Environmental Scan — June 2002

Economy

Summary

Two years after the end of the high-technology "boom," the world's economy appears to be in recovery mode. The recent recession, as well as the economic shocks felt after 9/11, helped bring to light several important lessons for international markets.

Perhaps most important among these is a recognition that the interconnected nature of the global economy has reinforced the need to clarify the roles of governments, corporations, NGOs and international organizations to ensure stability, financial responsibility, and equal access to markets.

In this section

• global economic recovery is underway, but structural vulnerabilities remain - recovery is varied across sectors and regions
  
• recent events have raised calls for government regulation, corporate responsibility
  
• international partners face the challenge of identifying their roles and responsibilities as global interconnectivity progresses
  
• demographic shifts will have strategic implications for performance in the knowledge economy - skills and innovation are Canada's "new" competitive advantage
  

Economy — Global

• world economy in recovery - synchronized global upturn emerging
  - North America to lead recovery
  · Canada a key performer-to reach 2.5%;
  · US GDP grew by 5.8% in 1st quarter of 2002 - up from 1.7% in Q4 2001
  - Euro currency zone strong
  · Greece, Luxemburg, Spain, Ireland to exceed 2%
  · Germany still dealing with East-West inequities, likely to reach 0.9%
  - UK and Japan slow to recover
  · UK to grow by 2%, relatively strong but a slight decline from 2001
  · Japan in historic economic slump, rivals that of 1930s US - may prove limiting factor on sustained growth
  - key drivers -slowed business inventory shrinkage (down 60%), sales growth (up 2.6%), consumer spending (up 3.5%), new housing starts
  - post-9/11 stimulus packages also helping prevent continued economic decline and recession
  
• indicators show growth likely to slow in later quarters
  - consumer confidence down 5% in April
  - personal consumption price index growth down 0.2%
  - slower growth could potentially allow Federal Reserve to maintain lower interest rates over longer term
  
• recession and recovery demonstrate extent of global economic synchronization, interconnectedness
  - strong housing markets helped prevent deeper recession in Western economies
  · prices increased by 3.2% globally in 2001, helping to offset impacts of recession
  · home ownership a stability factor during volatility
  - average US household has 400% as much wealth in housing as in less stable equities
  - sustainability key to ensuring continued recovery and expansion
  · maintaining high productivity growth - critical component of stability
  · concrete linkages emerging between sustainable development and economic stability
  · long-term economic well-being - strategic goal in attaining global economic strength
  - several vulnerabilities could hamper full recovery
  · 1990s borrowing binge: debt burden in developed countries is high and could constrain growth
  - average household debt highest in Japan, at 132% annual income - Germany, UK both exceed 115%
  - total debt in US (government, corporate, individual) rising at 6% per annum
  · international oil dependency
  - oil-producing economies to grow by up to 4% - but dependence increases risk exposure
  - Middle East volatility likely to impact on growth in petroleum-dependent economies
  · modest corporate profit margins expected - on average 13% below levels reached in 2000
  · verdict still out on consumer confidence
  - bolstered by international war on terrorism
  - undermined by Enron-like incidents

A major terrorist outrage on the scale of September 11 or larger, could undermine confidence and potentially abort recovery. A sustained upsurge in world oil prices arising from political or military events in the Middle East could impair growth and increase global inflation… [but] barring a major non-economic shock… global recovery for at least this year and next appears reasonably well assured.
~ Michael Mussa
Institute for International Economics
Prospects for the World Economy
April 2002

• key economic sectors demonstrate evolving dynamics of post-9/11 knowledge economy
  - high tech sector poised to recover - two years after crash began, industry appears on more solid footing
  · semiconductor industry is on the rise after worst year since 1997 - 31% decline in 2001
  · monthly chip sales over $10B since November 2001 - reversal of downward trend beginning February 2000
  · while growth will be slow, analysts point to key features underpinning recovery:
  – new technology investment as firms look to upgrade systems after a post-Y2K hiatus
  – low global inventory has boosted prices, expected to lead to increased production
  · insurance sector remains at crossroads in post-9/11 environment
  · reinsurance companies (insurers of insurance companies) refusing to cover against terrorist acts - claim insurance against terrorists is national security issue
  · at same time, governments seeking to diminish their roles in insuring airlines against terrorism
  – new American, European consortia expected to provide insurance for airline industry in wake of terrorist attacks
  – stakeholders exploring partnerships to reduce burden on governments

