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History Table of Contents
1998 Summer Conference
 
Summer Conference 1998
Rethinking Canada for the 21st Century

Meeting the challenge: In a global society in crisis and rapid change,
at what do we excel; where do we fail?

Peter Nicholson, Executive Vice-President,
Corporate Strategy, BCE Inc.

The message I’m going to deliver message today is unabashedly optimistic.

The conclusion is that Canada, and indeed much of the world, are now facing, economically at least, the most promising prospects in decades and certainly the most promising since the end of the Second World War some 50 years ago.

What I’m going to do is the mirror image of Peter Cook’s talk and sketch out the reasons why I believe this to be the case, first in a global context, and then I’ll try and relate that global picture as I see it to Canada.

Beginning then with the big picture, this closing decade of the 20th century marks not only the dawn of the new millennium, but also of a hopeful new economic and political epoch.

We all know that the eclipse of global communism — symbolized by the destruction of the Berlin Wall in November, 1989 — lifted the nuclear gloom and I think this is true, notwithstanding the recent bomb-testing side-show in India and Pakistan.

I think it’s a fact that today the world’s material and intellectual resources are no longer focussed on the threat of global holocaust, but rather on economic growth and human progress.

That’s a very significant change in the circumstances as we face the new millennium.

The truth is that a Pax Americana reigns today.

And this is creating the rare conditions of global order under which economic life can thrive. As we heard this morning, the American model of capitalism — the intellectual and institutional roots of which are actually more British than American — but no matter that model now stands unchallenged.

And the alternative models of the market economy that were developed in continental Europe, in Japan, and in Southeast Asia have proven unable to match the innovation, flexibility and institutional robustness that underpin the success of American capitalism and it’s a success that we in Canada have shared in our own particular way.

With no hostile power even remotely positioned to challenge the United States militarily, the energies of most nations are now being channelled into global economic competition.

Of course, it would be completely naive to assume that truly large-scale military conflict is forever a thing of the past. But we can at least be optimistic that the international spread of democratic institutions favours the continuance of generally peaceful conditions, if only because democratic states have rarely, if ever, gone to war with one another. That’s an interesting thought that perhaps we should ponder.

But the optimistic prospect rests on more than this encouraging security environment, though that clearly is important. It is equally significant that after 25 years of stagnant productivity growth in virtually all of the advanced countries — not just in Canada and the United States — there is finally the promise of an extended surge in productivity, and a corresponding elevation of living standards.

And you’re going to hear a lot in this talk about productivity, so let’s pause for a moment and focus on what it is because the central importance of productivity growth — by which I mean growth in the production and services per hour worked — is not sufficiently appreciated.

In the words of Paul Krugman, a quoted economist from MIT:

"Productivity isn’t everything, but in the long run, it’s almost everything. To a pretty close approximation, the rate of growth in our living standards equates to the rate of growth of our domestic productivity — period."

And, in fact, he equates a nation’s competitiveness — and I would agree with this — essentially with the rate of growth of its productivity.

When you understand this it explains the stagnant performance of family incomes during the past two-and-a-half decades in both Canada and the U.S. The reason is that productivity growth collapsed for reasons that are still somewhat mysterious in the early 1970s.

Let me just give you a few facts.

Between the end of the War and 1973, productivity in North America averaged about 2.7 per cent annually — sufficient to double the average living standard in a mere 25 years. That was the golden age of prosperity. At that rate you get three doublings of living standard in a lifetime. And that’s why that period is remembered now by those who lived through it as the Golden Age of Prosperity.

Since 1973, annual productivity growth has averaged barely one per cent. At that rate it takes 70 years to double living standards. So for the last 25 years, we’ve been in a prosperity funk.

I believe that funk is now ending. Productivity is once again poised to increase at a healthy clip — probably not up to the early post-war levels, because we’re not starting from such a deficit of capital and recovery after a war and the Depression that preceded it — but still a lot better than we’ve become used to in this generation.

Basically, the productivity recovery will be the result of things that David Zussman just spoke of; the pace of innovation in information technology and communications, but also in biotechnology, and in the science of materials, and importantly the combination of those technology developments with the emergence of competitive markets almost everywhere, and the continued liberalization of world trade.

