APRIL 30, 1981
The Future is Not What it Used to Be
AN ADDRESS BY Charles F. Baird, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, INCO LIMITED
CHAIRMAN The President, Reginald Stackhouse
If leaders of our society wore stars on their lapels, our speaker would wear four. Obviously he is a leader of the business community. Anyone who is chairman and chief executive officer of Inco, one of Canada's great corporations, has to be one of this country's business leaders.
But our speaker has also been a leader of government. Before joining Inco in 1969 as a Vice-President for Finance, he had been Under Secretary of the Navy in the United States Government, a post that made him the administrative head of a department which included one million naval personnel and four hundred thousand civilians.
Our speaker is also a leader in community life. He is, for example, chairman of the board of trustees for Bucknell University, and a member of many important councils and societies, including the prestigious Council on Foreign Relations.
As well, we must respect the way he is a leader in physical fitness. A former United States tennis champion, he recently won the Senior Doubles tournament at Toronto's Queen's Club. Golfers should also be warned that he has a handicap of twelve! Rich deposits of nickel and copper have made the Sudbury Basin one of the world's richest mineral areas. They were discovered in 1883 by accident when the CPR was being pushed through. But they have not been developed by accident. The success of the corporation which has become synonymous with Sudbury and nickel has been greatly due to the kind of leadership shown by our distinguished speaker of today.
It therefore gives me great pleasure to introduce Mr. Charles Baird.
In the last century Victorians looked with Tennyson "into the future" and, like him, saw "all the wonders that will be." Their overwhelming sense of optimism about the future arose in large part from the challenge and vitality that came from the developing frontiers of the New World. As confidence in the future faded after World War I, Paul Valery, French poet and author, expressed--rather well I think--his doubts about these changes: "The trouble with our times is that the future is not what it used to be."
And the world continued to leave its optimism behind--through depression and a second war to end all wars. In spite of a strong post-war recovery, by the 1960s Broadway was expressing its somewhat jaundiced view of the future in a more forthright style with the play Stop the World, I Want to Get Off. I'm not sure I could find a phrase more a propos to describe today.
Traditionally, writers and analysts attempted to stabilize the present by setting it in an historical context, to achieve perspective by relating where we are to where we have been. These days analysts project forward--from the instability of today into the uncertainty of tomorrow. Books about the future proliferate, ranging from the social and economic dynamics of change to econometric models of the next century--from Future Shock and Limits to Growth, through How to Prosper in the Coming Bad Years, The Third Wave, Managing in Turbulent Times and The Zero Sum Society, to the recent three volume U.S. study The Global 2000 Report to the President.
I don't have a crystal ball that is clear enough to cover all this ground, but it might be useful to examine some of the major characteristics of change that will face Canada and the world in the 1980s. I shall make no attempt to predict the outcome of the global strategic struggle between the Soviet bloc and the NATO nations, nor the impact of developments in China, nor the threat to global peace represented by the powder keg that is the Middle East. Rather I assume that the rather shaky standoff that has existed for decades will continue and that Third World nations will not disturb the peace. Nor shall I attempt to predict what new social changes will startle our future. Like most businessmen I shall focus on economic and political issues.
One common thread runs through almost all scenarios about the economic future of the Western industrial countries: the medium-term outlook for world growth is far from optimistic. Experts in Western Europe await the re-emergence of growth; those in North America are still seeking cc nfirmation that the recovery from the latest business cycle is firmly in place.
Record levels of inflation, a continuing series of energy-price hikes, growing balance of payments deficits, fluctuating exchange rates, rising unemployment and stagflation continue to erode the economic vitality of most countries, creating a policy dilemma of exceptional dimensions--how to manage the irreconcilable--price stability and growth.
Weakening economies cannot absorb the growing work force, and are facing unprecedented levels of unemployment. At the same time inflation has eroded much of the growth in earnings. Real income per worker in the US. has been declining for two years now; in Canada and much of Europe the situation is only marginally better. While the social and political costs of squeezing inflation out of the system seem unacceptably high for most governments, economic stimulation to reduce unemployment would, if carried too far, accelerate the inflationary merry-goround.
Clearly this is a vast over-simplification, but policy makers are caught on the horns of a double dilemma: the high cost of unemployment and inflation, and the fragility of the trade-off between price stability and growth. Mrs. Thatcher has learned that her tough Conservative policies can make things much worse, before they get better. Mr. Reagan has learned that pre-election prescriptions are more difficult after the fact. With an inflationary psychology and continuing pressures from oil prices firmly embedded in the economy, the outlook is problematic at best.
