The Role of Government in the Economy of the '90s

Ronald Goodall

Among its presidents, The Empire Club can count several fathers and sons, a not-too-surprising fact given the 84 years or so lifetime of this Club. In fact, one of these sons, Bredin Stapells, is at this head table. It would appear to be somewhat unusual to have a father and a son address this Club. That particular situation arises today. Our speaker's father, Paul Martin, addressed the Club on four occasions, one occasion being unique in that the address was heard over the radio telephone from Ottawa. l am delighted to note that Paul Martin, Sr., is with us today. This father-and-son team gives us an example of what Mathew Henry described in the early 1700s as, "Men of polite learning and a liberal education."

Another unusual situation arose today. I read a review of Mr. Martin's speech in The Globe and Mail this morning. I almost fainted. I thought it was Friday and that I had forgotten to come here today!

Paul Martin was born in Windsor, Ontario, and educated at the University of Toronto, earning degrees in history, philosophy and law. In the 1970s, he became a vice-president of Consolidated-Bathurst Inc. and a vice-president of Power Corporation of Canada. At present, he heads Canada Steamship Lines, a company which includes among its affiliates Voyageur Enterprises Ltd. and Canadian Shipbuilding & Engineering Ltd.

Mr. Martin is vice-chairman and governor of Concordia University and a founding director of the North-South Institute and The Canadian Council for Native Business. He is a director of a number of organizations which include the Canadian Council of Christians and Jews, Redpath Industries Limited, Imasco Limited, and The Manufacturers Life Insurance Company. Mr. Martin is married, and he and his wife, Sheila, have three sons.

Rumour has it that our speaker plans to seek a nomination in the next general election. The success of a venture of this nature will, of course, depend upon the venturer's ability, popularity and experience. The politician is a lawmaker and our speaker's qualification as a lawyer obviously provides some experience necessary for this venture.

Before embarking on his management career, our speaker spent several years as a merchant seaman on the Mackenzie River, in the High Arctic and on the Atlantic Ocean and as a roustabout in the Alberta oil fields. We are told in song that "All the nice girls love a sailor:" Our speaker appears to have the popularity necessary for this venture; perhaps one-half of the voters are already swayed.

I was not entirely sure what a roustabout did so I resorted to a dictionary to enlighten me. I found three definitions: 1) a deck hand or waterfront labourer; 2) an unskilled or transient labourer who does odd jobs; and, finally, 3) a labourer in a circus. The final definition worried me. However, when I considered the need for political ability in this venture, I concluded the ability of a roustabout should stand our speaker in good stead should he become a member of Her Majesty's Loyal Opposition and sit in a parliament mismanaged by another party. Your success in seeking a nomination and a seat, this political venture, seems assured and I wish you well in it.

Ladies and gentlemen, please welcome Paul Martin, Chairman and Chief Executive Officer of Canada Steamship Lines Inc., who will address us on "The Role of Government in the Economy of the '90s."

Paul Martin

In the first of four speeches to The Empire Club 33 years ago, my father spoke to you on the subject "Canada - A World Partner" - a discussion concerned primarily with this country's role in the NATO alliance and in the debate on nuclear disarmament. (Plus ca change ... )

Today I would like to pick up on the title of his remarks. However, in this instance, I will endeavour to talk to you not about international affairs but about the kind of world economic environment we find ourselves in and more specifically about what "ought to be" the changing role of government within that environment.

I will not burden this audience with a recitation of the effect of change upon our industrial activity. (I use the word industry here as a shorthand to include both agriculture and the increasingly important service sector in addition to manufacturing.) We all know the words of that tune. Suffice it to say that the change involved has manifested itself in two fundamental ways: first, in an increasingly globalized economy; and second, in a steady decline in the value of raw materials relative to manufactured goods and the technology embodied in both goods and services. So far as a nation we have adjusted well. However, the real turmoil lies ahead. The process of globalization is still in the adolescent stage and while many argue that the only problem for our natural resources is their cyclical nature, a more realistic projection is that the long-term trend is one of gradual decline in demand! Our prime economic objective, therefore, given these storm warnings, is to devise a strategy for maintaining our fair share of the world's industrial activity and in doing so there are two challenges which must be met.

