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The New Global Normal: What it means for Canadian Competitiveness
Background Perspectives for the 4Front Atlantic Conference
By Kevin G. Lynch Vice-Chair BMO Financial Group
2K. Lynch
We are entering a new global normal … with “China soaring, India poised, Asia re-emerging” … where many advanced economies going through difficult economic, financial and fiscal restructurings … and all countries need to adapt to succeed.
Source: IMF, May 2011
1990
Country GDP
$US (B)
1. U.S.A
2. Japan
3. Germany
4. France
5. Italy
6. U.K.
7. Canada
8. Spain
9. Brazil
10. China
11. India
12. Mexico
5,800.5
3,030.0
1,547.0
1,248.6
1,135.5
1,017.8
582.7
520.7
507.8
390.3
313.7
262.7
2011
1. U.S.A
2. China
3. Japan
4. Germany
5. France
6. U.K.
7. Brazil
8. Italy
9. Russia
10. Canada
11. India
12. Spain
15,227.1
6,515.9
5,822.0
3,518.6
2,750.7
2,471.9
2,421.6
2,181.4
1,894.5
1,737.3
1,704.1
1,484.7
Country GDP
$US(B)
3K. Lynch
The new global context: structural trends and pivotal events are reshaping economies, societies, politics, expectations … and “the drivers of success” are changing for all countries.
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Globe is Restructuring
A new multi-polar world. The re-emergence of Asia: 50% of world GDP within decade. The great global financial crisis with lasting consequences. Geo-political risks rising; premium on security. Energy and commodities generating huge wealth transfers.
1.
Global Competitiveness is Changing
Nature of competitiveness changing: premia on a global perspective; and the quality of “national capital”: intellectual (i.e. innovation) capital, human capital and natural resources.
2.
Great Global Talent Hunt
Demographics: the West and China are aging … it puts an incredible premia on developing, attracting, and retaining skilled knowledge workers … multilingual, multicultural, entrepreneurial, and innovative.
3.
Information is New Global Currency
The 24/7 global digital universe is reshaping the value of information, how information can be used, how it can transforming businesses and markets, and its potential to reshape government.
4.
4K. Lynch
The economics of the new global normal are: … slow and volatile recoveries in advanced countries, many with large fiscal burdens and recovering financial systems … and rapid growth in dynamic emerging economies, many with inflation pressures and income inequality challenges.
2010 2011 2012
U.S. 3.0 1.5 1.8
Germany 3.6 2.7 1.3
UK 1.4 1.1 1.6
France 1.4 1.7 1.4
Japan 4.0 -0.5 2.3
Canada 3.2 2.1 1.9
China 10.3 9.5 9.0
India 10.1 7.8 7.5
Sources: Haver Analytics, IMF WEO Database, April 2011, IMF WEO Update, September 2011
Peak to Trough Decline in Real GDP During Great Recession
-6.4%
-5.4%
-6.6%
-4.1%
-3.9%
Chart TitleEuro Area
UK
Germany
US
Canada
Real GDP Growth: IMF Forecast
Previous Peak to Current Employment
Chart Title-1.8%
Canada 0.8%
US
1.3%
Euro Area
UK
Germany
-3.5%
-0.4%
Key Risks
• Sovereign Debt• Fiscal imbalances• Bubbles; inflating and deflating
• Inflation (Emerging Economies)
• Consumption/saving imbalances
5K. Lynch
In the new global normal, balance sheets really matter, for governments as well as households and businesses … with pervasive globalization, no government with market bonds is immune from fiscal risk … and economies benefit from the “national insurance” of fiscal virtue.
TOTAL Government Fiscal Balance: % of GDP (2011)
TOTAL Government Net Debt: % of GDP (2011)
Provincial Net Debt FY2011 (% of GDP)Provincial Budget Balance FY2011 (% of GDP)
Sources: Provincial budget balances and debt- Dept of Finance Fiscal reference tables; Federal Data: http://www.budget.gc.ca/2011/plan/chap5-eng.html (June 2011 update); IMF World Economic Outlook, September 2011
-1.5%
-1.0%
-0.8%
0.2%
-1.9%Canada: Federal
Nfld & Labrador
P.E.I.
