Archive for October, 2012

What Should a Resource-Based Economy Do?

October 30, 2012

In 2012, CIC published a report titled “9 Habits of Highly Effective Resource Economies, Lessons for Canada”. The report is a professional piece of work, written by Madelaine Drohan, the Economist’s correspondent for Canada and a journalist of standing. Its purpose is to propose policy steps to be taken by Canada to take advantage of its resources endowment. The complete wording of the nine recommendations is in the report. An abbreviated version as shown in the report is reproduced here. See http://www.opencanada.org/wp-content/uploads/2012/10/CIC-The-9-Habits-of-Highly-Effective-Resource-Economies.pdf

1. Save your money. Think sovereign wealth fund. A growing number of countries treat resource revenues as capital and not income. Canada is not among them. We’re rich in resources but could be richer still if we did more with what we have. Government can help business find the answers.

Countries with resource endowments need to take advantage of the revenues earned from resources while they last, and to be alert to the fact that they may become redundant. Coal, for example, now sits in the ground in some places because it is replaced by other forms of energy. Some resources like water, wind and solar are renewable.

The establishment of sovereign wealth funds (SWF) is one route to go. Alberta did this in 1976. It is now worth $15.6bn and is used by the government to fund annual budgetary expenditures.

“The investment income earned by the Heritage Fund, less the amount retained in the fund for inflation proofing, is transferred to the province’s main operating fund, the General Revenue Fund, to help pay for priority programs .

 Since 1976, investment income from the Heritage Fund has benefited Albertans in many ways. Approximately $34 billion in investment income has been transferred to the province’s General Revenue Fund to support program spending in areas such as health care, education, infrastructure, debt reduction and social programs, spending in areas such as health care, education, infrastructure, debt reduction and social programs.”

The UAE has the largest SWF at $795.2 bn and Norway $512bn. The latter was evaluated recently by three economists hired by the fund, and the investments found to have performed no better than if it had invested in an exchange traded fund. The expenses of its fund managers could have been saved.

Since money is fungible, the existence of a SWF is an incentive to politicians to spend the money on their pet projects and to engage in deficit financing when perhaps they should not. This is not to argue against SWFs, but to be alert to the issues which arise when a government has one.

2Don’t stand still. Add, extract and build value. We’re rich in resources but could be richer still if we did more with what we have. Government can help business find the answers.

This is an argument for forward integration to undertake more value-added activity in Canada. Why does private enterprise not do more of it? This question should receive greater research attention by government and academia. It varies by industry. In the petroleum industry, there have been no refineries built in Canada since 1984, several refineries have been closed, and there is little prospect for new refineries in Canada. Refining is a low margin business and Canada’s advantage is in exporting crude oil. Each resource will have different possibilities, and one question is why private enterprise has not taken advantage of them if they exist.

3. Research together or fail separately. Crisis is teaching Canadian resource firms the virtues of collaboration — a lesson their global competitors learned long ago.

The recommendation is for collaborative research. Between governments and between government and industry this is possible. Private firms may have difficulties in deciding how to divide up the positive results of any research.

4. Keep up with the world. Put a price on carbon. Canada must find a better balance between resources and the environment. Pricing carbon is a necessary first step.

 I will leave it to others to evaluate a carbon tax.

5. Get on the global boat and cast a wide trade net. Trade patterns are  changing. We need to go global and think less about finished products and more about value chains.

This is an oft-repeated suggestion for Canada to diversify its trade markets for exports and imports. When the US becomes a larger trade partner, the woes are cited. When Canada’s share of US imports decline, as is the case today, the same is heard. It would be a good idea to diversify our trade and heavens know Canada has tried under all types of government. But geographically we inhabit a continent with the largest and wealthiest economy in the world, which speaks the same language and uses almost the same currency. Major diversification is unlikely to happen, at least in my lifetime. Moreover there are so many multilateral, bilateral and other trade deals, that it is not only hard to keep up with them, and the only growth industry may be for trade consultants.

6Don’t bar the gates. Foster home grown champions. Governments must make it easier for Canadian resource firms to become global players. Keeping investment out is not the answer.

This recommendation includes the proposal for one federal as opposed to numerous provincial security laws, as well as the removal of arbitrary barriers to foreign investors. It does recommend powers to screen foreign investment. Reciprocity should be an issue here. (I have discussed FDI policy in other postings).

 7Use your aid to help strengthen good governance overseas. Canada should play to its strengths with its official aid. Focus on resource governance and collaborate with like-minded donors.

I favour good governance overseas (and at home), but I have grave doubts about whether Canada’s aid policy does or can do much about it. To start with the amounts involved are trivial, especially given the way it is sprinkled abroad. Previously I noted:

“For 2010, Canada’s aid budget is about $5.2bn a year (0.33% of GDP) of which CIDA’s share is $3.7bn. In relative terms, the aid budget is about $5 per person per year in the 20 countries that are currently the foci of CIDA’s aid, or perhaps $1 per year for the total population of developing countries. However looked at, the sums received are small change and will not make much of a developmental impact. If they are spent on investment such as schools rather than on current consumption, the impact will be somewhat greater. The annual cost to Canadians is about $158 per capita.”

Governance in developing countries is unlikely to be influenced by these amounts. Moreover Canada has problems with demonstrating good governance at home.

8Stop the temporary labour addiction. Find a long term cure. Overuse of temporary foreign workers is a short-term fix. The solution includes allowing in more permanent residents and hiring more women and aboriginal workers.

Immigration of permanent residents and temporary workers is a large and important issue and not just for resource industries, and not just for Canada. What is happening is that labour is being brought to the work as opposed to outsourcing the work to labour abroad. Both processes have their critics, but the processes reflect a natural response to market forces.

When there is unemployment in Canada, the importation of foreign labour means either that Canadians are unwilling to perform the work at the wage offered, fruit picking for instance, or they do not have the skills to do so, such as welding, carpentry and plumbing. Each points to a particular remedy. Either change the incentives so that the unemployed will do the work and/or provide training for the needed skills. Bringing in foreign workers is an alternative which many industrialized countries do, in Europe for example. There are problems associated with it, but few solutions have been found.

9. Make an inclusive national plan (Hint: it’s more than just energy). Other countries have been more strategic in developing natural resources. Federal-provincial infighting is holding Canada back.

I agree federal-provincial infighting is a disgrace as is the absence of free trade within Canada, which is pathetic, but I don’t see it changing soon. Agricultural and cultural protectionism are outstanding black marks for Canada. If the plan includes the government picking winners among firms, the record is poor.

