Making It in the New Economy

In the words of Anne Murray's hit song of a few years ago: "We sure could use a little good news today."

In Peter Pan, J. M. Barrie's classic, Peter urges children to clap if they believe in fairies. If they clap hard enough, Peter promises, they will revive a dying Tinkerbell. Too bad life doesn't imitate art! If it did, Canadians would be applauding till their hands went numb. Their fervent hope: that the economy would awaken from its prolonged narcoleptic slump.

The reduction in consumer confidence and the financial devastation associated with the tidal wave of unpaid 1980s debt are beginning to take their toll. Plant closures, business failures and bankruptcies, all marked by the trauma of job losses, dominate the news. As the business people in this room today will no doubt confirm, the economy has been one long luge ride the past two years.

Unfortunately, the quixotic attempts by North American political leaders to cheerlead the economy out of the recession, or the nostrums that appear in Professor Porter's recent wake-up call to Canadian business, hardly are encouraging signs for workers and families bearing the brunt of the current downturn.

Little wonder we are witnessing a growing stay-at-home syndrome--referred to by U.S. trend forecaster Faith Popcorn as "cocooning." In her recent book, The Faith Popcorn Report, she explains that cocooning is about "reality retreat--the impulse to stay inside when it just gets too tough and scary outside."

Canadian astronaut, Roberta Bondar, who seems to be endowed with enormous amounts of the "right stuff," viewed Canada from the unique perspective of space. She described the country as a "crisp, shiny, bright jewel."

Economically speaking, this jewel is tarnished and is in need of a buffing. What must be done? What steps must be taken to address the deep-seated problems of the economy? As a lay person, my own view is that a stringent prescription with an almost medicinal quality ought to appeal to a nation feeling guilty about its past profligacy. The worse the cod liver oil taste, the better it works!

Economists have not been able to develop a consensus on what they believe is an appropriate prescription for the ailing economy. To many observers, an inability to reach a consensus among economists is hardly a surprise. You know all the derisive things that have been said about economists:

George Bernard Shaw said that if all of the economists in the world were laid end-to-end they still would not reach a conclusion. Harry Truman said that if all the economists were laid end-to-end they would still point in all directions.

And Stephen Leacock said that if they were laid end-to-end they would never meet.

Some people think that if all the economists were laid end-to-end it would simply be a good idea!

In the midst of a most uncertain economic period, The Empire Club is privileged to have Dian Cohen as its guest speaker today. Dian's professional career has been spent communicating. She talks and writes about business and the economy and the responsibilities of government and people in ensuring overall good performance. She does this both in public, face-to-face, or through electronic and print media, and in private, through seminars and workshops. Dian advises several government and private groups, and is a director of half a dozen corporations, including three represented at the head table today: Canadian Pacific, Noranda Forest and Royal Insurance.

The definition of an economist, as we know, is someone who is good with numbers but doesn't have the personality to be an accountant! As an economic commentator who speaks plain English, Dian clearly challenges this myth. I am confident, during the course of her address today, she will effectively put this myth to rest.

Ladies and gentlemen, please welcome Dian Cohen.

Dian Cohen:

I appreciate the opportunity to speak to you, because I think each of us has an important role to play in making it in the new economy.

I'm going to be brief--and vulgar--because that's what I do best. First I'm going to spend a few minutes on exactly what this "new" economy is. I don't think we are making it now, at least not enough of us, but I think we can, and I want to suggest how. Twenty-five minutes may not be enough time to solve all our problems, but it's enough to point the direction, especially for a vulgarizer like me who's specialized in doing it in 45-second bites.

Let's start with a couple of headlines: Business Leaving. Investment Leaving the Country. Thousands of Jobs Disappearing.

Sounds like Ontario, right? But those headlines come straight out of the January 20 issue of Der Spiegel, the weekly German newsmagazine. The post war miracle, lately united into 70 million people--the one G7 country that, on a per-capita basis, exports more than Canada.

I didn't have to pick Germany. I could as easily have picked Massachusetts, or Michigan, or California. In the last couple of years, California has lost about 330,000 jobs, about the same as Canada, which incidentally has about the same Gross Domestic Product.

So, first, welcome to the new global economy. What's happening is not happening just in Canada, although if you stick only to Canadian media, you are forgiven for thinking Canada's problems are unique.

