Global Challenges: What global forces will affect Canada
over the next generation?

Thomas Courchene, Professor of Economics and Financial Policy, Queen’s University

The three forces I picked out are globalization [the information revolution and knowledge, or human capital].

There are many definitions of globalization, but I’m going to talk about the heightened degree of internationalization, the globalization of capital markets, the internationalization of production, and what Ohmae would say, his phrase: nothing is overseas any more.

I guess you can twist that around; everything is overseas. But what it means to an economist is all economics is international and I think all social policy is getting close to being international, as well.

The second force is the information revolution. Mr. Martin talked about it last night and Peter Cook has reminded us this is not new. But what’s new is it’s not instantaneous, as the minister reminded us last night and that networks now dominate. So globalization relates to a space of flows, not to a space of places. And that’s really important, despite the fact I’m going to talk about places today.

The third area is knowledge, or the human capital revolution. And globalization and the information revolution will do for human capital exactly what the industrial revolution did for physical capital. We have so much to look forward to, or be concerned about, whichever side your on.

Knowledge is at the cutting edge of competitiveness, which means that social policy — at least in its human capital dimensions — becomes indistinguishable from economic policy when we talk about competitiveness.

Social policy has moved up to be one of the portfolios of the Minister of Finance. I’ll refer to this as a GIR, global information revolution. There’s nothing new here, but I’ll try to recast it in a slightly different way.

I’m going to focus on three areas.

One I call "glocalization," and the "c" is in there by design. It’s sort of the unbundling of nation and state. I’m not going to talk so much about the unbundling of nation and state, but I’m going to talk about transferring powers upward and downward.

The second one is the emergence of region states.

The third is two statements on human capital and something also very short on citizens and the millennium. Then just to have something to finish with, a one sentence version of my vision statement of [what it will mean] to be Canadian in the 21st century.

Let’s go to the implications of the first one. I call this the shifting locus of power. I call this glocalization, which is a combination of globalization and localization. It’s much easier word to say though, than trying to say both of them.

As a result of GIR, powers are passing both upwards and downwards from central governments and nation states. In terms of passing powers upwards it’s obvious: economic space is transcending political space and, therefore, powers are being transferred upward to supranational organizations in countervail fashion and [Finance] Minister Martin is an important part of that process by his recommendation for a supranational regulatory agency for global financial markets. That’s part of passing powers upwards from the central government.

But I’m more interested in the problem in passing powers downwards. Glocalization is passing downwards in several ways. Some obvious ways [include]:

• To markets; markets are inherently decentralizing and we’re giving more power to markets. That’s what globalization is about. We’ve got deregulation, privatization, contracting out. That’s also transferring power from governments to markets;
   
• To citizens, because citizens as Peter Nicholson [has said, are] the principal beneficiaries of the information revolution. We can transmit, transform, do anything today that governments cannot prevent us from doing, so governance becomes much more difficult when we have as much information as they do. And perhaps more because we have time to look at it; and,
   
• The third way that powers are being passed downwards is to lower levels of government. This is subsidiarity; although subsidiarity powers can go either way.

Subsidiarity should say that things that are really mobile should be passed upwards and that’s what happening on the cold capital side. Ontario at one point, prior to a fight, decided it wanted to transfer financial regulation to Ottawa for a price. And Minister Martin is talking about transferring some regulation of capital to the international set.

But there’s things going down as well. Environment seems to be going down, labour is going down. Anyway, that’s one part of transferring to lower levels of government. The other is simply the devolution to the provinces. And perhaps one should go further, as was suggested last night, to the cities, ala Jane Jacobs, because how long will it take before Toronto, with 56 or 58 councillors and a mega city, is going to want to become like Bremen and Hamburg and Berlin, namely a city-province in this country?

Finance Minister Martin was adamant last night that globalization will not mean a less influential central government in Canada in 2026. I don’t think I agree with that. But he also emphasized that it’s influence will not be in its old form. And that I certainly agree with. In any event this is one of the factors that will have an impact on century 21. We have to accustom ourselves to the new role of the various levels of government.

The part I want to focus on within that context and within the context of passing powers downwards is the emergence of region states in the world. I have to be careful here. When I’m talking about region states, I’m talking about sub-national governments that are exercising quite substantial economic power, both domestically and internationally. I’m not talking about separation, I’m not talking about being non-Canadian; this is an economic version of a nation state.

It’s a well-known concept in Europe, a little bit difficult to sell in Canada because it gets tied up with separatism as I found out from a series of articles in the Ottawa Citizen about my book when it came out. I was called an Ontario separatist and that was the polite part of what I was told.

Here are three quotes on the emergence of region states:

• Storper, geographer 1994: The principal dilemma of contemporary economic geography is the resurgence of regional economies in a territorial specialization in an age of increasing ease of transportation and communication.
   
