One of our most serious economic problems dates back to the days of settlement, because Canada began as a colony and we still have a colonial type of economy.
The economies of independent nations are complete, because independent nations have to take care of their own needs. If they can not, they are not independent. Since prehistoric times the people of England, Germany, France and other nations have produced everything they needed to survive. As trade develops most healthy economies import luxuries and specialty goods and sometimes raw materials, but imports and exports are always secondary to internal production and trade.
With a small land area and a large population you would think a country like Japan would depend very heavily on foreign trade, but in fact it makes up only 21% of Japan's GDP. With a large land area and a small population Canadians should be able to supply most of their own needs, but foreign trade makes up 85% of our GDP.[1]
Even though it has not many physical resources Japan is effectively independent. We have far more physical resources than we need but Canada is still just an outpost in the wilderness, almost completely dependent on more-advanced countries to supply our manufactured goods.
We never developed an independent economy because Canada was settled as a colony and, in colonial times, our function was to produce the raw materials our imperial masters needed and to buy the finished goods our imperial masters wanted to sell. Colonial economies live on imports and exports, and they are not intended to be self-sustaining.
Before the white man came a Canadian native who needed an axe made one, or traded for one that was made in Canada. When a French or English settler needed an axe, he bought one that was made in France or England.
And settlers were not allowed to make goods that would compete with imports. In the 1730's a man named Joseph Huppe tried to make beaver hats in Montreal. Because his hats would compete with hats made in France the king's agents smashed his basins and dying and fulling vats, and took the rest of his equipment to the king's storehouse.[2]
The thirteen colonies that formed the United States had a colonial economy while they were colonies, but they broke out of the pattern when the revolution cut their ties with England. Trade with France would have made them dependent on France and they couldn't risk that so, starting almost from scratch, they had to build a self-sufficient economy.
Canada did not rebel and we had no urgent need to develop. Over the years we built some industry, first to support the railways that were built to hold the country for England and later to support England's war efforts, but the country was developed as a source of raw materials.
In colonial days an entrepreneur could come from England to Canada and take as much wealth as he could from the land, as fast as possible, then go back home to spend his profits. The profits were very big because the entrepreneur was taking natural resources that were already there. He didn't have to produce anything and, because this was not his country, he did not have to care how much damage he did with his mine or his logging operation.
That's a good deal for imperialists but as a Canadian I take a somewhat different view of Canadian resources. The most obvious facts are that these resources are mine -- if I speak of myself as a representative of the citizenry -- and that it's not in my best interests to dig them out as fast as possible and ship them to some other country as cheap as possible.
If we don't cut the tree or mine the ore or pump the oil this year we can do it next year -- and next year the resource will be worth more than it is this year.
On the other hand if we produce resources as fast as we can for export we will run out some day, and in fact that is already happening.
Fishing was one of our first resource industries but foreign competition, and the destruction of the seal hunt, seems to have wiped out much of the east coast fishery. We never did have much of a west coast fishery because England gave most of Canada's west coast to Russia in 1825, and the U.S.A. bought it from Russia in 1867. We once had potential for a huge inland fishery but it was never fully developed and much of our inland waters have now been polluted by ships, cities, logging, paper mills, mining and other human activities.
The fur trade was probably our most sustainable resource industry but it was never big, and it has been mostly wiped out by activists. The loss of the inland fur trade affects only the few tens of thousands of Indians and Eskimo who now live on drugs, booze and welfare because their traditional trade goods no longer have value on the world market. The loss of the seal hunt is more important because it was also a factor in the destruction of the Atlantic fishery.
Seal have been hunted for centuries and their breeding rate is adapted to the hunt. Even as the protesters began their campaign the hunt was tapering off and the seal population was increasing and, when the hunt was suddenly stopped, the seal population exploded. This was one factor in the disappearance of the codfish.[3]
Logging was our first major resource industry and in some ways it was a natural because settlers had to clear the land to develop farms, roads and towns. Canadian loggers sold wood to England until cheaper lumber from the Baltic states took over the market. Since then we have sold wood mostly to the US, but some very high quality wood goes to Japan.
Trees are a renewable resource but they don't grow very fast in Canada. Some companies re-plant more than they cut, but they still cut faster than the trees grow. The best forests in Canada were cut long ago and they will not grow again because the land is now covered with subdivisions and shopping centers, or paved for parking lots and super-highways.
Where the forest remains it's mostly because the land is poor or the weather is not good for growing trees or crops. In some areas of Canada we may get only one generation of trees for several generations of loggers.
Australians grow trees quickly in plantations and African, southeast Asian and South American loggers work in tropical conditions where trees grow quickly.
