Economic Directions for Canada

BRIG. GEN. LEWIS:

Members and friends of The Empire Club of Canada: A writer in Maclean's of September 4,1978, characterizes Robert Andras as the Prime Minister's fireman. Let me quote: "When a program blows up in the government's face, it is usually Andras who is summoned to douse the flames." Whether or not it is a fireman we need, there is no doubt that the two burning issues of our time are the national economy and national unity. And we are fortunate that a man who faces these issues on a daily basis as a minister of the Crown has taken time from his busy schedule to speak to us today.

Mr. Andras has been the federal member for Port Arthur since 1965. He achieved cabinet rank in 1968, first as Minister Without Portfolio, then as Minister Responsible for Housing, Minister of State for Urban Affairs, Minister of Consumer and Corporate Affairs, Registrar-General, Minister of Manpower and Immigration, President of the Treasury Board, and now President of the Board of Economic Development Ministers.

Prior to his election to public office, Mr. Andras held executive positions with a number of business firms including the Ford Motor Company, Moffat Limited, and the Canadian Bank of Commerce: and as additional preparation for the various hot seats he has held in his parliamentary career, he also served as an infantry officer in northwest Europe during World War II.

I mentioned earlier Mr. Andras' interest in national unity. He comes by it honestly and perhaps more intimately than most of us--he was born in Quebec, was raised and educated in Saskatchewan and Manitoba, and worked in New Brunswick and Ontario.

In his present cabinet post, he is literally at the centre of economic and fiscal planning policy for a federal government that is faced with the momentous questions related to the nation's economy. The Minister himself is said to be dubious about there being any easy solutions or grand designs on the part of the government. He is also said to feel that government intervention sometimes exacerbates the problems it sets out to solve. Let me quote him: "You can create dependencies that you cannot sustain." Furthermore, Mr. Andras has demonstrated that he has a high regard for personal initiative and feels that the government's role should be one of encouraging and rewarding that initiative.

Perhaps we will learn more about the problems he faces and reach a better understanding of his role in national economic affairs as Mr. Andras addresses us on the subject: "Economic Directions for Canada."

Members and guests of The Empire Club of Canada, I am honoured to present to you at this time the Honourable Robert Knight Andras, P.C., M.P., President of the Board of Economic Development Ministers.

M R. ANDRAS:

Ladies and gentlemen: Some of you perhaps watched a powerful drama unfolding on television earlier this week.* It may have seemed to drag, at times. And, according to your various points of view, one player or another may have failed to show any real sense of the great occasion. Yet, in spite of the imperfections, whether there was vision shown or an absence of it, you were witnessing Prime Minister Trudeau and the premiers playing their parts in the most important drama Canadians can ever face--the job of keeping Canada together or letting it split, forever.

Ladies and gentlemen, I have no gift for purple language. Just let me say, plainly, to you who are important leaders of opinion, that we all are participants in, not just spectators of, a drama of national life or death which is reaching a critical phase. It will not be resolved only by First Ministers, on TV or in back rooms. It will not be resolved only by the people of Quebec. It will be resolved by Canadians of politics, business, cultural matters, government, labour, Canadians who either have--or, let us face it, do not have--the mind and spirit to rise above special interest for the wider vision of Canada.

It is not easy. Interests do have to be safeguarded. Accommodations must be fair. Regional interests, language interests, economic interests,are much different in Toronto than in Trois Rivieres, Hamilton or Calgary, between Quebec City and St. John's, Newfoundland, or Victoria, B.C. Compromise, within reason, and in this case within the bounds of a strong united and indivisible Canada, is a noble endeavour. Negotiation, within that framework, is needed and acceptable. Negotiation beyond and signals of willingness to go beyond those boundaries--quasi endorsement of partition, separation by any fancy name--is naively dangerous and unacceptable in both the immediate and longer term. Some may think, with dangerous short-sightedness, that we don't have a national unity problem--or that if we do, it is all economic and nothing else.

