A New "National Policy" for Canada

MR. JOLLIFFE:

There was an ancient custom that the messengers who brought bad news should be slain. I believe Cleopatra was a notable subscriber to that practice. In modern times there is a group which strives for objectivity but is often divided by the public into two categories-those who bear good news and those who bring bad tidings. I refer to the economists.

I don't know in which category our speaker today is classified, but I think he should be heard and not put to the sword. He has very high qualifications. He was trained at the University of Toronto and M.I.T., returning to teach at Toronto in 1958. He also taught at Moscow University and at Harvard University, the modern equivalent of teaching at both Rome and Carthage. He lectures regularly at the Canadian Forces Staff School and the Canadian Forces Staff College. He is past Chairman of the Governing Council of Rochdale College and now President of the University League for Social Reform.

About two years ago he was asked by the Hon. Walter Gordon, President of the Privy Council to head an inquiry into certain aspects of Canadian economic development.

The report of his task force, dated Jan. 12, of this year was entitled "Foreign Ownership in the Structure of Canadian Industry", later tabled in the House of Commons.

Now he is studying Canadian policy as to outward investments with particular reference to the External Aid Office.

Prof. Melville A. Watkins.

"A New National Policy for Canada."

MR. WATKINS:

I very much appreciate the honour of addressing you today. It is a particular pleasure to appear before you when your President, Mr. Jolliffe, is one of my, long-standing heroes and your first Vice-President, Mr. Macdonald, is one of my old undergraduate friends and former colleague at the University.

I should make it clear that I appear before you as a private citizen and that the views expressed in this address are entirely personal. The Task Force which I headed is now dissolved. I certainly do not speak for the Government of Canada, though I feel privileged that one of the most illustrious members of the last Government, the Hon. W. L. Gordon, is at your head table today. Nor do I speak for any other members of the Task Force, though my views have benefited greatly from my association with them, and none more than Professors Safarian and Rotstein who also grace your head table today.

I wish to speak with you today of the Report on foreign ownership which we prepared, but, as my title indicates, in the broad context of a new National Policy for Canada.

No member of a club bearing your name needs to be reminded of the historic National Policy of Sir John A. Macdonald--a policy centering on the tariff which was intended to promote Canadian industrialization and Canadian independence, both economic and political. In the words of the Task Force Report:

"The old National Policy served Canada in its day, as an instrument of nation-building and a means of facilitating economic growth. The challenges have changed and a new National Policy is required. The nation has been built, but its sovereignty must be protected and its independence maintained. A diversified economy has been created, but its efficiency must be improved and its capacity for autonomous growth increased."

Now it is true that differences of opinion persist to the present day about the efficacy of the old National Policy. Historians, on the one hand, seem to be virtually unanimous in their view that the tariff was an invaluable instrument of nation-building, and that economic nationalism was necessary for political independence and the creation of a national economy. Economists, on the other hand, have tended to imply that the National Policy, by lowering the standard of living, weakened the material base on which political independence must stand and on which continuing economic growth must be based. They do, however, grudgingly concede that it permitted a larger Canada to develop in terms of population and aggregate income, and hence helped to build the economy and the nation.

But there would be general agreement that the old National Policy, in terms of its relevance as a central direction for government policy, is now a thing of the past. So far as protective tariffs are concerned, economic nationalism is hardly a viable creed. But history does not stand still, and the main issue of economic independence today has shifted to foreign ownership.

Now foreign direct investment--that is, foreign investment that carries with it ownership and control--is not a new phenomenon in Canada. Indeed, its roots were firmly planted in the period of the old National Policy. The Canadian tariff enclosed the Canadian market. Foreign firms, which had previously exported to Canada, now found it necessary to shift their production to Canada. The tariff created Canadian industry, but without sufficient Canadian entrepreneurship and hence new industry which was not under Canadian ownership and control.

Why did the Canadian tariff create Canadian industries but not Canadian firms? Some credit must be given to the expansive drive of American corporations. But to some extent these corporations flowed into a vacuum resulting from an entrepreneurial failure in Canada.

Now one of the most honoured themes of Canadian historiography has been that the state has played an important role in promoting and shaping Canadian economic development. In this historical scenario, the deficiencies of private entrepreneurship have been compensated for by public entrepreneurship.

