Canada is undergoing a profound economic and political transformation. Having benefited greatly from the free trade agreements with the United States and Mexico, Canada’s industrialized heartland is suf- fering the consequences of increasingly fierce competition from emerging economies such as China and India, and also Eastern Europe. The impact of this competition is exacer- bated by the sharp rise in the value of the Canadian dollar, which is negatively affecting the ability of our traditional industrial sectors to compete. We are witnessing large-scale job losses, and these will continue to increase in many industries, including textiles, garments, furniture, lumber, pulp and paper, automobiles and electrical appliances.

At the same time, the strong growth of emerging economies has created substantially higher demand for natu- ral resources like petroleum and natural gas. As a result, Western Canada and Newfoundland and Labrador are experi- encing major growth, which, given the current state of the international economy, seems very likely to continue. This high demand for resources is partly behind the sharp increase in the prices of petroleum and natural gas and is contributing to the rise of the Canadian dollar. So we have a situation where the indirect effects of strong growth in certain regions of Canada (on exchange rates, interest and the workforce) are complicating the readjustment of Canada’s core manufactur- ing industries, chiefly in Ontario and Quebec.

If this major price hike in petroleum and natural gas were just an economic fluctuation due largely to speculative activity, we could assume that this situation would be recti- fied over time. But we have every reason to believe that this strong pressure on energy demand is here to stay. Prices are likely to remain high and massive investments in oil and gas resources will likely continue.

This state of affairs, though positive in itself, is likely to create major economic and political tensions if it is poorly managed by the parties concerned. First, the indi- rect effects of these developments in energy resources and their impact on the capacity of other regions for growth will become more and more pronounced. Second, the regional disparities in Canada will not only grow, but their configuration will change also. Third, the primary source of this local enrichment is higher demand and higher prices for natural resources, which, under the Canadian Constitution, are the property of the provinces. This nar- rows considerably the possibilities for national policies. All the ingredients are therefore in place for a major national crisis. We already see it rearing its ugly head in the debate over fiscal imbalance, in Ontario’s wish to reduce its net contribution to the Canadian federation, in the special agreements that Newfoundland and Nova Scotia have obtained on revenues from offshore petroleum reserves and in Alberta’s repeated declarations that it would never agree to a national energy policy.

In order to deal effectively with these problems, it is essential that we realize how open markets and competition from emerging economies have profoundly altered the nature of Canada’s problems. The internal market counts less and less for the majority of our companies, and in the com- panies where it does matter, their position in the market is increasingly being challenged by foreign competitors. Furthermore, the advent of new technologies that facilitate the relocation of production is leading a great many Canadian companies to generate growth by putting their primary manufacturing operations in countries where wages are low. And that is not limited to primary manufacturing, but increasingly includes high-end jobs as well. The case of software development in India and Eastern Europe is by no means an iso- lated one.

This is no time for navel-gazing. Canada’s greatest challenges are clearly due to international developments more than to internal tensions. This is why the three priorities I will suggest here for making a better future for Canada do not include health care, child care programs or gun control, but rather massive investment in knowledge, controlling regional disparities, and ensuring the quality of the environment.

Canada, with its many knowledge- based sectors, has the immense advantage of being on the leading edge of technology. Economists have clearly shown over the past few years that in this type of economy the quality and availability of human capital plays a decisive role. When an economy is sit- uated close to or on the leading edge of technology, its competitive advantage cannot be guaranteed solely by reduc- ing costs. Our innovative capacity then becomes crucial and must take the place of copycat or catch-up strategies. And this capacity depends first and foremost on a creative workforce trained in world-class universities. Talented university graduates are the most effective vehicle for the transfer of new, cutting-edge knowledge.

We must also bear in mind that the quality of higher education depends not only on what we do, but also on what other advanced societies with which we are in competition are doing. The speed at which this train of knowledge moves ahead depends on the efforts and the abilities of those who live and work on the frontiers of knowledge. To be a pas- senger on this train, you must be willing to pay for the ticket, whatever it costs. Universities are thus at the very core of a society that wants to be an effective player in the globalized knowl- edge economy. In Canada, we have a network of world-class universities. Nevertheless, its chronic and persistent underfunding is increasingly under- mining the quality of education and research, and thus our competitiveness.

As a first priority, the government of Canada must increase its transfer payments for post-secondary education and pursue an aggressive development policy for research in our universities.

A precondition for greater cohesion in Canada is that each and every Canadian must feel convinced that equal opportunities exist for every citi- zen. This is a value that Canadians have always shared, and it is expressed in var- ious federal programs like the Equalization Program. This program seeks essentially to allow all provinces to provide comparable levels of public serv- ices at comparable levels of taxation. It is considered so important that it has been made part of the Canadian Constitution.