• UN: national boundaries have become increasingly irrelevant in a definition of market and production spaces, while regions — rather than countries — are emerging as the key policy arenas.
   
• Ohmae: on the global economic map: the lines that now matter are those defining region states.

Let’s look more closely at region states. The most cited example of region states is, of course, the so-called four motors of continental Europe — Baden Wurttemberg (Stuttgart), Lombardy (Milan), Rhone-Alpes (Lyon) and Catalonia (Barcelona).

One of the characteristics of a region state is it has a regional-international interface. It’s cross-border. It doesn’t have a national-national interface, obviously because it’s not a nation.

And the comparative advantages now being viewed in many quarters is a regional phenomenon, not a national phenomenon, although the central government plays a critically important role in providing framework policies that allow all regions to prosper and we have to thank our government over the last four years for doing this rather spectacular on some of these fronts.

These region states tend to favour wealth creation, rather income redistribution. So an important thing when you look at Europe is who’s going to look after the casualties of this? Is it going to the rest of the nation state, or is it going to be Europe? And since I’ll be arguing that Ontario is embracing this notion of region state, most of you will agree that it’s favouring wealth creation over income redistribution, who’s going to look after the casualties in Ontario from this? That’s another challenge.

So, let’s get to Ontario as a region state; that’s the thrust of my book. I may go too far with this, but I think it’s on.

In 1981, Ontario’s exports to the rest of Canada and its exports to the rest of the world — largely to the United States — were both about $40 billion. Move ahead to 1995 and exports to the rest of Canada are $55 billion, exports to the rest of the world are $140 billion — two and a half times greater. Small wonder that’s Ontario’s economic future is going to be within the larger context of North America. That’s the push factor and 40 per cent of Ontario’s output now is cross border trade to the United States. So, it’s emerging as a region state.

The push factor is, in part, federal downloading and perceived discriminatory treatment by Ontario from Ottawa and various areas of policy, whether its unemployment insurance or money for providing benefits to immigrants or whatever. But, analytically, what’s happening here?

The best definition I found is by geographer Storper. What’s going on, he said, is Ontario (or any region state) is trying to generate a set of untraded interdependencies.

The interdependency thing is obvious. The untraded thing is to make your area locational specific and a valued location. To put it this way, if you want to take advantage of Silicon Valley you should be in Silicon Valley. If you want to take advantage of Ontario’s tax cuts, you’ve got to be in Ontario.

One of the themes of the book is [that] you can view what Ontario’s doing in the last four years, or last couple of years, as trying to generate positive locational extra knowledge for the Province of Ontario, or trying to privilege the province as a site for location to trade in North America generally. That rationalizes the Common Sense Revolution in terms of the tax cuts. It also, I think, looks after the municipal institutional revolution, because with a larger public sector in Ontario than across the border you have to make sure the public sector is efficient. I’m not saying what they did is efficient; I’m not saying what they did is going to make it efficient, but I’m saying I can rationalize what they were trying to do in that context.

So that’s the region state. And the problem is Ontario’s got no choice because now that we’re fully integrated under NAFTA, if you don’t pursue this thing your base goes south. We had a time before when that happened, when all the Buffalo Bob signs were up on the highways in Ontario. This time it will be more important.

But this is not just in Ontario. This is a general phenomenon across the country.

Quebec tried to become a North American region state and was doing quite well until it decided it wanted to become a North American nation state, and then everything started falling apart.

British Columbia has always been Pacific Rim oriented; Alberta is Texas Gulf oriented and all provinces now exports to the rest of the world have increased relative to the rest of Canada. In 1994, international exports were 115 per cent of domestic exports. Now they are 183 per cent. Only two provinces — Nova Scotia and Prince Edward Island — export more to the rest of Canada than to the rest of the world.

What are the implications of this for governance in the 21st century?

First, Canada’s no longer a single economy the way I’m defining it, but rather a series of cross-border, north-south — and for B.C. Pacific Rim — economies.

Second, provinces, or some of them — Ontario, Quebec, Alberta and B.C. — will demand greater powers to ensure their economic futures will be integrated in North American geo-economic space.

Since all provinces cannot handle greater powers, we’re going to see greater asymmetry in the Canadian nation.

The social policy challenge in all of this, which we’re struggling with, is how do you mount an east-west transfer system over a north-south trading system. We’d better sort that out or we’re in dreadful shape.

The other implication — and here’s where I’m going to get on the wrong side of Mr. Martin if I haven’t got there already — with so much trade going north south it’s only a matter of time, and I don’t think much time, before the notion of having a North American version of a Euro is policy centre stage. The only problem is the Americans won’t want to do that. But there are other ways to get around it.