New Brunswick
Nova Scotia
34.6%
36.6%
36.2%
26.7%
34.3%
P.E.I.
Canada: Federal
Nfld & Labrador
Nova Scotia
New Brunswick
-4.3%
-5.9%
-1.7%
-4.0%
-10.3%
-8.5%
-9.6%
-7.9%Greece
France
Germany
Italy
UK
USA
Canada
Japan
34.9%
81.0%
57.2%
100.4%
130.6%
72.9%
72.6%
153.1%
France
Germany
Italy
Japan
UK
Canada
USA
Greece
6K. Lynch
Fiscal reality today: governments need to confront both fiscal consolidation and fiscal sustainability … the fiscal double header for many western economies including Canada and most provinces.
FISCAL CONSOLIDATION
FISCAL SUSTAINABILITY
Cause (recession, stimulus) and Consequence (debt accumulation)
• Slow recovery
• Weak tax bases• Income support spending
• Unwinding fiscal stimulus spending
• Deficit-debt dynamics
Cause (slower structural GDP growth, demographics) and Consequence (structural deficits)
• Structurally weaker nominal GDP growth … i.e. tax bases (4% vs. 5 ½+ %)
• Lower Cdn Labour force growth (0.9% vs. 1 ½ %)• Lower Cdn Productivity growth (0.8% vs. 1 ½ %)• Lower Cdn Inflation (2% vs. 2 ½ %)
• Structurally higher spending growth in demographically sensitive areas
• Health, pensions, training …
S
RP
NT
I
AM
AT
R
H
NO
7K. Lynch
In this fiscal reality, economies need to increase longer term growth … and this requires embracing the “New Global Competitiveness” = globalization + human capital + innovation + natural resources … and Canada is no exception.
DISRUPTIVE IMPACT CONSEQUENCES AND OPPORTUNITIESCOMPETITIVENESS
DRIVERS
• Strong macro fundamentals “provide national insurance”• Market opportunities shifting to dynamic emerging countries • ITC offers transformative ways to go global from anywhere
Unbelievably inter-connected markets …Globalization
• TALENT HUNT goes global• Premium for multi-lingual, multi-cultural workforces• Address challenges posed by demographics—to the workforce,
pensions and healthcare
Aging populations, put premium on talent …
Human Resources
• Opportunities for producers of food, energy and minerals/metals • Technology and logistics lever resources
Emerging economies need resources to sustain growth …
Natural Resources
• Moving up the value-added curve requires continual innovation and productivity
• Innovation creates opportunity to shift the demand curve, the market curve, and the cost curve; or else, risk competing with low-cost suppliers on price
Innovation drives productivity gains and economic growth …
Innovation
8K. Lynch
A universal reality … productivity is core to a nation’s competitiveness and the standard of living of its citizens … AND, Canada is lagging.
0
1
2
3
4
1947- 1973
1973- 2000
2000-2008
4.0
1.6
0.8
Annual % Labour Productivity Growth in the Canadian Business Sector: 1947 - 2008
73.6%
70
75
80
85
90
95
100
1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
US=100
Relative Labour Productivity in the Business Sector: Canada as % of US
–Paul Krugman (Nobel Prize Winner)
“Productivity isn’t everything, but in the long run, it is almost everything.”
