Archive for March, 2013

Is Canada losing its virginity?

March 25, 2013

Angst is expressed by some because Canada’s economy is threatened as the share of manufacturing in GDP has declined, as well as its share in total employment? Manufacturing has fallen from 20% to 10% of GDP from 1970 to 2012, and its share of employment from 19% to 10% from 1976 to 2012. (Figures from Statcan). 

1.    In the past, a similar change took place with agriculture, where its share of employment has declined to less than 2% from around 20% of total employment in 1921. The latter is now lauded as a vast improvement in labour productivity due to the mechanization of agriculture, as well as improved crop growing and animal husbandry practices. Much of the surplus agricultural labour migrated to manufacturing and the resource sector, each of which has also experienced improvements in labour productivity. Today, service sector employment accounts for 77% of total employment in Canada, and some despair that we have become an economy of burger flippers and coffee dispensers, although, beware, these two are and can be mechanized further.

2.    A parallel discourse points to the difficulty employers have of filling positions in the construction, resource, and certain manufacturing industries, issues addressed with skills training measures in the 2013 Canadian federal budget. The aim is to match the unemployed with available employment opportunities. At the same time, each year Canada brings in around 100,000 temporary foreign workers, some of whom leave after doing seasonal work, but at any one time there are an estimated 300,000 in Canada as a result of those who have not left from previous years.

3.    It may be that the unemployed Canadians cannot be retrained for the available jobs, do not want to be retrained, do not want to move to where the jobs are, are not attracted by the higher earnings, are looked after by government income safety net measures, or by some combination of the above. A frequent comment is that Canadians are not prepared to do the jobs filled by temporary foreign workers. It was not so long ago that earlier Canadians were doing the backbreaking work, which forged the conditions for the various industry sectors which now flourish, agriculture, forestry, mining and assembly line manufacturing.

4.    Is the declining relative contribution of manufacturing a disaster as some suggest? Probably not. Manufacturing’s share of GDP has been on the decline since 1970 for many if not all developed countries including Canada. For Australia, Canada, France, and the UK, it is now around 10%, for Brazil, Italy, the Netherlands and the USA 15%, and for Germany and Japan around 20%. Unsurprisingly, Germany and Japan are less natural resource intensive than Canada and Australia, so their share of manufacturing employment is higher even though it too has been declining.

Source: http://opinion.financialpost.com/2012/05/29/everybodys-dutch/ ; and Statcan Cansim Table 282-0008.

5.    Each country is endowed with certain resources natural and human, which when combined with the available and affordable technology will be among the main determinants of the industry structure of each economy. Since technology is always changing, and very rapidly today, it is understandable why sectoral shares of an economy change. Technology affects sectors differently and at different rates and times.

6.    Why is the manufacturing sector declining and the service sector growing in relative GDP terms? Part of it, I suspect, has to do with the structure of firms in the sectors. Manufacturing firms have substituted capital for labour, (as agricultural f(a)irms did in the past), with for example the use of robots; and more services may now be performed outside the manufacturing sector.

7.    For example, if an automotive firm has a legal department, these personnel would be counted as part of the manufacturing sector. Assume the automotive firm decides to close its legal department and contract out for legal services, these persons will then become allocated to the “Professional category” of services. Between 1976 and 2012, this category has risen from 4% to 9% of total services employment. It would require a more detailed analysis of Canada’s labour force survey to discover whether particular jobs are today performed within a different industry as compared with previous years.

Conclusion

Saying that Canada has lost its maidenhood by becoming predominantly a service economy, like many other developed economies, is more likely recognition that manufacturing industries are adapting to improve their competitiveness.

Employment in services should not be equated only with low skilled jobs, although there are employment opportunities there.Some services employment, plumbing, carpentry, electricians, computer programming, laboratory assistants, and teachers for example, require considerable skills and skill training. Further analysis of what the 77% of the Canadian labour force labeled at services occupations and employment would answer what is happening in the Canadian economy.

 

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Does an ageing population matter?

March 21, 2013

The immigration lobby and others constantly refer to the age structure of a nation’s population as being a problem. They point to a growing percentage of the Canadian population like myself which is old, leaving fewer younger people as part of the active labour force. Below I look at alternative ways to address this problem other than promoting increased immigration.

Canada is not alone. Some other countries which have managed to remain small is illustrative of alternatives. The 2013 Federal Budget proposes ways of retraining the unemployed to alleviate the skills shortage.