And so, ladies and gentlemen, we are bound to see the performances of our public players in this drama as uneven. They are searching for answers to complicated and intractable issues too, and just as businessmen and many others, they tend to be uncertain. They perhaps need, as do you, more faith and confidence in Canada.

There are reasons for uncertainty. Everyone here can cite his or her own. That's the trouble. Too many of us are too long on our own complaints and too short on a Canadian perspective that looks at others and our nation as a whole. A realistic perspective--not rosy optimism but a practical look at what we have and what we are as a country--would do wonders for our confidence and faith, and our economic and social performance. I am here to present such a balanced perspective, particularly with regard to our economic past, present and future.

To start with, international factors have given us cause for economic tensions. Since 1973, we never have been quite sure how far and how fast energy prices would rise. And energy prices have helped to upset the fairly stable exchange rate system. we enjoyed for twenty-five years after the war. Another major round of tariff negotiations, now nearing a conclusion, has Canadian businessmen wondering how they will fare. Both business and government in Canada, where we are so exposed to international trade and capital movements, find it difficult to deal with uncertainty about economic growth in the major industrial countries, especially the United States. We move from predictions of recessions to good growth and back to recessions with startling frequency, making it difficult for any of us to develop the best policy stance. Finally, there is inflation the world over, caused by international and domestic forces, creating uncertainty about price levels.

Here at home, all those are piled upon the major domestic concerns about economic performance and the national unity debate. These sources of doubt have been with us for a long time, but they are intensified now as never before and they all have come at one time, so that the effect is pretty strong. But so is our resilience, if we will but face the facts. The balanced economic perspective warrants optimism and confidence, and the right policy decisions can only come from a balanced, realistic assessment.

With all that said, against a difficult background, what is a realistic and practical judgement of Canada's economic performance in the 1970s and its portent for the future? Let me look at Canada's record compared with that of the ten other top industrial countries of the world. I will compare these for the period 1970 to 1977, the last year for which we have comparative figures. And I will discuss the period 1974 to 1977, when our problems intensified.

First, the strong points. Canada was best in the rate of job creation for the whole period, including the especially difficult four years 1974 to 1977. Canada was number one in the rate of capacity utilization over the whole period. Over the seven years, Canada was second in real economic growth, at a 4.4 per cent annual average (gross domestic product). We were second in the growth of real investment, at 4.8 per cent, only a whisker, one-tenth of one per cent, behind first-place Japan. Now for the latter four-year period, Canada dropped to a growth rate of three plus per cent in real gross domestic product and three per cent in real investment. That sounds terrible, except that in dropping back we in fact moved up into first place in these areas--among eleven nations. That is a telling illustration of how the world economy has softened but how, comparatively, we bore up.

Again, we hear a lot about our unit labour costs in manufacturing. In fact, our increase was the second lowest (second best performance) of the eleven countries for the seven years: but we were behind the United States and since they take seventy per cent of our trade we had difficulties. And then, we had a disastrous record--there is no other word to describe it - in the years 1974-76. By 1977, however, because of lower wage settlements and a depreciated dollar, Canada was back to the lowest growth in unit labour costs among all our industrial competitors--and 1978 seems to have been equally good.

We were moderately good, fourth best among the eleven, in price increases over the seven years, although that performance has been weakening. In 1977 we had dropped to sixth.

In our balance of trade, we had real troubles in some areas. The growth rate of real exports of all goods and services was ninth among the eleven nations--raw materials, processed and even manufactured goods were in moderate to mediocre shape, but were dragged down badly by deficits in tourism and other so-called "invisibles." Our percentage change in world trade share was the poorest of the eleven nations. In 1977, fortunately, we shot ahead of the United States and Europe to second behind Japan in growth for manufactured exports. And we continued to fare extremely well in this area in 1978. Moreover, the rate of increase of import penetration into Canada was the second lowest of the eleven countries over the period.