Paradox: Canada has a larger productivity problem than the U.S. --- indeed, our Can-U.S. productivity gap “costs” us
$300B annually --- but U.S. has greater urgency in improving
productivity
9K. Lynch
SECTORLabour
Productivity(2007)
Machineryand Equipment*
(2000-07 average)
ICT(2000-07 average)
AGRICULTURE, FORESTRY,FISHING AND HUNTING
86.4 70.5 79.1
MINING 88.0 80.0 31.2Mining, except oil and gas industry 47.3 57.0 35.1Oil and gas extraction industry 81.6 100.5 25.6
UTILITIES 62.7 51.0 73.6CONSTRUCTION 192.5 79.2 14.7MANUFACTURING 73.2 91.1 36.6
Wholesale Trade Industries 90.0 29.9 45.6Retail Trade Industries 75.6 70.4 72.1Transportation andWarehousing Industries
108.1 86.8 19.7
Information and Cultural Industries 46.6 82.8 98.5
FIRE** and Management ofCompanies Industries
72.1 105.4 72.2
Professional, Scientific andTechnical Services Industries
38.6 45.7 42.3
Administrative and WasteManagement Industries
107.6 39.9 49.9
Education, Health Care andSocial Assistance Industries
95.9 34.2 17.8
Arts, Entertainmentand Recreation Industries
39.0 39.3 128.7
Accommodationand Food Services Industries
72.2 28.3 47.1
Average for all Sectors and Industries 72.1 74.5 47.9
Canada-U.S. Labour Productivity and Selected Capital Intensity Comparisons (U.S. = 100)
GOODS SECTOR
SERVICES SECTOR
Canada’s productivity deficit versus the U.S. is both large and pervasive … most sectors have productivity levels considerably less than comparable U.S. sectors … and contributing to this, we invest much less in ICT and machinery.
Source: State of the Nation 2010 Report by the Science, Technology and Innovation Council
10K. Lynch
Innovation is the core to the new competitiveness because it alone has the capacity to create new products not compete on standardized ones and build new markets not fight for share in existing ones … BUT, Canada is not an innovation leader, particularly in the business sector.
Our public sector investments in R&D
spending as a % of GDP, delivered largely through
universities, are well above OECD averages,
and even the U.S.
But, the Canadian business sector ranked 15th among
OECD countries in business R&D expenditures. Canadian
business R&D spending is only 1% of GDP, well below the
OECD average of 1.6%; half the U.S. and a third of leaders like
South Korea, Sweden.
Business Sector R&D Expenditures% of GDP
0.9%
0.9%
1.0%
1.0%
1.1%
1.2%
1.2%
1.3%
1.3%
1.4%
1.5%
1.7%
1.8%
1.8%
1.9%
2.2%
2.5%
2.7%
2.7%Japan
Sweden
Finland
Korea
United States
Austria
Germany
Denmark
Iceland
Luxembourg
France
Belgium
Australia
United Kingdom
Canada
Netherlands
Czech Republic
Ireland
Norway
Source: OECD, Main Science and Technology Indicators. Volume 20
15th
“The first step in winning the future is encouraging
American innovation.” … “We need to out-innovate, out-educate, and out-build the
rest of the world.”
President Obama, 2011 State of the Union Address
11K. Lynch
Canada’s markets are “over-weighted” in mature, slower growing economies (many with structural fiscal challenges) and linkages are weaker to dynamic emerging markets.
Country
% of Canadian
Trade
Average GDP Growth Rate:
2010-2012
1. United States 74.9% 2.8%
2. United Kingdom 4.1% 1.7%
3. China 3.3% 9.8%
4. Japan 2.3% 2.5%
5. Mexico 1.3% 4.7%
6. Germany 1.0% 2.7%
7. South Korea 0.9% 4.9%
8. Netherlands 0.8% 1.6%
9. Brazil 0.6% 5.4%
10. Norway 0.6% 1.9%
89.6%
Canada's Top 10 Trading Partners () in 2010 (1% or more of Cdn. Exports)
Sources: Industry Canada; http://www.sse.gov.on.ca/medt/investinontario/en/Pages/coca_401.aspx; IMF WEO DatabaseNote: Numbers may not add to totals due to rounding.
