Economists almost universally believe in the virtues of economic growth, and " despite my own occasionally heretical views on some economic subjects " I am enough of an economist to share that view. Sustainable economic growth is a prerequisite for lifting up the standard of living of large numbers of the world’s people; redistribution alone cannot do the trick. On the other hand, the link between growth and well-being is increasingly uncertain: phenomena like environmental degradation, growing social inequality, and globalization are blurring the extent to which economic growth and efficiency translates into concrete improvements in our individual and collective quality of life. The three pressing issues that I have chosen to highlight in my contribution to the IRPP’s Canadian Priorities Agenda all demonstrate, in different but complementary ways, that to ensure that economic progress does indeed translate into human progress, we must increasingly be prepared to intervene with deliberate measures to shape and regulate growth " rather than simply assuming that a rising tide will indeed lift all the boats.
Figures 1 and 2, reprinted from Poverty by Postal Code (a recent project of the United Way of Greater Toronto), illustrate the change in urban poverty in Toronto over the past quarter century. Toronto has more inequality between neighbourhoods than any other Canadian city, but a simi- lar story could be told of other cities, too. Figure 1 illustrates poverty in Toronto in 1981; figure 2 shows the same thing, two decades later. Two trends are evident. First, poverty in Toronto has expanded: the number of poor families in the city has grown dramatically, despite continuing economic growth. Second, poverty has become more geographically concentrated in poor neighbourhoods. In 2001, 43 percent of all poor families lived in poor neighbourhoods, compared to just 18 percent in 1981. In other words, poor people are much more likely to live in places where poverty is concen- trated (both geographically and ethnically). This tends to accentuate the impacts of poverty on health, economic prospects and family life " and ensure that poverty is repro- duced, with increasing (and often violent) intensity, within definable communities.
The overall incidence of low income among Canadian households has been relatively stable in recent years, despite notable improvements in aggregate labour market perform- ance. This is disappointing, but at least the problem of poverty, measured this way, would not seem to have become any worse. However, statistical indicators also high- light two worrisome trends underlying this aggregate stabil- ity in poverty: an increasing depth of poverty for those households that experience low income, and an increasing concentration of that deeper poverty among more focused geographical areas and/or ethnic communities. In other words, poverty as a whole in Canada may not be getting worse, but it is becoming deeper and more concentrated, and in this regard its social and economic impacts (includ- ing on the non-poor) are becoming more costly.
The incidence of low-pay work (eg. under $10 per hour) among full-time employees has not changed in the past two decades, despite rising average levels of educational attain- ment and work experience. And low pay is increasingly concentrated among identifiable labour market groups: for example, among new immigrants who are also visible minorities, almost one-third of full-time workers experience low pay. Neighbourhood inequality within Canadian cities has increased. The concentration and depth of poverty among Aboriginal Canadians living in cities has also become increasingly severe. The depth of poverty " that is, the typical amount by which low- income households fall below low- income cut-offs " has also increased, despite the recovery in aggregate labour market indicators. All of this suggests that the impact of poverty on family and community well-being is correspondingly more intense.
Research on ”œsocial capital,” and the causes and consequences of social exclusion, suggest that absolute and relative deprivation have measurable and predictable negative impacts on educational attainment, family stabil- ity, health, crime and other important social and economic indicators. These effects are not contained to the indi- viduals who experience social exclu- sion, but impose external costs on the broader economy and community. Additionally, there is a new sensitivity in economic development literature to the importance of quality of life, and the condition of cities, as key factors in investment attraction, economic development and prosperity. City-spe- cific attributes have become recog- nized as crucial variables in explaining the attraction and retention of high- knowledge workers and the invest- ment which tends to accompany those workers.
For both reasons, the growing concentration of poverty in Canada among particular neighbourhoods and visible minority populations is a wor- rying and dangerous trend. Focused policy measures to address the prob- lem would need to include improve- ments in income security programs (new Canadians, in particular, are not well served by existing income securi- ty programs), the direct provision of services (like housing, child care and others) to low-income households and neighbourhoods to assist their well- being and enhance their participation and success in the labour market, and strengthening labour market policies, structures and regulations to reduce the incidence of low-wage work.
As indicated in figure 3, the aver- age global surface temperature has increased by one full degree centigrade (or close to two degrees fahrenheit) in the past quarter-cen- tury. The average land temperature has increased by even more. Climate models indicate that the average surface temperature is likely to increase by three degrees in the coming 50 years.