But the point has clearly been exaggerated, as the extent of actual reliance on foreign entrepreneurship attests. Looked at in these terms, the problem with the tariff, now so much abused in Canada for being too much, was rather that it was too little. Instead of creating a Canadian business class capable of leading Canadian economic growth, it created only an emasculated business class satisfied, by and large, to manage a branch plant economy.

My argument is that a successful National Policy should have created Canadian entrepreneurship capable of dominating the Canadian economy. The prime task of the old National Policy is yet to be completed. This should be seen as the central task of a new National Policy, and other aspects of policy, including the tariff, should be framed in this light.

Let us now put foreign ownership at the centre of the stage. The extent of foreign ownership and control of Canadian economic activity is too well known to this audience to require detailed presentation. Suffice it to quote the opening sentence of the Task Force Report: "The extent of foreign control of Canadian industry is unique among the industrialized nations of the world".

In the language of the economist, foreign direct investment creates both benefits and costs for host countries such as Canada. It is clear that the economic benefits resulting from easier access to foreign technology, capital, entrepreneurship and markets are positive and have made a substantial contribution to Canada's present high standard of living.

But in the process of reaping potential benefits from foreign ownership there have been a variety of costs. One of these, much emphasized by the Report, is the simple failure to get as large benefits as was possible because of inappropriate industrial policy in Canada. Benefits are reduced by the absence of sufficient competition in Canada to keep costs and prices down. Economists conventionally view this phenomenon as primarily due to the combination of a high tariff policy and a weak anti-combines policy. As well, the cost may inhere in foreign investment insofar as the American industrial structure is repeated in miniature in Canada, with a consequent proliferation of smaller firms unwilling to risk price competition among themselves.

A basic fact almost never made explicit is the deficiency, quantitative and qualitative, of indigenous Canadian firms. Foreign firms are not compelled to operate efficiently due to the absence of competition from efficient Canadian firms. Rather, foreign firms take over local markets and create higher barriers to entry for new domestic firms, thereby inhibiting Canadian entrepreneurship. In this sense, the major cost of foreign ownership is not only the reduction of economic benefits but the restriction in the growth of Canadian entrepreneurship.

It should be clear that political consequences inhere in this economic nexus. Foreign direct investment implies control by large foreign-based corporations with a consequent tendency for the locus of decision-making to shift outside the host country to the board rooms of the parent corporation. Policies of the home government then apply rather than policies of the host government. Key decisions relevant to Canadians are thus made by Americans in corporate board rooms in New York and in government conference rooms in Washington. But, at a more fundamental level, the basic fact is Canadian complicity in this arrangement. Canadian government officials, when confronted with actual intrusions of American law and policy into Canada, tend to sweep them under the rug in the name of quiet diplomacy. Faced in the last few years with the unilateral imposition by the United States of the Interest Equalization Tax and balance-of-payments controls on direct investment, Canada has sought special status, though at the cost of further diminishing credibility as an independent country. The Canadian economy has increasingly taken on the character of a concessionary economy and our politics have had to be tailored to meet this fact.

What kinds of economic policy have emerged, generally speaking, in the midst of these events? What do we already have by way of a new national policy? Essentially two things: monetary-fiscal policy and industrial policy.

Now the level of prices and employment in Canada, on which monetary-fiscal policy are intended to operate, are mostly determined by the levels of each in the United States. In part because of special concessions wrung from Washington, our monetary policy is largely shackled in terms of influencing domestic prices and employment. At the moment, monetary-fiscal policies in Canada are essentially weapons to facilitate Canadian growth along the American growth path. Bluntly stated, the capacity of the Canadian government independently to create jobs and control inflation is negligible. Our present neo-Keynesian policies must not be confused with policies designed to create, or even maintain, Canadian independence.

Industrial policy has been associated with the recent discovery of a long-standing productivity gap between Canada and the United States and attention has centered largely on the Canadian tariff and, to a lesser extent, on Canadian anti-combines policy. Predictably, Canadian economists have been in favour of lowering the former and stiffening the latter. The Report reflects these biases, but with important caveats which I wish to underline.