All of these things, when you take them together, is really what we mean by the knowledge-based global economy.

The early signs of a broad-based recovery of productivity growth in North America may, in fact and I believe do, signal the long-awaited pay-off from the enormous investment in information technology; am amazing figure, about two trillion U.S. dollars worldwide since the early 1970s.

Today, information technology investment accounts for almost half of total annual business investment in the United States and in most of the advanced countries.

It is still too soon to be confident that information technology will sustain a long-run productivity boom. But there are good reasons to believe that it will and the reasons are primarily the rapid spread of computer literacy in the generation under 40, and the re-engineering of business processes, which is even better to lever the power of IT. These are finally reaching the critical mass where significant economic pay-off starts to be felt.

If you look historically, you can understand this so-called lack of productivity of the IT investment in the macro-economic statistics, because we say a similar thing in the 19th century after the introduction of electrical machinery.

It took 30 years after the introduction of the electric motor to factories late in the 19th century before manufacturing processes became fully adapted to this new technology and the resulting productivity began to show up through the economy.

So, what I think we’ve seen in the last 25 years or so where this huge investment in information technology has been made is simply the lag of adaptation to such a fundamental paradigm shift.

The most encouraging aspect of the knowledge-based economy is its apparent sustainablity. That’s because the new sources of growth are based on ideas, and on the movement and shaping of information. That, of course, is a form of growth that is little, if at all, constrained by environmental and material limits.

So in my view, to sum all this up, a global prospect featuring years of relative peace and prosperity — and one has to emphasize the word relative — is the most likely scenario. Of course, there are going to be exceptions. And, indeed, there are some legitimate concerns with this rosy picture and you’ll already be thinking of those.

To anticipate you a little bit, I’ll cite a few of the downsides that occur to me.

The first one is the question of whether the natural environment is able to absorb the added pressure of population growth, but it’s not really population growth, it’s the combination with rising incomes and aspirations in what used to be called the Third World, to say nothing of our own appetites, which certainly are never satisfied.

Only time will tell whether a combination of technology fixes, lifestyle changes, better market signals, and effective international agreements will create the conditions for genuinely sustainable development. That clearly is going to be one of the major challenges facing society in the 21st century.

We also have to be concerned that inequality is on the rise as markets, and not governments, are increasingly the arbiters of income generation and its distribution. But here at least the coin is at least two-sided. For while increasing income inequality is evident within countries like the United States and the U.K. — and to a lesser but growing extent here in Canada — the inequality between the rich and the poor nations has at last begun to narrow.

What seems to be happening is that inequality is gradually diminishing internationally at the same time as it is increasing intra-nationally. The political challenge facing those in the rich countries who advocate continued trade liberalization in the face of this is fairly clear. And I don’t mean by citing this that we’ve reached the point where the convergence is assured between the poor and the rich. It certainly isn’t.

And there are many poor countries that are not making progress. But, I think as a general thesis there are finally some signs of convergence as a result of the globalization of production and capital flows. That’s the positive side.

Finally, we have to recognize that our technologically-dependent, globally-interacting society is increasingly vulnerable to the disruptive acts of both man and nature.

Last January’s ice storm brought this message home to those of us in Montreal in a very concrete way. Another example is the enormous cost that it’s going tor require to correct the "Millennium Bug" in the world’s computers — assuming we even can correct across a sufficiently broad range of the system and soon enough.

In fact, there is a host of "system vulnerabilities" that we are now becoming aware of — things like ozone depletion; the spread of exotic and lethal organisms like the AIDS virus; or the ‘‘contagious" transmission of economic shocks via global-integrated financial markets.

I’m even coming to the view that our growing dependence on microchips, microprocessors, wondrous as they are in so many ways, is in a sense the biggest vulnerability of all.

Computer chips are today found in almost everything — in fact 90 per cent of them are not in PCs. They epitomize the inter-connectedness of modern society. But, the question is how vulnerable are they?

In one sense — you have to say not very — since microchips are so widely dispersed and there is so much redundancy. But consider that the detonation of an atomic device at very high altitude in the stratosphere so it has an extremely broad footprint on the globe would generate a powerful pulse of electromagnetic energy which some authorities estimate would be enough to "fry" most of the microchips on earth — instantly and irredeemably.

