Industry Committee on Dec. 13th, 2007

[Glen Hodgson]

Absolutely. I would say that the fact that we've underinvested in our education system over the last 10 to 20 years is another major contributing factor. We're actually spending less as a share of our GDP than we were 10 years ago. We've cut it by a whole percentage point.

[Peggy Nash, NDP, Parkdale—High Park, ON]

By education you mean on post-secondary education.

[Glen Hodgson]

And that, frankly, I would say is due to the fact that every province puts health at the top of the list in terms of their spending priorities. So we're growing health spending at 7% or 8%, but we're growing education spending at 3% or 4%. Over time, that really does lead to an erosion of the quality of a kid who's coming out of school being able to work in the workforce. We are simply not retooling. We're not educating ourselves enough on an ongoing basis.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you.

[Glen Hodgson]

So that's another critical factor.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Nash.

We'll go to Mr. Eyking, please.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Mr. Chairman, I appreciate the witnesses coming today. We've had quite a variety of witnesses over the last few months, dealing with the economic situation and challenges.

My questions will be mostly to Mr. Hodgson, dealing with the Conference Board of Canada.

Your group compiles a lot of data, no doubt, on our economy and probably does some projections. Some of the projections we've been getting over the last few days have been pretty bleak, especially on manufacturing. I'd like you to give us a little bit of a snapshot of what you see in the upcoming months, half year, or year on some of the industries we have out there now--manufacturing, of course, but you also mentioned service industries, tourism. How is that going to be impacted over the next year?

Maybe also, how do the small and medium-sized enterprises adapt to what's going to be happening, or how do you see them adapting to this so-called shock we're going to have with the U.S. situation?

[Glen Hodgson]

I'm actually going to have a piece in Canadian Business Magazine, I think in their year-end issue, talking about this exactly.

Very quickly, our view on the Canadian economy for the next year is a little more positive, a little more sanguine than others, because of the very strong income growth we see in Canada, which is going, to a great degree, to offset the loss of export growth as a result of the mess that's unfolding in the United States right now. Even in central Canada, we think Ontario and Quebec can achieve growth rates of, say, 2.5% in 2008. Now, that is not potential. That is not as good as they could be. But it is actually better than we've seen for the last year or year and a half, driven by strong real income growth and the tax cuts we're seeing across the board, which put more purchasing power in consumers' hands. That's a little better setting than some others would probably set out for you--western Canada, much stronger; Atlantic Canada, slower, as a foundation.

Tourism is a particular sector that's getting clobbered by the triple whammy of the rising dollar, slowdown in U.S. consumer growth, and security. We've not been able to make more progress to open the border. The United States keeps raising the bar in terms of security. Things like the Western Hemisphere Travel Initiative are really quite crippling to our tourism industry.

We're seeing a bit of an offset in terms of visits from other countries and we're seeing fairly strong domestic growth in tourism, but visits are down 20% from before 9/11, and that's a huge hole to have to fill, as the American consumer is feeling a little under attack right now because of the meltdown of their housing market and is coming to Canada and discovering that prices are the same as back home. So tourism is going through a really rough patch right now.

We think there are actually a few bright clouds in a dark sky, in that as Americans age and as populations age, tourists get a little less enamoured with visiting exotic locations and they might look a little more favourably on visiting Canada than they would on going to the jungles of Brazil. But that's only one positive factor in what's a pretty dark outlook for tourism.

If I were to tell the story around forest products, it would be very much the same story. It's been a very, very tough year for forest products, pulp and paper, in 2007-08.

For autos and parts it's the same, because of that sharp slowdown in demand in the United States, combined with the dollar at par.

We do central analysis. We actually do detailed forecasts for 16 sectors, and I've plucked out three or four that are actually the ones facing the most difficulty, we think, through 2008.

[The Chair, Conservative, James Rajotte]

You have one minute.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

My second question would be dealing with the environment and how we can help, as a government--I guess, how they should help.

There are some things laid out on how to help large companies deal with the carbon crisis or what not. How can we be helping small and medium-sized business adapt to some of the environmental challenges, or help them, with their own businesses, deal with the environmental challenges out there?

[Glen Hodgson]

I had a chance to meet with Garth Whyte from the CFIB last night. In fact, we were talking about this very issue. Usually they start with easing the regulatory burden, and I think that's very consistent with our own view as well. Any progress we can make to have better alignment between federal regulation, provincial regulation, and alignment across provinces would be a huge net gain for small business.

Secondly, continue to reduce the tax burden, and that doesn't necessarily mean cutting tax rates. That might be making our tax system more efficient.

