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| World Marketplace |
Northern Exposures
Jack M. Mintz
11/01/2004
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Canada has enjoyed a remarkable economic recovery since the mid-1990s.
Emerging from years of stagnant growth and poor government fiscal policy, the
United States’ largest trading partner appears to be an attractive bet for
capitalists. From energy and steel to financial services and telecommunications,
many Canadian market sectors are enjoying impressive buoyancy, both domestically
and abroad at least for now.
The durability of Canada’s economic
success is about to be tested. In June, the Liberals, led by Prime Minister Paul
Martin, won 135 seats in the House of Commons, 20 short of the 155 seats needed
to form a clear majority government. Without support from members of other
political groups, the Liberals will be challenged to implement policy. This
leads some to fear that the government will squander hard-won economic gains in
a public-spending spree to secure the support of opposition parties and avoid a
parliamentary defeat. Such moves would mark a return to the days of heavy-handed
government intervention in the economy, which has historically undermined
competitiveness. It would also jeopardize Canada’s future as a competitive
member of the world economy.
Return From The Brink
Until the mid-1990s, Canada’s fortunes were
sputtering. Economic growth was anemic at best. An inability to compete in world
markets and ineffective political leadership ushered in a national malaise,
which reached its low point when the union barely survived a 1995 independence
referendum in the French-speaking province of Quebec. Provincial secessionists
lost by only 1.54 percent.
| After languishing in economic doldrums during the early 1990s, Canada has
enjoyed seven years of impressive growth. |
In the decade leading up to the referendum, Canada
suffered the fourth-lowest growth rate in per capita income among all
industrialized economies. The country’s unemployment rate rose to double digits
in 1992 and was still just under 10 percent in 1996—almost 5 points higher than
the comparable rate in the United States. At the same time, inflation-adjusted
per capita after-tax disposable income declined during those years, dipping to a
level that was $7,500 less than the average in the United States. The Canadian
dollar plummeted against its U.S. counterpart, leading the Wall Street Journal
to proclaim that Canada was fast becoming a third-world nation. Migration of
talented Canadians gained velocity, and policy makers debated how to counter the
brain drain.
Weak economic growth reflected fiscal mismanagement that began
during the administration of Liberal Prime Minister Pierre Trudeau, who
governed, with only a brief interruption, from 1968 to 1984. As late as 1965,
the Canadian and U.S. governments were about the same relative size, spending
roughly 30 percent of their economies’ resources. After 1970, however, Canada’s
federal and provincial governments expanded social programs dramatically, and
that expenditure, in addition to relatively large interest payments needed to
service the ensuing debt, drove annual government spending to 50 percent of its
resources. By 1995, Canada had one of the highest government debt burdens of any
member nation in the Organization for Economic Cooperation and Development
(OECD), exceeding 110 percent of GDP, and total government tax and nontax
revenue reached over 40 percent of GDP, almost 10 points higher than in the
United States.
Canada Has prospered from being the United States’ largest trading partner;
however, Canadians worry about maintaining independence as
their
country’s economic reliance upon the United States increases. |
At this nadir, seeds of change, sown by the electors in 1993
when they gave the Liberals under Jean Chrétien a strong majority in the House
of Commons, began to sprout. By the mid-1990s, trade with the United States was
beginning to boom, thanks in part to passage of the 1988 Free Trade Agreement
between the United States and Canada and the approval of NAFTA in 1994, which
brought Mexico into the fold. Today, more than $1.3 billion in two-way
merchandise trade crosses the Canada-U.S. border every day, making it the most
lucrative trading relationship in the world.
The Bank of Canada also led
efforts, beginning in the mid-1990s, to reign in persistently high inflation; it
currently stands at about 2 percent. The Chrétien government’s most significant
achievement, however, was enabling finance minister—now prime minister—Paul
Martin to eliminate the federal deficit by 1997, with annual budgetary surpluses
every year since. Federal and provincial governments trimmed spending to about
43 percent of GDP by 2003 and began to institute tax cuts in 2000 to reverse at
least some of the pain inflicted by excessive government spending.
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