Canada and the New Global Competitiveness · 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

Canada and the New Global Competitiveness

The Honourable Kevin G. LynchVice-Chair BMO Financial Group

Financial Executives InstituteOttawa, Ontario

June 10, 2011

1Financial Executives Institute

Ottawa, Ontario

June 10, 2011

Shifting fortunes and the changing world order: a 20-year snapshot

of the “International League Tables” of the top 12 global economies.

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)


Ottawa, Ontario

June 10, 2011

Context matters: structural trends and events are reshaping

economies, societies, politics …

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

Competitiveness

is Changing

New competitiveness emerging: global in perspective; and a focus on capital: intellectual capital (innovation), human capital (talent) and natural resources (energy, food, minerals, water).

1.

Globe is

Restructuring

A new multi-polar world. The re-emergence of Asia: 50% of world GDP within decade. The financial crisis has lasting consequences. Geo-political risks rising, premium on security.

2.

Great Global

Talent Hunt

Demographics: West (and China) are aging … puts incredible premia on attracting, retaining skilled workers … importance of talent management.

3.

Information is

New Global

Currency

The 24/7 global digital universe is reshaping the value of information, how information can be used and how it is reshaping doing business.

4.


Ottawa, Ontario

June 10, 2011

The basics really matter … strong economic fundamentals and

prudent public finances underpin a resilient economy … think of

Greece, worry about U.S.

Source: IMF World Economic Outlook (April 2011)

Note: Portrays general government net lending and general government net debt for all levels of government

2011201020092008 2015

Total Government Budget Balance (% of GDP)

-13

-12

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

G7Canada Japan Euro area United

States

United

Kingdom

Total Government Net Debt (% of GDP)

0

20

40

60

80

100

120

140

160

G7Euro area United

States

United

Kingdom

JapanCanada


Ottawa, Ontario

June 10, 2011

Stable financial systems matter to everyone in an economy/society …

as the great global financial crisis demonstrated dramatically.

1 = insolvent and may require a government bailout,

7 = generally healthy with sound balance sheets

Source: World Economic Forum, Global Competitiveness Report 2009-2010

Source: International Monetary Fund, Global Financial

Stability Report (April 2010)

(% of total loans)

Non-performing Bank Loans

6.2

5.4

3.3

2.8

2.8

1.8

1.2

US

Italy

UK

Germany

France

Japan

Canada

World Economic Forum 2010 Rankings: Soundness

of Banks

3.8

4.7

4.8

5.0

5.2

5.7

6.6

6.6

6.7

Japan

UK

US

Germany

Italy

France

Australia

New Zealand

Canada


Ottawa, Ontario

June 10, 2011

The “New Global Competitiveness” = globalization + human capital +

innovation + natural resources.

DISRUPTIVE IMPACT CONSEQUENCES AND OPPORTUNITIESCOMPETITIVENESS

DRIVERS

• Market opportunities shifting to dynamic emerging countries;

• ITC offers transformative ways to go global, create virtual

markets

Unbelievably inter-connected

markets …Globalization

• Talent hunt goes global

• Premium for multi-lingual, multi-cultural workforces

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

…

• Firms need more innovation spending, and complementary

partners

Innovation drives growth and

productivity gains …Innovation


Ottawa, Ontario

June 10, 2011

Natural resources matter … Canada is one of world’s most secure, largest

producers of natural resources … energy, minerals/metals, agriculture …

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


Ottawa, Ontario

June 10, 2011

Productivity is core to a nation’s competitiveness and the standard of

living of its citizens… and Canada is lagging.

We have a bigger problem than the U.S. --- our productivity deficit “costs” us $300B

annually --- but they have much greater public urgency in improving productivity

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

%7

0

7

5

8

0

8

5

9

0

9

5

10

0

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

US=100

Relative Labour Productivity in the Business Sector:

Canada as % of US

–President Obama, 2011 State of the Union Address

“We need to out-

innovate, out-

educate, and out-

build the rest of the

world.”