The new economy's a lot bigger than the old one. Your customer's no longer in the neighbourhood or around the comer--she's over the horizon and in another country. Same thing with your competition.

These changes have been coming for a long time. Seers like Peter Drucker and Alvin Toffler have been telling us about them for more than a decade. In the '80s, when they and others began their popular works, they foretold of one global economy based on information, in which national economies would be irrelevant for purposes of making decisions.

National output would be a function of global product strategy. Where employment growth would be unhitched from economic growth. New technologies would allow us to increase output without necessarily increasing the demand for labour.

They talked about the same thing happening in natural resources, decoupled from economic growth. Because of new materials, and different ways of using standard materials, we could have more output without more natural resource consumption. And they talked about a new finance economy in which money values would bear only a distant relationship to the world of material things.

We read and listened to all those predictions, but somehow we didn't respond to them. It doesn't much matter now whether we didn't quite believe them, or believed our leaders more when they said they'd look after us. The fact is that today, all the things that were predicted in the '80s are now mostly here. And with them, some surprises. I think if you understand the surprises, you'll also understand why, at least in this one respect, I absolutely agree with Premier Bob's pronouncement a few weeks ago that "business as usual" is gone forever.

First, it may surprise you to hear this, but there's no global recession. Globally, output is increasing. Europe's biggest economies are growing; so are East Asia's. Quarterly data are bouncing along the bottom in the U.S., U.K, and Canada. But that's the point--they're bouncing along the bottom, not falling through the floor. The annual cyclical data show that the decline is giving way to renewed growth. But you don't have to be a rocket scientist to know that if this is recovery, it's not much different from recession.

Let's just take corporate profits for a moment. If there really is a recovery, how come corporate profits aren't rising? Well here's another surprise: competition works. A global economy means more competition for national firms. Recovery means more competition from new entrants, adding pressure to corporate profits which have been falling in Canada for a decade anyway.

And if we look at the competition, we can see that much of it is trade related. The Big Three car companies are hurting, because now there's more than just three. There's Honda and Toyota and the rest.

Retailers are hurting as the whole retail sector restructures to include cross-border holdings and to eliminate the Canadian middleman. Transportation is hurting as traffic shifts from east west to north-south.

The oil patch is groaning because cheaper products are available elsewhere.

Of course, competition itself isn't new. What's new is its scale and intensity. As Joe Clark said in Halifax the other week, the global village is one tough neighbourhood.

But globalization, and the adjustments it entails, has some other elements. I'm talking about the long-term shifts that are making our "basic" industries a lot less basic. The things we measure in our economy, based on its output, reflect an industrial economy based on cars, housing, furniture and key commodities. Not an information economy based on knowledge and its discovery, development and utilization.

The truth is, Canada's traditional industries aren't as important as they once were. The problem here is that too many of us have clung to the illusions of past glory. The fact is that there's a global shakeout going on, and what's being shook out is most of what Canada's good at doing.

The corollary is that while about half of our output is no longer wanted by the rest of the world, we're not excellent at making what the world wants.

One way to look at all this is to say this seems to be a recovery without a driver, so a little more stimulus will be just what the doctor ordered. I don't think so. In fact, since I'm so convinced that we are shifting to a whole new economy, I think traditional policy is constraining the transition instead of driving it forward.

Economists are just beginning to understand that the product cycle has succeeded the business cycle as the main determinant of economic results. If you make something the world wants, you will prosper. If you don't, you won't. That's both a problem and a challenge for Canada.

From sea to sea, Canada has for most of its history been about natural resources--staple commodities destined for imperial markets. As a nation, were not great transformers of raw input into finished products. Rather we're great transformers of harsh landscape into mines, commercial timber operations, oil and gas wells and pipelines--sagas stored in the soul of every Canadian. And, as Michael Porter's recent review of the Canadian economy shows, our export dependence on resources is actually growing while exports in other sectors decline.

And there's more disturbing news. Over the last 10 years, our appetite for the international products of others is growing half again as fast as others' appetite for ours. Our merchandise trade growth is increasing more slowly than the economy as a whole. Over the same 10 years, total economic growth outpaced trade growth almost two to one. If the goods producing sectors were successfully internationalizing, merchandise exports would outpace national growth.

