Economy

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Economy

Most modern economists think of economics as the study of choice, so that, strictly, an "economy" consists of human beings - in this case Canadians - making choices, which obviously includes just about all of Canadian experience. As much as this sweeping definition might please economists, however, it is probably more useful to think of economic activity - as most laymen do - as taking place when people produce and exchange goods and services. This definition has the advantage of according more or less closely with what the national accounts statisticians count when they try to measure economic activity. On the other hand, the overlap between "the economy" and the economic statistics the government collects is not perfect.

Some goods and services - such as prostitution and drugs - are produced and exchanged as far outside the government's ken as possible, while more and more otherwise legitimate economic activity now goes on clandestinely, so as to avoid taxation. Estimates of this Underground Economy currently run as high as 25% of overall economic activity. And, of course, many other quite legitimate goods and services - cleaning, maintenance, preparation of food, and the like - are produced in the home, without being exchanged (or therefore included in "Gross National Product"). If "above-ground" production and exchange are the definitive economic activities, then the Canadian economy can be described by examining what kinds of goods and services Canadians produce and consume, what sort of jobs they do, how much they earn, and whom they work for and trade with.

Industrial Structure

Canadians have long been famous to themselves (if not to others) as "hewers of wood and drawers of water," and it is true that the European development of Canada was motivated mainly by a desire to exploit the country's natural resources, both renewable and nonrenewable (see economic history; fisheries history; timber trade history; fur trade; Staple Thesis). Moreover, we still account for an impressive share of the world's output of resources. In minerals, for instance, in 1983 we produced over 20% of the world's potash and asbestos; over 15% of its nickel, zinc, molybdenum, sulphur and uranium; and over 5% of its copper, lead, gold, silver and aluminum; and in none of these did we rank lower than fifth in our share of world output.

But while the resource industries still account for a significant share of overall economic activity - and also in part determine what goes on in the rest of the economy - the reality behind our self-image is that in Canada, as in all other developed countries, most output is produced in the manufacturing and service sectors. In 1997 manufacturing accounted for 18% of overall Canadian output, while agriculture and the resource industries - forestry, fishing and trapping, mining and petroleum, and electric power, gas and water - together accounted for under 15%.

By far the lion's share of output - two-thirds - was from the service industries, especially community, business and personal services (which include much of the "para-public" sector, education and health care, mainly), and public administration and defence. Other important service industries are construction, trade, and transportation and communication (the last 2 of which are crucial in a country as large as Canada).

While Canada tends, if anything, to have a somewhat larger service sector and smaller manufacturing sector than other industrial countries, our sectoral balance is by no means unusual for an advanced economy. Nor, interestingly, is the current importance of manufacturing and services all that new. Agriculture did account for 37.1% of output in 1870, but natural resources, at 4.1%, were hardly dominant, and manufacturing and services, at 22.4% and 36%, respectively, were already well established.

In fact, a rough summary of the last century's economic development is that the decline in the share (but not, of course, the level) of agricultural output has been matched by the growth of services, while natural resources and manufacturing have more or less held their own.

The current dominance of the service sector is even more dramatic when measured in terms of employees by industry (see service industries). In 1997, fully 73% of workers were employed in the service sector, with 15.5% in manufacturing, and only 5.1% in agriculture and natural resources.

The main reason for this is that in the postwar period increases in productivity (output per worker) generally have been greater in manufacturing, agriculture and natural resources than in services, so that while over time virtually all industries have been able to produce the same output with fewer workers, these 3 very capital-intensive sectors have required even fewer workers than the service sector.

But despite widespread concern in the 1980s about "de-industrialization," in most Western countries it is only manufacturing's share of employment - not output - that has declined. In fact, in the post-1973 period, Canada was one of the few industrialized countries in which the absolute number of manufacturing jobs increased (though as elsewhere manufacturing accounted for a declining share of employment).

Canadian Manufacturing

That Canada seems not to have as large or competitive a manufacturing sector as some other advanced countries has long been a worry for those Canadian policymakers and economists who regard a resource-driven economy as being excessively prone to regional and cyclical variations in income and insufficiently dedicated to innovation and industrial research.