We were great in creating jobs, but our unemployment rate grew faster than in any of the other countries. The labour force grew at unexpected levels, and we did not create jobs quickly enough to meet the aspirations of Canadians. This and inflation remain our major challenges and they are totally interrelated.

Another weak area was productivity growth in manufacturing--eighth over the whole period. Fortunately for us, the United States ranked ninth and so our exports could continue to grow. Moreover, by 1977 we had fought back and our manufacturing productivity growth rate was third best of the eleven.

That is our record in the 1970s--very good in job creation, in capacity utilization, in growth of real gross domestic product, and in growth of real investment. Our growth of unit labour costs was also one of the best over the whole period although we had a rough two years in 1975 and 1976. We were mediocre in price performance and productivity. We had a poor record in the unemployment rate, and in the share of world trade for goods and services. We cannot be overconfident, but we can surely reject despair. We have enough areas

of basic strength, with evidence of substantial improvement in 1977 and 1978, that we should be able to improve our weak areas.

Let me now address federal government response to the economic conditions as they unfolded. Not to put too fine a point on it, the response was spotty and the results not very good from 1970 to late 1974 or early 1975. From then to the present, we have improved markedly.

In the first half of the decade, I think the government, and most Canadians, did not fully comprehend the basic nature and the implications of the changes that were taking place.

For instance, it was recognized that the jump in energy prices would place a severe strain on consumer prices, on international capital markets and on exchange rates. But it was some time before it was realized that the increases were permanent and would continue to escalate. It also was some time before it became clear that the transfer of real income to the oil-producing countries was significantly depressing economic activity in the industrial countries. And the German and Japanese economies moved to full maturity, but their currencies were never appropriately revalued, with great difficulties for the exchange rate system.

In Canada, at the beginning of the decade, we had optimistic estimates of our own energy reserves and our insulation from world energy pressures. We failed to anticipate the degree of growth in women joining the labour force. The task of job creation was considered more manageable than it turned out to be, and was expected to provide substantial economic growth and government revenues. Finally, price increases had moderated in the first year or two of the decade and there seemed to be some reason to believe that inflation would be quite moderate.

In short, the 1970s then looked like a continuation of the growth of the 1950s and 1960s with their attendant expansion of government revenues.

In that environment, Parliament approved large new expenditure increases: indexation of old age security and children's allowances, enrichment of the unemployment insurance program, indexation of public service pensions, expansion of shared-cost federal-provincial programs in regional development, language education and other areas. The financial projections seemed reasonable. We thought we could do all these things, and so federal expenditures increased very rapidly. Prices rose rapidly as well, however, taking indexed expenditures with them. Unemployment insurance rose as unemployment rose. The indexation measures took government expenditures out of government control, to a degree, and made them unpredictable.

Indexation of personal income tax exemptions since 1973 has made the federal tax system significantly less sensitive than it was to rising personal incomes. In other words, while federal expenditures were rising in part because of upward indexation, revenues from personal income tax were decreasing relatively, because of downward indexation.

By 1975 there was a clearer idea of the economic forces at work and four major shifts were made, as a result, in government policies.

First, budgetary restraint programs were initiated in 1976 and subsequent years, so that the annual growth rate of federal expenditures was reduced from over twenty-eight per cent in 1974-75 to under nine per cent in 1979-80. The federal expenditure "bite" on the Canadian economy, including continuing substantial transfer payments to the provincial governments, has receded from its high of 22.5 per cent of a $165 billion GNP in 1975 to a forecast 20.3 per cent of a ($258 billion) GNP in 1979. Incidentally, you may be interested to know that the United States federal government will be spending a slightly higher percentage of their GNP than we do.

Second, monetary policy became much more restrictive: the growth rate of the money supply fell from an annual rate of fourteen per cent in the 1971-75 period to a little over eight per cent from 1976 to the first half of 1978: it rose sharply in the last half of 1978 but in recent weeks is back on track.

