RM Issue #031218

Did Paul Martin really revive the economy?

In 1998 Canada had the second- highest number of low-paid jobs of 29 industrialized countries

by Murray Dobbin
December 12, 2003

No theme was referred to more often by Paul Martin as Finance Minister than the need to attract foreign investment. Typical were his October 9, 1996, comments to the House of Commons Finance Committee. He repeated four times that the goal of his budget cuts was to establish the conditions for more investment: “An improving debt-to-GDP ratio means an improving economy … [and] more investment-greater economic growth. It means more jobs.” What were the consequences of failing to cut spending? Claimed Martin, “Goods not purchased, investments not made, and jobs not created.… It was simply that a terrible price would be paid if we did nothing — a price measured in high interest rates, lost investment, lost income, lost jobs.”

Foreign direct investment (FDI) became such an obsession with Bay Street, the financial media, and the Liberal government that it often seemed to be the singular objective of all government activity — and the single measure of success. If fighting inflation and the deficit, cutting spending, and implementing tax cuts were really key to attracting capital investment for new productive capacity in Canada, then the 1990s should have been a record-busting decade for such investment.

Inflation was below two per cent for the last two-thirds of the decade; the deficit was virtually gone by 1997; the social supports for labour were weaker than at any time in the previous 25 years; and by the time Paul Martin left the finance department, there was a tax regime in place that had corporate income taxes 50 per cent lower than those in the U.S. (23 per cent in Canada versus 34 per cent in the U.S.). Despite Martin's success in achieving these critical elements in his plan to attract foreign investment, Canada's investment record in the 1990s was the worst it had been in five decades.

According to CAW economist Jim Stanford, in 1997, investment risk reached its lowest level in the 37-year period the study examined. Yet not only was investing in Canada low-risk, it was also low cost. Canada won the competitiveness sweepstakes with the U.S. hands down. Since 1997, the international business consulting firm KPMG has done yearly in-depth comparisons of the cost of doing business in eight countries in North America, Europe, and Japan. In every year, including 2002, Canada has taken the number one spot — and by a wide margin over the U.S. According to KPMG, “Canada is the overall cost leader for 2002 with a … 14.5 per cent cost advantage over the United States.” …

In 1998, the Investment Review Division of Industry Canada prepared a report that looked at FDI in Canada. In 1997, FDI reached $21.2 billion — the second-highest total on record. However, according to the study, fully 97.5 per cent of that total was devoted to acquisitions of Canadian companies. And 1997 was not an aberration. On average, between June 1985 and June 1997, 93.4 per cent of FDI went to acquisitions — that is, corporate buyouts of Canadian companies. The most recent figures show the average percentage of FDI going to takeovers between 1985 and the end of 2001 was even higher, at 96.5 per cent.

In his book The Vanishing Country: Is It Too Late to Save Canada?, Mel Hurtig examines the impact of foreign ownership on Canada's economy. One impact is that more and more decisions are made in the U.S. As Canadian companies are acquired by U.S. corporations, the head offices of those companies almost invariably move south of the border. Corporate functions once undertaken in Canada by Canadians are now performed by absentee managers. The result is that in addition to having little influence over decisions about Canadian operations, Canadian companies are being managed according to the harsher culture of American capitalism.

Those becoming increasingly alarmed about the disappearance of Canadian head offices include several public figures who were among the most prominent promoters of free trade in the great debate of 1988. Former Alberta Premier Peter Lougheed stated in late 1999, “People will fall from their chairs to hear me say this, but maybe right now we need to return to the Foreign Investment Review Agency. We need to be more interventionist, the passive approach isn't working. If the present trend continues, we are going to look at our country in three years and say, 'What have we got left?'”

A further impact of foreign ownership, says Hurtig, has been the “hollowing out” of the Canadian economy. “Canada is now in 30th place in the UN list of high-development countries when it comes to high technology exports as a percentage of total goods exports,” writes Hurtig. “In terms of patents awarded to residents on a comparative population basis, Canada now stands 20th on the list of the top 37 technology leaders and potential leaders.… In the UN list of high human-development countries Canada is 15th in terms of research and development expenditures as a percentage of GNP, and 20th in business spending on R&D as a total of R&D expenditures. When it comes to the number of scientists and engineers in R&D per one- hundred thousand people Canada is down in 14th place.”

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As the 1990s progressed, Canada's productivity gap with the U.S. increased. According to Jim Stanford, “Real GDP per worker employed grew 50 per cent faster in the U.S. than in Canada during the first decade of the FTA, in both the manufacturing sector and in the economy as a whole.… It is recognized that the relatively less developed structure of Canada's economy (with a greater reliance on resource industries, and disproportionately small high-value, new-technology industries) is an important factor in Canada's relatively poor productivity performance.”

Throughout the 1990s, the U.S. invested near record amounts in new machinery and management systems, causing a huge spurt in productivity and leaving the Canadian corporate sector in the dust. According to Andrew Duffy, writing in the Ottawa Citizen, “Canada's average worker produced $60,163 U.S. worth of goods and services [in 2002], versus $75,573 U.S. for the average American. That gap continued to grow even as Canada's rate of economic expansion outpaced that of the U.S. over the past five years.”

“Astonishingly,” says Stanford, “the capital:labour ratio has not increased at all during most of the 1990s; in fact, it has declined slightly.” In other words, our economy actually became less capital- intensive in the 1990s, the first time that has happened in the post-war period.

… Also noteworthy is that the new jobs available to Canadians were not, for the most part, good jobs. Most were part-time with mostly marginal earnings in low-value occupations such as retail. The amount added to total earnings would have been much higher had those jobs been in high-tech or traditional industrial sectors. According to the Organization for Economic Cooperation and Development (OECD), in 1998 Canada had the second-highest number of low-paid jobs of all the twenty-nine industrialized countries, with fully 25 per cent of full-time jobs falling into this category.

… The relationship of free trade to productivity is revealed through an examination of where the increase, small as it was, came from. Productivity increased overall by nine per cent between 1991 and 1998, but in the auto sector it increased a full 80 per cent over that period, effectively dragging the rest of the stagnant economy up with it. The auto industry accounted for $20.24 billion, or 60 per cent, of Canada’s overall trade surplus in goods in 1999, suggesting that without that sector's contribution to growth, productivity may well have been in the negatives for the whole of the 1990s.

The auto industry provides a unique baseline by which to judge both the free trade agreement and Paul Martin's radical restructuring of Canada to create the perfect business climate. The automotive industry is the single most powerful driver of the economy because it was built on the foundation of a managed trade agreement, the Auto Pact, under which each country was guaranteed to benefit equitably from the North American production of automobiles. If free trade is superior to this kind of managed trade, where are the examples of similarly strong industries nurtured by liberalized regimes and measures to make labour more “flexible”?

Despite Paul Martin's reputation for having rescued the economy, the evidence shows that the 1990s represented Canada's worst economic decade of the century excepting the 1930s — in business terms of new investment, productivity gains, and GDP growth. The 1990s were harrowing in terms of unemployment, increased poverty, the gap between rich and poor, the erosion of the middle class, the weakening of the country's physical infrastructure, and more. If Martin had been running a large corporation, he would currently be unemployed — like Al “Chainsaw” Dunlap, whose disastrous “restructurings” of former corporate icons like Sunbeam and Scott Paper have made him an outcast who can't get a job.

Murray Dobbin is a Vancouver-based journalist and author. This is an excerpt from his latest book, Paul Martin: CEO for Canada?