On the investment side, too, something similar is happening. Canada's stock of foreign investment is increasing and diversifying. But in relation to the economy as a whole, foreign direct investment--that's what economists call investment in productive facilities--is staying relatively flat, especially in real terms.

Foreign-owned companies are reinvesting profits in Canada. But stocks of foreign investment are increasing faster in the U.S., which means the U.S. is modernizing faster than we are. Just to give you the numbers, the stock of foreign investment in the U.S. has been growing 50-per-cent faster than that of Canada's over the past decade.

Putting all this together, it seems that in a world that is internationalizing, the Canadian economy is almost going the other way. That while our major trading partners are getting relatively better at international business, we are getting relatively worse.

Let's put the question directly. Is Canada suffering from the condition Pogo once described as "confronted by insurmountable opportunities?"

Just about everything we do economically reflects our complacency that our resource-based economy will always continue. For example, our income maintenance programs are designed to park people outside the labour force. We actually pay people to stand around idle until whatever they did before becomes desirable again and they can go back to work We don't actively promote adjustment. If we'd had these programs in place a century ago, we'd still have a surplus of tall ships captains.

Our major credit granting institutions are big enough to be a barrier to small and medium sized companies seeking access to global capital markets. But not flexible enough or innovative enough to provide adequate financing to new business at home.

Banks and other Canadian leaders don't understand knowledge-based business. This is not mere risk aversion. On the contrary, banks are tolerant of the not inconsiderable risks in resource exploitation and commercial real estate. So it's culture, not economics, causing problems here.

Our education programs provide an adequate supply of lawyers, accountants, geologists, and, of course, economists. These are the people Canadian business employs. We export engineers and scientists, medical researchers, etc.

As for skilled industrial trades, forget it. If immigration doesn't provide them, we'll do without. We certainly won't bother producing them here. Hey, why shouldn't most optical and precision machinery come from Germany or Austria?

As for our automotive industry, it's based on assembling things conceived elsewhere. And it's at a crossroads, facing an uncertain future, whether or not we bring Mexico into a NAFTA (North American Free Trade Agreement).

In practical terms, we're doing more to protect our "cherished illusions" than moving ahead to meet the future. Nevertheless, there is some reason for cautious optimism. Many of us have been responding to market signals and the economy is transforming itself from resource dependency to knowledge based.

For instance, as Canadian Business magazine recently pointed out: (Quoting the work of Toronto-based consultant Nuala Beck)

More Canadians are now employed in our electronics industry than our pulp and paper industry.

More Canadians are now employed in our communications and telecommunications industry than our mining and petroleum industries combined.

Regionally, too, some major adjustments have already taken place:

More Quebecers work in health and medical care than in construction, textile, clothing, furniture and mining industries combined.

More Albertans work in financial services than in oil and gas.

More people in B.C. work in communications and telecommunications than the whole forest industries.

More Nova Scotians work as teachers and professors than as fish processors, miners, forestry workers, pulp and paper and construction workers combined.

Other signs of the redirection of Canada's economic efforts show up when you look at different sectors: restructuring of retail businesses to include cross-border holdings in the U.S. and the elimination of Canadian middlemen. Trouble is: Canada still isn't internationally competitive in these new sectors the way it was (and still is) in its natural resource sectors.

These new knowledge-based industries are soaking up much of our labour force--but they need to grow faster and bigger if they're going to generate the exports we need to replace the exports we are losing. They need to develop global strategies and a network of profitable overseas affiliates and alliance partners.

It's instructive to compare our restructuring with that of the U.S. For in the U.S., the advanced industries are not only major employers, they're also the major revenue generators in the economy.

In the U.S., computers and electronics are now bigger businesses in terms of sales than automotive--in fact the new cars use a lot of computing power, so there's some hidden factors that inflate the automotive proportion.

Medical expenditures are bigger than housing (non-farm) expenditures. Medical spending links back deep into the high-tech sector.

People spend twice as much on the phone as they do on the airlines, and we wonder why the airlines are having trouble finding passengers.

The top four computer companies outsold the top four companies in such sectors as food, beverages, industrial and farm equipment and forest products.

The point is that 20 years ago, those new businesses--computers, technologically sophisticated medical establishments, a wide range of phone services--barely existed. Now they are among the biggest and fastest growing, and driving the shape of companies as well as determining the kinds of inputs the economy will be using in the future.