First, there is the challenge all countries have of gaining foreign market access. In Canada, the current debate appears focused only on the U.S. market. This is more than just a little shortsighted. Nobody can seriously argue that we do not require stable and assured access to the American consumer. However, there is no guarantee that we will hold onto even that market if by default it alone becomes the limit of our vision. The U.S. market may be where the battle is being fought now. However, if we are going to hold our own against the Europeans and the Asians in that market, it will only be because we've taken the fight to them on their own turf as well.

The next challenge, one of even greater importance for Canada, arises out of the special problems facing an industrial sector whose roots are found largely not in indigenous activity but in the enterprise of others. Foreign firms, first British, then American, now Japanese, have brought us their ideas and technologies. Albeit gaining access to our market, they have also provided us with an invaluable industrial base. Now, however, with or without U.S. free trade, increasing freer world trade means that Canadian industry is going to be exposed more and more to open global market forces.

Thus the first question we will have to face is, assuming parity in productivity and a higher dollar, will our industrial base stay with us, and of even greater pertinence, will our foreign-owned multinationals be not less apt than in the past to use Canada as a base from which to expand?

With this as background I would now like to discuss with you what ought to be the role of government in responding to the changes ahead, a role which we all know has been called into doubt by the excesses of the past. More specifically I would like to focus on the ways the federal government can encourage Canadian industrial activity which has the potential to grow multinationally. I would do so in two areas where I believe state support can be crucial: the first relates to the specific problems of Canadian-owned small and mediumsized business; the second deals with the way technological innovation comes to market.

Recognition of the tremendous potential inherent in entrepreneurial activity in an era of rapid change is the major discovery of the last decade. If we are going to see innovative new Canadian industries appear on the scene, it will be as a result of the drive and perseverance of the Canadian entrepreneur.

Thus the changing role for government I would address here occurs not because of the failure of the Canadian private sector but because of its potential for success. It is a role which arises once the individual entrepreneur has reached the takeoff point and must choose between the easier alternative of selling to an offshore investor on the one hand or taking the rockier path of seeking first expansion capital and second foreign markets on the other.

In terms of expansion capital, the traditional problem of public-sector funding of private-sector activity arises out of the natural reluctance to see government monies involved in the so-called picking of winners and losers. While understandable, this reluctance is nonetheless clearly counterproductive when dealing with Canadian companies that have achieved domestic success but have not surmounted the size hurdle required for foreign market penetration. The answer, however, lies not in the traditional approach. The landscape is littered with too many examples of the failure of conventional state intrusion into private sector activity.

There are, however, examples of independent management of quasi-public monies which might provide precedents worth following. One such example is Quebec's Caisse de Depot. I am not arguing that the country suffers from a lack of immediate venture capital. I do feel, however, that there is a shortage of long-term venture capital of major size - the kind required to establish smaller companies in foreign markets where the payoff requires more patience than the pressure quarterly reporting sometimes permits.

Quebec's tremendous success in developing a vibrant entrepreneurial economy from virtually a standing start over the past 20 years is due in part to the fact that the public sector through the Caisse de Depot has always been able to take a long-term perspective in supporting credible privatesector initiative.

The Caisse, the investment arm of the Quebec Pension Plan, has established, I believe, a new concept in the way the public/ private-sector partnership can be developed. If the Caisse has been successful putting Quebec savings to work creating jobs and supporting Quebec entrepreneurs in the process, my first suggestion which I will leave with you would be to ask whether it is not possible to contemplate regional equivalents under the aegis of a redirected and fully funded Canada Pension Plan. In terms of job creation alone, this suggestion would provide thousands of hours of work as the various federal and provincial bureaucrats lock horns in negotiation. It might also give the medical profession some impetus as various provincial treasurers have cardiac arrest.