Missing major export markets in dynamic emerging economies including: India, Brazil, South Korea, Taiwan, South Africa, Russia, etc.
Export Markets Import Markets
Country
% of Canadian
Trade
Average GDP Growth Rate:
2010-2012
1. United States 50.9% 2.8%
2. China 11.1% 9.8%
3. Mexico 5.5% 4.7%
4. Japan 3.4% 2.5%
5. Germany 2.8% 2.7%
6. United Kingdom 2.7% 1.7%
7. South Korea 1.5% 4.9%
8. France 1.4% 1.6%
9. Italy 1.2% 1.2%
10. Taiwan 1.0% 7.1%
80.5%
12K. Lynch
In the new global competitiveness, talent is key … and a well educated, entrepreneurial, multi-lingual, globally oriented and innovative work force is a competitive advantage.
How is Canada Doing? … Some Talent Indicators
(i) Education attainment results for International Student Assessment (PISA)
• Science• Math• Reading
(ii) Percentage of population with tertiary education
(iv) PhD graduates
(iii) Percentage of population with university-level education
8th place (OECD)10th place (OECD)6th place (OECD)
1st place (OECD); 49% of population
23rd place (OECD); 146 per million
16th place (OECD); 34% of population
(v) Universities in Global top 100• MBA schools in global top
100
4 universities (1 in top 20)
6 schools (none in top 40)
(vi) Multi-cultural and diverse population
Over 40% of populations in Toronto and Vancouver foreign-born …
13K. Lynch
Natural resources matter … Canada is one of world’s most secure, largest producers of natural resources … energy, minerals/metals, agriculture … and as global demand rises, so do global prices … and the incentive to better apply technology (innovation) and logistics to maximize returns.
Sources: Canadian Minerals Yearbook, U.S. Geological Survey (USGS), Food and agriculture organization of the United Nations (FAOSTAT) * latest year
Lentils 1st
Linseed 1st
Mustard Seed 1st
Dry Peas 1st
Barley 2nd
Canola 2nd
Blueberries 2nd
Cranberries 2nd
Mixed Grain 2nd
Wheat 8th
Potash 1st
Nickel 2nd
Uranium 2nd
Diamonds 5th
Zinc 5th
Lead 6th
Oil 6th
Copper 8th
Gold 8th
Iron Ore 9th
And, the second largest oil reserves in the world, and large shale gas reserves
Natural Resource Ranking*
Agricultural Resource Ranking*
Source: Bank of Canada
Bank of Canada’s Index of Real Commodity Prices in the Post-War Period
14K. Lynch
Global benchmarks for business productivity growth … an Economist* survey of 400+ global CEO’s identified three main drivers of productivity and the imperative of innovation … lessons for Canadian business.
* Source: EIU (Gearing for Growth: Future Drivers of Corporate Productivity, 2011)
Managing Human Capital
Making Strategic Corporate Choices
Maximizing Best-Available Technology
• Functional training• Flex time workers
• Pay for performance• Reward process innovation
• Introduce new products/services• Enter a new market
• Invest in operational R&D• Acquire strategic partners with complementary know-how
• Mobile working• Customer analytics
• Social media for client interaction• Collaboration software
TODAY: Areas for biggest payoffs
• Management training
• Cloud computing
TODAY: Choices with greatest impact
TODAY: Maximum impact today
#1
#2
#3
15K. Lynch
Branding matters: in a transforming and volatile world, brands reduce uncertainty … a clearer Canadian brand … and Atlantic Canada brand within it … would help business sell abroad, attract investment, entice immigrants, facilitate education/research alliances, and open markets.
Solid economic fundamentals, including lower debt and corporate taxes than the U.S.
Robust resources; both natural resources and human resources
A sound financial system, with strong financial institutions.