Climatologists almost universally accept the evidence of pollution-driven climate change, and equally universally project that this change will accelerate in coming decades without powerful countervailing action. Climate change will impose a range of potentially huge costs, including drought, severe weath- er, dramatic changes in regional cli- mates (with implications for biodiversity, agriculture and social well- being), a rise in the sea level, and more.
Canada could be affected relative- ly strongly by this change, given the fragile ecological balance that prevails in many parts of the country (such as the Arctic); some economists have estimated that the cost of global cli- mate change to Canada is already in the range of 1-3 percent of GDP annu- ally, and growing. Examples of major economic costs related to climate change include biological changes (such as the northern expansion of pine beetles, which has wreaked havoc on western forestry), damage from violent weather and the increas- ing cost of additions to electrical generating capacity driven (in central Canada, anyway) by peak summer air conditioning loads.
Most governments in the world, so far including Canada, have recognized the need for multilateral strategies to limit greenhouse gas pol- lution, as part of a long-run effort to stabilize the concentration of green- house gases in the atmosphere and limit the rise in global temperatures. One result has been the Kyoto Protocol, the second phase of which was adopted unanimously last year (by participating countries) in Montreal. Canadians express deep concerns about climate change, and want Canada to play a role in control- ling and ultimately reversing the problem. Quite rightly, they fear what kind of hellish lives their grandchil- dren, and their grandchildren’s grand- children, will be forced to live if the earth’s temperature continues to rise without limit.
So far, however, the Canadian climate change strategy has been intense- ly disappointing " both in terms of its likely inadequacy in meeting our Kyoto targets and, just as importantly, in its questionable impacts on the underlying economic and technologi- cal forces that will be crucial, in the long run, to developing a more sus- tainable human ecological footprint. Canada’s ratification of Kyoto (sup- ported by a very large majority of Canadians) was only the first chapter in a longer, more complex public debate " one which will determine how (if at all) we meet our targets, who will bear the cost and what the eco- nomic impacts will be. Whether this process turns out to be bad or good for the economy depends on how we go about doing it. In general, we can imagine two broad strategies for reduc- ing greenhouse gas emissions: doing less, or doing more.
Conservationists emphasize that individuals can and should choose to simply consume less (e.g., consuming less, driving less and turning down the thermostat in winter), hence reducing the polluting side effects of consumption. This approach relies unconvincingly on voluntarism, occasionally helped along by positive or negative incentives (delivered through the tax system or other means). Even if these strategies suc- ceeded in changing individual behav- iour, the impact on the economy of mass numbers of consumers simply ”œcutting back” their spending would likely be negative.
The alternative is to take positive, proactive measures to reduce green- house emissions from current eco- nomic activities. Canadians can continue to pursue activities that con- tribute to their high material standard of living, but do them more efficient- ly (in environmental terms). That will require us collectively to spend ener- gy, attention and money on finding more efficient ways of delivering the final goods and services that deter- mine our standard of living. If it forces society to spend, invest and innovate, then responding to the challenge of climate change will definitely be ben- eficial for the economy.
If our Kyoto commitments lead Canadian companies, consumers and governments to spend billions on cleaner technologies, public transit systems, methane collectors at landfill sites and more efficient vehicles, then the effort will help both the environ- ment and our economy at the same time. Indeed, there is no reason why big-ticket investments in environmen- tal infrastructure and technology couldn’t power a lasting economic expansion " just like waves of invest- ment in railways (1850s), automotive infrastructure (1950s) and computers (1990s) did in earlier eras. But to take advantage of this economic upside requires strong and proactive policy intervention (including taxes, incen- tives, direct spending and regulation) " not just vague appeals for voluntary conservation.
Economists learn, from their first undergraduate course, that free trade is always good for economic efficiency. If that were true, then Canada’s economy should be advanc- ing by leaps and bounds " because we have entered a new dimension in globalization that is exposing Canadian industries to unprecedent- ed global pressure, experienced across a daunting range of sectors. This new era of globalization is producing unprecedented (and destructive) imbalances in international trade flows. Figure 4 illustrates Canada’s bilateral merchandise trade with China, for example. Canada’s bilater- al deficit with China reached almost $25 billion in 2005. Our imports from China increased fourfold in the last decade (partly thanks to a 25 percent expansion in Canadian GDP). But our exports to China have hardly changed " despite a doubling of Chinese GDP. It’s hard to imagine, from this evidence, that Canada has experienced much ”œtrickle-down” benefit from China’s phenomenal growth. Yet the fundamental viability of numerous Canadian industries is very much in question in light of unbeatable competition from Chinese imports.
