Finance Committee on Feb. 12th, 2013

[Raymond Côté, NDP, Beauport—Limoilou, QC]

My understanding of this is that there is a transfer of wealth to high end credit card holders.

[Mark Carney]

We understand the situation. It is an important one. This is an issue that concerns consumers. The government has a plan. It is an important issue for individuals, but it is not necessarily an important issue in terms of Canada's economic outlook.

[The Chair, Conservative, James Rajotte]

Merci.

Mr. Van Kesteren, go ahead, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Chair.

Thank you, Governor and Deputy Governor, for appearing.

Likewise I'd like to congratulate you on your recent appointment. Although we're very happy for you, we're going to miss you too. It's been a great experience having you head that. Whoever fills those shoes will do a great job as well.

There has been a lot of talk about the Dutch disease—and we need to clear the good name of the Dutch maybe—and the allegation that the high oil prices have caused manufacturing to leave. You made some pretty emphatic quotes during the summer. I will quote you, if I can. You said “It's too simple. The factors influencing our currency are more complex than one price or another, one interest rate or another. There are several factors and our economy is much more integrated than that.” You concluded by saying, “I reject that argument completely.”

I wonder if you could explain to the Canadian public, once and for all, why you feel that is incorrect.

[Mark Carney]

I'm happy to clear the good name of the Dutch. We'll speak in terms of the importance of commodities and commodity prices for the Canadian economy.

Let me start by underscoring that at the Bank of Canada we use, for forecasting purposes, 20-plus models, but our core general equilibrium model is called ToTEM. It's a terms-of-trade model. We run a terms-of-trade model because of the importance of the prices we receive for our exports—of which an important component is commodities—and the prices we pay for imports. This is at the heart of how we forecast and how we look at the Canadian economy, because the multiplier effects are that large. That's the first point.

The second is that when we look at past experience, only in rare exceptions—and I mentioned one in response to Mr. Jean's question—does an increase in commodity prices not benefit the Canadian economy.

One of the things that is drawn out in our analysis, which I referred to in a speech I gave in the summer, is that one of the challenges we have in the Canadian economy now is that historically what drove commodity prices was U.S. demand. That was the most important thing. So you'd have higher U.S. demand, higher commodity prices, but also obviously higher U.S. demand for the other goods that are produced by the Canadian economy, manufacturing goods. That was very positive for Canada and it remains very positive for Canada.

But the U.S. is not pricing commodities these days. If you had to pick a region, you'd say Asia is pricing commodities. Our economy is less oriented to Asia. So an increase in commodity prices, to put rough figures on it, that's driven by the U.S. is about three times as positive for Canada as one driven by Asia, but an increase in commodity prices driven by Asia is still materially positive for the Canadian economy, despite the fact that it also encourages, all things being equal, a rise in our exchange rate. The reason for this is the income effects on those commodity producers, because of the direct investment effects—which are driven not just in the oil patch but in mining, forestry, and other areas—and because of the revenue effects to all levels of government, including, very importantly, the federal government.

The federal government takes about 40% of the revenues, as you know, Brian, on an all-in basis from your riding, or, more broadly, from the oil sands, and then, importantly, because of the linkages through this economy—which are much stronger east-west than they are north-south—into the manufacturing parts of our economy and the services parts of our economy, which are linked into the commodity sectors.

I will make two other points, if I may, Chair. One is that we don't see commodity prices being elevated as a temporary phenomenon. They go up; they go down. We have this discount issue on WCS western crude. But we see the transformation of the global economy that is taking place. There is commodity-intensive growth being driven by an emerging Asia, which is supporting commodity prices as a whole. This is core to the old “Dutch disease” thesis: you had a temporary spike in a commodity, and then it came down and you shifted resources. We see this as more permanent.

The last point is that, as per other questions, there are a variety of factors that drive our currency. There are the terms of trade, but also our better fiscal position, our monetary policy credibility—we're a safe haven—the strength of our banking sector, and, it has to be said, the fact that there has been in recent years an understandable generalized weakness in the U.S. dollar and a diversification of currencies internationally out of the U.S. dollar and out of the euro. There are relatively few other places to go. So a variety of these factors are supporting our currency.

We see the need to respond to those realities and drive not just monetary policy—though ultimately we care about the outlook for growth and inflation in Canada—but a broader suite of policies that reflect those dynamics.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Van Kesteren.

Mr. Rankin, go ahead, please.

[Murray Rankin, NDP, Victoria, BC]

Thank you, Chair.

Good morning, and thank you very much, Governor and Mr. Macklem.

