The Canadian economy is starting to pick up after the slump by 0.7% and 0.3% in the first and second quarters of this year. In the third quarter, Canada's GDP grew by 2.3%. The New Pathway talked to Basil Kalymon, professor emeritus of finance at the Ivey Business School in Toronto, to find if there are chances for a continued robust growth in Canada.
Dr. Kalymon called the recent growth “respectable”, especially on the background of continuing low prices for oil and other commodities that Canada produces. A part of the growth is coming from other sectors, mainly manufacturing, which are benefiting from the low Canadian dollar. Some believe though, said Dr. Kalymon, that the Canadian dollar is still too high to make the Canadian manufacturing sector competitive. There are forecasts that the Canadian dollar could drop from 75 cents (US) currently to as low as 69 cents (US) next year.
From the longer-term perspective, Dr. Kalymon believes, the Canadian economy is doing quite well. It did better than the US economy since 2008 through last year. The growth happened despite the slowdown in the US, although there is a big dependence in Canada on the exports to the US. But after the commodity and oil prices fell, the Canadian economy slowed up relative to the US one.
Dr. Kalymon also believes that some of the criticisms of the previous government's economic performance were “absurd”. He mentioned the criticism that the government ran big debts “which isn’t true. Our Debt to GDP ratio is very low by any standards, certainly by comparison to the developed economies.” The budget deficits were brought back on track as of last year and most nations in the international environment considered Canada as a very successful economy before it was hit hard with the commodity prices falling.
We noted that the previous government was widely blamed for not diversifying the Canadian economy enough and leaving it dependent on the commodities. To this, Dr. Kalymon replied that it is not the government's mission to diversify the market economy. “Industries themselves decide when to expand and when to contract. The government doesn’t interfere with that, that is a Soviet concept that you pick an industry and you grow it. That’s not the way the Canadian economy works. The government has to create good order, keep its deficit small, keep the currency stable, keep the inflation low, make sure there is competition, and then let things happen. And economic strategy in Canada has been guided for a long time like that. We had low inflation for many years and our currency was stable until it got hit by the commodities, and once it got hit by the commodities, there is nothing that they could really do about it.”
Dr. Kalymon thinks that the current Liberal government has no intention of picking some industries to develop either. “You cannot arbitrarily develop industries in which you would need low wages, for example. But what you will see is some industries coming back, like auto assembly. Canada's auto exports are now greater than commodity exports because the US auto industry, which we are integrated into, is doing very well and our lower dollar makes production in Canada much more competitive than it was before the dollar declined.”
In Dr. Kalymon's opinion, the Canadian economy is already quite diversified with the services sectors constituting a large percentage of the GDP. “Canada is good at extracting and exporting commodities, and I don't think that it’s so bad. Some countries are better in one thing, and Singapore will never export commodities, it’s a city. Canada on the other hand is completely opposite – we have huge land mass, huge resources and small population. Many successful economies are different. Norway is even more oil and gas oriented than Canada, it’s a huge oil and gas exporter and is very successful. Canada is more diversified than other commodity-based economies, like Saudi Arabia or Russia, it is more diversified than even Norway.”
We asked Dr. Kalymon if there are any structural problems in the Canadian economy, in particular, any issues about productivity and costs. He said that, indeed, the Canadian economy has not shown as much productivity gains as some others lately, “and part of that is that we have it too good. When you have so much resources like Canada, you get what they call the Dutch disease, a problem that in many sectors you don’t have to work so hard. That’s the curse of being as successful as we are – you get high currency and you don’t get as much innovation. So Canadian economy isn’t as dynamic and efficient, as it might be otherwise.”
Dr. Kalymon also thinks that there are some problems in Canada's telecommunication sector which is “somewhat too concentrated and therefore some of the prices, which are being charged, are somewhat excessive. There is a fair amount of concentration in the banking system, too, but the system has served fairly well though the crisis. We only really have 5-6 big banks, and that’s fairly intense although they’re small by international standards. But if you diversify a lot in Canada, you become very small. So if the banking system was more diversified, the banks would be very small and they wouldn’t be very effective.”
We asked whether there are any signs of new sectors developing in Canada and Dr. Kalymon provided an example of Canada's IT sector which has emerged but “where, unfortunately, some bad decisions have been made by Research in Motion which used to have 50% of the global smartphones market. They were very competitive at one point and then they lost it, they just didn’t read the market correctly and they got killed by Apple.”
Dr. Kalymon provided one more example of “industrial management in Canada that is very negative. The Ontario government tried to intervene in the electricity market and they wasted huge billions of consumer dollars because they made poor decisions. Instead of allowing the market to operate, they put in prices, which were excessive, for solar, wind and other projects. Our electricity rates doubled in the past five years. The currently high electricity prices in Ontario to a significant extent are due to these poor decisions. They are paying 40 cents/kWh for solar and the cheapest energy is 3 cents. Current plans of carbon tax in Canada go even further in that direction and it will be very costly.
That is very negative for industries, and the government is pursuing a dream which won’t work anyways because China puts out immeasurably more CO2 in the air than Canada. Unless you get agreement from India and China, nothing is going to change and the latest Climate Change Summit in Paris is unlikely to bring any immediate results in this respect. There is no way that China and India will stop producing more electricity. They are growing economies, they want more energy. China has agreed to do something by the year 2030. When someone makes a promise for 15 years ahead, I don’t really believe it.”
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