The second role mentioned earlier for government is that of facilitating the entrepreneurs' access to foreign markets. This will become crucial in the future when Third World purchasing power begins to take off as it will when reality forces a resolution of the debt crisis (perhaps as per the recent Mexican proposal).

The costs of marketing outside of North America are simply astronomical when compared to the much smaller incremental cost of selling into the U.S. - one obvious reason for our excessive dependence on that market. For instance, it consumed substantial resources for Canada Steamship Lines to attempt to enter the Chinese market. The problem was not that of financing the numerous visits required in order to make the initial contacts, nor even the periodic follow-ups. The problem is one of long-term staying power. I do not know if the Chinese have a proverb equivalent to "Out of sight, out of mind," but it certainly applies - as indeed it does in most countries.

A permanent office, fully staffed, is the only way of not being forgotten in the constant parade seeking to tap this most intriguing of offshore markets. There are over 200 Japanese private-sector offices in China, over 150 American, yet but a handful of Canadian companies on permanent location. The reason is not lack of interest, it's lack of size, of financial wherewithal.

But there is an answer and it isn't a new one. It began in 1895 with our highly successful trade commissioner service, which the government is attempting to cut back when in fact it ought to be increasing.

We seem to forget that where the Japanese and Koreans initially beat us was not in production, but in marketing. In China, there are only 11 trade commissioners. They are extremely competent and dedicated but simply insufficient in number to do the job. What if we had 100 trade commissioners in China, each with prime responsibility for perhaps five Canadian exporting firms, each a highly trained specialist. Think of how much more successful small and medium-sized Canadian business could be with this kind of continuity and engagement in such a market! Expensive perhaps! But think of the return; for this is how you will grow the Canadian multinational of the future.

So far in seeking to recast the role of government, I doubt if I have offended even Milton Friedman. Unfortunately, however, as we begin to discuss the process of technological innovation, one begins to tread a finer line.

There are three reasons for a knowledge-intensive industry to come into being or to locate in a given country and these appear to follow a sequential process. Phase one - the initial industrial implementation of a given innovation normally takes place where that innovation or process originates. That is obviously why Sony finds itself in Japan, IBM grew up in the States, and our own Connaught Labs lives here. In phase two development, some industrial activity is transplanted to locations which provide easier market access - IBM Canada, for example. And finally, in third phase activity, industry seeks to gain competitive advantage by moving large elements of its activity offshore to low-cost "copier" countries for eventual export back home and elsewhere.

Canada, in this cycle, has traditionally not generated a great deal of originating or phase-one activity. On the other hand we are not, nor should we ever want to be, a low-wage "copier" economy. To date, the emphasis in Canada has been on phase-two development, i.e., attracting other people's enterprise here originally to gain access to our market, occasionally to eventually expand abroad through a world product mandate. This is precisely the segment of the economy which is most vulnerable to the global trends we have been discussing.

Thus, the message for us is clear: Canada's industrial prosperity will increasingly depend on our capacity to develop our own phase-one industrial capacity. This is not just a matter of national pride. The issue is whether as a nation we will provide future generations with worthwhile employment or just jobs. There is a tremendous difference between the two which government statisticians often seem to ignore.

The answer lies not in targeting a random increase in R & D as was announced last week. The answer lies in a fundamental commitment to the development of an entirely new family of phase-one industries of the future: industries capable of developing into home-grown multinationals; industries capable of surmounting the challenge of global competition; industries capable of investing in innovation because the world market bears the costs of their research which is taking place here at home. The question is how do we do it?

Most of us are believers in less government being the best government. Most of us however are also pragmatists who recognize that the free-market ideology would be fine if the world were as we would like it to be, but that unfortunately while we may be moving into a free-market trading environment, we are certainly not moving into a free-market industrial environment.