Many others argue, on the contrary, that manufacturing-based economies are not immune to instability and that if resource development is the most profitable use for Canadian manpower and capital, and if the relatively high domestic wage levels to which such development leads make it difficult for Canadian manufacturers to compete internationally, then forcing growth in manufacturing by means of direct or indirect subsidies will mean lower incomes for Canadians.

In fact, Canada has a large and varied manufacturing sector. Between 1960 and 1982 it employed 23.3% of the work force, on average - which is only 1.5 percentage points less than the US average in this period and not far from the Organization for Economic Cooperation and Development average of 26.1%. It is true that roughly 40% of Canadian manufacturing involves processing of raw materials; on the other hand, a substantial proportion is now given over to the production of end products.

Moreover, in the postwar period, Canada's manufacturing competitiveness improved dramatically; the historically large productivity gap between Canadian and US manufacturers closed substantially, and by 1985 manufactured exports represented fully 75% of overall exports. The increase has been especially dramatic for end products, whose share of exports has risen from 8.6% in 1954 to 43.1% in 1985.

The Canada-US Automotive Products Agreement of 1965, which created free trade in automobiles and automotive parts for producers (but not for consumers), is the largest single reason for this increase in manufactured exports, but, more generally, widespread reductions in tariff barriers, particularly between Canada and the US, have allowed many other Canadian manufacturers to enter the American market and take advantage of the benefits of large-scale production, which often were not available when producers were confined to the small Canadian market by the generally high tariffs of the 1879-1945 period.

International Payments

Though Canadians do produce lots of services and manufactures for each other, our "comparative advantage" (ie, what we do best of all) is still mainly in resource-related activities, a fact that is reflected in our trade statistics. After motor vehicles and parts (at 28.6% of merchandise exports) our biggest exports are crude oil, newsprint, lumber, natural gas, wheat, other food products, machinery and wood pulp. (In fact, our net exports - ie, our exports after our imports are subtracted - of oil, food products and machinery are either negative or not very large: though we export a lot, we also import a lot). Our most important imports are - by far - manufactured end products.

For most of the postwar period Canada has run a surplus on the "merchandise trade account," ie, we have exported substantially more commodities than we have imported. On the "service account," however, we have usually run an even larger deficit. The 2 most important components of the service account are travel and interest and dividend payments.

The main reason for our large and growing deficit on the travel account is that, as Canadians have become richer, more and more of us have become accustomed to the luxury of a sun-seeking winter holiday. Our traditional deficit in interest and dividend payments results from the fact that through most of our history we have imported capital from other countries - in loans, in takeovers and in new investment. In our first 50 years capital inflows ran as high as 10% of GNP per year, and despite a postwar rise in Canadian savings rates, which have risen substantially, we have remained a net importer of capital, which means we must continue to pay interest and dividends to our foreign creditors.

Together, the merchandise and service accounts make up the "current account" of the Balance of Payments. Traditionally, Canada has run a deficit on the current account. Because the balance of payments is nothing more than a record of all purchases and sales of Canadian dollars - whether for trade, travel, interest, lending or borrowing - and because for every buyer of a Canadian dollar there must be a seller, the balance of payments always balances. Thus our customary deficit on the current account has been offset by inflows on the capital account, ie, we have usually borrowed more from foreigners than they have borrowed from us.

This only makes sense: money could not continue to flow out of Canada to cover our net current account obligations for interest and travel unless it also flowed back to us in the form of loans or investments from foreigners. In the early 1980s, our reliance on foreign investment declined sharply; in fact we invested more abroad than foreigners were investing here until the situation was reversed in 1986 and 1987.

In general the balance between the current and capital accounts depends on many factors, among them the difference between Canadian and US interest rates (which affects capital flows between the 2 countries), the relative value of the 2 countries' currencies, the relative growth of their GNPs, and the relative strength of protectionism (all of which affect trade flows). Since each of these variables depends in large part on the 2 countries' economic policies, it is hard to know what will happen to the balance of payments in the future.

Of course, this emphasis on Canadian-American economic relations (see Canadian-American Relations, Economy) is not strictly correct: the balance of payments also depends on our relations with other countries. But by far the largest part of our International Trade is with the US, and despite attempts in the early 1970s (under the Trudeau government's Third Option) to increase trade with non-US, non-European countries, our economic ties with the US have become even closer.