The governance implications of the region state are that because we’ve changed the tectonic plates of the economy so much we need some new instruments. I’ve long argued what we need to do is bring the provinces more fully and more formally into the decision-making process, particularly on pan-Canadian concerns and the social union.

I think the provinces simply have to take more responsibility with their powers in this confederation and if they don’t, they damn well should lose their powers and Ottawa can take them back. I think the provinces will do that. I think they have no choice. Canadians will insist the powers go back.

Apart from equalization, I think Ottawa’s role is to ensure that all its other programs treat individual Canadians identically. If you want to have a preference for a region put it in the equalization program.

So that’s a new instrument. I call it co-determination. You might call it subsidiarity. If we don’t fix that up we’re going to find out that our social policy is also going south.

Human capital. The Minister covered this last night, so I’ll just be brief here. Market incomes are polarizing and it’s as if there’s a maximum wage for some low-skilled work. If a country puts its wage up beyond this level, [it results in] contracting out to the rest of the world.

We really have a problem here. I think the Minister really showed not only some creative ideas, but a certain amount of passion that is appropriate because I think this is the most serious challenge arising from globalization; most serious to central governments because they can’t affect much of the other stuff.

Now Canada’s fared reasonably well in all this because our transfer system is doing a pretty good job. But that’s because we don’t have universality any more. I’m talking about medicare here, I’m talking about social programs. Americans stuck with universality and they got a limited amount of money — it goes to those people who really don’t need it. We made our money go a long way because we’ve got child tax credits that are targeted, we’re targeting to the elderly. That’s wonderful social policy and the rest of the world loves us for it. Good going both parties.

There’s also a rising inter-generational problem. The soon-to-be-elderly, of which I include myself, are among the richest cohorts in the system. I call them Generation XS.

Burdens on the young generation, generation X, [include] rapidly rising tuition fees, a new pension system that will ensure that the returns to the young are negative, as well as the burden of debt the returns of which have accrued to Generation XS. Anyway paying down the debt represents one of the best ways to reverse this inter-generational burden and we’re well on our way to doing that. But it is an issue we have to combat on the way to Paul Martin’s vision of Martinville in 2026.

One other point about human capital is that it’s becoming like physical capital; that’s what the information revolution is doing human capital. You know what it means? Mobile. You know what that means? You can’t tax it. Or you can’t tax it as much.

If we want to keep our skilled people in Canada you have to reduce their marginal tax rates or they will go. And they are going and they’re going to go more.

Paul Martin says we’re going to reduce taxes on the low income people. I’m happy with that, but there won’t be any money to pay the low income people if these people go. And remember we’ve put enormous amounts of subsidies on these people. If we’re just producing kids to go to work in Oregon and Microsoft, that’s a funny role for a government.

Unfortunately, we’ve got to reduce taxes. Then what do we do? We have a tax that you people don’t like that is competitive because it’s export-import neutral. You know what it’s called? The GST. I don’t why social groups don’t jump on that tax. Where else are you going to get money from. You can’t tax corporations, you can’t tax human capital because the base will go. Tax what you can.

Looking at citizens in century 21, the citizen-state relationship, there has been a dramatic change in the size of government. Program expenditures have fallen from 37 per cent of GDP in 1992-93 to 30 per cent. That’s a seven percentage point fall in 1998. That’s not filtered down to the citizens yet. We have to do this, but it’s a big change.

The global revolution enhances consumers. In fact, Ohmae calls globalization of consumers sovereignty. But it disenfranchises individuals as citizens because so many things re happening outside of their borders that they can’t control; namely, what happens in NAFTA, what happens in all these other places. So, the big question is how are we going to handle these democracy deficits, but we don’t know how to do that.

Citizen market relationships, the labour force is becoming more tenuous, union power is diminishing because the private sector means are no match for immobile international capital. So we need some new institutional frameworks that are going to link people and citizens to the market.

I don’t know what they are, but we’ve got to start thinking about them. One suggestion I have is that we convert the benefits that are linked to employment and link them to citizenship. This is a more serious problem with the United States, because you get dual-type citizens; those that work have good programs, those that don’t have nothing; basically nothing.

This would involve sort of getting rid of UI [unemployment insurance] and converting it to a negative income tax; take it from employment base to citizen base. It’s not a very good example, but it’s what we’ve got to do.

In conclusion, forces are pervasive, challenges are formidable — if we ignore them and do not develop new and creative instruments we will run the risk of becoming Northern Americans, rather than Canadians. That’s not my choice.

My vision of 2026 is to be a Canadian in the 21st century must mean that all citizens have access to a social infrastructure that allows them full opportunity to develop and to enhance their skills and human capital in order that they become meaningful participants in the Canadian and the global societies. But you can’t get there unless you recognize some of the things I’ve been talking about earlier.

We can’t just say that’s where we want to be. We’ve got to handle these land mines one by one and we can do it.