Consider Northern Telecom, a company that evolved out of Bell Canada when it was protected as the sole supplier to Bell, and a major supplier to other telcos in Canada. Once it was spun off and had to compete in the open market, it failed, with the consequences now being enjoyed by its former employees and investors. There are also examples of Crown corporations with less than exemplary records.

In sum, the report is well written, well documented and a thoughtful analysis of issues a resource-based economy needs to consider. I do not agree with all the proposals, but offer the foregoing as views for further discussion. Madeleine Drohan and the CIC have provided an excellent starting point.

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FDI in Canada – State Owned Enterprises

October 30, 2012

The proposed acquisition of Nexen, a Canadian oil company, by CNOOC, a Chinese state owned enterprise, has raised questions in Canada as to whether the economic and non-economic criteria for assessing foreign investment should be amended to create more certainty. Here it is argued that the nature of the investment process is such that precision is not possible, and judgment is required when dealing with such cases. This is similar to court cases where judges and juries have to use judgment in reaching verdicts on cases involving murder, assault and robbery. The same is true for Investment Canada decisions regarding foreign investment by state owned enterprises.

Three issues raised by the CNOOC proposed takeover of Nexen are:

  1. Will there be a net benefit to Canada in economic terms?
  2. Will it harm national security?
  3. Are there special issues related to foreign investment in Canada by state owned enterprises (SOE)?

The first question was addressed in the posting of October 26th, 2012. My view is that the evaluation of net benefit works well. It has to be left to judgment and evaluation of the facts of each case, similar to a court case. No two cases are the same and if the evaluation became more specific it would allow investors to structure their business arrangements to be in accordance with the act, while perhaps still not being in Canada’s interests. Many actions require judgment and cannot be made subject to precise rules, such as hiring personnel, testing drivers and pilots, and rating films as to viewership.

Precision regarding national security, the second question, is more difficult. On May 25, 2009, the OECD issued “Guidelines for Recipient Country Investment Policies relating to national security.” (http://www.oecd.org/investment/investmentpolicy/43384486.pdf). These concerns are often considered as political risk issues, but in many cases they have an economic dimension. Ted Moran has proposed consideration of three types of risk: dependency on a foreign supplier, leakage of sensitive technology or know-how, and infiltration/ espionage/ disruption.  The three are described as follows:

“The first category (which I will refer to as “Threat I”) consists of proposed acquisitions that would make the home country dependent upon a Chinese Foreign Direct  foreign-controlled supplier that might delay, deny, or place conditions upon the provision of goods or services crucial to the functioning of the home economy.  The second category (“Threat II”) is a proposed acquisition that would transfer, to a foreign-controlled entity, technology or other expertise that might be deployed by the entity or its government in a manner harmful to the home country’s national interests. The third category (“Threat III”) is a proposed acquisition that would enable the insertion of some potential capability for infiltration, surveillance, or sabotage into the provision of goods and services crucial to the functioning of the home economy.”

http://www.ceocouncil.ca/wp-content/uploads/2012/03/Chinese-Foreign-Direct-Investment-in-Canada-Theodore-H-Moran-March-2012.pdf

What is labeled national security here has both a political and an economic dimension. Threat 1 implies refusal to supply by a foreign owned entity; Threat 2 refers to foreign control over knowledge and expertise to the economic and political detriment of the country; and Threat 3 dealing with infiltration, surveillance and sabotage implies political interference with economic and other consequences. The possibility of being specific when evaluating each of these three seems remote and has to be left to a judgment call. One factor which will discipline those making these decisions is that if they appear unclear and arbitrary it will limit future foreign investment in Canada by both newcomers and those already in the country.

A third issue deals with the nature of state owned enterprises and how they differ from private enterprises. Note China, which only has SOEs, already has $10bn invested in Canada, while Canada has $4.5bn invested in China. The China Daily (April 19, 2012) reports a different figure “Chinese investment in Canada surpassed $20bn in 2011.” Clarification is needed to know what is included in each total, for example, direct and/or portfolio investment. Ownership of 10% to 20% of equity can constitute control of a company.

A quick survey of state owned enterprises includes Canada’s crown corporations such as the CBC, and sovereign wealth funds like Japan ($1254bn), UAE ($620bn), Norway ($247bn), China ($298bn), Netherlands ($254bn) and Singapore ($248bn) according to the Peterson Institute in 2010. The Alberta Heritage Fund holds assets of $16bn. The differences between what are labeled SOEs are sufficient to argue that judgment is needed by Investment Canada to decide which cases to approve.


 

 

FDI – Gangnam Style

October 26, 2012
Does the “net benefit” test in the Investment Canada Act require clearer definition and a more transparent process? This is a view repeated by the chattering classes. My view is that the net “benefit test” results from a process that works as well as it can, given the prevailing conditions. Greater clarity sounds good but may make it easier for firms to structure their operations for their own but not necessarily Canada’s benefit. If there is a better way, lets hear the alternatives. Political risk is a separate issue but here Canada can learn from the experience of other countries. The following is my understanding of how economic screening works.
This blog is deliberately titled to entice readers, not that it has much to do with the new South Korean dance craze, but the discussion tries to explain the screening process in today’s world. Consider what happens in screening for a hiring interview. The interviewer makes an assessment of the person based on academic and other credentials, and an evaluation of various personality traits for which there may be soft evidence like letters of recommendation, and today Facebook and other postings. There is no neat formula to determine the future net benefit to the organization of hiring a person. The employer makes a judgment call and usually has the option to terminate an employee’s contract. The actual, as opposed to expected benefit, occurs after the hiring has taken place when the conditions for the employer and individual may have changed.
This is similar to what Investment Canada (IC) does with acquisitions which require its assessment. The acquiring firm provides information on the various economic features required by the act. This is then either approved or rejected. Approval may come after IC officials ask for and get conditions included based on past decisions and the special features of the applicant. The applicant is aware of this, with the advice of a Canadian lawyer, and may be prepared to offer more in a revised application. The officials then feel that they have done a good job, and the applicant that the firm’s owners are cooperative and reasonable. Both sides congratulate themselves, and the process leads to 90% plus approvals. So is the public interest served by this process? Is there a more transparent way?
First, foreign investment screening is similar but not identical to the process used in most other countries with market economies, which have not found an alternative. Second, similar to hiring an employee, ex-post working conditions may change for the firm and its actual performance may not live up to expectations. So, why can’t the conditions set by IC become clarified and enforced to ensure the public interest is served? Enforcement requires knowing the future, having the ability to measure commitments, and to discipline the firm if these are not met, even though market conditions have changed. At times the investor may exceed its commitments. In order to be credible, the host government has to be prepared to ask a foreign investor to leave and dispose of its assets, perhaps to a domestic firm for which there are no similar requirements. Third, we know that a high percentage of IC applications are approved, largely due to informal pre-screening processes which show the applicant and official as working cooperatively, with both earning brownie points in their respective organizations for a successful outcome.
The foreign investor would often like to have specific measurable commitments, but there are none that make sense because of uncertainty about the future. If they were specific, the foreigner would structure the firm in Canada to meet these commitments which seemed right at the time for Canada, but with changing economic and/or political conditions may no longer be applicable. Moreover, the more specific the conditions the easier it is to structure a business relationship in Canada which achieves the firm’s objectives but perhaps not Canada’s. For example, if a foreign firm wants access to Canada’s crude oil supplies or other minerals, it can sign a long term exclusive contract with a Canadian owned supplier. IC is not involved and the foreign buyer does not have to invest abroad. There are a number of commercial ways to achieve access to supplies without investing in Canada. Canadian firms do the same thing abroad when they set up plants to take advantage of cheap labour and then import the product. Alternatively, they can buy the output from a foreign firm without acquiring ownership of it. Often the latter is preferable as investment is not put at risk, and if there is a market downturn, withdrawal will be less costly.
The foregoing deals mainly with economic factors. I will address the political considerations in a separate posting by which time I may have mastered the Korean dance. UN Secretary General Ban Ki-moon has already done so on YouTube.