Nice + “Other” Brand Characteristics:
?Branding of Canada by Canadians
Opportunity:Nice
Canadians
… or …
Branding of Canada by
Others
Financial Crisis Oil SandsSeal HuntWall Street
JournalRisk:
THE WALL STREET JOURNALJanuary 12, 1995
Bankrupt Canada?Mexico isn't the only U.S. neighbor
flirting with the Financial abyss. Turn around and check out Canada, which has now become' an honorary member of the Third World. In the unmanage-ablility of its debt problem. If dramatic action isn't taken in next month's fed-eral budget, it’s not inconceivable that Canada could hit the debt wall and, like Britain in the 1970s or New Zealand in the 1980s, have to call in the International Monetary Fund to stabi-lize its falling currency.
The Canadian dollar’s problems were finely detailed in the Journal yesterday by reporters Michael Sesitand Suzanne McGee. Additionally, Canada has the second-highest ratio of debt to GDP of any industrialized economy. only Italy surpasses it. But Italy finances most of its debt through domestic borrowing, while Canada ran a $30 billion balance-of-payments deficit last year. About 40% of Canada's national and provincial debt is held by foreigners. They should worry that 35% of all federal revenues now go to service the debt.
Ed Neufeld, who until last year was Chief economist for the Royal Bank of Canada, says the moment of truth will come next month when the Liberal government presents its budget. Finance Minister Paul Martin has been making noises about a radical pruning of government expenditures. "We don't have much time," Mr. Neufeld says. "If Canada has to go cap in hand to the IMF it will represent the worst finan-cial crisis in the country's history."
Thankfully, some of Canada's 10 provinces have been showing It's pos-sible for governments to get out of the tax and debt trap and survive politi-cally. Saskatchewan has closed many marginal rural hospitals. New Brunswick has abolished the school board bureaucracy and Imposed tough workfare requirements.But the most impressive perfor-mance is in Alberta, where former Cal-gary Mayor Ralph Klein was elected
premier in 1992. He has slashed gov-ernment spending 20% by simultane-ously taking on every special interest from subsidized businesses to health-care providers. Some 40,000 of Al-berta's 90,000 welfare recipients have been removed from the rolls or placed in training programs. As a result, Al-berta's provincial debt has been cut by 80% at the same time that Mr. Klein's Conservative government has risen to a 61% approval rating.
The economy there has responded well to the medicine. It grew by 4% last year, while unemployment has fallen to 7.4% from 9%, Premier Klein predicts that the provincial govern-ment's share of GDP will fall to 14% from today’s 18% by 1997. He hints he plans to cut income taxes before the next election. "The U.S. is talking about achieving a balanced budget in 2002," He says. "As a province we plan to be deficit-free long before then, and already paying down our debt." Inspired by Alberta's example, the Ontario Conservative Party re-cently endorsed a plan to reduce gov-ernment spending and cut the top rate of income tax in the province to 46% from 52%.
On the federal level there are dozens of budgetary white elephants long overdue for a diet if the Liberal government has the proper will. The Fraser Institute, a Vancouver free-market think tank, recommends pri-vatizing the Canadian National Rail-way and Canada Post along with end-ing transfer payments to taxpayers with above-average incomes. Short of that, there are massive savings to be had in trimming other federal programs.
What's clear is that Canada can no longer dawdle over its debt and tax burdens. It has lost its triple-A credit rating and can't assume that lenders will be willing to refinance its growing debt forever. Before Canada "hits the wall" it must put on the brakes and take its government in a new direction.
THE WALL STREET JOURNALJanuary 12, 1995
Bankrupt Canada?Mexico isn't the only U.S. neighbor
flirting with the Financial abyss. Turn around and check out Canada, which has now become' an honorary member of the Third World. In the unmanage-ablility of its debt problem. If dramatic action isn't taken in next month's fed-eral budget, it’s not inconceivable that Canada could hit the debt wall and, like Britain in the 1970s or New Zealand in the 1980s, have to call in the International Monetary Fund to stabi-lize its falling currency.