OPEC energy price increases and the failure of national policies to adjust to their inevitable inflationary impact lie at the heart of continuing worldwide inflation. Up to now most attention has been focused on the problem of financing the international deficits, on a searc h for ways to reduce dependence on imported oil, and efforts to ensure security of supply. Some oil users are changing to cheaper or more dependable forms of energy. Others have cut consumption. Britain's oil consumption in 1980, for instance, was the lowest in fifteen years due only in part to the economic slowdown. U. S. gasoline consumption in March was the lowest since 1971. In Canada where prices have risen less, energy consumption continues to set records, but energy production is not being increased as it would be if proper price incentives were present.
As prices escalate, energy saving takes on greater urgency. In my own company, for example, Inco's Ontario Division--the province's largest single energy user--has been able to reduce its rate of energy consumption by ten per cent since 1975; as prices rise we shall find ways to invest profitably for even greater savings.
What remains largely unresolved in this new environment is the longer-term and more difficult task of restructuring industry to accommodate higher energy costs and new price relationships among labour, capital and energy. A resolution of these changes in relative and absolute costs will result in a decline in some energy intensive products and processes as well as new patterns of competitiveness for domestic and internationally traded goods.
In Canada there has been no lack of discussion about energy. The federal government is taking the position on prices that Canada's energy resources represent a comparative advantage that can be used to hold back the tide of inflation and increase the competitiveness of Canadian exports. There are short-term advantages in this position, particularly to the consumer. Nevertheless, if Canadian industries are long insulated from the full impact of world oil and energy prices, they will delay making the inevitable structural adjustments to changing production costs, currently in process throughout most of the industrial world. This reality was forced on most oil-dependent Western European countries some time ago, and at last is being faced in the US. In Canada, the failure to use prices to force these adjustments will defer them, at high cost to the Canadian economy and to all Canadians.
If OPEC is able to set oil prices in relation to world inflation, the value of the US. dollar and the rate of growth of oil demand, international prices could increase by over ten per cent a year. This could bring us $100 a barrel for oil by 1990. An alternative scenario recognizes the possibility of disruption in Middle East oil supply as internal or international strains cripple one or more producing countries. Either way the Western countries will, literally and figuratively, pay a high price. Prospects for growth in the rest of the world are equally problematic. Failure of the communist countries to achieve their production goals over the past five years has resulted in a reduction of targets for the next plan period. This will dampen the growth of trade between Eastern and Western Europe that has been of increasing significance in recent years. The situation in Poland must exacerbate more than the politics of the region.
The economies of the non-oil-producing developing countries are reeling under the impact of high energy prices. The newly industrialized countries, or NICS, as they are called, such as South Korea, Taiwan and Brazil, burdened with high levels of debt and growing dependence on Western markets for their output, are particularly hard hit. As these countries try to get their economies under control, there will be an increasing number and variety of policy changes-some of which may prove particularly difficult for the investor. By and large, the less developed countries are likely to remain poor, and under considerable economic, social and political stress.
Any objective view of the next several years suggests that, on average, growth in most regions of the world is unlikely to be significantly stronger than in the 1970s.
In the Third World extremism and confrontation seem to be spreading, with wars between countries and revolution and terrorism within. Differences exist, not only among Third World countries but between groupings: between oil and non-oil producers; between the NICS who have grown rapidly and the least developed who have not; between aligned and nonaligned; communist and non-communist. These differences make mutual co-operation difficult and meaningful dialogue between North and South almost impossible.
In the industrial world confrontation seems peaceful by comparison, but that pendulum is also tending to swing to extremes. The resolution of many important issues is being stalled in the difficult and sometimes impossible search for a national or international consensus.
Differences among the Western countries appear to be neutralizing collective action. The variety of responses by NATO member countries to recent events in Iran, Iraq, Afghanistan and Poland suggests a crumbling of cohesion among the Western Alliance.
The intractability of many domestic policy problems is also creating a heightened polarization of views. The middle ground is being deserted in favour of;' doctrinaire views on the right and the left of the political spectrum; society is fragmenting into splinter groups with different and conflicting interests and goals. This environment, more fractional and more parochial, is tending to enhance protectionist and nationalist, anti-market, anti-business and antimultinational sentiments that threaten more than our ideological orientation; they threaten the very system on which the Western nations have built their success.
