Canada’s economy has been in trouble, and for a long while. To progress, Canada needs to dissuade itself of certain national myths, while adopting others.
I hope to write a series of posts on this topic. It is tough, touchy, and I’m underqualified. Nonetheless, my right to think for myself exists; my right to learn from the criticism of others exists. In my view, there is more to lose by misunderstanding why the Canadian economy does not have good prospects, than hoping that a Liberal or Conservative government will fix it when they show no evidence of understanding the problems nor the people. What is lost? Solving our housing crisis, reducing economic inequality with real prosperity, and increasing our unity and pride as a nation.
The information I bear, and bring to bear, to tell this story:
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Demographics. Canadian demographics do not have a good outlook. Our inverse-population structure is masked or suppressed by immigration, which is dominated by different dynamics than populations whose growth is driven solely by birth rates. In particular, there are interactions between demographics and wages, and demographics and capital-per-person, which predict economic inequality. When it comes to Canada, it is economic inequality that we should seek to minimize, as that is the prime source of discontent when Canadians consider their standard of living.
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Housing. Contrary to popular belief, housing prices in Canadian cities are not supply-driven, but demand-driven. More precisely, housing prices are driven by the expectation of demand, which gives value to speculators to hold property. This is demonstrated by rising interest rates showing noticeable change in housing prices in, say, Vancouver, during times where increased supply didn’t make much of a dent. Without more diverse savings prospects, those with cheapest access to foreign or domestic credit will continue to invest in housing, pricing others out of the market while expanding the renter class. Both long-naturalized and recent-immigrants would like more permanent prospects in Canada, and thus, all suffer. If these saving prospects are not there, however, housing will continue to be the primary means of preserving wealth, which means that prices can’t go down without severe reprecussions to personal wealth. Although the issue of homelessness affects many nations, Canada’s problems need to be engaged with in ungeneric terms.
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Immigration and State Capacity. The diversity of Canada is often cited as a strength. As someone whose family tree contains “only” third- and first-generation naturalized Canadians, I wouldn’t be here if my parents or great-grandparents didn’t immigrate, fleeing from poverty and war. However, there are key tradeoffs that exist when relying on immigration alone for population growth. Canada’s current strategy is to import skilled labor to build the houses it should live in, as reskilling is more expensive than green-carding. With this chicken-and-egg problem, however, Canada risks poor timing, being unable to provide recent immigrants the standard of living required to stay, which is already implicitly signalled by its growing homeless population and mental health issues. In animus, it’s possible for some to remark on the squandered opportunity of the homeless. But it might truly reflect narrowing prospects for living at the same standard that attracts people to Canada, which suggests that Canadian institutions have failed to deliver on their social benefits: a weakening of state capacity. If true, this will undermine increasing immigration to Canada, making this model unviable alone.
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Industrial Development is bottlenecked by IP, which bottlenecks economic equality. Canada has many top research institutions, as indicators of “economic complexity” demonstrate. These same indicators suggest Canada fails to turn this research into technological- and trade-complexity: no IP, nor sophisticated economic exports. Technology and trade complexity are strong correlates of economic equality, independent of GDP. And likely, Canada’s research is done in partnership with international institutions that fund it for benefit. To rely on its own strength, Canada must turn research into application, “creating complexity” in technology and trade through economic reconfiguration. There are hearkening signs that this is being done. But there is more yet to do, as Canada has already shown a decline in economic complexity over the last 30 years - shockingly, a deindustrialization, a loss of state capacity.
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Catching the Dutch Diease, Again. Canada’s reliance on its natural resources such as oil may partially explain how it’s moved from a high-complexity to low-complexity economy. Before, we sold cars and aeronautics parts. Now, we barely do. This is known as the “Dutch Disease”, named for how the Netherlands in 1977 saw a decline in its manufacturing industry due to funding skewing towards gas extraction, pinning the economy’s prosperity to commodity demand. This raises the cost of living while preventing other industries from growing. Notably, the definition of the disease refers to “any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment”. If Canada’s prospects are low-growth, not savings rich, resource extraction will not save us. The economy needs to grow from domestic exchange that becomes increased trade in goods and services among more nations that depends on increased know-how and gains from our selling or processing existing resources.
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Climate Change and the Global Commons. Canada’s future is intricately tied up with climate and future resource wars. Our agriculture, forestry, hydrology and mining industries can contribute to reducing famine as land becomes less arable, absorbing greenhouse gases with trees, and shift ourselves to sustainable energy with high up-times and exceedingly high density, with geothermal and nuclear power at the forefront. However, one doesn’t make profit off of contributing to the commons, and one doesn’t solve immediate cashflow needs with long-term investments. Future Canadian growth next decade needs to be based in a strong vision of economic transition which should have existed last decade.