I'm completing, right now, a fairly major study on broad reform to the tax system, and I'm really struck, for example, by the lack of harmonization between provincial sales taxes and the GST. I'll set all the politics on the GST rate aside, but the truth of the matter is that you'd be hard-pressed to find a credible economist to come in and talk about the GST not being a good form of taxation. It is stable through the business cycle and it rebates the input costs to business. And in fact what we really need, I would argue, is harmonization of provincial sales taxes with the federal system to create a national sales tax system, knowing full well that Alberta doesn't have sales tax, but also knowing that Atlantic Canada has already harmonized.

[The Chair, Conservative, James Rajotte]

Thank you.

[Glen Hodgson]

Atlantic Canada has found a very efficient way of levying consumption taxes.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Eyking.

We'll go now to Mr. Stanton.

[Bruce Stanton, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

And thank you to our presenters. There is a wealth of information here this morning, I have to say. It's just terrific.

My first question is really directed to Mr. Hodgson, again. Yours is a very coherent message here and it is certainly consistent with what we've been hearing.

One of the issues I want to explore a little further is this. You talked at some length about the need for our service sector to expand its export capability, and we heard from CMC that in fact about 10% or 11% of your industry is able to derive export receipts. This goes back to one of the examples where Doha has really stalled at this point. Canada has been working at more bilateral arrangements. These last several years and up until now we haven't been doing enough in that area. We're having vigorous discussions with the likes of South Korea, through which we have the capability to potentially expand our service economy.

Using that as an example, I wonder if you could drill down a little further on how we can build a stronger economy from those kinds of bilateral arrangements.

[Glen Hodgson]

Our research suggests that if you can't compete at home, you can't compete abroad, which is why we invariably start with reducing barriers within the Canadian economy. That's pretty simple. That would allow even small businesses to serve a larger domestic audience and to become more efficient and more competitive. That really is the starting point. Then you're in a better position to go abroad.

In this report on service exports, we drilled into health management systems and education. Education is a great example. Australia has seen a spectacular takeoff in the number of foreign kids in education, either by bringing them to Australia or by having campuses go abroad. They have a national strategy. They've come up with a national Australian brand. It's not a state brand, because there are seven or eight states in Australia, just as there are ten provinces in Canada. New South Wales does not go to China to try and sell education services; Australia goes to China.

There's an area where you have to get into the guts of the sector and identify the barriers that exist. Foreign students who come to Canada pay differential fees, but only recently have we allowed them to look for jobs and made it easier for them to stay and become Canadian citizens afterwards. So you have to really look at the elements in a given sector and figure out the domestic barriers that are preventing you from becoming more competitive internationally.

We did the same sort of work around business process outsourcing, and around transportation.

I keep coming back to the domestic performance agenda, because really, if you cannot compete at home, you're never going to find clients abroad.

[Bruce Stanton, Conservative, Simcoe North, ON]

Okay. I have a question for either Mr. McCulloch or Ms. Osler.

Our study is here on understanding the dynamics of the service sector in Canada. We've seen how large it is, and we've heard about how the service sector is in fact well integrated into our economy as opposed to being a secondary industry to other primary sectors like manufacturing, agriculture, and so on.

I wonder if you could comment on that mutual dependence between what you do, say, for the manufacturing sector, and how interrelated you are with those other important industries. I would say that you're often a supplier to those industries, and so you're deriving....

Could you comment on that interdependence?

[Bob McCulloch]

I'll make some comments, and then I'll turn it over to Heather.

First, we go back 40 years, to when the Canadian industry was $25 million in revenue. If you hired a consultant, it was because you didn't know how to do your job. If I was a CEO and hired a consultant, I was admitting weakness.

Now we're a $9 billion industry. The smart CEO or executive is saying, I don't have the expertise in-house and I don't want to train the expertise in-house; it's going to take me too long to get up to speed. Let me get an expert and put him or her in for six months or twelve months or whatever, and then I move on.

Everything is changing so rapidly. The technology is changing. The human resources, operations management, etc., are changing so rapidly. I want somebody who is current, state of the art, and who can do the work, transfer some skills, and then get out of here. I'm prepared to pay a premium so that we're highly integrated with our client base.

[Bruce Stanton, Conservative, Simcoe North, ON]

Good. Thank you.

[The Chair, Conservative, James Rajotte]

Ms. Osler, did you want to follow up? No? Thank you.

We'll go to Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you.

My question is for Mr. Hodgson. You talked about the manufacturing sector by saying that it had not invested enough in new machinery in order to be more competitive.

Do you really believe that if this industry had invested money in machinery, it would have been as competitive as China, which engages in dumping its products? Even if we had the best machines and the best operational processes in the world, how could we compete with China on the market for various products?