For illustrative purposes and not a random sample, consider three countries, all of which have experienced an ageing population over the past seven years. Between 2005 and 2012, the share of the population over 65 years old increased approximately 8 percentage points (23.9-15.4) for Switzerland, 6 for Sweden and 10 for Canada.

                                    Population mil.

                                      1990     2011

Switzerland                        6.7        7.6

Sweden                              8.6        9.0

Canada                             28.0       34.0

                         

Switzerland and Sweden have kept their populations reasonably small with increases of 13% and 5% between 1990 and 2011, while Canada has increased its population 21% over the same period. There are ways to prosper economically without large increases in overall population, even if the population is ageing. What are these alternatives?

  1. First, it is useful to have a population policy, which Canada does not have. The private Population Institute of Canada is one place which studies these issues. Canadian governments and political parties have shown little interest in discussing the overall size, rather than the age structure of the population, where most assume an ageing population is a problem.
  2. Consider WW2 when men were conscripted into the forces and their places in the workforce (factories etc) were filled by women and even youths helped out on the farms – as illustrated by the British TV program Wartime Farm. Today a larger percentage of women are already working, but this could be increased if the wage/salary incentives were there. Increased wages and salaries would attract more labour of both sexes to the work force.
  3. The customary retirement age, say 65, is not fixed in stone. It can be altered in a number of ways. When I retired, my contract with the university required me to retire from the university at 65. It no longer does so for existing faculty. It did not require that I stop working at 65, and I carried on in related areas, as many do who retire from government, business and elsewhere. There is life after 65 and with it an increased supply of labour. Living longer and inadequate pensions are an incentive to continue working.
  4. Ages for receiving pensions and other benefits can be altered so that people have incentives to work longer.
  5. With communications technology, many types of work can be outsourced, not just abroad, but to people in their homes, so that both the size and flexibility of the workforce are enhanced. Some people will be prepared to work longer if the convenience of working is increased. A 40 hour work week may exist for certain service sector jobs, but as a result of people texting and talking on various devices at all hours of the day (and night), many office workers and professionals are already working far more than 40 hours a week, thus increasing the input and output of the existing workforce.
  6. Outsourcing abroad is another way of expanding a country’s workforce. An alternative is to permit the entry of temporary foreign workers which Canada already does. The number of temporary workers, especially live-in caregivers and seasonal farm workers, entering Canada each year has doubled from 100,000 a year in 2003 to almost 200,000 per year in 2011. In 2011 there were about 300,000 such workers in Canada, consisting of those who entered in 2011, and those who entered in previous years and have not departed (CIC figures as reported in the Ottawa Citizen, Nov. 6, 2012, p.5).
  7. Adjustments can be made as to whether these workers can then apply to become permanent residents. Note, Singapore has a closely monitored policy of bringing in foreign workers and requiring them to leave if they are no longer working. I suspect Switzerland may do the same.
  8. Substituting capital for labour is a way of making better use of an existing labour force. It has already occurred in many industries, agriculture being a prime example. Today, the share of the labour force in agriculture is around 2% down from 25% in 1941. The loss of manufacturing jobs in Ontario and elsewhere, such as in the automobile industry, is less due to the shrinkage of the industry and more to the introduction of automation.
  9. In the service sector, communications technology has introduced labour saving methods of production in industries such as banking and related financial services, publishing (books, newspapers and magazines), television, movies, music, online shopping, defense and security activities. More can be done with the existing number or with less people, although retraining will often be required, but this has had to happen before.

Conclusion

Increased immigration is one but not the only way to deal with an ageing population. It ignores the alternatives that exist, how this is dealt with in different countries, and what other measures can be taken in Canada. It also requires addressing what size of population Canada is attempting to achieve and the alternatives for achieving it. One possibility is tax incentives for increasing Canadian birth rates. At the same time, there is a need to examine the other consequences (costs and benefits) of an enlarged population.

Vatican Inc.

March 16, 2013

 

Twenty-five years ago, Gillian Zacharias wrote an outstanding MA thesis for the School of International Affairs at Carleton University comparing the Catholic Church, its organization and management, to that of a multinational corporation. The thesis provides a background for current developments taking place at the Vatican head office, where the Cardinals have elected a new Pope, and in the Catholic Church throughout the world, where its subsidiaries are offering competing brands of the dogma of Catholic beliefs. Recent events suggest how a corporate type analysis helps in understanding what is going on.

