Irving Pulp and Paper Mill in New Brunswick, Canada
Stuck at an economic crossroads, Canada must choose between two paths: stick to the tried and true formula of relying on historically strong industries, or pursue a rapid economic transformation to stay competitive with emerging economic powerhouses. To clear pressing economic hurdles and keep up with rising economies like Mexico and China, Canada must choose the second option. If it doesn’t make speedy adjustments, it will be left behind and locked out of growing global prosperity.
Canada is mired in a recession. The Canadian Dollar is trading precariously at 70 cents to its southern counterpart. A barrel of crude, one of Canada’s primary exports, sells for just $30 – a huge drop from two years ago. On paper, the decline appears relatively mild (GDP shrank by less than a percentage point in 2015). But the numbers, benign enough on the surface, hide a grave reality. By sticking to the status quo and relying on oil and manufacturing, the Canadian economy is guaranteed to keep falling further and further behind.
There are two main reasons for the Canadian economy’s current quagmire. The first is Canada’s overwhelming dependence on just a few key sectors, namely manufacturing and energy production. The second is reluctance to kick its addiction to oil and commodities-fueled growth and quickly adapt to the increasingly global economy and trade market. As the world transitions away from fossil fuels and embraces free trade, Canada is fated to lose its place as a commodities and manufacturing superpower. Rather than try, and fail, to keep up with rising economies that outstrip its capacity to perform in these sectors, the Canadian economy needs a quick and drastic fix. It must diversify – fast. If it doesn’t, its current economic slump will become the norm as quickly developing economies like South Africa and India surge ahead to take its place.
Fortunately, Canada is well-equipped to pull off the transition. However, it might take a bit of creative thinking and significant adjustments. A closer examination of the root problem – Canada’s dependence on oil and commodities – provides a diagnosis and suggests a prescription.
Canada has never counted diversification among its economic strengths. Turning the situation from bad to worse, its two primary sectors, commodities and manufacturing, essentially cannot perform well at the same time. The western-based oil, gas and mining industries find their profits at their highest when the Canadian Dollar is at parity with or higher than the U.S. greenback.
It’s little surprise, then, that the Canadian economy managed to weather the 2007-2009 global economic meltdown far better than the U.S. Meanwhile, Canada’s eastern-based manufacturing sector sees its margins soar when the Canadian Dollar trades much lower than its southern counterpart. This is because American investors and buyers buy more Canadian goods when the currency exchange provides them with a discount.
Following conventional wisdom, many economists were cautiously optimistic when oil prices collapsed in late 2014 and continued to freefall throughout 2015. They argued that the fiscal losses from oil revenues would be offset by increased economic activity for the eastern manufacturing sector. Sixteen months in, at the start of 2016, their predictions continue to ring false.
Factories hoping for a manufacturing renaissance like the one that occurred in the 1990’s have met with serious disappointment. Unfortunately, in the decade-plus since the Canadian Dollar was last trading this low, the country’s chief trading partner, the U.S., has made new friends that build its goods. Mexico and China have taken Canada’s place as the chief manufacturers of products Americans buy. For example, most of Ford’s foreign-built cars sold in the U.S. now come from factories in Mexico, not Canada.
This dynamic leaves Canada, though in an admittedly mild recession, with no prospect for making a full economic recovery unless it significantly changes course. Fortunately, a few Canadian regions and towns have updated their economies, holding out hope for the rest of the country. Alberta and British Columbia are taking steps to strengthen the service sectors of their economies. So far the results are promising, providing a model for clearing economic hurdles that could likely be applied with success in other regions. Similarly, in the east, vibrant knowledge-based industries are starting to sprout up outside of major tech hubs like Toronto and Montréal. One-time manufacturing heartlands like London and Windsor can follow the lead of other small cities like Waterloo – dubbed the “Silicon Valley of the North” – and develop industries that will serve them better in the long run.
Unlike most other countries, major economic transformation is possible in Canada. The country’s manufacturing sector is already dying a slow, painful death, and most former factory workers had either already transitioned to other industries or were unemployed. The economy is poised for transition. And though more people will likely need to seek advanced degrees to be successful in a renovated economy, Canada is better suited to make the shift than any other country on earth. Over 50 percent of Canadians hold a postsecondary degree, making them far and away the best-educated population on the planet. In light of this fact, 2016’s Canada seems almost destined for a shift towards a knowledge-based economy. As the manufacturing industry is absorbed by rising economies in Asia and Latin America and the energy industry starts to evolve toward more self-sufficient and greener sources than fossil fuels, it has no time to lose.
Canada has been through a few key economic evolutions in its history – its transition from a British colony to an independent nation in the late 1800’s, the beginnings of a trade relationship with the United States in the early 1900’s, and the adaptation to NAFTA in the late 1900’s. Each time, its key industries have remained intact, shifting their role in the country and the world, but not their character. This has worked as a solution to short-term problems, but as we race headlong into a global economy, Canadians need to think long-term. What Canada needs today is not economic evolution, but economic revolution.
Benson Cook is a first-year student at McGill University, studying Political Science.
Image Attribution: “Irving Pulp and Paper Mill” by Christopher Craig, licensed under CC BY 2.0
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