Let us look first at protectionism. As the Tokyo--Round came to a conclusion the erosion of its purpose was already under way. Economic problems in particular industries prompted a number of governments to react defensively to protect domestic output and employment--the crisis in the world steel industries is a case in point. The economic slowdown last year resulted in further efforts to protect the domestic economy from foreign competition as illustrated by a call for protection against Japanese cars in Europe as well as North America.
Commodity agreements, another form of protective market intervention, have a long and controversial history, but I think it is fair to say that there is some consensus that past attempts to design and implement such agreements have not been particularly successful. In recent years, the United Nations Conference on Trade and Development (uivcrAD) has been a prime mover in promoting agreements in metals and agricultural commodities. Weaker world demand and balance of payments problems in the Third World may revive pressures for such agreements. At Inco, we support the Canadian government's proposals for intergovernmental meetings in which a balance of producer and consumer interests discuss industry and commodity problems. In my view, we should continue to resist proposals that provide politically satisfying but unworkable answers to this very complex problem.
Nationalism--a larger concept than protectionism--takes a variety of forms, from patriotism to zenophobia. Deeply rooted in our value system, it can be a positive and productive force. On the other hand, as George Ignatieff indicated in a recent article, selfregarding nationalism is anachronistic and selfdefeating.
As their economies deteriorate, many governments of Third World countries are under increasing pressures from nationalists on the political right and the left, both demanding explicit discrimination against foreign business. This may take the form of oppressive tax regimes, controls on capital or income remittances, hostility to the operations of foreign companies, and in some cases outright nationalization. On the fringe of nationalist extremism is the threat of violence and terrorism against foreign companies and their employees.
At one time, businesses operating in a foreign and unpredictable environment were sheltered by a political umbrella provided by the government of the parent country. The fabric of this umbrella has long since dissolved and companies cannot rely on governments to safeguard their overseas operations.
As a result, corporations no longer focus only on finding promising business opportunities. They must now allocate increasing resources to studying the balance between potential growth and potential hazards. Risk measurement is not an art or a science. In fact, in the light of events in Iran and Afghanistan, students of risk forecasting are learning that predicting the future is hazardous to your reputation.
There is a tendency in the industrial countries to consider extremes of nationalism an exclusive characteristic of the Third World. This is far from being the case. When times are good, attitudes and policies are open, outward-looking and supportive; when economic growth and social change are stalled or threatened, there is always and everywhere a tendency to pull the wagons into a circle.
In a world that, by any standard, is becoming more interdependent, the cost of economic nationalism will in the final analysis be felt, not merely in reduced profits for business, but in lower real income for everyone. On these grounds, I must express my grave concern about the philosophy of economic nationalism currently being translated into policy in Ottawa.
Capitalism brought to the Western world an incomparably high standard of living and legitimized the role of the mixed economy and the business sector. Unfortunately, their authority has been declining. In the 1960s, there was an upsurge of emotional and intellectual effort, primarily among the young, that called into question many of our traditional social, economic and political values. This process established social and human objectives as our primary goal and the economic system as a means to achieve that goal. Unfortunately, this conclusion is often distorted to suggest that economic considerations are minor or dispensable. Nothing could be further from the truth. Economic progress still provides the basis for any significant improvement in the quality of life, and we ignore this fact at great cost. The rhetoric of the left has tried to sell the idea that private enterprise economy--big business in general, and foreign big business in particular--is to blame for the failure of economic growth to produce the promised rose garden of universal social progress. In this process, multinationals have been made responsible for more of the world's problems than any reasoned or objective analysis could sustain.
Don't misunderstand. Corporate performance has not been perfect. Corporate leaders agree that the business sector's responsibility for creating wealth must be squared with social and individual as well as economic needs and objectives. Corporate integrity must obtain--and be seen to obtain. There are legitimate differences of opinion on priorities but these can, and must, be resolved. Individuals and groups who promote policies that threaten the survival of the mixed economy do not act in the long-term interest of the average worker or consumer, and I think most of them know it.