Selecting a Pope

Prior to March 13th, 2013, much of the focus was on which of the voting cardinals would get two-thirds plus one of the eligible votes to become Pope. The 38 cardinals over 80 are disqualified from voting, although the newly elected, Cardinal Bergoglio, to be known as Francis I, at age 76, will likely lead the organization well into his eighties.

The voting was rumoured to be split between supporters of a Cardinal with either conservative or ultra conservative views. None were in favour of women joining senior management by becoming either Pope, Cardinal or Bishop, although some candidates suggested that there is room for women to take a greater role in the church. The glass ceiling of the Sistine Chapel appears to have none of the cracks which have appeared in public corporations. This means that the church, in its marketing, could alienate about half the people who might consider their religious brand. On the other hand, it does appeal to a niche market, males, who make up the other half the world’s population.

In Europe and North America, Catholicism is losing market share against competing religions, while in Africa and Latin America it is gaining members. The head office remains in Rome, which is understandable as the Vatican is recognized as a state, but Europe with 24% of the world’s Catholics has 34% of the cardinals – Italy alone has 28 cardinals and the rest of Europe 32. Meanwhile, Latin America has 41% of the Catholics and 11% of the cardinals. The fact that Francis I comes from Argentina may help to correct this. Due to sunk costs, I doubt the head office will be moved.

Head Office

One group of cardinals lives and works in the Vatican where they get to know each other, while those who travel to Rome, if they decide to run for office, or if they want to lobby for a papal candidate, have a harder job campaigning. In this sense, the church is more like a government or exclusive club than a corporation, as in the election of a pope the shareholders/church members have no say, leaving it to the present Cardinals, who have been appointed by former Popes to act as the electorate for a new one. The voting procedure is closely monitored and the ballots burned so that there is no direct way to undertake a recount.

Troubling Times

Headlines involving the Vatican in recent years include the relationship which priests have with each other, with young boys, women, and with members of their congregations. All this makes for salacious reading, which receives public airing and sometimes, but probably not often enough, leads to the disciplining of priests. In an era of social media and the willingness of insiders to leak information, which then becomes public knowledge over what has happened and how the church has responded, the church can no longer hide the facts. Social media has also allowed victims to liaise with each and to coordinate their responses. The message goes viral.

The other public relations disaster which the church has had to deal with relates to financial management or mismanagement, a situation not unknown to private sector firms. Publicly traded firms are forced to have published annual audits undertaken by independent auditors. Accounting firms and elected directors can be sued for releasing misinformation and carry insurance to limit their legal liability. (I don’t know whether church executives carry such insurance).

No similar disciplining forces relate to the Catholic Church (and similar religious organizations of other faiths) which are usually treated as charities for tax purposes, and where the Cardinals as senior managers are appointed by the Pope as CEO, who in turn is elected by the Cardinals. Charities are given tax breaks and do not make profits, however in any year their income may exceed their costs in which case the surplus (profit with a fairer name) can be used to construct buildings like the Sistine Chapel and support  lifestyles, not unlike executive perks in the private sector. Their surroundings and way of life becomes difficult for ecclesiastical management to explain to their congregations, especially those in poor countries in Africa and Latin America. Francis 1 may be an exception, as he chose to live in an apartment not the available palace in Buenos Aires, and he is a strong supporter of an Argentinian soccer team.

The dubious financial dealings of the Vatican have arisen a number of times. An example from the eighties involved The Institute for Works of Religion, known as the Vatican Bank, located inside Vatican City and managed by a CEO who reports to a committee of Cardinals and ultimately to the Pope

“The Institute was involved in a major political and financial scandal in the 1980s, concerning the 1982 $4.7 billion collapse of Banco Ambrosiano, of which it was a major shareholder. The head of IOR from 1971 to 1989, Archbishop Paul Marcinkus, was under consideration for indictment in 1982 in Italy as an accessory of the bankruptcy; however, he was never brought to trial due to the Italian courts’ ruling that the priest, being a high-ranking prelate of the Vatican, had diplomatic immunity from prosecution. As a private organization performing banking-like functions for religious institutions, it is not subject to public scrutiny.”

http://en.wikipedia.org/wiki/Vatican_Bank

Subsequently, Roberto Calvi, President of the Bank, was found dead hanging under Blackfriars Bridge in London. The week before, his secretary, after denouncing him, committed suicide by jumping from a window in Rome.