In the end… governments will become the insurer of last resort, in the case of a big terrorist outrage, whether laws are in place or not. Governments cannot risk the collapse of their insurance industries. Nor can they contemplate the huge damage done to their economies if most businesses remain uncovered for terrorist risk - whether because cover is unaffordable or because it is available...
"The pariah of risks"
~The Economist, January 12 2002, p.64

• mounting pressures for expanded international regulation, standard-setting, "statistical truth" exposed by Enron scandal
  - Enron collapse exposed vulnerabilities of industry self-regulation
  · pressure to meet investor expectations resulting in corporate deception
  · key areas include: employee share options, intangible assets, derivatives, revenue recognition
  - governments exploring means of improving and regulating corporate transparency
  · Japan's Investment Trust Association limiting daily corporate withdrawal limits and strengthening disclosure regulations to protect retail investors
  · US expected to mount comprehensive review of auditing and accounting regulations
  - auditing a challenging first step for both governments and industries
  · pressure mounting for greater emphasis on auditing transparency and government oversight of financial reports - since 1998, over 700 companies have been forced to restate accounts
  · ensuring accuracy of national economic indices critical to analysis of international economic system - lack of international reporting and transparency standards hinders accurate depiction of world economy
  - e-commerce, international regulation, and growing trans-national trade posing important jurisdictional challenges for governments and multi-national trading blocs
  · trans-national e-crime, white collar crime taking advantage of inter-jurisdictional
  · vulnerabilities negative impacts of growing e-crime on economy already felt (see pages 4, 5, 7 of "Policing and Security")
  
• declining consumer confidence due to ethics concerns could undermine growth
  
• currently no standards or oversight for national economic performance reporting, opening the door to corruption and misrepresentation
  - divergence in national methodologies + lack of oversight have allowed many governments to inflate economic performance indicators to bolster international confidence and investment
  - China recently reported 2001 GDP growth of 7% - western analysts believe figure to be exaggerated
  
• need for clarification of roles, responsibilities of stakeholders in global economy emerging in wake of international crises
  
• hemispheric economic stability identified as major long-term challenge for FTAA - clear set of roles and responsibilities lacking
  - Argentinean crisis highlights need for consultative, multi-stakeholder approach to ensuring economic stability in international trading agreements
  · role of international organizations, international partners, in flux as national government struggles to reverse "political implosion"
  
• Euro currency region facing structural challenges to ensure stability - potentially requiring greater intra-region support and regulation
  - high unemployment levels in former East German labour market likely to have negative impact on value
  - rising inflation across Europe (2.5% January 2002)
  · challenge to more prosperous Euro-zone partners to support their less well-off counterparts as European Commission Bank struggles to maintain levels below 2%
  
• key economic factors emerging as political levers
  - growing need for international organizations to take on oversight responsibilities
  - potential levers
  · international development assistance programs as "dealmakers" in post-9/11 era - US providing foreign aid to countries implementing sound economic policies and anti-corruption measures
  · import tariffs and trading agreements to encourage policy shifts
  
• absorptive capacity of developing world economies threatens sustained growth and strains immigration and economic policies worldwide
  - Chinese economic restructuring points to explosive growth of unemployed workers
  · growth of heavy industry outpaces light industry, now producing over half of GDP - transition to industrialized economy to be less labour-intensive, resulting in displaced rural workers
  · 49% of China's labour force in primary sector - producing 18% of GDP
  - workforce in many Middle Eastern countries will double by 2020 - unemployment already over 20% in some parts
  · less than 50% of new job-seekers in Saudi Arabia find jobs each year
  · extreme poverty plaguing Middle East, resulting in displaced persons, economic stagnation - over 25% of population in most countries under poverty line
  - unemployment potentially undermining long-term economic expansion in India
  · ILO states over 25% of young people aged 20-24 are unemployed - women, rural inhabitants most at risk
  · 70% employed in agriculture, contribute 20% of GDP - sustainability of industrialization challenged
  
• developed countries experiencing labour shortage - decline in natural population growth
  - annual labour shortages in US as high as 10M by 2020
  - population growth in Russia at -0.35%, posing long-term structural challenges
  
• immigration, security frameworks to be tested by demographic pressures
  - workforce growth in Western economies to depend on increased immigration, despite emphasis on security
  - developing world unemployment to result in marginalization of youth, increased potential for criminality