Screening FDI – Economic and Political Risk

October 23, 2012

It is often stated that IC (Investment Canada), and FIRA before it, approved over 90% of applications, with some implying that the agency was an easy sell for the foreign investor. In practice this result is not surprising given the process used to meet and negotiate with the foreign investor and its Canadian legal advisors. The foreign investor and its lawyer meet with the agency officials to discuss its written application. From previous decisions, it is known what conditions are likely to be acceptable. Bargaining may take place with the investor aware that the agency may want something which it is prepared to give. The agency can then show that they have obtained better conditions for Canada. The Canadian legal adviser will advise the investor of how to play this game. No investor wants a rejection and has the ability to withdraw the application if failure is apparent. The result of this process is that the approval rate is high, maybe over 90%.

The foreign investor may be asked to meet certain conditions in order to pass the net benefits test. This is similar, but with one significant difference, to a patient being told by her doctor to eat certain foods, exercise daily, and get eight hours of sleep. These can be monitored and corrections made if necessary. If the foreign investor agrees to employ a certain number of Canadians, perform R and D in Canada, and export a certain percentage of production, these commitments suppose that market conditions are known in the future. If a recession occurs, it may be difficult or impossible to keep them, whereas the patient normally can comply when warned.

Commitments can be made for a certain point in time but not necessarily kept in the future. They could be exceeded in a growth situation, or not reached with a downturn. One then has to inquire about the monitoring procedure of the screening agency. I am unaware of the details, but pretty sure the agency does not have the staff to monitor in detail all previous approved investments. Foreign investors may disinvest for economic reasons but there is no record of investors being thrown out of Canada.

 Political Risk

Quantification is not possible. There are a series of issues to examine and these are clearly outlined in a study by Professor Ted Moran (Georgetown University) where he sets out current practice in other countries and by the OECD, and suggests how they might be applied in Canada,

“The first category (which I will refer to as “Threat I”) consists of proposed acquisitions that would make the home country dependent upon a Chinese foreign-controlled supplier that might delay, deny, or place conditions upon the provision of goods or services crucial to the functioning of the home economy.  The second category (“Threat II”) is a proposed acquisition that would transfer, to a foreign-controlled entity, technology or other expertise that might be deployed by the entity or its government in a manner harmful to the home country’s national interests. The third category (“Threat III”) is a proposed acquisition that would enable the insertion of some potential capability for infiltration, surveillance, or sabotage into the provision of goods and services crucial to the functioning of the home economy.”

http://www.ceocouncil.ca/wp-content/uploads/2012/03/Chinese-Foreign-Direct-Investment-in-Canada-Theodore-H-Moran-March-2012.pdf

Ted Moran has been an expert on this general subject area since the 1970s with a large number of publications. In Canada, the only comparable person would be Professor Ed Safarian, Professor Emeritus at the University of Toronto.

Since each case is different and political risk non-measurable in a precise way, the decision, on this dimension, becomes one which the cabinet must make with the best advice from officials. In this instance the issue of reciprocity needs to be considered. Canada is reported to have a stock of $4.5bn invested in China and China has $10bn invested in Canada. No doubt there will be more on its way, depending in part on the Nexen decision.

Can Diplomacy be Restructured?

October 20, 2012

The delivery of diplomatic services is becoming increasingly costly due to the growing number of mostly small nations in the postwar period, and to the labour intensity of providing the service for political, economic, defense and humanitarian reasons. The government has proposed cost savings by combining these services with other countries. It is suggested here that further use of information technology may also reduce costs without markedly decreasing the quality of services. I expect diplomats, past and present will denounce this idea, as academics do when cost savings are proposed.

 Can Canada’s diplomatic service be reorganized to provide more cost effective services? Diplomats are a bit like academics. Both cherish their tenure and perks and are loath to admit that their services can be reorganized in a more cost effective way; both tend to be, or have been, to-date, labour intensive with lectures, labs, seminars, tutorials and research supervision for academics, and interviews, meetings, conferences, presentations for diplomats. Both professions need to read, study and write reports, make presentations and deliver lectures as well as provide general administrative services.

Developments in information technology have affected most areas of economic activity. The next to feel this cyber tsunami will be higher education, where the bricks and mortar of colleges and universities will stand empty, be demolished or sold for other purposes, casinos or homes for the aged perhaps. In their place, distance education will emerge and grow. It has always been there with correspondence courses and then various television delivered courses. Carleton and McMaster universities were among the pioneers of TV courses, but were slow to adapt to changing technology. Courses are now being delivered as MOOCs, multiple open online courses, which reduce the costs of education and diminish the need for bricks and mortar and salaried professors with tenure. One professor can give a course to hundreds of students located anywhere with internet access. Information technology has also reduced the need for academic office space.  Academics spend more time at home except for lectures, office hours and meetings leaving their offices empty for the rest of the time. If a hotel had a similar occupancy rate for its rooms, it would soon be bankrupt.

In October 2012, the Canadian government indicated that it would reduce the number of its representatives abroad by sharing premises with other countries, mainly the British. When travelling abroad, a Canadian may be told to visit the embassy of another country if Canada is not represented there, and foreigners to Canada may get their visas from another Canadian embassy, often Washington, if Canada is not represented in the foreign country.