In fact, I heard a guy last night — a Newfoundlander who was in Nagasaki 53 years ago when the atom bomb dropped. He was at the epicentre of the explosion, but he was working on a dock. He said nothing burned around him except the transformers. Every electrical transformer caught fire. And that was the shorting caused by this electromagnetic pulse.

Think of that in the context of our hand-wringing over the simple Millennium Bug, if instantly and globally all the microchips in the world were shorted out.

I mention these things, not because I believe it’s going to happen. There are going to be many challenges in the 21st century. Many of them we haven’t dreamt of yet.

I don’t think the prospective threats overwhelm our opportunities; in fact, quite the opposite.

But we do have to remind ourselves that the we haven’t seen the end of history.

Indeed, I think the lesson of history is that there is an entropy in human affairs which is a persistent tendency for things to go off the rails that eventually transforms order into chaos, and so the cycle repeats.

But for now — and I think for several years to come — optimism is going to dominate the basic human prospect.

So, what about Canada’s prospects then in this context?

Against this global back-drop that is exceptionally up-beat.

Canada’s prospects — if we look beyond the daily noise of the dollar, the TSE, the monthly jobless rates, and all the other economic sound-bites that are sent to distract us from the big picture — Canada’s prospects are even more promising than those of the world generally.

We are finally ready to shed the three-decade blues that followed our centennial year in 1967 and were the subject of a recent book by Pierre Berton, called The Last Good Year.

I’m just going to run through some of the reasons why I think we can be bullish and they’re familiar in a way, but I’ll put my own spin on them.

The first is that order has finally been restored to our public finances and, as Paul Martin reminded us last night, we’ve got the best fiscal numbers in the G-7 on a current basis. Our debt ratio isn’t quite there yet.

Secondly, our international competitiveness has more than recovered the ground lost during the 1980s. The tremendous export success of Canada bears testament to that. The structure of our exports reflects a remarkable — and little remarked on — upgrading of the Canadian economy.

This stubborn image of Canadians as "hewers of wood and drawers of water" has become completely outdated. As recently as 1980, 60 per cent of Canada’s goods exports were resource commodities and now that share in the first quarter of 1998 is under 30 per cent. Autos and machinery today account for about 50 per cent, up from a mere 28 per cent just 18 years ago.

Unfortunately, our international image as simply a lumbering, unsophisticated raw materials producer, indeed, dies hard with the result that we’re presumed in the superficial analysis of the currency traders to be much more vulnerable to Asia’s economic woes than at least the current trade facts would justify. There may be other reasons why the contagious impact of trouble in Asia through the financial sector will affect us, but in that respect Canada will be no worse than others.

Meanwhile, our international cost competitiveness has been improving steadily.

Our unit labour costs — the cost in Canadian dollars to produce a standard of production in the economy — have been falling relative to those in the U.S. since 1991 and not just because of the depreciating dollar. When you factor in the dollar it just boosts the improvement enormously.

We’ve also had a better overall combination of productivity growth and restrained wages. The ratio of which gives you the unit labour costs.

Indeed, The Economist magazine reported, based on a survey last January, that the overall cost of doing business in Canada was the lowest in the G-7.

I’ve got to say a word or two on the dollar because it’s so topical. The depreciating dollar does make most Canadian product producers a lot more cost-competitive in cost terms and it encourages Canadians to buy at home, all of which creates more jobs domestically. And that’s the upside.

So what’s the problem?

The usual concern about a falling currency is that it stimulates inflation, because devaluation both increases prices of imports and tends to heat up the domestic economy. But there are no signs of inflation, whatsoever, in Canada today, so why should the authorities worry.

I think there are four reasons why they perhaps might worry:

  • First, is a political one and it’s simply the growing public anxiety, that politically potent sense that something is seriously wrong and nobody is doing anything about it. That’s a problem for Mr. Martin.
     
  • Second — and more fundamentally — is that today’s retreat on the dollar could turn into a real rout given the hair-trigger psychology that pervades global currency markets.
     
  • Third, is the fact that there is quite a long lag before the inflationary impact of a significant currency devaluation shows up. So you want to address the problem well before symptoms occur, since in this instance an ounce of prevention or a gram of prevention is worth a kilogram of cure.
     