Global Labour Source - Striking Contrasts
Proportion of under-15 populations - selected countries
Oman - 44.5% United States - 21.1%
Mexico - 33.3% United Kingdom - 18.9%
Saudi Arabia - 43.4% Russia - 17.4%
Source - CIA World Factbook, 2001

Economy — Canada

• Canada expected to be among leaders of global economic recovery in 2002, but increasingly dependent on US performance
  - IMF predicts Canadian economy to lead industrialized countries to reach 2.5%
  - recovery driven by US expansion - high Q1 2002 growth helping recovery in Canadian manufacturing, services sectors
  - at same time, Canadians concerned about household, individual wealth
  · 48% believe household income is "very adequate," down 4% since 2001, 8% since 1998
  · 63% have sufficient savings for 6 months or less of joblessness
  
• impacts of FTA, NAFTA continue to materialize
  - direct foreign investment has increased unabated since early 1990s
  - concentration of trade unprecedented - American market accounted for 87.33% of Canadian exports in 2001, up 6% since 1997
  - impact of integration on knowledge based economy yet to be determined
  · continued growth of knowledge economy requires heavy investment to ensure Canada remains competitive in globalized, integrated economy
  · integration helping to foster north-south competition for talent
  - trade tariffs = key political levers in post-9/11 Canada-US relations
  · 29% softwood lumber tariff latest in long-standing dispute - Canada pursuing legal action through WTO
  
• economic bargaining chips should not be underestimated in their influence on discussions on integration, policy interoperability, continentalization
  
• economic recovery expected to vary across Canada
  – key growth sectors - service, energy, housing
  – "old" economy natural resources remain critical in "new" economy - will influence overall provincial, national performances
  · new oil production to contribute to 5% growth in Newfoundland in 2002-03 - but maturity of Alberta resource economy likely to suffer under declining international gas prices
  · PEI agricultural industry rebound expected to help provincial economy grow by up to 3%
  · lumber tariffs and reduced demand for timber will constrain BC's economy for at least next 2 years - GDP growth expected to reach only 0.7%
  – strongest growth in 2002 -St-Catharines/ Niagara region (3.9%) and Edmonton (3.2%)
  – weaker performance from major urban centres - Montreal, Toronto, Ottawa-Hull
  · Ottawa-Hull -recession due to delayed high-tech manufacturing recovery - contraction to reach 0.9%
  · expected federal government hiring to provide stop-gap against further slides
  · strong economic diversification points to Toronto reaching top-growth position in 2003
  (Source: Conference Board of Canada)
  
• impact of public-sector spending particularly strong over long-term
  - infrastructure, health care two key areas of public sector spending
  · aging population ensuring long-term growth of economic activity in health care - growth over 50% in last 2 decades, acceleration expected to continue with shifting demographics
  · infrastructure projects on the rise - annual cost of essential infrastructure projects now exceeds $11B
  
• US/Canada trade, migration patterns demonstrate geographic concentration of activities related to economic integration
  – activity concentrated along Ontario, Quebec, British Columbia borders
  · border crossings by individual travellers, automobiles mirror activity in trucking
  – "have-not" provinces dependent on east-west trade routes to provide access to US markets
  · increasing dependence on border crossing, customs facilities in Central Canada - Ontario is US's 4th largest trading partner

Concentration of truck crossings — Canada to US, 2000

Maine (7.17%)
Idaho (0.78%)
North Dakota (6.51%)
Vermont (3.72%)
Washington (8.75%)
Michigan (35.87%)
Minnesota (5.05%)
New York (29.22%)
Montana (2.92%)
Source: US Bureau of Transportation Statistics

• closer integration with US potentially leading to re-examination of dollarization option
  - growing export dependence, closer security and trade integration post-9/11, as well as relative strength of euro viewed as potential "starting points" for common currency
  – several precursors already in place for common North American currency
  · high proportion of Canada-US trade is intrafirm (between units of related companies)
  · approximately 50% of Canadians have a bank account in US dollars
  
• extensive regional diversity in Canada strains domestic monetary policy
  - continued growth of technology and service sectors enabling opportunities for North-South trade
  – relative strength of Central Canadian economies has dominated monetary policy in past, resulting in friction from "have-not" regions