Even American loggers should be able to sell cheaper than Canadians, because most of their forests are in kinder climates and on better land. They can't, because American loggers working in the States have to grow their own trees or buy them for fair market value. They claim that Canadian loggers, and American loggers who work in Canada, have an unfair advantage because our governments under-value trees that are cut on public land.[4]
Canadian logging makes good jobs for a few men and very good profits for some companies, but it's a short-term business. In the long run we can't compete with countries that have better weather and better land and cheaper labor and, when our forests are destroyed, we will lose the business.
Paper also depends on cheap trees. Like other resource industries it pays well for a few but it is very capital intensive, it causes a lot of pollution, and most of the profits go to investors who may or may not be Canadian.
Because they need huge capital investment paper mills are not local businesses. Most are owned by businessmen who have no connection with the areas where the mills are located, and who don't worry much about the long-term needs of local people.
Fortunately the Canadian paper business has a limited future, because Brazilian paper mills now grow trees in plantations and mills in other countries are learning to recycle paper, and to make it from grasses rather than trees. If we are lucky, most Canadian paper mills will go broke before the last of our forests is destroyed.
MINES AND OIL
Mines make big profits but they don't create wealth because the value is there before they dig it up. They don't make many jobs, relative to the size of the business, and relatively few people get to share in the cash returns. In many cases, the people who collect most of the profits live in other countries.
Because the money they make is factored into the GDP Canadian mines contribute to the myth that Canada has a viable economy but, for many Canadians, the most important products of the mining industry are blighted landscapes and toxic chemicals in rivers and holding ponds.
And mines don't last. In 1959-60 I lived for about a year at Tilt Cove, on Newfoundland's Notre Dame Bay, where a copper mine was then in its third or fourth incarnation.
It was discovered in the 1800's when an English surveyor noticed that a local fisherman was using a huge chunk of nearly-pure copper as an anchor. For a few years English schooners landed at the cove, filled their holds with copper, and sailed home.
When the pure copper was gone the operation shut down until rising prices and better technology made it worth while to come back. Then another English company opened a mine which dug ore, smelted it on the spot and shipped the copper back to England.
By the time I arrived the mine had been closed several times and had finally been re-opened by a Canadian company that mined low-grade ore out of deep shafts and concentrated it in a huge mill before shipment. The Canadian company also mined the slag heaps left over from the previous mines, because the slag that previous miners had thrown away was now the richest ore in the area.
When I last visited the cove, in 1982, the mine had been closed again and most of the buildings torn down. While the early miners came and went a fishing village occupied the cove but after the "modern" mine had dumped waste from the concentrate mill into the sea for more than ten years, there was no more fishing in the area.
Modern mines are not as rich as the mines we used to have and our markets are no longer guaranteed. If the mine at Tilt Cove had lasted long enough, it might have been bankrupted by the change from copper wire to glass fiber-optic telephone lines.
The first miners at Tilt Cove sold their copper on a protected market in England but Canadian mines now have to sell on the world market. Some of the competition includes developing countries which have not yet worked out their best mines and where most people work for little more than slave wages. Some third world mines are financed by Canadian companies with profits from Canadian mines.
Many third-world countries have lax environmental regulations and, in order to compete, Canadian resource industries have to take more and more chances with our environment. One example is a gold mining technique now in use in the Yukon.
Gold that cannot by mined by normal means can be extracted profitably by the process known as heap leaching, in which ore is piled in a heap and "leached" with a deadly-poisonous solution of cyanide.
The ore is piled on a waterproof concrete pad to prevent the cyanide from soaking into the ground. When the pad at the Galactic Resources Mine near Summitville, Colorado cracked, the mining company went broke and left the US Environmental Protection Agency a cleanup bill estimated at $155 million.[5]
One mine began in 1997 to use heap leaching near Dawson City, in the Yukon Territory. The mine employs 140 people, and is expected to produce about $400 million worth of gold over eight years.[6]
It could be a serious danger for the environment because concrete may crack in cold weather, and a crack in the concrete of this heap leaching pad could poison more than a thousand miles of a river that provides water and fish for thousands of people and millions of animals.
If we actually needed gold the risk might be justified, but we don't need gold. We already have more gold in the world than we have real use for, and the new mines may even threaten the use of gold as symbolic money.
We value gold partly because it's hard to find but as the production of gold goes up the price of all gold -- including the gold that misers keep in vaults -- goes down. If heap leeching works as well as the promoters think it will, it might actually destroy the value of gold.
Hoarders like to pretend that gold will always keep its value but that's just not so. In late December of the year 2000 gold sold for $273 per ounce but 20 years earlier it peaked at about $985 per ounce -- equal to about $1,600 in today's Canadian dollars. In our time the so called "hedge against inflation" is in fact a disastrously bad investment. In the summer of 1999 the Bank of England began to dump gold. Some promoters are still trying to maintain the price, but long-term prospects are not good.
