Industry Committee on Dec. 13th, 2007

[Glen Hodgson]

You're touching on huge issues.

[The Chair, Conservative, James Rajotte]

Yes, but he has about two seconds left. Mr. Brison likes to ask big questions at the end.

[Glen Hodgson]

I'll answer the first one.

[The Chair, Conservative, James Rajotte]

Yes, if you can just--

[Scott Brison, Liberal, Kings—Hants, NS]

I love big answers.

[The Chair, Conservative, James Rajotte]

Yes, he loves big answers--just very briefly.

[Glen Hodgson]

I'll answer the first one more generically. In my experience, the earlier you begin adapting, the more you can reap the benefits by positioning yourselves as suppliers to others who haven't adapted as quickly. I think that is a pretty solid first principle in all human behaviour. Those who adapt early gain a strategic advantage, and usually the cost goes up the longer you delay.

Dutch disease is a massive issue. I think part of the bleeding we're seeing in manufacturing is the challenge firms are having in trying to cope with a fundamental restructuring of the Canadian dollar, driven by global commodity prices. The demand for commodities in China, in particular, but also in India is so strong that most economists would agree there's been a structural shift in how commodity prices are going to keep flowing.

The one I'm most attracted to right now is food, because the demand for food in India, China, and other emerging markets is going up, up, up. As the protein content rises, there'll be increasing demand. I think we're now at a point of a structural shift in global food prices over and above what we've seen around energy and metals prices.

[The Chair, Conservative, James Rajotte]

Thank you. Thank you, Mr. Brison.

We'll go to Mr. Stanton, please.

[Bruce Stanton, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

Through you to Mr. Hodgson again, I'd like to go back to the notion of interprovincial trade. It's quite insightful to see that some of our traditional industy sectors and those where there are more free and open markets are pretty competitive, pretty productive by comparison, but the service sector is not.

Do you have any measure on how the lack of open trade between provinces and its impact on our lack of service sector productivity is a drag on the Canadian economy as a whole?

[Glen Hodgson]

I referred earlier to the study we'd done called Death by a Thousand Paper Cuts: The Effect of Barriers to Competition on Canadian Productivity, where we tried, using economists' tools, to come up with a measure on the drag on productivity. We found that there is a relationship between the price differences. We did a Canada-U.S. comparison, and the assumption was that non-tariff barriers, barriers really on the service sector, would be the drag on productivity, and we found a positive correlation. We had a hypothesis that barriers would slow Canadian productivity. The numbers confirmed our hypothesis.

We have not done a similar study across the country. There has actually never been a study to look at price differences between the B.C. Lower Mainland and southern Ontario and the Saguenay to see whether consumers have to pay more for services because of barriers that exist, for example, in the mobility of skilled workers between provinces. It is really quite striking how we've been debating interprovincial trade barriers for a long time.... And there is a method. We've actually read the literature, and studies were done in Europe, as the Europeans moved to more of a common platform, concerning how there were huge gains to the European economy from reducing barriers. It is very striking that a similar study has not been done in Canada. We would love to do it.

[Bruce Stanton, Conservative, Simcoe North, ON]

You commented earlier that it's really not that complicated. The steps are there. The knowledge is there to know how to make a more productive economy through relaxing and liberalizing--I don't like to use that word--

[An hon. member]

Get used to it.

[Bruce Stanton, Conservative, Simcoe North, ON]

Yes, get used to it....unbelievable.

Would you say then in summary that essentially what's preventing this from happening is just a lack of political will?

[Glen Hodgson]

That's a good summary. If you look at the fact that B.C. and Alberta are the ones that have become the leaders in reducing barriers between provinces, still the TILMA annex has 63 categories and they're giving themselves three years to actually bring the alignment about. But you have to get over the first hurdle, to have the willingness to bring about change.

[Bruce Stanton, Conservative, Simcoe North, ON]

Do I have one more minute?

[The Chair, Conservative, James Rajotte]

Yes, you have two minutes.

[Bruce Stanton, Conservative, Simcoe North, ON]

Back to the management consultants association, on this notion of the export, is your association making any initiatives around how to expand your ability to export? You mentioned a few of the barriers and we have that on the record, but are there some initiatives that you're undertaking, as an association, to grow that part of your business?