The reality is that the so-called free market continues to be dominated by government intervention. While traditional protectionism, such as tariffs, is being reduced, our trading partners are honing more civilized ways of using government resources to achieve such public objectives as reducing the risk for technological innovation; encouraging such sectors as aerospace, biotechnology, computers that they see as critical to national growth. Our competitors are not boy scouts; they are using every lever possible to gain an industrial edge.

Examples of what have become a global pattern are multifold. For instance, MITI, the Japanese ministry of international trade and industry, conducts periodic reviews to select specific industrial targets and to plan ways to meet them. In 1980, MITI identified three areas of basic research necessary for industrial success in the 1990s: new materials, biotechnology, and electronic devices. The resulting research drew on the abilities of industry, the universities and the government in coordinated laboratory and research efforts, and set specific targets. You can be sure that when 1990 arrives, there will be new target sectors on the Japanese agenda that have hardly dawned on us here.

Similarly, some time ago Japan realized that robotic development would be needed to remain competitive as labour costs went up. MITI, in conjunction with the Japanese Development Bank, ensured this thrust by buying robots from manufacturers offering them to industry on short-term leases, with the option of returning them if they didn't work out. Not only did this give Japanese industry in general an enormous leg up, it meant that nascent robot manufacturers were guaranteed a market. In this way they could afford to tool up on a large-enough scale that unit costs were quickly lowered and a new Japanese industry came into being while the rest of us slept.

But of course, the Japanese are only the best at what the entire industrialized world practises as a matter of course. To the south of us, while making so much of our overt subsidies to disadvantaged regions or targeted industries, the U.S. retains and is building a huge array of barely covert subsidies to strategic industries through its military, space and other procurement programs. For instance, rather than waiting for market forces to react while Japan increases its industrial advantage, the U.S. government is proposing to provide over $100 million a year to a consortium of private sector companies called Sematech to force feed the development of semiconductor technology. Furthermore, as if the federal government's largesse isn't enough, in addition half the state governments in the union are offering enormous incentive grants to attract the consortium's physical facilities to their locale. Finally, under the terms of its government grant, the consortium, consisting only of the bluest of the blue bloods on the U.S. high-tech register, specifically excludes the participation of American-based but foreign-owned companies. Thus even in the home of the free market, ideology is expendable when the industries of the future are at stake.

In contrast to all of this, Canada's approach to government intervention appears cumbersome, is reactive and apologetic, and in the end our methods are simply obsolete. Yet the conditions are certainly present in this country for imaginative support policies across a wide range of industrial sectors. What is missing is leadership. For what is required to build the kind of strategic programs that have served our competitors so well is, quite simply, the will at the centre to show the way. We are not talking about massive intervention, about propping up dying industries, about creating huge new bureaucracies. Quite the opposite, that's what we are trying to avoid. That is the intervention of the present.

What we are talking about is providing risk-sharing assistance in sectors that government and business identify as key to national success. What we are talking about is government accepting its responsibility for ensuring that the ingredients for industrial progress exist in Canada by using a variety of tools to ensure that the famous level playing field does exist.

The first thing we must do is play to our strengths. As a nation we have made huge public commitments to transportation and hope to do the same for the environment, to pick two areas, for instance. These are the kinds of fields capable of being leveraged using the massive public funds already being spent to stimulate the creation of new technologies and new industries.

How? Perhaps by licensing to the private sector technology developed under government aegis; or by subcontracting R & D or again by new product development requirements being inserted in procurement contracts - in short, not just buying today's product but also tomorrow's breakthroughs.

For example: We should be the world leaders in environmental control, not for its commercial possibilities but for our own sakes as members of the human family. However, once we have embarked on the proper path public/privatesector cooperation becomes possible in many ways. For instance: 1) We might envisage a demand-driven exercise involving environmental megaprojects. A focused effort to clean up the nation's harbours would almost certainly, for example, have a galvanizing effect on a series of Canadian companies analogous to the effect the James Bay hydro development had on the growth of Quebec's engineering firms; 2) or again, we might consider licensing the government's existing data banks and store of skills in a multitude of areas such as chemical testing of water, pesticide testing in foodstuffs, toxicogenic management in environmental service.