Yet, increasingly, this program and other federal transfer programs are being challenged. Their detractors would have us believe that Canada is some sort of freak among the major industrialized nations and that this spe- cial feature is hurting our country’s pros- perity and dulling our competitive edge.

While it may be fair game to criti- cize certain aspects of these transfer programs, to claim that a developed, democratic country would be better off without them finds no support in the situations of other major industri- alized countries. The United States is a good illustration. In 2003, New Jersey and Connecticut contributed C$5,000, net, per capita, to the American feder- al government. Twelve American states contributed more, on a net, per capita basis, to their federal government than Ontario did to Canada.

Nevertheless, in order to be accepted by the majority of the population, trans- fer programs must be based on clear, consistent principles, not subject to manipulation by the polit- ical process, and governed by airtight rules for accountabili- ty. In Canada, it is probably the lack of rigour, trans- parency, consistency and accountability that has most undermined the legitimacy of transfer programs over the past 10 years. This is particularly true of the Equalization Program.

As its second priority, the federal government must, with the support of its Committee of Experts and working together with the provinces, implement an in-depth reform of the Equalization Program. This should be the beginning of a re-examination of other aspects of Canadian fiscal federalism.

In order to leave a worthwhile inheri- tance to future generations, we have to concern ourselves with the environ- ment and the impact on it of our devel- opment. This is an issue of intergenerational equity and an interna- tional responsibility. The new generation of Canadians is particularly concerned about environmental protection, and therefore, setting tough but realistic objectives in this regard can only rein- force our social cohesion. At the interna- tional level, we also expect Canada to assume a leadership role. In this context, the Kyoto Protocol has taken on, nation- ally and internationally, a symbolic qual- ity that we ignore at our peril.

In a very fine article published recently (January 2006) in Le Devoir Philippe Barla and Jean-Thomas Bernard of Laval University describe the commitments Canada made as part of the Kyoto Protocol and the consequences of the terms on which these commitments will be met. The authors remind us that Canada must reduce its greenhouse gas emissions by 6 percent of the 1990 level over the period 2008-12. This reduction would actually be 30 percent of the emissions forecast for this period, if nothing is done. At the current rate, we are still far from our target. In fact, as Barla and Bernard tell us, Canadian emissions rose from 596 megatons in 1990 to 740 megatons in 2003. The major polluters are, among others, the petroleum and natural gas indus- tries and thermal electrical genera- tion. Alberta, for example, which has only 10 percent of the Canadian pop- ulation, has contributed 46 percent of the increase in greenhouse gas emis- sions. The federal government’s cur- rent strategy, by deviating from the principle that the polluter pays, would effectively lead to a significant redistribution within Canada and could even undermine our ability to meet our goal.

As its third priority, Canada must make every possible effort to meet its commitments under the Kyoto Protocol and minimize the redistributive effects of any program that it might adopt.

To address these priorities, Canada has incomparable assets. First, we have a highly qualified workforce that is among the finest in the world. We must appreciate how important this asset is, since it has been built up over a very long time. Of course, the lead Canada already has on this front absolutely must be increased.

Second, we have a deeply rooted industrial and business culture. Such a culture is acquired only with time and experience. Our country also has a capacity to produce, disseminate and commercialize new knowledge that is among the very best, and is endowed with natural and energy resources that make us the envy of the rest of the world.

These relative and absolute advantages will allow the country not only to meet the major chal- lenges of the new international order, but also to create national unity by means of an inspiring vision of a society that delivers the greatest benefit to all Canadians. The three priorities I have proposed here are part of this vision, though they are by no means exhaustive.

The Canadian confederation is one of the most decentralized of all the major industrialized nations. This peculiarity has the great advantage of relating decision-making and actions more directly to the people’s expressed needs. It also makes it possible to take account of the different preferences of various social groupings that make up this vast country. The flip side of this flexibility would be the necessity to coordinate major national policy with provincial policies that may have nationwide repercussions.

To effectively meet the enormous challenges raised by the new interna- tional order, we need " more than ever in the history of this country " internal cohesion, and a common understanding of these challenges and the appropriate ways to meet them. My perception is that this precondi- tion does not exist at present. Several factors may explain this. The most important is that a majority of Canadians do not realized how big these challenges really are and the dra- matic consequences that will ensue if we do not effectively meet them. Therefore, above and beyond any spe- cific priorities we can formulate, we must ensure that Canadians become better educated and more fully informed about the economic space in which they live, both inside and out- side this country.