Oil is the newest resource industry and the most profitable. It may cost a million dollars or more -- often much more -- to drill an oil well but a good one will produce tens or hundreds of millions of dollars in revenue with very little effort on the part of the owner, and with very little employment for others. Oil makes up 35% of our export surplus but it produces relatively few jobs, and most Canadians do not share in the profits.
Like mines, oil wells produce wealth but they do not create it. In fact oil taken from a well should be regarded as a withdrawal from a national savings account.
But Canadian governments spend hundreds of millions of dollars to subsidize oil projects -- like the Alberta Tar Sands and Hibernia -- in order to get them going before they are economically practical. If we did not develop them now they would be worth more in the future, when prices will be so high that they would need no subsidy. With the help of our federal government, Canada will run out of oil before that happens.
We need resource industries to produce raw materials for use in Canada. If the price is right we can even export some, but resources produced for export do not provide much benefit to the country as a whole. Rather than export resources we should keep them for our own use, or at least use them to make finished goods which we can sell to the world.
One way or another we will have to develop a new strategy soon, because our natural resources won't last. As oil runs out the industrialized countries will turn to renewable resources -- but what will we do? There will be a big business selling solar cells and wind turbines around the world but, unless we develop an independent manufacturing industry, we will not be able to compete in that market.
If we hope to maintain first-world status we must develop an industrial machine while we can, and that's not as easy as it sounds. Canada tried to develop an industrial economy about 100 years ago, after we lost the English and American lumber markets, but we didn't make it.
HOW IT HAPPENED
Our problems began in the mid 1840's when Britain opened her ports to virtually unrestricted free trade. Because the Baltic states offered lumber cheaper than Canada, England began to buy from them.
Canada was saved from bankruptcy by a reciprocity treaty with the US but the treaty was abrogated in 1865, partly because England supported the southern states in the American Civil War.
Loss of the American market created another emergency, and Canada tried to develop an independent economy. Partly to fill the need and partly as an election ploy Sir John A Macdonald's "national policy" of 1879 erected a tariff wall against American manufactured goods.[7]
The idea was to give Canadian manufacturers a chance but it backfired because American manufacturers were too close, too strong, and too smart to be shut out. When we closed our borders with tariffs they set up branch plants in Canada, to make American goods for sale throughout the British Empire. That began an economic take-over and by the early 1920's the US held more investment in Canada than Britain did.
The American branch plants gave Canadians work but they stifled Canadian industry, because branch plants always have an advantage over local industry. If the American Widget Works has a branch plant in Canada, the Canadian Widget Company doesn't stand much chance in competition.
Economists talk about "economies of scale" and they're partly right, but only partly. Based in a bigger market American Widget has an advantage over the Canadian company because it can spread its tooling and development and marketing costs over more widgets.
But if American Widget's office and plant are in Chicago Canadian Widget can beat them in Toronto, because the local company can provide better service in the local market. The difference was more pronounced in 1890 than it is now, of course.
But we're talking about the 1890's and when American Widget built a branch plant in Toronto, Canadian Widget lost a big advantage. Worse, the Canadian company had to compete with a branch plant that had no head office or tooling or development costs to cover, and so could make widgets even cheaper than the American plant.
And the effect on the Canadian economy spread beyond Canadian Widget because the local company used to keep a couple of machine shops busy making its tools and maintaining its machines, and it used to buy all its supplies in Canada. The Canadian branch plant of American Widget gets its tooling in the States and, if it buys supplies in Canada, it buys from Canadian branches of the American company that American Widget buys from in the States. Some of those branches came to Canada to deal with branch plants and, with that business as a foundation, they went on to push Canadian suppliers out of business.
Branch plants provide some of the jobs that politicians promise and they produce good numbers for the GDP, but they block real industrial development.
Two world wars gave Canadian industry a second and third chance to develop because we had to build an industrial base to make the arms that England needed, but both times the Canadian government blew it.
Three examples. In 1949 a British company and the Canadian subsidiary of another British company developed the world's first two jet airliners. The Canadian plane was an unquestioned success and, even though the Canadian government set standards which made it impossible for the government-owned Trans Canada Airlines to buy jets, at least two American airlines wanted to buy it. They did not because the Canadian government decided that Avro should make fighter jets, and would not allow Avro to pursue sales of the jetliner.
As it happened the British Comet had an unfortunate habit of exploding at high altitude. If the Canadian plane had been in production it could have had a world market, but by that time the Canadian project had been shut down.