The proposed arrangement generated painful cries from diplomats past and present, especially those who disliked the reminder of Canada’s imperial roots, while ignoring that the Queen remains head of state which gives the arrangement a logical connection. Some would prefer a different head of state, although they seldom explain how the position would be filled by either appointment or election. An elected head would have power, something present parliamentarians dislike, and did so when such a referendum was presented and defeated in Australia, where a strong Irish presence tends to be anti-monarchy because of past events. An appointed head like today’s Governor General would increase demands by interest groups in Canada to have their turn at the wheel and the associated perks.

Why alter the delivery mechanisms for diplomatic services? One reason is that there are so many small countries now, many of which have little trade with, migration to and aid from Canada, principal but not sole reasons for representation – defense is another factor. I would be surprised if there were not cost savings to be found without loss of effectiveness. Again information technology is one reason for this possibility.

Consider the arena for diplomacy in the postwar period. Around 50 countries signed the UN Charter in 1945. There are now 191 UN countries, all of which expect to offer and receive diplomatic services. Diplomacy is a growth industry and if conducted bilaterally on the ground creates a large number of well paid jobs.

In the case of Canada, there are 127 countries with embassies in Ottawa, 54 others are covered by their embassies in Washington, 24 of which have consular offices in one or more cities in Canada. Abroad, Canada is represented in 196 countries, about half with direct representation from Canada, and the rest have offices serving Canada in neighbouring countries. There are also international organizations with Canadian representation. Because of Canada’s historical links with the UK and France, Canada is represented in the 54 states of the British Commonwealth and 56 members of the Francophonie. The Commonwealth has a total population of two billion people with the largest countries being India, Nigeria, Pakistan, the UK, Canada and South Africa; in the Francophonie with 890 million people, the largest are Egypt, France, Ghana, Greece and Canada.

 

Aid, Trade and Representation – how significant are they?

I have selected a number of smaller countries in Africa which are represented in Ottawa with embassies or high commissions, and where Canada is represented abroad; two are represented via their offices in Washington. This information is taken from websites including the DFAIT website for Canadian representation in these 17 countries. The information on foreign representation in Canada is incomplete. DFAIT probably has it for those employed by country in Canada, but this is not available to outsiders. The following observations are not a scientifically based study, but should be indicative of what is going on.

The 17 countries in Table 1 have embassies or high commissions in Ottawa. Some have consular offices in other Canadian cities, some of whom house Honorary Consuls. Population size for the 17 range from 6 million in Libya and 11 million in Tunisia to 91 million in Ethiopia and 73 million in the Democratic Republic of the Congo. For the 17, Table 1 contains information available on various country websites:

The first column indicates the number of persons employed abroad by Canada in the foreign country.  Ethiopia* and Mozambique* are represented by their Washington offices; Niger** states resident in Cote d’Ivoire. Column two lists the number employed by foreign countries in their Ottawa offices. Websites show pictures of each country’s Ottawa offices and residences, some of which are combined in the same building. CIDA funding of ODA by country and Canadian exports by country are listed in Columns 3 and 4, population size in Column 5.

                                                       Table 1.

         Canada’s diplomatic connections, trade and aid with the selected countries

Col.1   Canadian representatives employed abroad from DFAIT website

Col.2   Foreign representatives in Canada from country websites where available.

Col.3   CIDA funding of ODA from http://www.acdi-cida.gc.ca/acdi-cida/ACDI-CIDA.nsf/eng/NAT-216144310-R5J  Note 70% of ODA funding came from CIDA, 16% from Dept. of Finance, 6% from DFAIT, and 8% from 10 other departments.

Col.4   Canadian exports –  Jan.-Aug. 2012 from Statistics Canada.

Col.5   Population from CIA Factbook.

Burkina Faso        8 – 5 – na – 44-17

Cameroon             5 –  8 – na- 22 – 20

Congo                    12 – 1 – 19 – 12 – 73

Cote d’Ivoire       6 – 5 – na – 31 – 22

Ethiopia*            na – na – 105 – 10 – 91

Ghana                39 – 5 – 80 – 143 –  25

Kenya                 46 – 10 – 22 – 66 – 43

Libya                     6 – na – na – 100 –  6

Mali                    19 –  4 – 86 – 12 – 15

Mozambique* na – na – 103 – 28 – 24

Niger**              na – na – 12 – 4 – 16

Senegal              23 – na – 67 – 23 – 13

Sudan                    8  –  na – 86 – 82 – 34

Tanzania            12 – na – 88 – 52 –  50

Tunisia               16 – na – na – 101 – 11

Zambia                 3 – na – na – 24 – 14

Zimbabwe         16 – na – na – 6 – 13

Diplomats deliver political, economic, defense, development/humanitarian and consular services. Some of these are labour intensive and may require persons on the ground. But in the same way that other organizations now hold teleconferences to reduce costs, some of these could be incorporated in the conduct of foreign relations. A 2007 government report stated the following:

“DFAIT employs nearly 10,000 personnel located at headquarters and at more than 270 offices in 180 countries. Approximately 55 percent of departmental personnel are locally engaged staff (LES) – citizens of host countries – working mostly in administrative and support positions but also as trade officers, public affairs officers, and mission administration officers. The remaining 45 percent are rotational Canada-based staff (CBS), spending portions of their career at headquarters and portions on assignments at missions lasting from two to four years, and non-rotational staff at headquarters.” http://www.international.gc.ca/about-a_propos/oig-big/2007/evaluation/CFSI-ICSE.aspx?lang=eng&view=d#summary

Those on the inside now and in the past are among the best placed to comment on how savings can be made. There is little doubt that this must happen as it will in higher education. Comments would be appreciated.

Book Review: Christopher Hibbert, Mussolini, The Rise and Fall of Il Duce,

October 17, 2012

My impression of Mussolini from childhood was that he was a clownish leader of the Fascist Government in Italy from the 1920s, until he was strung up with his mistress to end their days on April 28, 1945. Hibbert’s biography shows that this was far from the case and that Mussolini was a shrewd and effective politician and dictator, albeit with some peculiar characteristics. The first edition of this book was written in 1962 and the second in 2008. Hibbert, now passed on, served in Italy during WW2, spoke Italian and had access to diaries, including that of Ciano, Mussolini’s son-in-law, whom Mussolini later had shot in January 1944 at the behest of the Nazis. The events, especially those during WW2 are described by Tobias Jones, a present day historian of Italy as, “From the opening paragraphs, however, I was gripped. It was a real page-turner, a mixture of the styles of the scholar and the thriller-writer. Here was a true story about a heroic revolutionary who had freed his people from foreign oppression.”

