The Economic ReMaking of Canada:

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The Economic Re-Makingof Canada

• Implications for Air Travel
• and for the Country!

Presentation by Jim Stanford CAW Economist To
NavCanada Labour-Management Committee January 2008
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The Economic Remakingof Canada

• Renewed reliance on primary resource production
  and export
• Consequent relative and absolute decline in other
  tradeable industries
• Resource boom drives strong overall conditions
• resource investment - supply chain
• labour incomes - spin-off effects
• But for how long???
• Resource dependence raises troubling questions
• nature and sustainability of growth
• Canadas role in the global economy
• Implications for air travel

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HOLLOWING OUTDifferent Concepts

• Most common conception
• Foreign takeovers of Canadian businesses
• Loss of head offices associated functions
• Loss of capacity for economic leadership
  (innovation, finance)

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HOLLOWING OUT
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HOLLOWING OUTDifferent Concepts

• Most common conception
• Foreign takeovers of Canadian businesses
• Loss of head offices associated functions
• Loss of capacity for economic leadership
  (innovation, finance)
• A different but related conception
• Structural regression in our economic makeup
• Hewer of wood, drawer of water

Your Logogoes here
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REGRESSION OF CANADAS EXPORTS
1999 57
2007 43
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Composition of Growth
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REGRESSION OF BUSINESS INVESTMENT
1960-99 125
2000-07 87
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Consequences of the Remaking

• Strong growth in resource industries
• Contraction in other tradeable industries
• Rising dollar
• Terms of trade gains
• Rising profit share, falling wage share
• Strong nominal income conditions
• Regional economic shifts
• Strains on fiscal federalism
• Environmental, geopolitical issues

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Shrinking Wage Share
Labour Income as Share of GDP
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Growing Profit Share
Before-Tax Corporate Profits as Share of GDP
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Two Sides of the Street
Redistribution of GDP Since 1999
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Tradition of CanadianPolitical-Economy

• Harold Innis, 1930s-1960s
• Identified structural resource-dependence of
  Canadian economy
• Staples theory
• Successive waves of development drive and shape
  our economy
• Fish - Furs - Timber - Agriculture
• Minerals - Energy
• Not without benefits, but assigns Canada a
  stunted role in world economy

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Drawbacks of Resource Dependence

• Tendency of real commodity prices to fall over
  long-term
• Instability in prices, volumes
• Risky basket to put eggs in
• Tendency of resources to run out, become obsolete
• Environmental / geopolitical risks
• Loss of high-value high-productivity jobs
  associated with secondary tertiary activities
• Eg. exporting raw bitumen vs. refined products

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The Dollars Unique Strength

• Loonie has appreciated much more than any other
  major U.S. trading partner
• Extra rise of the loonie (relative to U.S.
  trade-weighted index) accounts for most of its
  appreciation
• Canada (along with Mexico) is uniquely dependent
  on exports to the U.S.

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Where Should the Loonie Be?

• Governor Dodge December 6, Senate Banking Trade
  Commerce Committee
• "Now 98 cents sounds very specific. I don't
  intend it to be nearly that specific but
  something in the mid- to upper 90s seemed to be
  pretty consistent with that."
• Implication Loonie in high-90s is somehow
  logical.

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What is the Loonies Fair Value?

• Rolling econometric regressions may give credence
  to argument that high-90s is fair value
• Simply because the apparent importance of the oil
  price coefficient gets larger
• But does that imply that this is a sensible,
  sustainable, equilibrium level???
• Other benchmarks
• Purchasing power parity still low 80s, rising?
• Unit cost competitiveness low 70s, falling

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Auto Labour Costs

• Canada U.S.
• Hourly wage, 25 21
• Auto parts
• Hourly wage, 32 26
• Assembly
• Implied exchange rate 82-84 cents
• Canadian productivity advantage in assembly
  helps, but not enough
• UAW

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Possible Transmission Mechanisms

• Real trade surplus?
• Real inflow of FDI?
• Corporate profitability?
• Equity valuations?
• Foreign takeovers?

Real Mechanisms

Financial Mechanisms
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CHAIN OF CAUSATION
High Market Valuations
Foreign Takeovers
High Resource Profits
Resource Investmt. Boom
High Resource Prices
Higher Interest Rates
Higher Dollar
Shrinking Non-Resource Export Industries
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How to Bring the LoonieBack to Earth

• Other countries manage currencies, we can too
• Cut interest rates
• Change monetary policy direction
• Mess up the resource/investment boom
• Taxes
• Approvals / environmental rules
• Foreign investment review
• Appoint Jim Stanford Finance Minister

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A Broader Vision

• True prosperity must be based on more than whats
  buried beneath our feet
• Use resource wealth carefully and deliberately to
  foster more well-rounded form of economic growth
• Slow down resource boom
• Capture more rents from resources
• Pro-actively foster other high-value tradeable
  industries
• Manage global interactions
• Share the wealth
• Labour income - Public services

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Is Canada Reallyas Rich as We Look?

• November StatsCan study hits front pages
• In three years, real income levels have returned
  to the levels of the mid-1980s.
• Out-performing U.S. for 1st time in decades
• Per capita up 16 since 2002
• Caution real national income is a funny duck
• Includes terms of trade gains, profits on FDI
• By conventional measures (real GDP per capita),
  we still lag the U.S. despite their many
  problems
• Canadas productivity performance still poor
• Real compensation per worker up 6 since 2002

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What Does it Mean for Air Travel?
PS NavCan is NOT an Airline!

• High incomes ? strong consumer spending, consumer
  travel
• Very high profits ? strong business travel
• Regional shifts in destinations
• Resource destinations in Canada (Nfld, N.Alta.)
• Global links?
• Growing travel deficit
• Dollar - Income levels
• Dollar mutes fuel price impact on domestic
  carriers
• Structural condition of Canadian airlines still
  weak

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International Travel