On February 27th, McGill’s Economics Students’ Association hosted Mr. David Dodge as part of an ongoing speaker series. Mr. Dodge is the former governor of the Bank of Canada, as well the former Deputy Minister of Finance under Jean Chrétien. Described as “an economist right to the tips of his Dacks shoes” by McGill’s Professor Christopher Ragan, Dodge enlightened students with his take on Canada’s economic hurdles. Staying true to his dynamic nature and academic roots, he enticed the crowd of eager students with his knowledge and analysis of national economic troubles and offered some lessons we can learn from the situation in Europe.
Introducing the attendees to the context of Canada’s economic hurdles, Dodge explained the origins of the financial crisis that began in late 2007. He referred to the 1990s as the start of a period of growing opacity in financial markets that, in his view, was ultimately an underlying cause of the financial meltdown we encountered. Interestingly enough, however, Dodge did not expect the crisis to be financial in nature. Instead, judging from data and economic analysis on global imbalances – excessive saving in China, excessive consumption in the United States – he expected a dollar crisis. His prediction was of course justifiable, as the US dollar’s value in international exchange had been falling since the start of 2002. By the end of 2007, with a clear acceleration of the depreciation of the US dollar, a dollar crisis seemed ever imminent.
In 2008 poor fiscal management, weak financial regulation, and global imbalances ushered in an economic crisis. The crisis swamped the economies of the United States and Europe and contributed to a global slowdown. While many continue to refer to Canada as being in an enviable position, in terms of the soundness of its financial institutions (e.g. a study by the World Economic Forum in 2008 ranked Canada first in the world for the soundness of its banking system with regards to its very low risk of defaulting and bankruptcy), this conference exposed its attendees to some of Canada’s fundamental economic problems.
Prior to addressing Canada’s economic hurdles, Dodge discussed the underlying causes of Europe’s current troubles as a means to draw parallels and comparisons from. He once again spoke of imbalances, but this time between the excessive saving in Germany and excessive consumption in the PIGS (Portugal, Italy, Greece and Spain). While the past decade has seen countries such as Germany, Holland and Finland proactively implementing policies aimed at increasing productivity and holding wages down; others, such as Italy, continue to operate with high unit costs and ineffective management of public finances. Ultimately, this set in motion a system of vendor financing featuring Germany as the lender for other European states that in turn bought German goods. Dodge concluded on Europe by saying that the lack of any central fiscal authority is an issue that should have been dealt with in the very early days of the Euro.
Following his analysis of the economic situation in Europe, Dodge moved on to the primary theme of his talk: how Canadian policy makers could benefit from a better understanding of Europe’s economic woes and successes. Dodge chose Ontario and Quebec as sample Canadian economies, and the manufacturing sector of the provinces as a sample industry, on which to base his analysis during his speech. The past decade proved to be rather choppy for Canadian competitiveness, according to Dodge. For instance, the strong appreciation of the Canadian dollar relative to the US dollar made Canadian companies 28% less competitive compared to 2005. He further explained that over the decade the US manufacturing sector saw comparatively greater gains in productivity while wages in Canada increased at a faster rate than the US.
While a strong Canadian dollar is a factor that the Canadian economy will have to account for in its future economic decisions, much can be done to reduce inefficiencies and improve economic performance. As Dodge suggested, in Canada much can be learned from Germany’s structural reforms over the last decade. Driving down unit costs (by means of holding down wages, or more efficient use and employment of capital) is essential to deal with rising offshore competition and support industries such as manufacturing, which lost over 500,000 jobs in the last decade.
Canada can also consider the current state of the PIGS as a warning of the consequences of poor fiscal management. Dodge explained that public services in Canada have been delivered disproportionately given the performance of the economy. This issue has translated into skyrocketing deficits since 2008 (especially by the provincial governments of Quebec and Ontario) and an upward trending federal debt. According to Dodge, an understanding of Europe’s current turmoil shows exactly why a fundamental re-thinking of the delivery of services must occur.
Despite its relatively stable economy, Canada must recognize that important reforms are needed to sustain growth in the long run. The European sovereign debt crisis is a striking reminder that rich countries are not immune to economic decadence. Financially irresponsible governments and the lack of innovation, both materially and intellectually, pose a threat to the social and economic foundations of the developed world. Governments and citizens must now, more than ever, adapt to shifting global economic realities.
– Nikita Pillai and William Debost