The book describes the relationship between four dictators, Hitler, Mussolini, Stalin and Franco as well as their interaction with leaders of democratically governed countries. Each dictator had their supporters in England for example. The common foe to many was Communism, and Fascism was sold in the west as the only viable alternative to communism. Liberal democracy was supported by some but not all leaders in the west. Many were reluctant to engage in another world war.

Another dimension of the book is Mussolini’s envy of Britain for having an empire and the desire by Hitler and Mussolini especially to create their own empires. Mussolini tried in Africa and Albania and Hitler in the east, which put him on a collision course with Stalin. One of the saving factors was the British navy which managed to control the English Channel and the Mediterranean Sea. For me the book is about both the functioning of dictatorships and the history of the interwar years.

Today, Tobias Jones provides an update of present day Italy and its politicians, some of whom appear clownish to outsiders. I have yet to read these accounts in detail.

Teaching Economics in Primary School can be fun!

October 17, 2012

“Thanks to my granddaughters for letting me know what is important to them.”

Economics is derived from the Greek, home and rules, or management of the home which is the foundation of economics at the micro level. Home economics, as taught in the past in schools and universities, dealt with cooking, needlework, cleaning, and managing the home generally performed by the ladies of the house or their servants, if they had any. Today, both sexes act as managers, workers and servants to their children. Currently, universities offers a much broader range of home economics topics including information technology, but a glance at the many course offerings at UBC reveals little associated with the discipline of economics. I suggest that a basic understanding of economics would be a useful addition to the home economics curriculum, and that the concepts used in economics can be introduced at a much earlier stage of learning, at least in the later years of junior school (grades 6,7 and 8).

The daily lives of young children incorporate many examples of economic concepts, especially in microeconomics. There is no need to introduce the jargon, like opportunity cost and demand elasticity, but when children use their time going to the movies at the expense of playing baseball, or splurge their allowance on a particular item, opportunity cost underlies these decisions. Demand and supply is illustrated when they offer their services washing cars, delivering fliers and babysitting where they have to decide how to set their fees. I know of children who sell drinks and cupcakes on the sidewalk, and think about how best to market and price these goods. They also become aware of government regulations regarding things like the minimum age for babysitting, and what needs to be known when offering this service.

Aspects of demand and supply fill children’s lives, and the underlying principles can be introduced at an early age. It can be an appealing topic as it deals with activities familiar to children. There is no shortage of topics to discuss, such as what goods and services are delivered to the home, who provides them and how they are paid for. Ownership of cellphones familiarizes children with the various payment plans offered, and how to extract funds from their parents to purchase them. A book like Richard Scarry, What People Do All Day, is an available textbook providing illustrations for discussion purposes. In a Dec.  2010, I posted a blog on this topic. To review past work, see the 2007 paper by Rodgers, Hawthorne and Wheeler, “Teaching Economics through Children’s Literature in the Primary Grades,” at http://econkids.rutgers.edu/images/pdf/final_draft_reading_teacher.pdf .

More generally there is so much relevant to economics in running a home and dealing with the different goods and especially services purchased. The market for TV cable services, the internet, telephone, utilities like gas, electricity, water, garbage collection and recycling, newspapers, letters, paying bills, managing bank accounts, trading securities are among the items traded, for which the consumer has to read the terms of the agreement, and select an option knowing exactly what is being purchased. I received my new Visa card this week and it incorporated the latest wave technology so a purchase could be made without a signature or PIN. Anyone who picks up the card could complete a transaction. There is a no liability provision for purchases made by an unauthorized user, but this does not apply if the card is used at an ATM where the card owner is liable up to $250 per day and $1000 per week. So why would anyone consider accepting this risk? On inquiry, you are told that wave technology is not used at ATMs. That may be the case now but what about the future?

 

See Posting from website of the Conversable Economist for Oct. 15, 2012.

Death Watch And the Media

October 15, 2012

CTV and other news channels have given much air-time to the e-coli outbreak affecting the distribution of meat in Canada, where 10 persons have been affected but none have died. This is commendable. However the same news media are asleep at the switch when it comes to reporting on other preventable events which daily cause deaths in Canadian hospitals. Known as “nosocomial” infections, they occur in Canada at the rate of about 1 to 1.4 per hour, 22 to 32 per day, or 8,000 to 12,000 per year. The numbers refer to infections acquired during hospital care which are not present at the time of admission and occur 48 hours after admission.

Hospitals turn out to be dangerous places to visit, some more than others, but prospective patients should be alerted to this danger factor, if their time comes. Such information can be as or more important than knowing the daily weather forecast or minute by minute movements in stock prices. Discussion of “nosocomial” infections is found at http://www.mcgill.ca/law/sites/mcgill.ca.law/files/khoury_lara_healthlawjournal_2009.pdf p.198. (The article also examines some the legal ramifications of this type of illness.)

Canadian news media exhibit the behavior of a gold rush, with all reporters zeroing in on the same story, and slow to seek out new ones. I am not aware of other cases of preventable deaths and illnesses to this extent, but I suspect that journalistic initiative would uncover some. This is where social media can make a contribution, and continue to siphon off audiences from more traditional sources. Social media increases readers, fragments audiences and allows new information channels with search engines able to locate particular topics. Recognizing these new conditions has lead many of the traditional news media to diversify their delivery mechanisms to the extent that it is no longer necessary to subscribe to a print copy if it is available online. Some are not free and require payment, but there are sufficient reliable alternatives for readers to get the news for free, forcing firms to find new funding mechanisms. Readers are limited to 24 hours in the day, and will always seek out cheaper ways to get reliable information.

Canada shoots itself in the foot

October 12, 2012

Self-inflicted wounds

In commenting on the previous posting (October 9th, 2012), Don McFetridge pointed out that many of our growth and innovation problems are handicaps we have imposed on ourselves, which because of political pressures are difficult to resolve. Here I comment on three such areas, the cultural industries, education and healthcare.

It is argued here that Canadian policies have caused self inflicted wounds and have retarded development of industries which today have significant growth possibilities, and can be considered emerging industries with export potential. Instead of focusing on emerging markets in geographic terms the focus here is on emerging markets in economic terms. Which then are the growth industries of tomorrow?