Canada’s expanding trade ties with emerging markets (especially China, but also other rapidly develop- ing economies such as India, Korea and Brazil) raise issues and challenges that are different, both quantitatively and qualitatively, from those we face with our traditional trading partners (such as the US, Europe and Japan). Our current trading relationships with emerging markets are uniquely unbalanced.
They are likely to become more so, in coming years, due to the con- tinuing progress of these economies in implementing socio-economic regimes which combine dramatic cost competitiveness, rapid technological progress and productivity growth, and aggressively pro-growth econom- ic, social and political structures. Trade liberalization " whether multi- lateral (China’s accession to the World Trade Organization) or bilater- al (the proposed Canada-Korea free trade agreement) " will simply has- ten the impact.
Several factors suggest that the trade challenge posed by emerging mar- kets is historically unique. The competitive cost advantage enjoyed by pro- ducers in a few emerging economies (and especially in China) is unprecedent- ed in both its scale (the proportional cost differen- tial) and its breadth (prevailing across a very wide range of industries). The countries involved (again, especially China) are very large. Technological and policy changes have allowed producers in these countries to begin to penetrate important markets for tradeable serv- ices as well as manufactured goods. For both reasons, the scope of eco- nomic disruption and dislocation resulting from the expansion of trade with emerging economies is unprece- dented, affecting a very wide range of tradeable industries. Moreover, tradi- tional market adjustment mecha- nisms (such as adjustments in labour and other factor markets, or adjust- ments in exchange rates) will clearly not equilibrate the resulting trade imbalances. To the contrary, govern- ment policy in these markets is pow- erfully aimed at preserving and enhancing the cost advantages that have given rise to such unbalanced trade flows.
There is no room in this scenario (at least not within the broad category of ”œmanufacturing”) for the comparative advantage form of spe- cialization envisioned in the economic textbooks. Emerging mar- ket producers are demonstrating robust absolute cost advantages across the full range of manufactur- ing, and the capacity to essentially eliminate the viability of Canadian production (an outcome already vis- ible in several broad sector group- ings, with more to come). Other than responding with still more resource exports (at least for as long as those non-renewable resources last), it is not clear what Canadians will be left producing for the global market under this new emerging international division of labour.
The effective integration of Canada’s economy with very large foreign jurisdictions with very abun- dant, low-cost ”œendowments” of labour will also, if unmanaged, exert a sustained and negative impact on domestic labour market outcomes. This effect will be experienced beyond directly affected tradeable industries; it will be felt throughout the labour market " a fact that has been cited by former US Federal Reserve Board Chairman Alan Greenspan, among others, in explain- ing the continuing stagnation of real wages despite near-full employment conditions.
Yet the challenges posed to Canada’s economy by the emerging economies are not solely or mostly due to their ”œcheap labour.” It is, rather, a unique conjuncture of economic and social polices that explains the ”œsuper-competitiveness” of exports from China and other emerging markets: rapid technologi- cal advancement (facilitated by aggressive policies, including enforced technology transfer through incoming FDI); subsidized, state-directed capital market policies and sectoral planning; active man- agement of exchange rates and other key variables; and pro-active labour market and income distribution poli- cies that (for now, at least) demon- strate an ability to contain popular demands for a slice of the growing pie they produce. These crucial ingredients in the emerging market policy recipe reflect a willingness to deliberately manage or even distort market forces in the interests of rapid development. The rapid growth of China and other emerging markets is testimony not to the virtues of free markets, but rather to the potential value of interfering with markets.
For all these reasons, Canada badly needs a ”œChina strategy” (and, more broadly, an emerging market strategy) to sustain our industries in a world in which super-competitive emerging economies are dominant forces. And perhaps that policy response should aim to be as pro- active as the emerging market eco- nomic strategies that have proven so powerful. Our own policy response certainly cannot rely on a naive effort to shift our industries ”œup the value chain,” or on a faith that natural market forces will ensure we end up competitive at producing ”œsomething.” With growing trade flows in high-skill service industries, growing exports by China and other emerging economies of high-technology prod- ucts, and massive invest- ments by emerging economies in their own skills and technology, our ”œskills” will never protect us in this new global economy. Nor can our strategy focus on assisting Canadian companies to shift investment and production to those super-competitive foreign juris- dictions: this may protect the profits of those companies, but will further undermine investment and employ- ment in Canadian industries.
Inevitably, our ”œChina strategy” will need to recognize that liberaliza- tion alone provides no guarantee of a mutually beneficial pattern of interna- tional economic interchange. Pro- active strategies are required to ensure that the expansion of international trade and investment works to the advantage of Canadians, rather than to their impoverishment.