While some economists worry that this makes us too dependent on swings in the US economy, others argue that trading with the US comes most naturally to us and that the possibly considerable expense involved in deliberately diverting trade in other directions would not be worth the (quite likely minimal) reduction in dependence that it would bring.

Jobs and Workers

Another way to describe Canadian economic activity is to look at the kinds and amounts of work Canadians do, not at what they produce. The distinction between what is produced and the type of work done to produce it is often forgotten but, of course, is crucial. Not everyone working in the forest industry is a lumberjack, and in fact in most industries in recent decades mechanization has led to a large reduction in the number of direct production workers. The number of Canadians who actually hew, draw, drill or farm for a living is minuscule, while 7 out of 10 Canadians now work in classically white-collar occupations (see Labour Force).

Another dramatic change in recent decades is in just who is working. The overall "participation rate," that is, the percentage of the working-age population that either has work or is seeking it, has risen significantly, from 55% in 1946 to 64.8% in 1997, a result of the dramatic influx of women into the labour force (see Women in the Labour Force).

Over the same period, the female participation rate increased from 24.7% to 57.4%, while the male rate in fact declined, from 85.1% to 72.5%. Among the most common explanations for the influx of women into the work force are improved methods of birth control, the invention of many new labour-saving home appliances, changing attitudes about women's appropriate social role, and the growth of the public sector, with its preponderance of service-type jobs.

One of the great puzzles of recent Canadian economic experience is that while the proportion of the population that is employed has risen more or less steadily, the unemployment rate has also risen, though less steadily. Record increases in the creation of new jobs have been outstripped by even greater increases in the number of people seeking work. As a result, the national unemployment rate has risen from an average of 5.2% in the 1960s, to 6.7% in the 1970s, to 9.9% between 1980 and 1986 (though it was on a downward trend in the mid-1980s).

Two common explanations for this phenomenon are that the unemployment insurance program has become much more generous than it used to be, so that people are more inclined to undergo periodic spells of unemployment, and that there are many more "secondary workers" - women and young people, mainly - who presumably are not as desperate for employment as was that archetypical worker of the 1950s, the male head of a household in which no one else earned income. On the other hand, the unemployment rate for prime-age males has also been creeping up over the last 2 decades.

The relatively poor economic performance of the 1970s and 1980s also helps explain this, although even in the face of sustained economic expansion in the mid-1980s unemployment proved discouragingly resistant to rapid reduction. There is growing suspicion that more and more people simply are not qualified for employment in an increasingly technological economy. Many economists also point to high minimum wages, union wage policies, and restrictive Labour Market practices on the part of both unions and governments as reducing the labour market's ability to absorb the marginally employable.

Ownership Patterns

More and more in the postwar period, Canadians went to work for their governments, both directly and through the intervention of Crown Corporations. This growth in public employment took place at all levels of government but was most dramatic at the provincial and municipal levels, where employment in education and health care, especially, grew rapidly in the 1950s and 1960s. In 1960 only 8.6% of the work force was employed by provincial and local government, but by 1981 this had risen to 12.0%.

On the other hand, the increase in public employment in the last 3 decades is nothing like the increase in public expenditures (which have risen from 29.6% of GNP to 45%). This is because less than half the increase in spending was for the purchase or production of goods and services. Most went instead for transfers to individuals and interest payments on the public debt.

While employment data for crown corporations are harder to come by, estimates suggest that nowadays upward of 3% of Canadians earn their living by working for such agencies, of which there are more than 230 at all levels of government in Canada.

Perhaps the best-known characteristic of Canadian economic life is that many Canadians who work in the private sector of the economy are employed by foreign-owned corporations. The level of foreign ownership - first mainly British and then, following WWII, largely American - has always been very high in Canada. By 1968, when the Watkins Task Force on foreign ownership reported to the federal government, foreign control of Canadian manufacturing had reached 57%, while foreigners owned even more - over 70% and 80%, respectively - of our mining and petroleum and gas industries.

