The Canadian Imagination

What it means to be Canadian; examining and reworking Canada as a nation.

Thursday, July 03, 2008

Recession?

As I write this, Ontario has just emerged from an economic quarter in which the economy has shrunk. Two successive such findings indicate recession.

Federal Finance Minister Jim Flaherty has long been blaming Ontario's economic slowdown entirely on the policies of Ontario Premier Dalton McGuinty. That McGuinty is a Liberal and that Flaherty had served as provincial finance minister in the (pseudo-Alliance) Conservative government that had been defeated by him surely bears no relevance.

Of all provinces and territories of Canada, Ontario's economy is the most heavily weighted toward manufacturing and export. It is a function simply of geography and relative population: the small patch of land furthest south also happens to be closest to the largest nearby market (which also happens to be among the highest consumers in the world, the United States). In addition, many of the major transportation corridors between the eastern seaboard and Chicago, gateway to the American west, happen to run through Ontario or along its borders. The Windsor-Hamilton-Toronto corridor is among the most heavily trucked in the entire world. The Montréal Lachine locks have made the Great Lakes accessible to water traffic, both domestic and ocean-going, to nearly as deep as the centre of the continent.

Thus, even though agrarian land value in this small southern strip of land remains among the highest in Canada (and comes close to worthless much further north), this region has often usurped by urbanisation, both residential and industrial: to the point where the Ontario population along the St. Lawrence into the southwestern Ontario peninsula now makes up more than half that of all Canada ... and despite every immigration incentive to settle elsewhere in Canada, it still continues to grow at among the highest rates in Canada outside the migratory labour of Alberta's oil fields.

This combination of good, stable land readily accessible both to shippers of raw materials and exporters of manufactured goods has created an economic diversity which has started to lean almost as heavily on manufacturing as other provinces lean on raw resources. During the major rise of global thinking in manufacturing over the past three decades, the Canadian dollar value also fell from parity with the United States dollar to 60% of its value, making Canadian goods artificially cheaper and further increasing Ontario dependence on cheap manufacturing costs and easy exports. In fact, this combination of factors has spawned an entirely new industry in Canada: Hollywood North. (It didn't hurt that many parts of Toronto bear a striking resemblance to the architecture of New York City.)

Consequently, as the dollar rises, it is Ontario which takes the brunt of globalisation factors and the continual quest of business for the cheapest possible labour. Other provinces, much more heavily weighted toward raw resources and agriculture, have struggled at other times against global competition and international subsidies, but now benefit hugely from sharply rising world demand for both. In contrast, in Ontario even the rising price of oil, which is driving the high Canadian dollar and the Canadian economy as a whole, is having the exact opposite effect on the Ontario economy, which does not sell oil but relies on the transportation of goods. In a single year, the effective "cost" of Canadian goods has risen by over 30% relative to the USD due to currency exchange factors alone.

On top of these factors, within the past two years the subprime mortgage crisis and a longtime looming credit crunch in the United States has now sharply reduced the cost of land and labour in the United States, as well as the accessibility of credit generally. Modern business absolutely depends on the ready availability of credit.

In a global economy, business flows where the costs of production are cheapest. Increasingly, that is not Canada.

Should it be? Up until now many of us had always considered it a fortunate thing that, since before its birth, Canada has never been the source of that cheapest labour ... although the Ontario Conservatives Common Sense Revolution has long seemed to wish it otherwise. Yet Canada's social values were not so easily overturned, and despite three terms, Ontario's workers -- and Canada's generally -- still earn more than their equivalents south of the border. (Other figures are often quoted, but here I focus on trades and manufacturing alone. As well, I do take into account the value of Canadian health care and educational infrastructure.)

Certain it is that, in a global economy, mass manufacturing costs can only ever be as stable as the economics of their primary markets. In Ontario, this means that manufacturing is about to experience an upheaval such as it has never before experienced. Hollywood North may be on life support. I would even venture to predict that most "Big Three" automotive plants will leave Ontario altogether, although they may milk their respective constituencies for significant subsidies for some years first. On the other hand, the changes may leave high-tech industries, entities such as Diamond Aircraft, high-end high-quality niche market goods (Canadian ice custom manufacturers) will be left stronger than ever. In an ironic reversal of the historical truisms, struggling United States companies may even be bought out by Canadian companies. For the first time since overwintering became feasible, Canadian snowbirds are increasingly buying out cheap American real estate rather than six-month renting.

In the process of change, many Canadians -- and especially Ontarians in the manufacturing sector -- will lose their jobs. But many other types of jobs will open up, and they won't all be low-end service jobs either.

Obviously either Ontario or Canada could stop these changes from happening, either by throwing money at the problem or by allowing local labour value to slide into something more globally competitive (say, Indian or Chinese). To cling to the status quo within a country that embraces an open market is socially expensive, and may be fundamentally unsustainable.

Interestingly, during all the years when Ontario's manufacturing base made it the powerhouse of Canada, during all the years of transfer payments, no other province spoke up to suggest that Ontario and Ontario alone should be the beneficiary of its own wealth. Now, however, when the scales have shifted, as they always will, in a dynamic marketplace ...

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