Industrialised countries now have a large proportion of their work force in the service sector, around 80% in the case of Canada and the U.S. rising from around 50% in 1960 and 60% in 1990. Only some services can be traded internationally but recent developments have increased these opportunities. Traditionally it has been thought that goods were more tradeable over a distance (domestically and internationally) than services. Thus wheat could be grown on the Prairies and shipped to Ontario, BC and to Europe and Asia. Non-tradeable services occur when the buyer and seller have to be in the same or nearby location. Thus a restaurant meal, haircut and medical operation have this feature. If Canadians wants a French meal, they have to travel to France, go to a French restaurant in Canada or buy the ingredients with which to cook a French dish; a French haircut or funeral requires the Canadian being transported to France; and a medical operation by French surgeons means the patient has to travel to France or the surgeon has to come to Canada. The GATS recognizes these forms of service delivery, which have all been affected by falling transportation and communication costs.

More services can and are now traded internationally. Even medical operations are undertaken with the surgeon and patient in different locations by using television screens and robotic arms, known as telesurgery – I  might be a little nervous if there was a power failure or communications were interrupted.  Dr. Anvari, a laparoscopic surgeon in Hamilton, Ontario, has conducted numerous remote surgeries on patients in North Bay, a city 400 kilometres away. Other examples of trade in services at a distance are teleconferences, and universities offering online courses which do not require instructor and student to be in the same location.

The three wounds

Three growing service related industries are culture, health and education where Canada has expertise which could be more export oriented, but whose performance has been retarded by self-inflicted policy wounds.   The cultural industries are protected by measures such as a tax on foreign advertising, Canadian content rules for music and television distribution, limits on foreign ownership and public ownership of certain broadcast undertakings. These industries are encouraged to be inward looking in the name of Canadian cultural sovereignty rather than seek out international markets. Even with these policies, Canadian artists (authors, actors and actresses, directors, producers and artists) have achieved success internationally in their respective fields. There are too many examples to cite here to show the global success of certain Canadian artists which Keith Acheson and I have written about over the past twenty years, with strong criticism from Canadian cultural nationalists.

A second area is education, a growth industry at all levels, primary, secondary and post secondary. Canada prides itself on the its universities and colleges which attract some foreign students to Canada, but has been slow to establish campuses abroad like Australia and the US. The Canadian approach is to fund publicly all levels of education, although university fees are beginning to rise slightly as a percentage of college funding in most places except Quebec. If there had been greater emphasis and encouragement on private educational institutions, with tax deductibility of some student expenses, more Canadian universities and colleges would have looked to attract foreign students or sell their services abroad. Now most have probably missed the boat with MOOCs, multiple open online courses offered to students at low cost in their own countries or abroad. Athabasca University is an exception in Canada.

The third area, healthcare is a service which is government funded about 70% and is causing fiscal headaches due to an ageing population and advances in medical technology. In the future, for fiscal reasons, it may be necessary for governments to abolish payment for certain procedures such as knee and hip replacements to people above a certain age, perhaps 80 (I am in my 79th year). The individual could have the operation if it is paid for privately. Canada has expertise in this sector. It could be expanded with medical education and services sold to foreigners either in Canada or abroad. The emphasis on public provision of healthcare, whatever its other effects, has retarded taking economic advantage of this expertise.

At a broader level, the postwar liberalization of trade policy in the GATT, NAFTA and WTO has eliminated handicaps in other areas.

Canadian foreign domestic and international policy – some thoughts on two reports

October 9, 2012

Summary

Two 2012 reports address future directions for Canadian foreign and domestic economic policy. Both stress the importance of a renewed focus on emerging markets, the need to understand the nature and impact of firm supply chains, the productivity of Canadian firms, and the policy towards inward foreign direct investment. This note suggests that future policy needs depend on which will be the growth regions of tomorrow, not just today. Canada has missed opportunities to develop service industries such as education and healthcare.

While industry supply chains are important they are constantly in a state of flux resulting from technological change leading at times to outsourcing to where labour is cheaper, and at other times requiring temporary foreign workers. Immigration policy needs to be integrated with trade and investment policy. At present they are located in different departments of government, and academic study tends to examine migration separate from trade. The delivery of diplomatic services are affected by these changes and are already underway.

 

Two reports published this summer (2012) deal with overlapping but not identical issues in examining Canada’s future economic policy options. Both are available online. The first, Winning in a Changing World, Canada and Emerging Markets, is written by a committee with four chairs – Derek Burney, Thomas d’Aquino, Leonard J. Edwards, and Fen Osler Hampson. Input was provided from a series of roundtables with the participants listed in the report. It is available online at http://www.gowlings.com/knowledgecentre/publicationPDFs/20120626_Winning-in-a-Changing-World-EN.pdf , hereafter referred to as Gowlings.  

A second report, authored by Michael Hart, Breaking Free: A Post-Mercantilist Trade and Productivity Agenda for Canada, is published by the C.D.Howe Institute, available online at http://cdhowe.org/pdf/Commentary_357.pdf , hereafter referred to as Hart. Gowlings lists no references or sources except in the case of several charts. It reflects the work of a committee with something noted for each of the main interest groups involved. Hart reads like a paper authored for an academic policy journal with bibliography and footnotes. By way of disclosure both Fen Hampson and Michael Hart were colleagues of mine. I read and respect their scholarly work. They are persons from whom I have sought comments on my own writings.

Both reports make recommendations for Canada’s future domestic and foreign economic policy and examine similar issues, such as the importance of emerging markets, the extent of and policies for foreign direct investment, the significance of supply (value) chains in different industries, and the productivity performance of Canadian firms. I started by making some succinct comments but when these reached over 5,000 words, I realized this was the “full monty” which no-one wanted to be exposed to or would read. I have shrunk my comments to two aspects of the reports, the nature of emerging markets and the implications of firm supply chains, plus some final thoughts.  

 Gowlings’ findings are summarized as follows:

“Since 2009, nearly all the world’s growth has come from emerging powerhouses led by China, India, and Brazil, and include dynamic economies such as Mexico, Korea, Turkey, Poland, Indonesia, and South Africa · Less than eight per cent of Canadian exports and four per cent of outward investment go to these emerging markets · Canadian participation in non-North American value chains remains low · The U.S. share of Canadian exports of goods and services declined from a high of 87 per cent in 2000 to 75 per cent in 2010 · Global trade volumes will quadruple by 2030 · By 2020, China’s GDP is projected to be the world’s biggest · By 2030, the individual GDPs of Turkey, Indonesia, Mexico, Vietnam, and Nigeria may surpass Canada’s GDP · By 2050, emerging markets will be home to 60 per cent of the world’s wealth and 70 per cent of global trade · By 2050, less than eight per cent of global trade will take place in North America, compared to 15 per cent today · In the next 10 to 15 years, there will be one billion middle class consumers in Asia and Africa.” It concludes with the following, “This report examines these rapidly changing trends and recommends a new approach to our trade and investment strategies for engaging emerging markets.”