[Bob McCulloch]

I'll make just an introductory comment as I'm reflecting here on some of the challenges interprovincially. Because we fly under the radar and we do have that designation by province, we are self-directed. Nobody is holding back from doing the interprovincial stuff. So we selected...saying that we had to get our act together. This was back in the 1980s when I was involved. We had to make sure that our code of professional conduct was consistent across the country, and so we did that ourselves, and because we're under the radar, nobody stopped us from doing that. We were able to get a national cooperation in operation.

Going externally, because of our orientation to helping the International Council of Management Consulting Institutes, yes, we are trying to develop some way to get our members involved in foreign contracts.

Let me turn it back to you, Heather.

[Heather Osler]

We're trying to formalize groups within the organization to come together to do international work. About 75% to 80% of our members are not in the large firms, so it's a lot tougher for them. It's costly to go into other countries. It is very costly. So we are working with them to help them do that, because there's a great interest and a great need--

[Bruce Stanton, Conservative, Simcoe North, ON]

This is where your association can actually help the smaller operators.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Stanton.

We'll go to Mr. McTeague, please.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Mr. Hodgson, I want to shift gears a little bit to the health and viability of the service sector. I'm reading some of the stories today from U.S. Secretary of the Treasury Paulson with respect to his concerns about the rising trade deficit in the United States, concern about labour costs being artificially bumped up high by increased oil imports into the United States making it inflationary, while at the same time dealing with the fallout from the commercial paper issue, the so-called subprime controversy there.

Give us an idea of whether or not Canadian services into places like China are being hampered by its currency valuations. I understand that our increase on an annual basis...and there's not just manufacturing aside, but as you quite rightly point out, a lot of what we produce is in terms of know-how, and given the relative slow increase since 2005 in the Chinese yuan relative to the Canadian dollar since it has skyrocketed, what do see as the challenges for public policy-makers as we try to come to grips with the prospect of being dragged into a recession that no one wants?

[Glen Hodgson]

First of all, our view is that the United States is barely going to avoid a recession. We do a U.S. forecast, and we're forecasting growth in the United States of about 2.3% next year because we see a real vibrancy in U.S. exports. We see enough investment supporting exports to avoid a recession.

Really, the bigger question is about the competitiveness of Canadian service providers. It's going to be a challenge. We've now entered a new phase. Because of commodity prices and because our currency is so closely linked to global energy prices and other commodity prices--gold, for instance, and a whole array of things--we've entered a new phase.

China is just one of many examples. We probably have a very small share of our service exports going to China. That is one thing we're going to try to capture in a new piece of research on our missing trade with Asia.

But yours was more of an across-the-board question. The fact is that service exporters are challenged structurally because their costs are Canadian-dollar costs. We're paying ourselves in Canadian dollars, we're getting supplies from Canada, and we have foreign currency revenues at a time when the currency is strong.

So it really is quite a fundamental challenge, and I don't think there's a magic solution. Service providers have to ask themselves about how to get more efficient, how to boost their own productivity, or how to actually have pricing power by being a specialist in something.

Having thought through it, I guess that is probably the key: stop being what I call a price taker, where you just have to take the world price, and get so specialized that you can actually drive the price. You can charge $300 an hour because you're worth it; you really do provide that specialized a service.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Tell me, are you concerned about the recent development of commodity prices increasing but no response by the Canadian dollar? I've noticed in the past week that oil, for instance, is up from $87 to $94 a barrel. At the same time, the Canadian dollar has plummetted almost 2¢.

Is there a disconnect here as a result of something we're not seeing? And what impacts do you think that will have?

[Glen Hodgson]

I think the more accurate word would be “relief”.

The Canadian dollar was the strongest currency in the world from about mid-summer, let's say July, until the spike at $1.10. That was a little bit of irrational exuberance on the part of the young people trading currencies on trading desks. Our forecast is that the dollar should be something in the high nineties, which is kind of where it is now.

So maybe we're seeing a little bit of a delinking of the exuberance and looking back to the fundamentals, looking at the fact that our trade surplus with the U.S. is shrinking a little bit, taking all factors into account.