The final end of the Canadian project is interesting. Three Canadian Avro jetliners were built and one of them flew successfully for nearly ten years. Then it was destroyed, in its hangar, just in time to allow Boeing to introduce "the first jet airliner built in North America."[8]
Nobody ever explained why the Canadian jetliner was destroyed, but the US government has accused Boeing of bribing officials of some foreign governments in order to sell planes.
No Canadian politician has ever accepted a bribe, of course, but until the late 1980's Canadian tax laws allowed companies to claim bribes to politicians as a legitimate business expense. On Jan 31 of 1986 Revenue Canada actually published a circular to advise people how to handle the paperwork.[9] If Revenue Canada saw the need for a circular, we have to assume that it knew about a lot of bribes.
And for one reason or another the Canadian aircraft industry has had an assortment of problems. In the 1950's Avro Canada produced a fighter that many think was the best in the world, but again the project was abandoned. Claims about the fighter can never be proved because on Feb 20 of 1959, before the plane was fully tested, the government canceled the project and had all the existing Arrow fighters, and the plans for them, destroyed. Again, the destruction of the completed planes and of the plans for them was never explained.[10]
For more than ten years DeHavilland Canada produced a world-beating bush plane called the Beaver, but it had an American engine and the company had to stop production of the original Beaver when the American manufacturer stopped making the engines. DeHavilland tried again with a turbine engine, but the turbine-powered Beaver did not sell well.
Canadian industry keeps stumbling along but for the past 30 years we have been going downhill and other nations have been developing. Asian countries, in particular, have several advantages over Canada.
One is that while the Canadian economy was pure colonial most Asian countries were able to keep their own economies after Europeans arrived. Even the Asian countries that were ruled by Europeans were able to make everything their people needed and, because the crafts were established and some natives could not afford American or European goods, they continued to make their own. As native economies, the Asians also knew they had to train their own craftsmen.
European settlers in Canada destroyed our natives' economies, and the colonies they established bought most of the goods they required from France and, later, England. In the first years of political independence we had a constant flow of trained technicians and craftsmen coming as immigrants from Europe, and we didn't have to train many here. We did not develop a real economy, and we did not train the people we needed to develop one.
Then in the 1960's the European economy boomed, and European tradesmen saw no need to emigrate. About this time the Trudeau government closed consulates in Europe and opened others in third world countries, apparently in the hope that migrants from the third world would be more likely to support the government that allowed them to immigrate.[11]
Unfortunately most of the third world countries where the new immigration offices were opened were former colonies which, like Canada, had never developed modern technical training. Because our immigration rules favored people with a European-style education many of the new immigrants were well educated but they were trained to be office clerks, not tradesmen, and they could not make up for our lack of technical training.
The shortage of trained craftsmen in Canada gives branch plants another advantage over local industry because they don't need many trained workers. Branch plants buy tooling from their owners but Canadian companies need trained machinists and tool-makers to operate. The shortage of skilled workers and other problems made it hard for Canadian manufacturers to compete. One by one they shut down, and Canadian stores filled up with imported goods that were once made in Canada.
SPENDING OUR WAY TO WEALTH
As our industrial economy wound down the Trudeau government, and later others, tried to keep it afloat with "Keynesian economics." As a cure for the depression that brought world industry to a halt in the 1930's, economist John Maynard Keynes suggested that governments spend borrowed money on public works.[12]
Government spending on public projects did not stop the depression because most public works are cost goods. National parks and monuments are nice to have, but they are not economic wealth and they do not produce economic wealth.
World War II did stop the depression, because it involved government spending on a much larger scale. The arms we made for the war were cost goods too, but the factories and the tools that produced them were benefit goods. We wasted a lot of material in the war but we also built an industrial machine that survived the war and that could produce peacetime prosperity as well as wartime arms. With the help of those factories real average incomes in Canada doubled in the 20 years from 1945 to 1965.
But the wartime factories were built for England's benefit, not Canada's, and when England no longer needed them our governments made no serious effort to keep them working.
When the economy began to slip in the '60's Pierre Trudeau's government tried to re-start it with Keynesian spending but Trudeau put the money into liberal arts education and feel-good social programs -- all of them producers of cost goods -- instead of backing industries that could produce benefit goods. Because the money was invested in programs that do not produce economic wealth, the economy never did get re-started.
In fact it declined because, as the government continued to pour more and more money into production of cost goods, it passed the costs on to producers of benefit goods. As producers of benefit goods were driven out of business our actual production of wealth declined.
But many Canadians didn't notice that because Trudeau's giveaways did increase the GDP, and we thought the GDP was a measure of the economy. Because the numbers looked good we didn't worry and, even though our economic problems are now obvious, some people still don't worry about them.
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