And there’s the rub.
With the facts above telling this story, I will end it with the following conclusions:
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No longer a middle nation. Canada’s story of being a “Middle Nation”, the Good Guy alternative to the United States, is toothless and insubstantial. If Canada wants to retain competitiveness globally on its current merits in attracting and retaining talent, it has to start thinking in terms of fundamental constraints rather than political preferences alone. This will let Canada live up to its ideals and remaining reputation. How?
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Quality over quantity. Reskilling Canada’s existing base is a long-term solution to many demographic problems. It would quell domestic tensions between long-naturalized and recent immigrants, and have- and have-nots. It would give more confidence to Canadian’s to build their households and have children - to mitigate housing expenses, Canadians have been fleeing from coastal cities to cities like Calgary. The problem: it can’t just be digital. Rather, to whatever extent it is digital, it must be in support of a reconfiguring industrial organization that brings increased material growth, rather than relying alone on fungible digital goods. Why?
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It’s still the economy, stupid. Canada’s resources are a strength and a crutch. As a crutch, they mask our future economic problems through cheap unsustainable growth. The gains from these resources must translate into economic diversification in the manufacturing sectors of the future, capitalizing on Canada’s strong position in research, and investing in post-climate industries to remain competitive as the world moves on from fossil fuels and petroleum products. Of interest: aeronautics and space, high-density sustainable energy production, materials and metallurgy, biomedical and post-quantum technologies. What these industries have in common: they leverage our existing resources to new levels of complexity, and if they rely on material imports, they can be placed in have-not provinces to incentivize development in other parts of our nation. They are also capital and know-how intensive. Pivoting will be difficult without large coffers of funding, which brings up the temptation to rely on foreign finance: leading to…
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Cross-province interaction. Trudeau says housing is not a federal concern, and there’s almost nothing they can do on the issue. But there is: broker inter-provincial coordination to invest in each other’s economies and trade, starting with the gains of the energy sector. Few will like this, as it defeats the point of confederation, and crosses political lines. It requires an understanding that certain industries will not remain around forever, nor should they necessarily exist in the form they do now. It means rejecting the easy answers which are straightforwardly supported by existing theories or legal frameworks. But it is a transition which can support Canadian independence while moving to a more complex, and thus equal economy. This again quells several key concerns of our populace.
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Citizen health reigns supreme. Both physical and mental. We should be expecting to be working for awhile. If not, we should care about how we treat our elderly now and why. Long-term healthcare is the canary for the quality of Canadian state capacity. As a key part of Canada’s image, if healthcare fails, it shows a dysfunction, and signals a lack of opportunity for living here in the long-run. At that point, we become a passport for globalists to pick up on their way to different economies.
As my conclusions highlight what a “real” solution to Canada’s problems would look like, one grimly notes: this will take decades.
Elections in Canada follow a parliamentary approach, which allow Canadian administrations to arc over 8-12 years if not longer. And yet no administration has shown they are capable of this thinking clearly about the future. Either resources are overemphasized leading to long-term stagnation, or social politics and compromises are overemphasized which fails to keep eye on the right kind of growth. All other positions are marginalized, except for projects that work between administrations that attempt to keep afloat between funding cuts and changing budget priorities.
Dreadfully, capital-intensive industries require a decade to pivot onto, even with improved manufacturing techniques, and especially with a small population base. Any reasonable impact a person wants to make on policy needs to account for these long time-frames. And when being as selective as this strategy I outlined, it’s easy to become overwhelmed.
I don’t see no hope. I do see pockets of progress, in certain institutions, governmental and not. I don’t know to whom the picture is clearest in government or in non-profit or investment sectors, that guide these steady hands, but I see their works. I will mention those I know as they come up naturally in the story. They include crews of bankers, activists, academics and politicians that care.
I also know that Canada’s problems as a country, are collective. They require popular support to sustain the whims of bureaucrats which are correct, and challenge the ones that aren’t. And I know the way I have outlined these issues is complex. I don’t believe the problem is simple, even if, eventually, it must be communicated simply to motivate others.
Luckily, I have one way to tell this story, one card to play. There was a time when Canada came together in unity and excitement over its possibilities. A time when new industries for Canada felt more possible than ever, and new growth that everyone could pitch into and hold onto. And a pride. Canada failed to deliver, for good reasons and bad ones. But it might show us keys to redemption. And it might give us a new myth to tell ourselves, to bring about our necessary change.
On that note, I begin this story with the Avro Arrow.