A balance sheet

In one sense the Catholic Church has substantial assets in terms of the buildings and furnishings at the Vatican, and throughout the world. Assets also include the goodwill it has generated over time, although adversely affected at times. Its liabilities include, amongst others, any outstanding debts from borrowing and for claims resulting from court cases.

However there is a problem with the tangible assets. If the Vatican or parts of it are put up as a guarantee to a lender, that lender may realize the difficulty posed if foreclosure is necessary. This arises for any church or historic building which offers its buildings as collateral for a loan. Tangible assets exist but may be difficult to use as in order to raise money.

Conclusion

As the earlier research discussed, many aspects of the Catholic Church are similar to those found in a profit driven multinational enterprise. It also has aspects of a political organization or club with its voting and appointments procedures. A combination of economic and political analytical tools helps to explain its operation.

While it is easy to focus on the church’s scandals past and present which make for good reading, Catholicism has been around for 2000 years, and as an organization it has outlasted governments and corporations by centuries. One indirect comparison is the British Empire which lasted for about 500 years, but was only a major world force for about 20% of this time. If anything, the Catholic Church is a survivor, and while it might benefit from learning how corporations operate, the reverse may apply and corporations learn from the Church’s survival in competition with other major religions.

Does Canada have a real estate bubble?

March 9, 2013

Knowing what happened when it burst in the US, Ireland and other countries, one question is whether Canada has a real estate bubble in its urban markets. Carney and others say (hope) no, but he keeps interest rates low, encourages spending and warns people not to go into debt.

“The Economist thinks Canadian housing is overvalued by a third relative to income. The Fitch ratings agency pegs the overvaluation at 20 per cent.

To be sure, Mr. Carney no longer sounds as worried about a housing bubble as he did last year. On Wednesday, he indicated that repeated warnings by him and Mr. Flaherty may be scaring Canadians straight, curbing their appetite for debt. But both men are up against history. When property prices get this frothy, pendulum swings are more likely than soft landings.

Such is the pickle in which Mr. Flaherty and Mr. Carney…find themselves. Their risky experiment in guiding Canada through the recession by stoking housing demand is threatening to come undone. Household debt (largely the result of ever bigger mortgages) remains much higher in Canada than it was in the U.S. just before the 2008 crash. It wouldn’t take much to turn a vulnerability into a calamity.”

http://www.theglobeandmail.com/commentary/oh-those-house-crazy-consumers/article9378240/

When a financial bubble bursts, wealth decreases with the fall in expenditure on real estate and other products, and a general recession. What are the facts about housing prices in Canada?  The source is http://www.housepriceindex.ca/Default.aspx

The index for Canadian cities shows that, from mid 2005 to the present, real estate prices have risen:

Approx av.per annum %

Toronto       46%        6.6

Ottawa        41%         5.9

Calgary        61%         8.7

Vancouver   62%         8.9

If that was the annual rate of inflation for all goods and services since 2005, it would be cause for concern. Should it be for housing?

Looking outside of Canada, when times get tough, foreigners put their money in gold, Swiss bank accounts and real estate in a number of countries. This is especially the case for buyers from developing countries and places where there is less security. North America and in the past Europe have acted as depositories for such foreign funds.

Is this the case now? And are Chinese and other foreign investors inflating the Canadian real estate market? There is plenty of wealth in the Middle East, India and other parts of SE Asia besides China. Australia appears to think that there needs to be some control on foreigners buying real estate if they don’t intend to live there. So far Canada has made no such moves. Should they?

China’s Potemkin cities, built for several million inhabitants, but remaining empty or ghost cities, provide an example of the vagaries of real estate investing, which may have some relevance for Canada. These cities, which the Chinese government finances in order to maintain investment spending, are to westerners the result of unusual policies. Chinese however appear willing to invest in ghost cities without much (any) hope of renting, selling or living in their properties. If they buy under these conditions, why would they not invest in Canadian real estate also?

Well, according to their own government they are not allowed to, but this appears to do little to curb the ways found to circumvent these rules. Add to that the wealth of investors in India, the Middle East and other parts of Asia and the real estate buying pressure from foreigners is added to that of already free spending Canadians.

My strong impression is that we do have the makings of a real estate bubble, and the cocktail circuit in Canada confirms it. There people are boasting about buying condos as investments even though rental rates don’t cover the costs at present, and will be even harder to justify when interest rates rise and prices fall. Foreign buying adds to this upward pressure on prices.