Canada Through The Looking Glass

Today’s public discourse about Canada’s future includes the following: China in particular and Asia in general are the growth areas of the future; add Brazil and Russia and you have the BRIC countries. Over the past two decades these countries experienced substantial economic growth at home, and gained a larger share of world exports. Other features of the recent past include an increase in foreign direct investment flows, large crossborder movements of people, the introduction of the internet and its growing use publicly and privately (including social media, if you call this private).

Each country looking backward sees these forces at work and tries to project its future. For Canada, the flavors of the month for public discourse is the need to focus more on trade and other relations with the BRIC countries; to imitate the policies of Australia; to address the declining share of younger people in the Canadian population (the ageing of the population), and to diversify trade away from the US. Canada has tried the last repeatedly, with little success, and when it does occur, as is happening now, the cry is that Canada is becoming less competitive in its main foreign market.

Driving a car, while looking in the rearview mirror, is liable to result in an accident. This is what many are doing with economic and political policy making for the future. There is little other choice, but there is a choice about deciding what factors, from the recent and distant past, assist in deciding which policies make the most sense. The following views are at odds with the majority of those engaged in Canada’s public discourse, and include the following, with reasons given below:

  1. Current evidence suggests that economic growth of the BRICs is not sustainable at the present levels. The forecast that China will      have a larger economy (GDP) than the US by about 2035 is of limited relevance for policy purposes.
  2. The Canadian economy has lost manufacturing jobs and this is a bad thing which needs correction by introducing policies to promote and protect these industries. The loss is correct, the rest misleading.
  3. There is no need to increase immigration because there are other ways to address an ageing population with a declining share of the active labour force.
  4.  While integration follows immigration (permanent or temporary), multiculturalism policies have failed to aid integration and should be phased out.
  5. Australia is of limited use as a role model for Canada to follow re economic growth and policies to assimilate foreigners in Canada.
  6. Energy and other natural resources will continue to make up the bulk of Canadian exports.

How to assess the composition of bricks.

  1. China will soon have a GDP greater than the US leads to the question, so what? The statement is probably correct – some suggest China is already larger – but this is like saying a child is smaller than her mother, but one day will be larger. In the future, the mother may continue to be smarter, stronger and richer than the daughter, but may weigh less and be shorter. The metric chosen for comparison needs to reflect what is being studied.
  2. Many countries with small economies and populations are magnets for people trying to migrate to them – Norway, Switzerland, and New Zealand for example. These countries have remained small demographically and sustained a high living standard. I don’t read of many migrating to China, although within China people are migrating from the countryside to the cities. It is doubtful if these three countries could maintain their growth rates and quality of life if they permitted unlimited immigration. The same is true for Canada.
  3. A more interesting metric from the viewpoint of economic development is GDP per capita, where China is far behind that of the US and smaller high income countries, and will remain behind even though its economy is growing fast. The following quote is from Timothy Taylor whose blog, The Conversable Economist, provides much useful information, but may have a different take on the past and future:

“Mark A. Wynne of the Dallas Fed asks: “Will China Ever Become as Rich as the U.S.?” The standard answer here is that the total size of China’s economy may well exceed the total size of the U.S. economy within a couple of decades, but because China has nearly four times the U.S. population, it will take much longer for China to catch up in per capita terms.

Wynne writes: “The simplest approach is to measure GDP in U.S. dollars at 2005 prices and use 2005 exchange rates. Doing so results in estimated 2010 Chinese GDP of $3.88 trillion in 2005 dollars, or just less than 30 percent of U.S. GDP. China’s economy will exceed that of the U.S. in 2025 if it continues expanding at its past-decade rate of just more than 10 percent a year and the U.S. keeps growing at the 1.7 percent annual rate it experienced during the period. Per capita GDP allows us to compare the relative well-being of residents of the two nations. Based on the 2010 U.S. population of 309 million, per capita GDP was $42,874 last year. China, with a 2010 population of 1.34 billion, had per capita GDP of $2,893 last year, or 6.7 percent of the U.S. figure.”

“Of course, it is not inevitable that China will continue at this rapid rate of growth for the next several decades. Wynne points out that on average, countries with lower per capita GDP have faster growth rates. However, it also seems to be true that as countries reach some level of middle-income, their growth rates slow down. One explanation for this “middle income trap” is that the growth policies that help in catch-up growth do not work as well as an economy reaches higher-income levels.  Wynne offers a nice figure to illustrate how the G-7 economies caught up to the U.S. economy since 1950, at least to some extent, but then seemed to stop catching up when they hit (very roughly) 80% of U.S. per capita GDP. The figure also puts China’s growth path in perspective.”


My concern here would be that by studying Chinese economic performance for the past twenty years some have concluded that this will continue into the future. If this is not the case, then tying policies today to certain aspects of past experience may lead policy makers astray. In particular China, and other BRIC countries may have hit the “middle income trap” and/or picked the “low hanging fruit.”

The “low hanging fruit” refers to things which are easy (cheap) to do, like fruit picking from the ground without having to use a ladder (I think  this phrase was coined by Tyler Cowen.) In China’s case the emphasis has been on bringing cheap labour from rural to urban areas, emphasizing exports, and making capital expenditures on factories and public infrastructure like roads, railways, ports and airports. Domestic wage rates have now risen so that export prices are not as competitive, economic downturns in North America and Europe have shrunk export sales, and domestic consumer expenditures have not risen as yet to fill the gap.

  1. The foregoing gives rise to questions about the implications for Canada of existing Chinese growth projections. These and other concerns, but for different reasons occur in the cases of Brazil, Russia and India (to be discussed in a later posting.)
  2. The growth rate of China’s GDP is claimed by its government to be around 7.4%. The actual growth rate is probably close to zero according to China watchers. The lower estimates are based on data of electricity consumption, maritime freight shipments in and out, a recent 25% fall in Australian mineral shipments to China and increased inventories of these materials in Oz. While unemployment in China is reported at just above 4%, China watchers report that this does not include massive numbers of workers in rural areas.

In future postings about Canada Through The Looking Glass I will comment on labour, migration and multicultural issues plus the case of Australia. As always, comments are appreciated.



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