Hart (2) states:

“To revitalize its flagging trade and productivity performance, Canada needs to adapt its international trade and investment policies to a world of value chains, evolving trade and investment patterns, and deepening global integration…

Canada should not wait for a hypothetical “payoff” from negotiations with other countries, but instead proceed in its own interest to remove home-grown impediments to trade. The author identifies disruptive anti-dumping and countervailing duty regimes, ineffective subsidies and procurement preferences, tariff restrictions in supply-managed sectors, overabundant regulations and many remaining restrictions on foreign ownership, as areas where less trade-restrictive measures should prevail. Such reforms would generate cost savings for the government, and leave the economy more competitive and with a stronger tax base.

These reforms would leave Canada free to focus on easing passage for secure trade and people at the vital Canada-US border, and on aligning its regulations with the United States and other major trading partners in areas where duplication does not make sense. Beyond the United States, Canada should better use its diplomatic resources by proceeding with trade negotiations only on the basis of clear business support, extensive consultations, and a clearly articulated rationale.”

 

Emerging markets

Nine desirable emerging markets are identified in Gowlings. The facts of their economic growth and trade performance are accurate. The concept of “emerging” has slipped into everyday usage. Some such as the Economist thinks it is time to retire the phrase. It refers to a geographic space defined by artificially created political entities, nation states. If Scotland separates from the rest of the UK and Quebec from Canada, global international trade would increase at the expense of domestic trade. Emerging is measured by a country’s rate of economic growth.

From Canada’s viewpoint, the economic desirability of an emerging market depends on a number of factors, for example the country as a source of raw materials or cheap foreign labour that is allowed to migrate to Canada. Alternatively goods can be shipped abroad, and the emerging market may become a destination for goods and services exported from Canada. Note here, it is firms that export and import not countries, although it may be indicative of future opportunities to focus on countries as these administer policies and negotiate internationally on behalf of firms and consumers.

So what is it that we need to know about emerging markets aside from the fact that some have shown remarkable growth in recent years? I would suggest at least two dimensions in addition to those noted in the reports – population size and GDP/capita, the latter used as a crude measure of wealth. Measures for the nine are shown in Table 1.

Table 1.

               GDP/Cap.$        World Rank           Pop (mil)

China         8,500                  (121)                      1300

Brazil       11,900                  (101)                         199

India          3,700                  (169)                       1200

Mexico    14,800                    (85)                         114

Korea       32,100                   (40)                            49

Turkey     14,700                   (86)                            79

Poland     20,600                    (60)                           79

Indonesia  4,700                  (156)                         248

S. Africa   11,100                  (105)                           49

 

In contrast:

Canada   41,100                      (21)                            34

USA         49,000                      (11)                          314

 

Source: CIA Factbook, accessed online Oct. 2012

The figures show the variation of the nine emerging markets in terms of population size and GDP per capita and where they stand relative to Canada and the US today. These are stock variables which need to be added to the flow variables concerning growth of a country’s GDP and exports.

The highest ranking countries in GDP per capita are Liechtstein (141,000), Quatar, Luxembourg, Bermuda, Singapore, Jersey, Falkland Islands, Norway, Brunei, Hong Kong (49,800). By this measure the wealthiest countries today are very small countries with special attributes. Quatar, Norway and possibly the Falkland Islands have natural resources – the Falklands also has sheep. Singapore, Hong Kong and Bermuda are financial centres. The nine selected in Gowlings vary enormously in population size and GDP/Capita, factors which need consideration as well as their recent export performance. Population size of the nine varies from 79mil. to 1.3bn, and GDP per capita from $3,700 to $32,100. One of the largest India is one of the poorest in GDP terms.

If you are a punter you want to know the horse’s performance to-date, but you are betting on performance in the next race, or the future in the case of emerging markets. Consider China and Australia, the latter not considered an emerging market but used by Gowlings (p.8) as an example for Canada to follow.

“Australia is the only G-20 developed country that experienced growth in its trade during the past decade, nearly doubling its share while Canada saw its portion nearly halved… Much of Australia’s growth came from exports to rapidly growing, emerging economies, as Australian firms nearly doubled their presence in these markets from an already stronger base than Canadian firms…” .

Two reasons to wonder about the future of China and Australia are first, that economic growth in China is slowing down and according to Tyler Cowen and others, China, has picked all the “low growing fruit” with future growth difficult to sustain. It has invested heavily in infrastructure and export oriented industries but with slow growth in the domestic consumer market.   Growing consumer expenditure is needed if China’s growth is to continue. (Cowen developed the term when examining US economic growth from 1700 onwards).

One Asia-based analyst notes that Australia  “ …has dug up its outback (literally) to ship to China. Now, China has significant overcapacity in areas like steel, as well as mountains of commodities like iron ore sitting idle in its ports, Australians are feeling a bit insecure, having tied their fortunes so closely to that country’s development. In any case, diversification of trade partners should always be the policy aim, as targeting export destinations by government planners is bound to be sub-optimal. The US pays well, on time, and you don’t have to ship the products very far, so that’s a hard-to-beat combination.” In Canada, there are already concerns about the future demand for energy resources like oil and gas, and few expected that its wine and clothing industry would prosper after the introduction of the FTA and NAFTA.

A recent paper (April 2012) helps to show the underlying changes taking place in the US, supporting in part the two reports’ conclusions, but suggests other directions for further analysis:

http://www.iie.com/publications/interstitial.cfm?ResearchID=2220 and http://conversableeconomist.blogspot.ca/ for Oct. 3, 2012. The paper states:

“The business service sector accounts for about 25 percent of the US labor force—two and a half times the size of the manufacturing sector. Moreover, the business service sector is growing. Over the past decade or so, manufacturing sector employment has decreased by about 20 percent, while business services have increased by about 30 percent. And business service jobs are good jobs: Average wages in business services are more than 20 percent higher than average wages in manufacturing.

Many people hold an outdated view of the US economy. Just as an example, consider the relative size of one service industry, engineering services, relative to two important manufacturing industries: the automotive industry (including assembly and parts) and the aerospace industry. It might surprise you to learn that engineering services is the largest in terms of employment. Engineering services (NAICS 541330) employed 980,000 people in 2007—more than the automotive industry (910,000), and more than twice as many as aerospace (440,000), according to the most recent economic census. Average earnings in engineering services ($73,000) are significantly higher than in auto production ($52,000) or even in aerospace ($68,000).

… the U.S. trade surplus in services has been was running about $5-6 billion per month for much of the 1990s and first half of the 2000s–call it $60-$72 billion per year. But since early 2011, the monthly trade surplus in services has been more like $15 billion per month–call it a services trade surplus of $180 billion per year.”