On the international side, organizations such as the United Nations, the Organization for Economic Cooperation and Development (oEcD) and various business groups are formulating performance guidelines on multinational investments that help protect the interests of the host country. Unfortunately, they do not provide useful safeguards for corporations against arbitrary actions by governments. The elaboration of guidelines will continue, and companies should participate iin the process in the hope that mutually constructive agreement on the rules of the game can be achieved. Greater stability of the corporate environment in the Third World is essential if investment from Western countries is to reverse its downward trend.
The traditional role of government was limited to safeguarding the conditions of the market. In many Western industrial countries, government regulation and intervention have been a growing source of friction with the business community. When, in its view, the market is not working, the government or its bureaucracy seem to believe that they can create a managed market that will do better. For the most part, this is a fallacy.
In the U.S., there is evidence of a new commitment to back away from regulation. In Canada, there have been some encouraging statements about reducing the burden of regulation, but as yet the rhetoric seems to exceed the reality. Senator Olson recently reported that the reduction in paperwork from last year's revisions to the government's reporting requirements will save eight thousand boxcars of paper this year. I applaud this move. Unfortunately, if the Minister of Industry, Trade and Commerce has his way on the proposed revisions to FIRA that would require performance reporting by foreign-owned companies in Canada, the eight thousand boxcars will be full again.
The business community welcomes every attempt to reduce the burden of reporting and regulation. The cost of regulation runs high. When it strangles incentive and efficiency in the private sector, society's gain is small and short-lived.
This overview is not particularly optimistic. Churchill said that the British prefer to be told how things are--in fact they like to know the worst. I hope this is a Commonwealth characteristic too, and that members and associates of The Empire Club of Canada also have some predilection for "hearing it as it is." In fact, my purpose is not pessimism. I have gone down this road today believing that it is crucial to look at the way our world is developing. If we don't like what we see we must try to change it.
It is some time since I last heard the prophecy that the second half of the twentieth century belonged to Canada. Given the present state of disarray it is hard to recall that over the past thirty years, economic and social progress in this country has been almost unrivaled. The opEc oil cartel has diminished the mediumterm growth potential in the industrial world in fundamental ways. Canada, with its exceptional energy and resource advantage, could--note, I said could--achieve and maintain a leadership role into the next century. If this is to happen, governments must resolve their political and economic differences and develop a policy orientation that will, among other things, stimulate business to higher levels of productivity and to increased investment in the Canadian future.
We must not let the problems overwhelm the potential. If we, and this means all the players, can get our act together, the prophecy may still come true. Valery also said, "L' avenir est la parcelle plus sensible de 1'instant." I agree--the future is the better part of today.
The thanks of the club were expressed to Mr. Baird by Ian McPhail, a Director of The Empire Club of Canada.
Ladies and gentlemen, this is the final meeting of the 1980-81 season. I thank you for being with us today and for your support through all the previous twenty-six meetings which began on the first Thursday of October. It has been a privilege and a pleasure to serve you as your President and to work with so many fine people whose services each week are required for the club to function with the efficiency and the finesse for which it has become well known.
The Empire Club of Canada more than deserves the dedication that has made this voluntary society possible since its foundation in 1903. It provides the kind of public forum that is vital to democracy. Here leaders of business, government, the arts and every significant dimension of our life discuss issues vital to us all. If free speech is the soul of democracy, a corporate body for that soul is just as essential and this club provides one that is known and respected the world over.
But The Empire Club of Canada does more. It represents values and traditions that must be respected and preserved if Canada is to survive as the kind of nation that is honoured by all, and envied by many. It was the threat to those values and traditions which inspired the organization of the club seventy-eight years ago, and it is the even greater threat to them now that must inspire us all to continue this club into the future.
Some outside our membership find offence in the name, "Empire Club," and in a strictly political sense it is anachronistic. But not in a symbolic sense, and no one should want to change it any more than he or she would want to change the name of the Empire State Building. It represents something precious to us as a people, something that has been implicit in every speech given this year, however unconsciously the speaker advanced this message. It is the commitment to greatness, the conviction that greatness can be our future, the determination that greatness will be not a memory but a target. Empires have always been the achievement of people who have thought in those terms, and Canada's future depends on its having people described in the lines:
Give me men to match my mountains, Give me men to match my plains, Men with greatness in their bosoms, Men with empire in their brains.
It has been one of the great honours of my life to preside over a club with that spirit of greatness, and I have only happy memories as I say for the last time: Ladies and gentlemen, this meeting is adjourned.