  • Finally — and most fundamentally in my view — our cheapening dollar creates the false impression that we are becoming more internationally competitive than we really are. The truth is that Canada cannot devalue its way to a higher standard of living in the long run.

As I emphasized earlier, higher living standards come from productivity growth, that’s producing more with less. The problem is that a falling dollar is the cheap and easy way for businesses to become more internationally competitive in the short run.

So there is less pressure on producers to do it the hard way through innovation, workforce up-grading, investment in new technology; in short, in all the ways that lead to enduring productivity growth.

So, what’s the bottom line?

I think that the forces pushing down our dollar are of the relatively short-run variety, and many of the consequences in the short-run are, in fact, positive for Canada net, net.

But we cannot be indifferent, both because there is a risk of a real run on the dollar by hair-trigger markets, and more fundamentally, because a chronically weak currency eventually undermines the incentives to boost productivity.

Now, back to the main story.

The encouraging news on the long—term productivity front is that business investment in Canada has been very strong for the past several years and that strength continues.

Investment rates are the highest since the late ‘50s and ‘60s. Moreover, the investment has a heavy emphasis on new technology, and therefore provides a solid foundation for sustained productivity growth.

Summing all this up — I believe that the Canadian economy is well-positioned for an extended run of non-inflationary growth and sustained job creation; that holy economic grail that the G-7 ministerial communiques always talk about.

You may wonder how I can say this when all the dally evidence points to the contrary — the unemployment rate is stuck; the dollar is being hammered; interest rates might have to start rising; the monthly GDP growth numbers are stagnant; Asia is in a mess; etc., etc.

And that’s all true and it may portend a dip, conceivably even a mild recession though I doubt.

But these are just whorls and eddies on the big flow. And for the first time in at least a quarter century, the big flow in Canada’s economy is fundamentally strong and in the right direction.

Let me just repeat:

  • The fiscal structure is basically sound;
     
  • Lots of investment is going in the right places;
     
  • The underlying cost trends are very favourable;
     
  • Our excessive dependence on resource commodities is coming to an end;
     
  • Domestic competition is getting healthier all the time. Our factored product markets domestically are working;
     
  • We’re upgrading our human capital. Record numbers of young Canadians are finishing high school and taking further training;
     
  • And moreover, economics is only part of the positive trend. In the political domain, the focus is now more pragmatic than constitutional, which in my view is a welcome and long-overdue development.

Finally, and for the fourth year running, Canada ranks at the top of the United Nations’ Human Development Index.

For some reason — probably connected to the "glass is half-empty" psychology of Canada’s chattering classes — our pundits tend to denigrate this benchmark. But to me and for others looking enviously at Canada from outside our borders — it is solid, objective evidence that no other nation has achieved a better balance of economic and social well-being.

One can only conclude that we Canadians have much to be proud of and thankful for. But, of course, we can’t be content to rest complacently on our many recent laurels.

And, to be sure, there are some significant items on the liability side of the ledger. So, as I did a moment ago, to acknowledge, and anticipate, some of your "yes, buts," let me touch on just two or three of those.

The truth is that the fiscal problem, which was 20 years in the making, is not definitively solved with a couple of balanced budgets. Our debt ratio and our taxes are too high and there are plenty of indications that the lessons of government over-reach have not fully sunk in everywhere.

And while business investment is exceptionally strong, the downside of that is that our personal savings rate is at an all-time low — less than 2 per cent of disposable income, which is a reminder that the great majority of Canadians have not enjoyed any growth in their after-tax earnings for many years.

Too many of our young people remain jobless and alienated, which is an unacceptable situation because it squanders potential and sows the seeds of growing inequality in the next century.

Finally, and despite an apparent erosion of support for separation, Quebec still has not found a comfortable place within the federation.

So unquestionably, challenges do remain for Canada. This is not going to be a dull 21st century we’re heading toward.

But the fundamental difference today is that the global momentum and the national momentum are now solidly synchronized behind this country in a way that hasn’t been the case for at least the last 30 years.

As was the case almost a century ago when Laurier prophesied that the 20th century would belong to Canada, so do I believe that our country is now exceptionally well-positioned to succeed in the 21st.