Third, the anti-inflation program helped to cool off the inflationary psychology until the monetary and fiscal measures could bite. The rapid rise in unit labour costs came down to the lowest among the eleven countries in 1977 because of that program, combined with some depreciation of the dollar. Our record in 1978 was equally good and we are in a position to further improve our trade performance.

Fourth, in co-operation with the private sector we launched a systematic review of government policies that affect economic performance. We started by interviewing 5,000 firms across Canada, in 1977. Then we launched specific analyses, along with labour and business, of twenty-three major industrial and service sectors, which produced recommendations to the federal and provincial governments. A purely private sector committee, comprised equally of business and labour, produced a significant overview report. In all, there was an unprecedented review of policies on manpower, transportation, taxation, government regulation, trade and export marketing, competition, energy and many other areas.

Last November, the federal government issued a First Response to these separate industry task force reports--accepting some proposals and saying the government was already moving to meet others or had met them. The November budget addressed itself specifically to a number of recommendations.

One of the main tasks now occupying me and the Board of Economic Development Ministers is preparing further responses. We will have an opening reply to the recommendations of the review committee later this month and responses to each of the twenty-three industry reports by the end of March.

The Board of Economic Development Ministers in fact was set up precisely to review our basic economic development policies using a consultative process. Our job is to ensure that the range of framework policies across the whole of the federal government is developed and applied in a co-ordinated way, so that one department's policy does not duplicate or nullify another's. So the Board is actively reviewing major government programs toward industry, and consulting business and labour about that. Two specific examples are the programs announced last week for the forest-products industries and for shipbuilding. We are at present studying more industries.

We carefully review the allocation of funds of member departments, and we examine their budgets carefully, with authority to recommend that programs be cancelled, changed in their nature, merged or consolidated, and also to cut red tape.

The Board, with the approval of Cabinet, has the job of directing and improving the speed and quality of government support to private economic development. Our job is to provide more coherency and unified direction to the work of the separate economic departments, and to try to reduce duplication and conflict with provincial policies and programs.

What we essentially are trying to do is to manage and move the continuation down the road toward a more predictable and stable climate for investment, economic growth, the retention and creation of jobs for Canadians, and better price performance.

There is much still to be done, but there is much that has been done, and I must say that I get a bit fed up with the accusations that we as a government have had a sudden last minute conversion on the road to Damascus--that we are acting on a "death-bed" repentance.

No government, no country, can or is going to be able to isolate itself from uncertainty. This is a world, a tough, real world, of constant and often unpredictable social and economic changes.

But in the face of these, we in the federal government have been responding and charting a steady course particularly since 1975, toward greater realism, more predictability and stability in the broad levels of economic policy (monetary and fiscal), and more intensely now in government policies and programs that affect economic development. The clear thrust and dominant theme is that we are doing this, in consultation, cooperation, and support of a dynamic and competitive private sector which we believe is and must be the prime factor in a healthy economy.

We are convinced we are charting the right course. We intend to stick to it with steadiness although not blind stubbornness. We are not going to promise miracles. We are not going to indulge in cosmetic diversions--appearing and disappearing deficits--that are nothing but a fiscal fairy tale.

Our economy is deserving of your confidence. I am continuously consulting with business and labour people. My sense is that, behind a lot of the rhetoric, there is a positive feeling. Profits in many industries have been good. We want to see those ploughed back into improved competitiveness, expanded plants, new businesses, for more jobs and better consumer prices, as well as decent earned wages and dividends. This is in the interests of all Canadians--consumers, workers and investors.

One thing is for sure--many of the movers and shakers in Canadian industry are far more buoyant and upbeat than the theoretical economists. As for me, I know where I will place my bets, for I have always known that, while theorists analyze and forecast trends, others make them.

The appreciation of the audience was expressed by Sarah A. Band, a Director of The Empire Club of Canada.

*Editor's Note: Portions of the First Ministers' Conference on the Constitution, held in Ottawa on February 5-6, 1979, were broadcast on national television.