova Scotia’s deputy minister for development, foresees an end to federal policies that put a premium on employment over technology—and put the province at a

disadvantage in world markets. The result: less employment in the fishery.

Training in specific skills was once the certain road to a better job, but it can no longer offer employment guarantees. “So what do you do with Windsor?” queries Fred Lazar of York University. “So what if it has skilled workers—skilled workers aren’t so important now.”

Where the new jobs will arise is still another perplexing issue. There are two schools of thought on whether the new technologies will create more jobs than they eliminate. “I don’t think anyone knows,” says Philip Fay, in charge of strategic policy and planning for Employment Canada. But the need for new work is enormous and will not be solved by mega-projects alone. Since last August, 269,000 jobs have been lost in manufacturing—a figure roughly equal to total employment in all primary resources.

What is clear, however, is that jobs will not be picked up in the service sector, which created the vast majority of new employment during the past 20 years. With its new microelectronic

technology, Bell Canada needs just one worker per 10,000 telephone lines, compared to four workers a decade ago. Word processors have made clerks and secretaries so productive that Westinghouse Canada decreed that its executives must now get their own coffee. But the net effect is fewer people

; employed. James Car3 man of Westinghouse

; agrees with Axworthy othat the emphasis must z be placed on retraining “and relocation. “What’s § going to happen is that a 8 whole new breed of employee is going to create, with a whole new mix of skills,” says Carman. “It doesn’t mean the head count will change, but there will be a different kind of head.”

The cold winds of the new economic reality are chilling Bob White’s heart. “For the first time in this country people are working full-time and failing to meet the increased costs of their mortgages,” laments White. “For us to go to a worker and say we can’t get him a wage increase for two or three years and that he’s going to lose some benefits, too . . . .” The young union leader can only shrug. “The one way we can do that is if we can tell him, ‘If you don’t, you’re going to lose your job—and if you do, you’re guaranteed a job.’ And I don’t think it’s black and white in the automobile industry that you can guarantee anyone a job these days.”

The difficulties facing policymakers are compounded by the fact that they simply lack the fiscal fist they need to punch the economy into shape. In Ottawa, a senior official at the ministry of state for economic and regional development breaks down the money Ottawa

has available to spend on rebuilding industry. Of the $42 billion over five years allotted to economic development, he ends up with $15 billion after paring away such items as railway subsidies. That is $3 billion a year. There is just no margin for manoeuvring, he complains. Alsands alone would cost $13.1 billion. The interest on the federal debt this year is $16.8 billion. Ottawa’s hands are virtually tied.

What ultimately may be required is a change of attitude on the part of all Canadians, starting at the top. Bruce Rankin, Canada’s former ambassador to Japan, returned to Toronto as a consultant and was shocked to find businessmen stubbornly hostile toward their unions. “They’re not talking about changing the situation,” says Rankin. “They’re talking as if it will be that way forever.” But such companies as Sony and Sanyo have achieved Japanese levels of productivity with American workers, and Northern Telecom is aiming for the same. “I do not think there is any such thing as unproductive workers,” says Northern Telecom Executive Vice-President Charles Millar. “There’s only good management and bad management.”

But perhaps the greatest difficulty in finding a solution to the country’s current economic crisis may be the lack of political will and singleness of purpose between Ottawa and the provinces. Carl Beigie shakes his head in puzzlement. “I start thinking of getting a national strategy for anything in this country,” he muses. “Does it mean you have to satisfy every province’s desire for a car industry?” Almost, it seems. For one thing, Ottawa found it necessary to spread its small subsidy for microelectronic centres over all 10 provinces. And that, growls one federal planner, is like threatening to hit someone with your fist—one finger at a time.

The “breathing space” Canada allowed itself in the 1970s has long ago been used up. The country has a new Constitution, but it also has 10 provincial governments, each in varying stages of creating independent development strategies. The common thread seems to have been lost. As international events converge around Canadian lives, it is becoming vital to move beyond the simplistic rhetoric of belttightening. To make common sacrifices will require common goals. “We need some guiding principles,” argues Beigie. And we need the political will to stick to them. But until Canadians can better understand where they are being led, a nation’s well-being may well continue to be slowly eroded.

Elaine Bateman

Diane Luckow

Julie Van Dusen

Leonard Michael

Michael Posner