There is a similar view in Canada that there are good paying jobs in manufacturing and poor paying jobs in services, and that the loss of manufacturing jobs can somehow be brought back. The NDP talks about the Dutch Disease as depressing manufacturing exports from Canada, but as the US example shows there are good and poor paying jobs in the service sector as well. Not all are low paying Tim Horton jobs. It depends on what sector you are talking about.

I doubt Canadian manufacturing employment will return to its previous levels. It will undergo further change due to technology, as took place earlier for employment in Canadian agriculture, which has declined massively since the turn of the century, while output has blossomed due to research leading to the substitution of capital for labour.

What then is happening today which may affect industry competitiveness tomorrow? One example in manufacturing is the research underway on the production of 3D parts on computer operated equipment, similar to desktop printers for publishing. If some parts production can be done on a small scale with the further substitution of capital for labour, it will change the nature and location of parts of the supply chain. This may repatriate some production which is presently outsourced abroad. (Check MakerBot Industries in Wikipedia for details – I have not thought through all the implications as I am not sure about the details of these changes and how they might affect specific industries.)

In services, information technology has already altered the publishing industry (newspapers, books and magazines), the audiovisual industry (films, television and music), the financial industry (banking and trading) as well as other industry sectors. It is coming to education, especially higher education.  This will increasingly go online for certain disciplines, and is already doing so and referred to as MOOCs, massive open online courses, with no or low charge for taking the course, but payment required to write the final exam and methods designed to assure that the exam is taken by the person who will receive certification. One instructor, the stars, will be able to teach massive worldwide audiences in their homes, or smaller audiences around the world interested in esoteric topics and small language groups. The pros and cons of MOOCs are discussed in Wikipedia, with Athabasca University as one pioneer in Canada. Many years ago Carleton University introduced courses on TV (camera in the classroom with blackboard and chalk), but was slow to undertake the opportunities made possible with evolving technology.

I expect that there will be a vastly reduced need for classrooms and instructors for courses which require no lab work or face-to-face interaction between teacher and student. Why Canadian provinces would go ahead with financing further university buildings is a mystery to me; governments experiencing budget deficits and rising debt will be able to cut expenditures for buildings and salaries, and perhaps sell off some land. This is good news for those alarmed at rising university tuition fees and student debt. The medical care industry is another area where Canadian industry could have developed by training more foreign medical personnel and treating foreign patients. Instead we have problems in treating Canadians. ( I am grateful to Don McFetridge for pointing this out to me.)

The future for numerous industries is unknown. What appears to be a growth market today may evaporate if a closer look is taken at underlying conditions. Prospects in various emerging markets may not be as rosy as anticipated. Each one needs separate analysis and added data such as population size and GDP per capita. Although not around to see the outcome, I would make a small bet that by 2050 Switzerland, the US and Canada will still have a notably higher GDP/capita than any of the nine chosen countries.

 

Supply chains

Both Gowlings and Hart argue that the growth of industry supply chains (a new word for an old concept, the extent of vertical integration) which cross borders may alter how we analyze world affairs. Supply chains have always existed, there are now more of them in total because of economic growth, and more within particular industries because of technology and changing cost conditions. Transportation and communications costs have fallen and there is increased crossborder movement of persons. For example, immigration and supply chains illustrate that work can be sent to foreign workers with or without FDI, or the workers can be brought to Canada as permanent residents and/or temporary foreign workers employed in domestic or foreign owned firms. Firms will seek the cheapest alternative taking into account things like investment risk and taxation abroad and at home. Where FDI occurs, firms will contract so as to reduce risk, for example by renting rather than owning facilities in Canada and abroad.  

 

Some Examples of supply chains

  1. In the past, Alcan’s supply chain was fairly simple. It mined bauxite in places like Jamaica and Guyana, imported it into Canada and processed it into alumina then into aluminum and different primary manufactured products, which were used in the aircraft, beverage, construction, and other manufacturing industries at home and abroad. It had far more smelting capacity than could be sold in Canada. It might do some manufacturing itself extending the chain, or sell metal and manufactured parts to third parties. Over time it would decide whether to modify the supply chain to do more or less manufacturing.  All of this would be done with whole or partial ownership of an operation. Today since Rio-Tinto acquired Alcan, the supply chain is more complex. See for example http://www.riotintoalcan.com/index_ouroperations.asp which maps the world wide operations of Rio Tinto Alcan’s global operations.
  2. For an automobile manufacturer, the supply chain has to deal with the large number of parts that make up an assembled vehicle. These might be produced in-house in a wholly or partially owned subsidiary in Canada or abroad, or perhaps contracted out to an arm’s length supplier. Falling transportation and communication costs, foreign ownership policies at home and abroad, and protection of intellectual property are among the considerations in determining the nature of the supply chain which will change over time.
  3. In services, some firms have outsourced their call centres to firms in Canada and abroad and at times reversing previous decisions regarding ownership and location.
  4. My thesis supervisor Basil Yamey at LSE argued that the grammar for analysis of markets consisted of four factors, market size, firm size (scale and scope economies), firm diversification and vertical integration. In my mind, these factors remain the basis for understanding the present and future competitiveness of markets and the type of policies a government should consider.  

Canada with a declining share of US imports, and the US as a declining market for Canadian exports is a bad and good news story. It means that the US is a less important market for Canadian exports, thus diversification of export markets is taking place, but it may not be considered enough, or the non-US market for Canadian exports is still the same old markets and not where the report thinks exports should go.

Gowling’s analysis supports the view that there is a separation between what are domestic and international affairs. With the growth of the number of countries, population, trade and investment, this separation may no longer be the case, or the form of separation is changing. I am not sure what all the consequences are, but this needs further thought and may alter the way policies are administered domestically. Will this change the functions and conduct of diplomacy? Canada is proposing to locate some diplomatic activities in the embassies abroad of other countries, a form of foreign outsourcing. The existing diplomatic community will be reluctant to give up their current perks but these resources might be better deployed. Academics have tended to deal with trade and investment as separate from migration. These topics need to be integrated in analysis and in policy management at home and abroad.  

Finally, there are a number of Canadian economists who could provide expert input into trade policy options for Canada especially regarding emerging markets – Frank Flatters of Queen’s University presently living in SE Asia, John Chant of Simon Fraser University, and John Whalley of Western University amongst others. A glance online at their research and publications will indicate their areas of expertise.

Enough said here. There are other issues to discuss, perhaps at a later date. I would appreciate comments, rude or otherwise, on the above.