Monday, December 17, 2007

Harper's Foreign Investment Review Policy Targets China

Here is our regular monthy column that we do for the LaPresse newspaper in Montreal. It was publised last week.

The Broken Equilibrium of the Canadian Economy
Satya Das et Ken Chapman

Surging oil prices and the rising Canadian dollar will profoundly alter Canada’s equilibrium. The short-term volatility in commodity and currency markets this week is a blip on the way to $100-oil. Rising oil prices drive the dollar’s strength, as does Canada’s fiscal stability and its falling national debt.

The Canadian economic balance – relatively cheap energy prices, a weak dollar, a flourishing manufacturing industry – has been under threat throughout the early years of the new century. Now, it is definitively broken. The contrast is ever clearer between the energy-fuelled boom of Alberta and British Columbia, and the manufacturing economies of Central Canada reeling with higher input costs and reduced export revenues from the United States.

The Bank of Canada faces the difficult – if not impossible – demands of reconciling these two economies under a single fiscal policy that works to the benefit of each. Politicians aren’t likely to be satisfied with the Bank’s logical response – to concentrate on its core mission of controlling inflation, thereby preserving the intrinsic value of the currency.

The realistic answer of what to do about expensive oil and the high dollar is: get used to it. While this may be no comfort to a manufacturing sector in turmoil, the only viable strategy is to adapt to this new reality, no matter how painful this may be in the short-term. Canada, with the world’s second largest oil reserves, is the only stable democracy with a secure and abundant hydrocarbon supply. Despite the high costs of energy production in Alberta – and a recent announcement of higher royalties beginning in 2009 – the “democracy premium” is seen as well worth the price to a world thirsty for more and more oil and natural gas.

This trend is unlikely to change soon, according to the International Energy Agency, despite a growing and justified public unease about climate change and the sustainability of the hydrocarbon economy. In fact, preliminary findings from research being conducted by our firm show Albertans deeply committed to protecting habitat and capturing carbon emissions as the oil sands are developed to feed the world’s energy hunger.

Yet rising oil prices are not necessarily a disaster for Quebec and our other Canadian partners. More than half of the government revenue from oil sands development goes to the federal government. In 2006, the federal share amounted to $12 billion. This goes a long way in equalization payments, and amounts to more than a third of Ottawa’s transfer payments for health and social services.

Moreover, compared with Alberta, Quebec enjoys significant economic diversity. Quebec is home to Canada’s largest money pool, the $240 billion Caisse de dépôt et placement du Québec, and the tens of thousands of families it benefits. (By contrast, Alberta’s Heritage Savings Trust Fund, set up by Peter Lougheed to house petrodollar revenue, only has about $15 billion saved because government kept on diverting the interest income for general expenses). Despite recent revelations regarding its investments and fiscal performance in La Presse, the very existence of the Caisse and its clout in international markets is an asset that is the envy of other provinces.

Aerospace, the financial services sector, biotechnology, health and of course tourism are major contributors to the Quebec economy. More than 100,000 highly skilled Quebecers work in the IT industry alone. The concentration of skilled workers is surely a result of widely available and reasonably priced higher education – Quebec tuition fees are typically less than half of what college costs in Anglophone and Allophone Canada. Indeed, one can assert that Quebec is strongly placed to compete globally in the knowledge economy, precisely because it doesn’t have the “easy” money of Alberta’s petrodollars.

The challenge for Canada is to wisely invest the economic benefits of the energy boom – remember the federal share is greater than Alberta’s – in building an even stronger knowledge economy. And to apply that knowledge to “greening” our collective future by making environmental sustainability and stewardship the essential precondition of developing our energy resources.