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William Watson: Canada's economic plate-glass ceiling

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We were fortunate to have distinguished economist Vaclav Smil contribute to the Post’s New World Disorder series on Saturday. He provided a view of the Canadian economy from 35,000 feet and then, Google Maps-style, zoomed down to focus on some fascinating details about our economic development — the absence of our own plate-glass manufacturing industry, for instance, about which more later.

Smil began with our declining performance in the United Nations Human Development Index, which we really shouldn’t regard as alarming. In 1990 we were ranked in first place, with a score of .860. Our latest score is .936. The top score (Switzerland) is .962. So we’re behind. But the top of this ranking is a little like the finish at some Tour de France stages: a big pack of riders with one or two squeezing ahead at the end. Besides, the scoring system has changed over the years and it severely discounts income, which many people figure is designed to keep the United States out of top spot because, well, you can’t have the UN declaring the U.S. best at anything.

Prof. Smil went on to discuss Canada’s declining score on the lesser-known Economic Complexity Index (ECI), which is produced at Harvard, where it’s explained that “countries improve their ECI by increasing the number and complexity of the products they successfully export.” We were 22nd in 1995 but only 43rd in 2020, sandwiched between Saudi Arabia and Tunisia. Nothing against these countries (well, actually, lots against Saudi Arabia) but we’d much prefer to be sandwiched between fellow G7 countries, if that could be arranged.

And there are real consequences from our economy’s lack of complexity (besides reinforcement of the idea that we’re lumberjacks and we’re OK: simple folk but happy). As Smil puts it: “countries with a great diversity of advanced and complex productive know-how will come out on top as they will be able to sell highly diverse and highly valuable products that are sought after around the world.”

That’s where plate glass comes in. It is a “telling fact,” Smil writes, that “a country of nearly 40 million people is the only G7 member not making any plate glass despite the fact that in per capita terms Canada has had the largest glassed-condominium construction boom among G7 countries during the past decade.” Hungary, Portugal and “even economically decrepit Venezuela” make plate glass. But we don’t.

That’s just one example, of course. But if declining economic complexity does put a, ahem, plate-glass ceiling on our growth prospects, what do we do about it?

First, don’t suppress, derail and vilify, to use Prof. Smil’s terms, the development of key industries like energy and minerals, as the federal government has been doing in recent years. These industries often involve complex capacity — how do they figure out where all the pipes and valves go in the spaghetti puzzle that is a modern refinery? — and they would add to the diversity of our exports, if we would let them. Germany just bought some LNG from Qatar. That could have been us, if our governments didn’t insist there’s no business case for such an unsexy, incorrect industry.

But beyond that, what should policymakers do? If you believed industrial diversity was important, how would you encourage it? Innovation, Science and Industry Minister François-Philippe Champagne looks like the kind of guy who couldn’t be happier if his officials told him it was now his duty to go out and give $100 million or more to a bunch of folk who are starting up a new state-of-the-art plate-glass factory, presumably in a part of the country where Liberal electoral prospects aren’t hopeless.

He might reflect that plate glass seems lower-tech than the kinds of things his officials usually recommend he support — bio-medical research, robots, rocket science and so on — but if there are ribbons to be cut and grateful recipients of federal largess to be schmoozed, who is he to question the importance of improving our economic complexity index?

That’s the industrial-policy dilemma. How do you tilt toward favoured industries without creating crony capitalism? How do you encourage Canadian producers without acquiring permanent political clients?

This is where I came in to economics. Canadian economists in the 1950s and ’60s worried about “miniature replica” industries — our tendency to operate facsimiles of U.S. industries, autos being the prime example, behind steep tariff walls. If the U.S. Big Five (including Studebaker and American Motors) produced 30 auto lines, we would produce as close to 30 auto lines as possible. Complexity abounded.

Of course, because of our much smaller market, each production run was much shorter, which meant set-up costs were much higher per unit of output, which meant we needed the high tariffs in order not to be undercut by imports from the U.S.

First with the Auto Pact of 1965 and then with the Canada-U.S. Free Trade Agreement of 1989, we changed our strategy from artificial product diversity to efficient scale of output. We are probably the only G7 country without a number of industries. But we’re also the only G7 country with a common border and free-trade agreement with the world’s biggest economy.

How we would get to efficient (i.e., world) scales of output with lots of industrial complexity and diversity and no crony capitalism remains a Rubik’s policy cube.

Financial Post