[Glen Hodgson]

That's very much an apples and oranges comparison.

China's comparative advantage in the world is what I call standardized labour, standardized process. They can take people who can read and write, who have some number skills, and train them to work in a basic manufacturing setting, where Canada probably was 50 years ago. Our niche within the world, I would argue, is in highly specialized things, in niche markets where we can add huge amounts of value.

We have seen different classes of jobs move from Canada, from the United States, to Asia over the last 20 years. You can see it in the apparel industry in Quebec, for example. You can see what's happened for people who are making pretty basic things that can be reproduced quite easily in China--those jobs are gone. The firms that have succeeded are firms like Perlis or the specialized apparel manufacturers who have found a way to do high-value-added things within Canada.

And I'll go a step further. What has happened? I've had one big idea as an economist. I came up with a brand about five years ago called integrative trade. I tried to explain that in the modern world of trade you don't make things in country A and sell them in country B. Trade is now an integrating process where you link together investment, imports, exports, services, and sales from foreign affiliates--all as part of the equation for businesses to be internationally competitive.

So more and more what you're going to see is that people in apparel, still based in the Montreal economy, for example, where they do the research and development design, will do the sales, the marketing--all the financials will stay in Canada. And they will have shipped out a small portion, which is actually the manufacturing itself, to an offshore facility that will be in Costa Rica or the Dominican Republic or China.

The same thing is happening across global trade. We're doing a study right now where we're trying to measure what we call Canada's missing trade with Asia, because the official trade statistics that we get from Statistics Canada or Industry Canada represent only a small slice of what we're actually doing, if you start to probe a little bit deeper.

The most concrete example of this is the iPod. Our kids are buying iPods. I don't know what they sell for, about $300 in the store. If you take apart the iPod and figure out functionally where the work is actually done.... When the iPod arrives, it says “Made in China” on the box, but only about 2% of the value of the iPod is actually Chinese. There's another 30%, 35%, 40% that's from other countries in Asia that build the components that are shipped to China to be put together, but half the value is actually in the United States. That's where all the thinking happens, to design the thing, to keep advancing the technology, to do the ads, and to take the profit that's coming back.

So your Canada-China comparison is an interesting starting point, but we're at very different stages within the global value chain. Our challenge is how to get people who are doing basic manufacturing into the high-end functions--being management consultants, frankly, because that's where the money is being made.

[Robert Vincent, Bloc, Shefford, QC]

As I listen to you speak, I start to wonder whether we wouldn't need specific and specialized industries.

Based on what you say, all manufacturing industries in Quebec and Ontario will have to shut down. We're going to have to transform these workers into service sector employees who get the minimum wage.

What's your vision of the future if there is no more economy in Quebec, Ontario and the rest of Canada? If we tell the manufacturing industries who pay their employees $13 to $22 an hour that their jobs aren't very good and that we're not competitive enough compared to other countries, if we just sweep all that aside, do you think that the economy will actually flourish? There are a lot of jobs in Canada but these are jobs in the service sector, and workers will see their wages cut in half.

This will be dramatic for Canada as a whole and for Quebec, because wages will be reduced by half and regional economies will suffer the consequences. This will lead to the closure of convenience stores and anything else because there will no longer be a real economy.

[Glen Hodgson]

I understand your sentiment. I actually am quite concerned about the loss of jobs in particular segments. I would put this in a really long historical context, and then I'll come back to your specific point.

A hundred years ago, probably 75% to 80% of the Quebec economy was in agriculture. It was a rural economy. It was agriculture-based. Today, it's probably less than 1%. So you have to understand, I guess, economic transformation over a long period of time. Manufacturing at one point was probably a third of our economy; now it's about 12% to 13%. There is constant evolution. Part of the reason rich countries got rich and have stayed rich is that they have been able to adapt on an ongoing basis. We spend money on education. We go back and learn other languages. We learn mathematics. We learn skills that can be sold in the marketplace. That's the context I start from.

To the specific point about job loss, I am actually quite concerned about the huge spread of employment that exists in the service economy. You have everything from what I call McJobs, with people working for minimum wage turning over burgers or doing fairly minimal service things—and we all rely on those services, and for our 16-year-old kids, that's a great place to enter the workforce—all the way up to investment bankers, who are making $3 million, $5 million, $8 million, and $15 million a year.

So one of the challenges we're facing in the sort of pre-industrial age is that we have people who are often unionized making very good money in manufacturing. Those jobs are disappearing, because the firms figure out that if they don't transform, someone else is going to, and they will lose their market share regardless. The challenge is how you actually help people transition over a lifetime from entry-level job to building the skills so that one day they can dream to be management consultants making $300 an hour.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Hodgson.