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Canada: Lesson for the United States from an Economic Turnaround

by Edward Alden
July 3, 2012

The CN Tower is seen against the clouds in Toronto (Mario Anzuoni/Courtesy Reuters). The CN Tower is seen against the clouds in Toronto (Mario Anzuoni/Courtesy Reuters).

TORONTO — Canadians are feeling pretty good about themselves these days. On the country’s 145th birthday this past weekend, they were greeted with news that, on paper at least, Canadians are now wealthier than Americans. Mostly as a consequence of more stable housing prices, the average Canadian household now has a net worth slightly greater than the average U.S. household.

With Americans set to celebrate July 4 still digesting the news that the median worth of a U.S. household fell nearly 40 percent in the past three years and is now at 1992 levels, the comparison is a bit unsettling. It certainly is for me. When I was the Toronto bureau chief for the Financial Times in the late 1990s, Canada was still deeply mired in debt, and the Canadian dollar was worth less than 65 U.S. cents. Pundits (myself included) dubbed the Canadian dollar “the peso of the north” and wondered whether Canada, which had taken a huge gamble entering into a free trade agreement with the United States, could ever develop an internationally competitive economy.

Today, the Canadian dollar is roughly on par with the strong U.S. dollar, Canada’s budget deficits are manageable, and the unemployment rate of 7.3 percent is among the lowest in the OECD. What changed?

As a fine recent report by the Aspen Institute lays out, Canada’s turnaround has been a mixture of luck and sound policy. The luck has been the steady rise in the value of natural resources. Canada remains a heavily resource-dependent economy, and growing demand from China and the rest of Asia in particular has provided new, large markets. Canada has been able to diversify its trade away from the United States, even though more than 70 percent of its exports still go south. Rising oil prices in particular have turned Alberta’s oil sands, the world’s second-largest proven oil reserves after Saudi Arabia, into a cash cow, making Canada the largest supplier of U.S. oil imports (though a controversial one given the vast release of greenhouse gases that accompanies oil sands production).

But luck has been also accompanied by good government. The Canadian federal government cut spending and raised taxes during the buoyant years of the 1990s, turning a big budget deficit into a surplus. While deficits have reemerged in the wake of the recession, Canada’s fiscal position remains much stronger than the United States. Canada’s banking system is more conservative than its U.S. counterpart, insulating the country from the financial crisis; in 1998 the government blocked two proposed mergers among the country’s biggest banks, and Ottawa has maintained a heavier regulatory hand. Immigration has brought new vibrance to the economy, and Canada has done a reasonable job of targeting skilled immigrants. Canada halved its corporate tax in the 2000s, helping attract investment, even as the U.S. corporate tax rate has become the highest in the world.

Canada’s future prosperity is certainly far from assured. Indeed, the current comparison with the United States is more of a bad news story for this country than it is a good news story for Canada. Canada’s productivity has continued to lag behind that of the United States. The strong dollar, largely a consequence of high resource prices, has hurt Canada’s manufacturing sector. And the country has developed few world-class companies; its reigning star, Research in Motion, has been unable to follow up on the extraordinary success of the Blackberry and has lost its once strong position in the mobile handset market.

But there certainly are lessons to be learned. The optimistic one is that economic turnarounds can come surprisingly fast. While Canada took some tough decisions on its budget, for example, buoyant growth quickly turned the vicious circle of debt into a virtuous one of surplus. From my vantage point in 1998, few would have predicted that Canadians would be wealthier than Americans a decade later. There is no reason that the United States cannot similarly surprise the world over the next decade.

Post a Comment 7 Comments

  • Posted by Mike Uretsky

    This is a very good analysis. It misses one other critical point, i.e., the willingness of the Canadian government and its people to recognize problems and deal with them. It is a unity and purpose that has been totally missing in Canada’s US counterpart, where the Senate Majority Leader says that his primary objective is making sure that the administration fails.

  • Posted by bill someone

    to mike uretsky. Harry Reid is the senate majority leader, he is a Democrat, I am sure he never said anything about making sure the (democrat) administration fails. At least fact check your own statements.

  • Posted by Duff Gordon

    Bill, Mike meant the Senate minority leader, Mitch McConnell.

  • Posted by Alan Soul

    SOCIALISM can never work since the Social Workers are really paid to pretend to care about other people’s problems. Government employees are the ultimate “careerists”. Obama can never understand anything but the left wing critique of “Imperialist Western Values”. His buddies at ACORN and in the Clinton Administration are the ones who created the real estate mess….NOT WALL STREET!!! Until the liberals in the West quite thinking they have a moral right to other people’s money to “do good” we will never truly pull out of this mess.

  • Posted by Dave Thomas

    Comparing Canada’s economy to the United State is preposterous on its face. Canada has a population less than that of California and an economy smaller than California’s.

    I know nothing of Edward Alden, but his economic insights leave much to be desired if this article is representative.

  • Posted by Mark Collins

    As an American living in Canada for the last 11 years, I share the view of most Canadians that the US political process is broken. I agree with Mike that a sense of national purpose is present here, certainly to a greater degree than we see in the US legislative and executive branches of government. The picture of social stability here includes a collective notion that the well being of ‘we’ benefits the well being of ‘me’. There’s a far wider aspect of a society which includes prosperity and opportunity for everyone, not exclusively for 1% of the population.

  • Posted by Mike Gordon

    Perhaps Canada’s size works to its advantage. Large is not necessarily better – that applies to population as well as physical size. Canada has always impressed me as a country with smarter leadership and government. There seems to be is a closer connection between government and the people. Purpose trumps politics and, as noted, “we” wins out over “me.”

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