“The first step in

winning the future is

encouraging

American innovation.”

–Paul Krugman

“Productivity isn’t everything, but in the long run,

it is almost everything.”


Ottawa, Ontario

June 10, 2011

The productivity conundrum … why such poor productivity

performance in such a wealthy, advanced economy?

Low ICT Investment

- ICT per worker 50% of U.S.

Low Capital-Labour Ratio

- Less M&E per worker than U.S.,

many other OECD countries

Low Dollar

- Low dollar discourages investment

in imported M&E, licensing new

technology, spending on R&D

Low Innovation

- Less private sector innovation

investment then major competitors


Ottawa, Ontario

June 10, 2011

INNOVATION is core to the new

competitiveness because it

alone has the capacity to

change the value proposition: to

shift the cost curve not move

along it; to create new products

not compete on homogeneous,

standardized goods; and to

build new markets not fight for

share in existing ones.

Innovation is the key to productivity … but the problem is: 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


Ottawa, Ontario

June 10, 2011

Macroeconomic

… balanced “macro

environment” leverages

“corporate/micro

environment”

Financing

… venture capital key to

start ups; bank financing

for sustained corporate

innovation/productivity

investments

The new competitiveness imperative: “Innovate or Perish” … a

6-point Science and Technology (S&T) plan for Canada ...

Belief System/Paradigm

… a “belief system”,

shared by ALL, that S&T

drives growth

Globalization

… mindset, benchmarks,

and ambitions are global

Excellence

… excellence, not

entitlement, guides S&T

investments

Commercialization

… bookend to “belief

system”: turning S&T into

products, firms, jobs and

growth

6-Point S&T Plan


… a “belief system”, shared

by ALL, that S&T drives

growth

Excellence

… excellence, not


investments

Macroeconomic



“corporate/micro

environment”

Financing

… venture capital key to start

ups; bank financing for

sustained corporate


investments

Globalization

… mindset, benchmarks, and

ambitions are global

Commercialization




growth

Macroeconomic



“corporate/micro

environment”

Financing

… venture capital key to start

ups; bank financing for

sustained corporate


investments


… a “belief system”, shared

by ALL, that S&T drives

growth

Globalization

… mindset, benchmarks,

and ambitions are global

Excellence

… excellence, not


investments

Commercialization




growth


Ottawa, Ontario

June 10, 2011

Innovation and productivity growth at the firm/corporate level: … a

perspective by global CEOs on today’s key drivers of productivity.

Productivity Growth: The top

3 corporate drivers

1. Managing Human Capital

2. Making Strategic

Corporate Choices

3. Maximizing Best-

Available Technology

• Functional training

• Flex time workers

• Pay for performance

• Reward process innovation

• Management training

• 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

• Cloud computing

#3 TODAY: Maximum impact today

* Source: EIU (Gearing for Growth: Future Drivers of Corporate Productivity, 2011)

#2 TODAY: Choices with greatest impact

#1 TODAY: Areas for biggest payoffs


Ottawa, Ontario

June 10, 2011

Branding matters: … in a transforming world, brands matter because they

reduce uncertainty … a clearer Canadian brand would help business sell

abroad, attract investment, entice immigrants 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 Hunt

Wall Street Journal

Risk:

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.


Ottawa, Ontario

June 10, 2011

Canada and Canadian firms have the resources and capacity to

compete to win in this changing global economy … provided we build

upon our strengths, not rest on them, and tackle our weaknesses.

Going forward, Canada needs a focus on:

Sustainable fiscal balance, including more productive, innovative government;

Stronger productivity and innovation growth, key elements of the new competitiveness;

Deepened economic ties to key dynamic emerging markets;

Tackling the challenges posed by demographics: to the workforce, pensions, health care.

Documents

Canada and the New Global Competitiveness · 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