With respect to anti-combines policy, Canada must guard against the danger that a stronger policy would reduce the ability of new, large, Canadian-controlled firms to develop through merger and thereby indirectly strengthen the power of existing foreign-controlled firms. The real name of the game for industrial policy-makers is to rationalize inefficient Canadian industries, and revision of the legislation should not be such as to preclude mergers which would further rationalization.

Similarly, changes in tariff legislation should be seen as but one part of a broader economic policy designed to rationalize our economy. While tariff reduction facilitates rationalization, given the existing extent of foreign ownership, it must do so in the context of multi-national corporations and in a manner appropriate to their mode of operation. When foreign-based firms rationalize their Canadian operations, the decisions will be made in head offices outside Canada, and a pattern of specialization is likely to be adopted that will require more parent company control for the indefinite future. When decision-making moves to the parent, it moves from the subsidiary. This could mean less sensitivity to Canadian interests and needs. It means that rationalization programmes should be accompanied by deliberate measures to ensure a stronger Canadian presence through Canadian ownership and through government policy.

What presently passes for national policy in Canada is insufficient. The set of monetary-fiscal policy and industrial policy now widely supported has not interfered with, but rather has probably facilitated, the recent drift toward continentalism.

A new national policy must centre on these concrete issues raised by foreign ownership. The beginning, but hopefully not the ending, would be to implement the proposals of the Task Force Report--if not its letter, at least its spirit.

There is a need to increase the economic benefits from foreign ownership--by rationalizing the structure of Canadian industry, by proper taxation of industries dominated by foreign-controlled subsidiaries along lines recommended by Carter, and by Canadian participation in ownership, including minority shares. There is a need to decrease political costs by setting up Canadian legal and administrative machinery to countervail the intrusion of United States law and practice with respect to trade with certain communist countries, anti-trust procedure, and balance of payments guidelines and controls imposed on direct investment firms.

Above all, things must be done to promote domestic entrepreneurship, private and public. The growth of the Canadian economy down to the present day has depended mainly on its capacity to export primary products. Canadian entrepreneurship would be a much more viable force were stronger policies pursued, at both the federal and provincial levels, to promote Canadian ownership of our resource industries. Increasingly, firms grow by their capacity to expand foreign operations. More encouragement should be given to Canadian firms to evolve into multi-national firms. A potentially important instrument for the achievement of such objectives, and one that would build on the Canadian propensity to mix the public and private sectors, is the Canada Development Corporation.

Just as the old National Policy had broad implications for nation-building, so a new National Policy should adhere to this objective. The failure to limit American extraterritoriality via the medium of the American subsidiary constrains the exercise of an independent foreign policy in Canada and thereby limits an essential manifestation of nationhood. Canada will be in a most anomalous position should Ottawa succeed in diplomatic recognition of China while our major corporations which happen to be American-controlled face formidable obstacles from Washington in trading with China.

The old National Policy was designed to curtail American manifest destiny by a strategy of "defensive expansion". A new National Policy must reassume that burden. Serious attention must be devoted to nurturing and sustaining Canadian institutions and values in the face of America's present erratic behaviour.

It is sometimes said that the pursuit of Canadian independence would involve undue costs in terms of reducing our standard of living. But the assumed dichotomy between political independence and economic benefits may be a false one. The extent of foreign ownership of Canadian economy activity has meant the creation of a branch-plant economy in Canada. Such an economy has inherent limitations in terms of its potential for economic growth in a world of constant innovation. A branch plant is not where the action is, in terms of new products, technologies and ideas, and neither is a branch plant economy. An economy more under our control might well have a greater capacity for autonomous and sustained growth.

To argue for a policy of Canadian independence, as I have today, is not to insist that a new National Policy should ignore other matters. The broader tasks of social reform are not precluded by focussing on economic independence. Rather, it is difficult to see how Canadians can implement more progressive, human, and social measures in an economy over which they have lost control.

And if I appear to suggest that Canadian nationalism is a good in itself, it is not to praise nationalism but rather to insist on the need for protection from larger and more terrible nationalisms which presently ravage the world.

Thanks of the meeting were expressed by Mr. R. L. Armstrong.