COVER

BUILDING THE NEW ECONOMIC

DEIRDRE McMURDY June 27 1994
COVER

BUILDING THE NEW ECONOMIC

DEIRDRE McMURDY June 27 1994

BUILDING THE NEW ECONOMY

DEIRDRE McMURDY

COVER

Joseph Schumpeter is hardly a household name in Canada. But even for those who have never heard of him, the Austrian economist who died in 1950 is very much a part of their lives these days. Schumpeter is the author of the economic theory of “creative destruction.” His theory states that there are periods in history when long-established, but increasingly inefficient, economic and social structures collapse because they are no longer able to respond to the changing demands made of them. Then, after a painful time of transition and insecurity, new and more relevant institutions emerge. Even though he has missed the opportunity to cash in on a recent wave of workshops about surviving in the New Economy and bestselling business guides to the New Economy, Schumpeter was actually the first to identify the complex phenomenon that has so fundamentally changed the way that Canadians now work and live.

There is a magnificent—if hollow—ring to the term New Economy. It evokes bold strides forward fresh frontiers and golden opportunities. But however catchy, it is an overly tidy euphemism for a series of messy structural shifts, from the globalization of financial markets to the reform of the welfare state. In fact on several levels, the magnitude of upheaval—and opportunity—associated with the rise of the New Economy parallels that of the Industrial Revolution.

Starting around 1760, the forces of “creative destruction” were unleashed in Britain as steam power became cheap and widely available for industrial use. Workers were wrenched from their agrarian roots and transplanted to urban centres where newly built factories provided jobs. As the methods and the organization of the workplace altered, people were forced to adapt their labor skills to new demands. Because the social framework and the role of government suddenly existed in a radically different environment, they had to be adjusted. And as mass production and mechanization gained momentum, international markets became an essential outlet.

Now, computer technology is having as revolutionary and broad-based an impact on the economy as steam power and mechanization did in those early days of industrialization. It has had a direct effect on how and where people work, on the skills that they must have to survive, on the globalization of trade and on the demands that are placed upon government. And as it was during the Industrial Revolution, the climate of tremendous uncertainty and flux creates at least as many fresh opportunities as it does casualties. Those who are able to use the new tools, to identify emerging markets early on and to propel new institutions forward, can prosper to an enormous extent.

Such comprehensive change—and the ability to capitalize upon it—does not come about overnight: it takes years for the established institutions to crumble or evolve and for the pattern of such manifold changes to become clear. In the case of Canada, economic circumstances and government policies obscured many of the early warning signs that change was in the wind. Through much of the 1980s, the Canadian economy benefited from a low dollar and a substantial trade surplus with the United States. Since that created economic activity and prosperity at the time, the country was temporarily sheltered from some of the New Economy pressures that were starting to be exerted elsewhere. Similarly, the Liberal government’s National Energy Program, which was in place from 1980 until 1984, kept domestic oil prices down and insulated Canada from the shock of international price hikes that had spurred major restructuring in the United States, Japan and Europe.

Because Canadian business was under less pressure to innovate and to rationalize in the 1980s, domestic productivity gradually began to flicker, even as international economic competition intensified. At the same time, the system of federal welfare programs and provincial transfer payments muted growing regional disparity and the financial distress of an increased number of dislocated Canadians. When the recession hit Canada in 1990, it was more ferocious and prolonged because of the lack of awareness of the change under way—and the absence of a strategic national action plan. But eventually, by painfully stripping away layers of accumulated corporate fat and administrative bureaucracy, the recession finally exposed the skeletal structure of a New Economy.

That New Economy diverges from the Old Economy in several key areas. In the past, Canada has relied principally on its comfortable trading relationship with the United States and on the export of unprocessed raw materials. The manufacturing sector was heavily populated by the branch plants of multinational companies, which produced goods exclusively for the limited Canadian market or components for products that were assembled elsewhere. Much of the technology, the marketing expertise and the strategic decisions came from managers imported to Canada.

By contrast, the New Economy is driven almost entirely by computer technology and by the fast-paced change of that technology. Even companies that still operate in the natural resources sector now use computers extensively to improve their productivity. In the New Economy, strong trade ties with the United States remain, but Canada is also reaching out to broader markets. For instance, in the first three months of 1994, Canadians sold Mexicans $216 million worth of goods, up 19 per cent from the same period in 1992.

But the steady integration of international markets—partly through regional free trade agreements like the North American Free Trade Agreement—has also enabled lowskilled, low-cost workers in less developed countries to displace low-skilled, higher-cost workers in countries like Canada, especially in the manufacturing sector (page 32). As a result, many of those jobs have been permanently lost. Low-skilled workers are not the only ones who have suffered: computerization and the corporate restructuring that it has engendered have also pushed aside white-collar workers and middle managers.

The globalization of computerized financial markets, which has paralleled the boom in international trade, is also a pronounced characteristic of the New Economy. Using sophisticated equipment, currency and bond traders can move huge sums of capital around the globe within seconds, responding almost immediately to events in specific markets. Last week, for example, the Canadian dollar was buffeted— once again—by mounting uncertainty about the upcoming Quebec election.

For Canadian businesses, the imperative to compete in those international markets has highlighted the need for efficient, low-cost operations. That push to improve productivity has forced most large, cumbersome corporations, which dominated the Old Economy, to narrow their focus, reduce their size and dismantle much of their organizational structure. To some extent, that retraction has allowed small Canadian-owned businesses, tailored to serve specialized niche markets, to flourish. It has also prompted an increase in the number of people who work on short-term contract assignments or as consultants on specific projects. But most significantly, Old Economy “downsizing” has created a new class of chronically underemployed workers who are struggling to find their place in the new order.

As at the time of the Industrial Revolution, those fundamental shifts in domestic and international economies are gradually prompting changes in government and in social policy. There is an increasing acknowledgment of the need to adapt the existing social contract between individuals and the welfare state to better suit the shifts for workers and employers in the New Economy. And that adjustment may just require the most creativity in this cycle of Schumpeter’s “creative destruction.” □