Academic journal article Independent Review

Unfinished Business: Reflections on Canada's Economic Transformation and the Work Ahead

Academic journal article Independent Review

Unfinished Business: Reflections on Canada's Economic Transformation and the Work Ahead

Article excerpt

A Canadian Century?

For virtually its entire history, Canada has lived in the shadow of the behemoth to its south: the more populous, more economically vibrant, and more globally assertive United States. In fact, it could even be said that Canada's national psyche is marked by a nagging inferiority complex vis-a-vis the United States, a trait captured in the saying "To be Canadian is to be not American."

However, as the twenty-first century approaches its third decade, a well-governed, resource-rich, and xenophilic Canada is beginning to forge its own identity, even surpassing the United States in some areas. For instance, the Luxembourg Income Study of 2014 found that Canada is now home to the world's most affluent middle class (reported in Austen and Leonhardt 2014). Canada's new global relevance is also evident in the enthusiastic response in the United States and elsewhere to the 2015 election of the youthful, telegenic Justin Trudeau as the country's new prime minister. (1)

Canada is also notable for its robust response to the global financial crisis of 2007-8. The effects of the crisis on Canada's financial sector were limited thanks to the stability of the country's prudently managed domestic banking system. (2) In fact, Canada was the only G7 country that did not bail out or guarantee its banks in the wake of the crisis (Farlow 2013, 322). Moreover, it has been one of only two G7 countries (the other being Germany) to maintain a Triple-A credit rating throughout the postcrisis period. Canada's conservative federal government, led by former economist Stephen Harper, initiated a multiyear deficit-spending program to mitigate the most severe effects of the global downturn and subsequently managed to bring the federal budget back to a surplus position just prior to ceding power in the fall of 2015. Put simply, Canada's serene political climate and stable finances make it the envy of virtually every other advanced economy.

Yet Canada's curve-beating postcrisis performance ultimately reflects a set of transformative fiscal-policy reforms implemented throughout the 1990s, dubbed Canada's "redemptive decade" (Crowley, Clemens, and Veldhuis 2010). Such reforms included the implementation of a nationwide value-added sales tax, the finalization of a regional trade pact with the United States and Mexico, the restructuring of federal pension and social assistance programs, and large-scale reductions in public spending. Moreover, a number of intrepid provincial and municipal governments have found innovative ways to reduce the burden of public spending on health care, education, and other public services. To my knowledge, the story of Canada's historic turnaround has yet to be told in its entirety to an international audience.

Accordingly, the purpose of this article is to provide an objective account of that economic transformation and a candid discussion of the problems that continue to hold Canada back economically. I aim to place the hype surrounding Canada's economic governance under closer scrutiny and therein promote a more measured discourse regarding which aspects of "the Canadian model" should and should not be emulated. On the negative side of the ledger, I cover Canada's ongoing problems with productivity, innovation, and the governance of natural resources.

The first section of this article recounts gains made during Canada's redemptive decade, identifying the year 1995 as a critical juncture in the country's history. The second and third sections, respectively, cover what I consider to be the largest obstacles to Canada's continued economic development and diversification: its lagging performance in the critical domains of productivity and innovation as well as political obstacles to effective natural-resource governance, concerning in particular the country's vast petroleum reserves. Finally, I briefly touch on possible policy solutions, although I must stress that my primary aim is to elucidate problems facing the Canadian economy, not to prescribe remedies. …

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