Canada is matching these shifts, but much too slowly. The consequences for us, if we can't make these sectors more productive, include continued disappointment on our trade accounts and a declining living standard. Indications are this is happening. OECD estimates for this year include a current account deficit of about three per cent of GDP, nearly three times worse than that of the U.S.

So, as Will Rogers was fond of saying: "Even if you're on the right track, you'll get run over if you just sit there."

What's holding us back from moving faster? Basically, I think Canada's held back by a rather large cherished illusion. (A cherished illusion is one that is held even more firmly when we know it is contrary to fact because we find it comforting) The illusion is that you can deal with challenge by just saying No. In too many powerful places in our society we have evolved a Canadian culture that is a culture of refusal.

Our discouraged and tentative embrace of globalization is one example of this. In fact, globalization is a tremendous opportunity for every region of Canada But lukewarm is as enthusiastic as our policy makers can get.

Perhaps nowhere is the operation of this culture of refusal so apparent as in the current obsession of our national elites with the constitution. The expectation of justice is fundamentally what binds the citizen to the state. Break that and you kill any basis for the exercise of political power except force. The system quickly deteriorates: the best will not seek office. You will have tyranny in fact, if not in name. Rights in law that are not available in practice might as well not exist, of which we used to have the Fast Bloc to remind us.

This theme goes deeper than simple redress of individual grievances to what Canada is all about as a country. As some Quebec writers have pointed out from the beginning, a project such as a nation has to go beyond simply maximizing individual wealth and individual possibilities. It needs a moral basis before it can enlist the collective efforts of its citizens.

In the constitutional debate, our obsession with the arithmetic of equalization and the vocabulary of "distinctness" has obscured the importance of this moral dimension, the dimension of justice. For in my mind--and I suspect for many other Canadians, too--the point of the constitutional debate is not just to have a deal. It is to put in place an arrangement which Canadians will feel merits a commitment. One cannot build a country just by expanding the space available to a "culture of refusal," of spiritual emigration.

Nor can you substitute national programs, like the CBC and health insurance, for commitment. Baby boomers may not remember, but there was a Canada before universally accessible health care. Indeed, the programs emerge from the shared commitment of Canadians to each other, not the reverse.

What I'm getting at is this: My reading of Canadian history and of federalism in general tells me that federalism is a morally superior form of government to that of the unitary state. It empowers regions to be distinctive. It creates an extra dimension of political freedom not available in a unitary state.

The moral superiority of federalism is not a perspective that receives a powerful echo in Ottawa's federalist pronouncements. Yet it is one case to which the autonomists of every stripe--from western regionalist, to native peoples to Quebecers--have no good answer.

Similarly with the global economy. This is something that promises every country fresh opportunities to display its special genius to the rest of the people on the only life-supporting planet we know about. The new global economy is designed for people who think big and act boldly--and plan carefully to survive in an unforgiving environment. Come to think of it, what could be more Canadian than that?

So here are some suggestions to help us move faster. What I think is required is that business "privatize" Canada's process of adjustment to global competitiveness. A privatized adjustment process might look something like this:

• Greater business involvement with education, to ensure that high school graduates are literate.

• Greater business involvement with labour adjustment process: why not generalize what Northern Telecom

did a few months ago, namely guarantee a first job to those who graduate with certain qualifications.

• Greater business involvement with technology diffusion, universities and government labs. So that continuous learning can be built into every employee's performance requirements.

• Greater business involvement with municipal poverty programs and food banks. Logistical support, management support, participation in work sharing programs, etc.

And, in return for taking some of the social program burden, greater management freedom, including the right to fail and an easing of the tax burden, say an end to the income tax surtax and a lower GST.

In a word, involvement that speaks to concerns for the society that generates customers and employees, involvement that also generates some immediate visible benefits. I suggest that some such program is within the capacity of every major Canadian company.

Without suggesting any particular program, I am suggesting that business has the power to alter the pattern of incentives that now block the "perestroika" Canada so badly needs.

Most of all we need to change our attitudes about how the world works. That's the hardest part, but a lot of us have already done it. All we need is a few million more. I hope I can count on you.

Thank you.

The appreciation of the meeting was expressed by Diana Chant, Partner, Price Waterhouse, and Treasurer, The Empire Club of Canada.