All of these provide a nucleus around which an exportable technology can be derived much in the same way that the Americans built the world's largest aircraft industry using technology and contracts generated by that country's military needs.

Now no government program, however sophisticated, is a guarantee of success. We will have our failures, just as other successful industrial countries like Japan, Germany and the U.S. have had theirs. But one thing is clear. Without the dedication of the resources of government to the task in cooperation with the private sector as our competitors are doing, we will continue to be only buyers of technology, spectators to the rest of the world's innovation.

It is in this context among many others that I believe the current U.S. free trade agreement gives great cause for concern. The failure of the Canadian government to pursue the softwood lumber case last year to its logical conclusion through the courts may well have established some very unfortunate precedents in terms of the public/private-sector relationship.

As a result, that which we absolutely had to obtain in the free trade negotiations was a mutually acceptable definition of what constitutes a subsidy. (This is obviously a short form for a set of rules determining what is "fair trade.") For it is that definition which will determine the permissible scope of public/private-sector cooperation. Without that definition, the menace of U.S. trade harassment remains an omnipresent threat to Canadian innovation, to Canadian exports. Unfortunately, we did not get it. All we got was the promise to negotiate the definition of a subsidy over the next seven years.

By putting off possibly for that absurd length of time a negotiation of which industrial practices are fair and legitimate, we have put under a cloud the strategic support Canada requires for the kind of technological initiative that we have discussed here.

On the other hand, the United States has retained the levers it needs, to subsidize and direct its vital phase-one industrial activity. Indeed it must if it is to compete with the Europeans and the Japanese.

Almost any new technology developed in Canada has to look ultimately to U.S. markets, whereas U.S. companies can support such development in their domestic market alone.

(Access to the U.S. market is why we entered the negotiations in the first place. The fact that we did not get it and still signed the agreement is comparable to a general declaring victory and then ordering a full-scale retreat.) Thus, as a practical matter, pending the definition of what constitutes an allowable subsidy, Canada will be constrained, while the U.S. will not be. Nor will there be any pressure on the Americans to agree to such a definition. Indeed the current situation suits them just fine.

In the final analysis, what U.S.-Canadian free trade must mean if it is to make any sense is that a company in Nova Scotia exporting to California must be in exactly the same position as is its counterpart in New Hampshire which also exports to California insofar as the receipt of comparable government aid is concerned. That means for instance that neither is subject to countervail if it accepts a permissible expansion or re-equipment grant from its respective government. That is the guarantee we required and we did not get it. Thus at a very minimum, negotiations should begin immediately on the subsidy code, for if they fail so does this agreement.

What should be the driving force of the businessgovernment relationship in Canada, as it is in most other countries, is a clear idea of the nation's industrial goals and the means of achieving them. This government has either gone into the trade deal without an industrial program in mind, or perhaps it is simply prepared to leave Canada open to existing U.S. trade remedy controls because it does not believe in industrial policy. In either event, the result is not freer trade. I believe in freer trade. This isn't it. This is unilateral trade disarmament.

The time has come to close. I began by saying that I wanted to examine what "ought to be" the changing role of government in the world market environment of the '90s. "Ought to be" because it appears on the whole that government has failed to exchange its old machinery for the newer more effective equipment needed, on the one hand, to further the rise of the Canadian entrepreneur, on the other, to develop a knowledge-intensive industrial base.

I recognize that there are certainly among us here today those who will disagree with me. Those who, in terms of the economy, would see the federal government confined to loose framework policies. In response, I would ask them to consider what kind of a country we will have down the road if, following the free trade agreement and Meech Lake, we end up with aggressive provincial governments, a passive centre and, increasingly, policy formulation being dictated by the United States.

I also recognize that in a short speech, and I fear that this one has already gone on too long, one can barely scratch the surface of the subject at hand. But then again -you did invite my dad four times! Thank you.

The appreciation of the audience was expressed by R. Bredin Stapells, a Past President of The Club.