Wednesday Night #1296

The Report (and photos)

The first Wednesday of the year that will see the celebration of 25 years of Wednesday Nights was in many ways a return to the origins of the institution albeit with a special ambiance fueled by Hans Black’s magnificent 1993 Ermitage “Le Pavillon”. The topic, spurred by the doggerel invitation suggesting that WN would host a “year-in-review” session dominated by economists and market mavens, was devoted principally to economic issues, ably and wittily covered by an impressive collection of experts. The presence of André Saumier and Ron Meisels further evoked the earliest Wednesday Nights. New guest, Craig Wilson added further strength to analysis of public policy; Michael Shafter [one of Diana’s co-Mayors in the forthcoming Prescription for Murder] contributed pointed comments on the role of politicians versus the role of the people, and Julia Deutsch reminded us all that it is her generation that will inherit the “mess we make”.

Competitiveness and Innovation
Free Trade Agreements (FTAs), led by the NAFTA, were intended to give Canada access to world markets and have done so.. However, Canada’s competitiveness lags , arguably due to the gap in relation to its trading partners in the area of research and development, the underpinnings of successful innovation. This is partly because R&D [which tends to be equated with Science & Technology in what amounts to a shell game] is largely publicly funded, in contrast to most OECED countries where the ratio tends to be 3:1 in favour of private sector funding. With the best of intentions, private sector reaction to public policy has the tendency to produce unforeseen effects if not unintended consequences. At best, public funding cannot help but be politically motivated, frequently favouring selected geographical areas or industries. Allan Mass & Jacques video 3:47
But this raises the question of the role of government investment. Outsiders have difficulty understanding that Canadian governments will invest in completely inefficient industries in order to “create jobs”.R&D is largely publicly funded. With the best of intention, private sector reaction to public policy has the tendency to produce unforeseen effects if not unintended consequences. At best, public funding cannot help but be politically motivated, frequently favouring selected geographical areas or industries. In today’s world, lumber can be grown almost everywhere, but Canada persists in subsidizing an industry which, in Canada, has remained uncompetitive and will remain increasingly so until there is a major change in philosophy on the part of both government and business. But, this raises the question of the role of government investment. Outsiders have difficulty understanding that Canadian governments will invest in completely inefficient industries in order to “create jobs”.
Guy Stanley OWN has just published “What’s wrong with Canada’s innovation?” in the IRPP journal Policy Options. He notes that since Michael Porter’s Canada at the Crossroads was published in 1991, the country’s innovation performance continues to fall in relation to that of competitors. Other countries are nurturing innovation systems that outperform Canada economically. The formula for enhancing innovation has so far eluded Canadian policy-makers despite a stream of prosperity initiatives and innovation strategies announced since the mid-1990s. The root cause: policy incoherence. To fix things, government will have to become as adept at managing complexity and inducing system coordination as it is now at manipulating macro-economic levers.
What is required is the recognition of the opportunities provided by the FTAs, a greater will on the part of Canadian companies to invest in R & D, and a more favourable tax environment for innovative companies.

The Alberta model
The innovative thinking coming out of Alberta tends to belie the common belief that there is a shortage in Canada of dynamic CEOs and our best ones move to more lucrative jobs in the U.S.

[Edmonton area firms shine: Average gain among 40 local companies exceeds returns from major indexes in 2006. It’s a three-peat: Edmonton-area stocks and income trust units comfortably outperformed North America’s major equity market indexes for a third straight year in 2006, as Alberta’s powerhouse economy roared ahead.]

Economic outlook (See also Jacques Clément Report)
There’s a lot of optimism around the world and sooner or later, we will have to have a correction. The global economy has a lot of resilience and 2007 looks like a pretty decent year. However, the outlook for the stock market appears to be bumpy but generally positive throughout the year, but 2008 may very well be problematic.
The overall picture for Canada is an economy that will be below potential, a continuing strong stock market, particularly in the U.S., a weakening U.S. and Canadian dollar, followed by narrowing of trade deficits and a possible climb in Canada’s trade surplus. It may be expected that the next federal budget will be very fiscal, highly stimulative, including corporate tax breaks and breaks for those with incomes under $25K. No inflation expected for either U.S. or Canada.
The Asian markets, with the exception of Japan, appear to be outperforming North America and Europe. Emerging markets (except for bonds) continue to offer good investment opportunities. There appears to be a lot of liquidity looking for a home and unreasonable yields in world bond markets constitute some cause for concern.

[Editor’s note: curiously, there was no mention this evening of the upcoming meeting of the ASEAN summit where a free trade association will again be on the table.]

Afghanistan
Canada does not appear to have an exit strategy in Afghanistan, falling into the same pattern as previous invaders of that country. One possible solution to economic development might be one taken from the Canadian past, namely the building of a railroad which historically has enabled marginal regions to reach more distant markets . As Canada is no longer in the railway building business, it might do well to convince China to build a railway from one end of Afghanistan to the other and on to Iran. China not only has the capacity perform this task, but has more interest in Afghanistan than we realize and could defend it, and thus assist the Afghani farmers to replace the poppy with a more lucrative crop.

Québec healthcare – the continuing saga
In 1990, following a series of technological advances resulting in shorter hospital stays and an attempt to reduce health care costs, the government closed a number of smaller hospitals, including the Queen Elizabeth and Reddy. In its more recent attempt to equalize the availability of quality health care throughout the province, the government has not only restricted the number of practitioners in the larger cities, particularly Montreal, but has made the tertiary care institutions, basically the University hospitals in Québec, Sherbrooke and Montreal, responsible for more advanced care throughout the province, to the detriment of the local population seeking specialized care in the larger cities. This care had previously been provided by those smaller hospitals closed in 1990 as well as by the larger institutions including the MUHC and CHUM. While politically astute, this policy, along with the increasing and aging population, exacerbates an already difficult local situation.