By the early 1970s, foreign ownership had become a contentious political issue and as a result the Trudeau government founded Petro-Canada, the state-owned oil company, set up the Foreign Investment Review Agency, which was supposed to screen proposed foreign investments to assure they provided net benefits and, in 1980 after the second OPEC episode, introduced the National Energy Program which included special incentives for Canadian-owned oil and gas companies.

Critics of these measures argued that the "Canadianization" they brought came at too high a cost both in damaged relations, especially with the US, and in discouraged investment in general. But, together with the turnaround in direct investment mentioned earlier, they helped reduce overall foreign ownership to 44% in manufacturing (in 1984), to 35% in mining, and to 39% in petroleum and gas. Although the Mulroney government replaced FIRA with Investment Canada in 1985, it retained general, if more relaxed, Foreign Investment restrictions and introduced special restrictions in publishing and other "cultural industries."

Economic Growth

The customary measure of a country's economic well-being is the amount of goods and services it produces - its GNP - per capita. Man does not live by Gross National Product alone, of course, and as an index of happiness, GNP suffers several well-known deficiencies. Among the most obvious are that it does not take account of such things as pollution, urban crowding, health, security of person and property, and the like. On the other hand, picking fault with GNP as a measure of well-being is much less fashionable now than it was before 1973, when economic growth began to slow in most industrial countries.

There is no question that Canadians enjoy a high standard of living, and that this has been true for the entire postwar period. The usual estimates place Canadian GNP per capita 5% to 15% below the US level and roughly equal to that in the north European democracies. Of course, many Canadians would argue that other aspects of Canadian life make up for the economic gap with the US, though it is still true that many of us choose to emigrate to the US each year.

Though average Canadian living standards remain high, in recent years there has been widespread concern both here and in the US that other countries in the industrialized world are catching up with - indeed, in the case of W Germany, may already have caught up with - N American living standards, and this has prompted a vigorous debate about which policies are most likely to rekindle N American economic growth. In part, the problem is statistical. The way living standards usually are compared across countries is to add up respective countries' GNPs, each measured in terms of their own currency, and then to translate across countries by using the current rates of exchange between currencies.

Though common, this procedure is fundamentally flawed: when our dollar falls by 30% vis-à-vis the Japanese yen this does not mean our living standards have fallen by 30% in comparison to Japan's. True, any Canadian who lives exclusively on Japanese goods, as some diplomatic personnel may do, will suffer a 30% decline in income, but everyone else loses only in proportion to their consumption of Japanese goods.

But even when statistical problems rising from movements in exchange rates are taken into account the Japanese and European economies have posted better per capita growth rates than either Canada or the US. Explaining this has become one of N America's growth industries. Both the Germans and Japanese began the postwar period at a significant disadvantage. Given their low initial base, it was not difficult for them to grow rapidly, and since a good part of their capital stock was destroyed during WWII, by the late 1950s they had a much newer industrial plant than most of their competitors.

On the other hand, while advantages of this sort are temporary by definition, both West Germany and Japan have continued to grow more quickly than North America for fully 4 decades now. Momentum cannot be their only advantage, and other explanations point to significant organizational differences, especially between the Japanese and North American economies.

Unfortunately, for those seeking a clear understanding of Japanese success, the problem is too many explanations, not too few. Differences between our 2 societies abound. Does the Japanese advantage come from the more apparently collegial nature of worker-management relations in Japan? From the fact that their government seems to do more long-term industrial planning? From the very high Japanese savings rate and very low strike rate? From the practice of charging higher prices at home than in export markets? From the apparently unforgiving system of weeding out industrial managers? From the lower share of GNP that is funneled through the public sector? From the underdeveloped social security system? From the much greater prevalence of profit-sharing?

Many Canadian observers, notably the Science Council of Canada, argue that in fact the crucial difference is that Japan has a better worked-out set of "industrial policies," and they propose that Canada formally adopt a system of sectoral economic planning (see industrial strategy). Critics of this view argue that planning probably is not the crucial Japanese advantage, that several of Japan's greatest industrial successes have been developed despite planners' wishes, and that in any case it would be very hard to transplant Japanese economic institutions to a society not well designed to accept them.