The Canadian dollar’s problems were finely detailed in the Journal yesterday by reporters Michael Sesitand Suzanne McGee. Additionally, Canada has the second-highest ratio of debt to GDP of any industrialized economy. only Italy surpasses it. But Italy finances most of its debt through domestic borrowing, while Canada ran a $30 billion balance-of-payments deficit last year. About 40% of Canada's national and provincial debt is held by foreigners. They should worry that 35% of all federal revenues now go to service the debt.
Ed Neufeld, who until last year was Chief economist for the Royal Bank of Canada, says the moment of truth will come next month when the Liberal government presents its budget. Finance Minister Paul Martin has been making noises about a radical pruning of government expenditures. "We don't have much time," Mr. Neufeld says. "If Canada has to go cap in hand to the IMF it will represent the worst finan-cial crisis in the country's history."
Thankfully, some of Canada's 10 provinces have been showing It's pos-sible for governments to get out of the tax and debt trap and survive politi-cally. Saskatchewan has closed many marginal rural hospitals. New Brunswick has abolished the school board bureaucracy and Imposed tough workfare requirements.But the most impressive perfor-mance is in Alberta, where former Cal-gary Mayor Ralph Klein was elected
premier in 1992. He has slashed gov-ernment spending 20% by simultane-ously taking on every special interest from subsidized businesses to health-care providers. Some 40,000 of Al-berta's 90,000 welfare recipients have been removed from the rolls or placed in training programs. As a result, Al-berta's provincial debt has been cut by 80% at the same time that Mr. Klein's Conservative government has risen to a 61% approval rating.
The economy there has responded well to the medicine. It grew by 4% last year, while unemployment has fallen to 7.4% from 9%, Premier Klein predicts that the provincial govern-ment's share of GDP will fall to 14% from today’s 18% by 1997. He hints he plans to cut income taxes before the next election. "The U.S. is talking about achieving a balanced budget in 2002," He says. "As a province we plan to be deficit-free long before then, and already paying down our debt." Inspired by Alberta's example, the Ontario Conservative Party re-cently endorsed a plan to reduce gov-ernment spending and cut the top rate of income tax in the province to 46% from 52%.
On the federal level there are dozens of budgetary white elephants long overdue for a diet if the Liberal government has the proper will. The Fraser Institute, a Vancouver free-market think tank, recommends pri-vatizing the Canadian National Rail-way and Canada Post along with end-ing transfer payments to taxpayers with above-average incomes. Short of that, there are massive savings to be had in trimming other federal programs.
What's clear is that Canada can no longer dawdle over its debt and tax burdens. It has lost its triple-A credit rating and can't assume that lenders will be willing to refinance its growing debt forever. Before Canada "hits the wall" it must put on the brakes and take its government in a new direction.
16K. Lynch
Canada has enormous strengths that have served us well, built one of the highest standards of living in the world, and one of the most civil societies.
Solid public finances
Actuarially balanced public pension plan
Competitive corporate taxes (12 percentage pts. less than U.S.)
Stable, secure financial system (rated #1 in world by WEF)
Well educated, diverse population
Huge natural resource assets
Stable institutions
Universal safety nets and public services (education, health, …)
17K. Lynch
In the new global normal, Atlantic Canada can win … provided it builds on its strengths, not rests on them … embraces the new global marketplace strategically, and tackles its weaknesses, particularly productivity and innovation …
Atlantic Canada has many strengths: the key is to understand our comparative advantages, and lever them globally
Changing world brings opportunities as well as risks: markets and market opportunities are shifting; Atlantic Canada needs to adjust well and early
Need to fight the tyranny of “short-termism” and “status quo-ism”: the status quo is not a strategy for the future in a dynamic, changing environment
Sustained productivity improvements will take national effort, and sustained corporate focus on global markets, talent, and innovation
“Innovation is the oxygen that fuels the star runner …”
And, we need to avoid complacency risk … Atlantic Canada has the potential … BUT … we need to compete to win