"Since the United States has nothing tangible to gain from the formal Canadian adoption of its currency, Washington policymakers will be leery of offering any encouragement to Canada that could serve to draw the U. S. government into a domestic Canadian debate over sovereignty. However much some Canadian nationalists may wish to view the United States as a remorseless opponent of Canadian sovereignty, this is not the case, and participation in this tiresome mythology holds no interest for Washington. Should Canada wish to switch to U. S. dollars, it must take this decision alone."
~Sydney Weintraub and Chris Sands
"Why dollarization is a Canadian affair"
Center for Strategic and International Studies

• Canadian workforce stands to benefit from current global demographic trends
  - immigration to provide 80% of population growth in Canada by 2030
  - Canada needs to take advantage of limited absorptive capacity of key developing economies to keep up with workforce demand
  - enabling access to jobs and learning critical to ensuring migrants can contribute to Canadian knowledge-based economy needs
  - prior learning assessments, foreign credential recognition are seen as critical elements of facilitating workforce entry, or a "brain gain"
  
• economic sustainability dependent on balance of security, trade, immigration policies
  – growing dependence on US trade demanding heightened scrutiny on immigration, border security
  – parallel dependence on high-skilled immigrants to be critical test for policy

"The non-accreditation of immigrant professionals has… macro-economic costs to Canada. The annual revenue loss derived from labour market inefficiency (i. e. non-utilization or poor utilization of foreign-trained human resources) may be approximated by the sum of foregone income, taxes lost and income support given to unemployed professionals. Although this information is not currently available in Canada it may be roughly estimated to be hundreds of millions of dollars. In Australia… the number of immigrants who have failed to gain recognition and never returned to their pre-migration occupations in 1990 was estimated to be close to 200,000. Losses to the Australian national economy due to the non-recognition of foreign degrees ranged between US $100 and $350 [million]"
~Fernando Mata
The Non-Accreditation of Immigrant Professionals in Canada

• inclusion in knowledge-based economy poses most significant economic challenge for Canada
  
• explosion in Canada's Aboriginal youth population mirrors that of third world, creating urgent need for Aboriginal job creation
  – population of 15-35 year olds expected to rise by up to 60% in next two decades
  – current unemployment rate for off-and on-reserve Aboriginals exceeds 25% nationally
  – 160,000 new jobs required by 2006 to maintain current Aboriginal labour force participation - a 50% increase of currently employed Aboriginal people
  – job creation requirements for Aboriginal youth expected to reach 280,000 by 2020
  
• proportion of marginalized workers remains high - leveraging full capacity of workforce to be key challenge to inclusion
  - OECD research shows 44% of Canadians do not possess the literacy skills believed to be required for entry-level positions in knowledge workforce
  · Canada above OECD average - outperformed only by Finland - New Zealand and Australia close behind
  - high-school completion rate in general population stands at less than 82% - improving among younger generations
  · high-school drop-out rates have declined an average of over 5% across Canada since 1991
  · strongest performers - Nova Scotia, New Brunswick, Ontario, Saskatchewan - drop-out rate below 10%
  · Quebec and PEI have highest drop-out rates - over 15% of students do not complete high school
  
• skills and innovation strategies identify challenges and opportunities of knowledge based economy
  - federal knowledge and innovation strategies released in February as "invitation" to community of stakeholders (see "Science and Technology" for further analysis)
  
• challenges relate to ensuring all Canadians have access to lifelong learning, breaking traditional "learn-then-earn" sequence
  – demand for highly-educated workers growing at unprecedented rate
  – by 2004 -70% of new jobs will require some form of post-secondary education

Facing the challenge
Conference Board of Canada Research confirms current trends threaten long-term productivity and competitiveness:
— Labour demand 2020: 19.36M
— Annual supply growth: 0.55%
— Shortfall: 950,000 workers
~Judith MacBride-King, Bonnie Shiell
Building a Knowledge Workforce
Conference Board of Canada

Lifelong learning agenda stresses linkages between at-risk youth, learning exclusion, and economic disparity
"Children who perform below their potential come from all kinds of backgrounds, but low family income is a major risk factor. Currently, almost 20 percent of children 15 years old or younger (some 1.4 million individuals) live in a low-income household. These children show higher than average rates of behavioural and learning problems, lower readiness to learn upon school entry and higher drop-out rates."
-Knowledge Matters: Skills and Learning for Canadians, p. 14