Regional Problems

Another aspect of Canada's economic performance that has caused policymakers much concern through the years is that the country's different regions seem to share unequally in its economic fortunes. In part, this is because Canada consists not of a single economy but of several. The 5 traditional regions have significantly different industrial structures, with manufacturing being most important in Ontario and Québec, agriculture, petroleum and mining in the Prairies, fishing and agriculture in the Maritimes, and forestry and fishing in British Columbia (see regional economics).

Regional differences in per capita income - usually termed regional "disparities" (with a strong negative connotation) - have narrowed slightly since the data were first kept. Though the Prairies' fortunes have swung widely over the last 50 years, and Alberta, at least, has recently vied with Ontario for the country's highest per capita income, the general rule is that earned incomes are higher in Ontario and in British Columbia than in the rest of the country. That these disparities have remained more or less constant, with only very gradual movement toward greater equality, suggests to many economists that in fact they represent "equilibrium" income differences.

In this view, since mobility across the country is relatively easy - many millions of Canadians have moved between regions in the last 50 years - any persistent interregional differences in income are best interpreted as representing the nonpecuniary value of living in the outlying regions of the country. Thus people who live in the Maritimes may consider the social, cultural or environmental features of their region adequate compensation for income differences between themselves and, say, Toronto residents. In addition, many federal programs, most notably equalization payments to the "have-not" provinces, make it possible for people to stay where they are and receive comparable government services even though their own earned income is on average lower than it would be in central Canada.

More radical critics argue, however, that regional economic growth feeds on itself, in a process of "cumulative causation," especially when the best and brightest of the poorer regions' young people decide to take up roots and move to central Canada and Alberta or BC to seek their fortunes. If so, then the outlying regions of the country can be expected to become still poorer as the centre (ie, the Québec-Windsor corridor) continues to grow. Policymakers must then decide whether to sacrifice the greater private wealth that efficient urban agglomerations can produce and try instead to use subsidies of one kind or other to divert growth to the outlying regions - assuming subsidies of a manageable scale would be sufficient to do the job.

Though the federal government has been trying since the mid-1960s to promote growth in the low-income regions of Canada, it is hard to discern any significant effect of these programs in the regional income data. However, federal programs such as equalization and the "Established Programs" do bring public services in the poorer provinces closer to the national average. And the fact that regional disparities have closed slightly in the last 50 years suggests that the more alarming versions of the "cumulative causation" story may not be that realistic.

Individual Inequality

Though regional inequality has often had more dramatic effects on Canadian political life, inequalities among the incomes of individual Canadians are in fact much greater. There are, despite the stereotypes, rich Maritimers and poor Ontarians, and the differences in incomes in any given province are and always have been much greater than the differences in average incomes across provinces. Before taxes and government expenditure programs have their effect, there is a great deal of inequality in Canada, and there has not been much change in this inequality in the last 40 years. The top 10% of income earners accounted for 42.8% of earned income in 1951 and 41.8% in 1981, while the bottom 10% accounted for only 4.4% and 4.6%, respectively.

It must be kept in mind, however, that there have been many changes in the composition of the work force and the pattern of employment between 1951 and 1981. There are now many more part-time workers than there used to be, and they naturally fall closer to the bottom of the distribution than full-time workers do. Similarly, relatively more generous social programs now enable workers to work full-time for some parts of the year and then take more or less voluntary spells of unemployment during others. It is therefore hard to draw meaningful conclusions about changes in the inequality of earned incomes. What is certain is that both taxes and government expenditures cause significant reductions in the degree of inequality. Still, while government programs do reduce inequality, they only redistribute 5% to 6% of GNP across income groups, despite the fact that in total government expenditures amount to over 45% of GNP.

Clearly, a great deal of government activity involves "horizontal" redistribution among the members of the same income class, rather than "vertical" redistribution from higher income classes to lower. This is all but inevitable in a system in which many social programs are universal, rather than income-tested.

In 1981, while 61.0% of social assistance and 41.0% of old age security/guaranteed income supplement monies went to people in the lowest fifth of the income distribution only 11.6% of unemployment insurance benefits, 23.3% of Canada and Québec Pension plan payments, and 7.8% of family allowances did. So long as many large-scale social programs are not aimed directly at those most in need, gross redistribution will inevitably be much greater than net redistribution. There may be some comfort in the fact that Canadian practice is not much different from that in the other industrialized countries.