I'm going to shift gears and ask a couple of questions, if I may, on governance arrangements at the bank. I've noticed there's some confusion in the media, as there is amongst some of us members of Parliament, about which codes of conduct and guidelines apply to the Governor of the Bank. Given the importance of the office of the governor, and of course given the key need for independence, I think it would be valuable if, for the record, you might clarify which codes of conduct and guidelines apply to the person who serves as governor, given that the incumbent is concurrently Canada's ultimate governor to the International Monetary Fund. For example, I'm advised it is the bank's formal position that the bank's guidelines specifically apply to you and to the board. Is that correct?

[Mark Carney]

Sorry. The first question was whether the Bank of Canada's guidelines apply to the governor and the senior deputy governor. The answer is yes.

[Murray Rankin, NDP, Victoria, BC]

Given that the governor serves as the alternate governor to the International Monetary Fund, wouldn't the PCO guidelines likewise apply?

[Mark Carney]

To the governor in the capacity as the alternate governor to the IMF, those guidelines would apply.

[Murray Rankin, NDP, Victoria, BC]

Likewise, do lobbyist registration rules apply to the Governor of the Bank?

[Mark Carney]

The lobbyist registration rules do not apply to the governor.

[Murray Rankin, NDP, Victoria, BC]

All right.

It's my understanding that under the present arrangement it's the bank's general counsel who is both author of the bank's conflict of interest guidelines and the person called upon to interpret them in specific cases. If that's so, do you think that process is sufficient, or does it need strengthening, in your view?

[Mark Carney]

The bank's code of conduct is approved by the bank's independent board of directors. The determinations of conduct consistent with the code, or if there are issues consistent with the bank's code related to the governor or the senior deputy governor, are conducted by the general counsel, who is secretary to the board, in conjunction with the independent directors of the board, obviously not including the governor and the senior deputy governor, who are recused for obvious reasons.

[Murray Rankin, NDP, Victoria, BC]

I'd like to ask you another question concerning temporary foreign workers. We've heard in the news about recent policy decisions to allow temporary foreign workers to be paid, I believe, 15% below market wage for their services.

If my understanding of economics is correct—and it may not be—it seems this will tend to put downward pressure on wages in the relevant sector, which would discourage workers from obtaining relevant training. Is your analysis similar to that?

[Mark Carney]

The issue would have to be—as I believe it is, but I stand to be corrected—that in order to have temporary foreign workers there has to be a demonstration that there are not Canadian residents who are able to do the work. The timeline for filling the position should be such that if there is going to be training to then fill the position with a Canadian resident worker who wants to fill the position, the two must dovetail.

In other words, it's truly a temporary arrangement as opposed to a rolling temporary arrangement, which becomes a permanent arrangement. So the spirit of it should be that they're temporary, and if Canadians need to be trained, they have the opportunity to be trained, and then that discount would be removed.

[Murray Rankin, NDP, Victoria, BC]

But that's solely on that premise; that is, if they are truly temporary in nature. If they're continuing on a long-term—

[Mark Carney]

For the economics to work, that premise should hold.

[Murray Rankin, NDP, Victoria, BC]

All right. Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Hoback.

[Tiff Macklem]

I would maybe just add one thing a little more broadly on this issue of foreign workers.

[The Chair, Conservative, James Rajotte]

Sorry, Mr. Macklem.

[Tiff Macklem]

Getting back to Mr. Jean's question, in the recession there were a lot of people out of work and it was really about finding jobs for people. As you look into the future, with declining labour force growth and with baby boomers who are retiring, increasingly the challenge is going to be finding workers for jobs.

We've talked about some of the ways to address that. It could be drawing underserved parts of the labour force into the labour force. It could be making the labour force more efficient. But another element of that is immigration and effective immigration policies.

We don't look at specific things like temporary foreign worker programs, but it is a broader issue that deserves some attention.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Rankin.

Mr. Hoback, go ahead, please.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Chair.

I, too, want to wish you and your family all the best as you move on to your next adventure. You seem to like to slay dragons, so I think you're going to have some interesting dragons in Europe while you're over there. But we wish you all the best and all the success, because if you have success over there, then we have success back here in Canada, and that's very important. So I want to wish you all the best, for sure.

This past year, in a recent speech, Deputy Governor Macklem, you made some interesting comments about Canada's exports and trading interests. You talked about our overreliance on the U.S. and the problems that has created in the past. You also talked about the underperformance, and who we trade with, and basically about how we should be engaging with the emerging markets, and about how Canadian companies are maybe a little too slow to get involved in these emerging markets.

With that reality in mind, just how critical is it for Canada to pursue more trade diversification through free trade agreements with India or CETA, and to participate in forums like the Trans-Pacific Partnership? I feel trade is very critical, and I am just looking for your opinion on how important trade is.