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The New Global Normal: What it means for Canadian competitiveness


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The New Global Normal: What it means for Canadian competitiveness

  1. 1. The New Global Normal: What it means for Canadian Competitiveness Background Perspectives for the 4Front Atlantic Conference<br />By Kevin G. Lynch Vice-Chair <br />BMO Financial Group<br />
  2. 2. We are entering a new global normal… with “China soaring, India poised, Asia re-emerging” … where many advanced economies going through difficult economic, financial and fiscal restructurings … and all countries need to adapt to succeed.<br />2011<br />1990<br />Country<br />GDP <br />$US (B) <br />Country<br />GDP<br />$US(B) <br />5,800.5<br />3,030.0<br />1,547.0<br />1,248.6<br />1,135.5<br />1,017.8<br />582.7<br />520.7<br />507.8<br />390.3<br />313.7<br />262.7<br />15,227.1<br />6,515.9<br />5,822.0<br />3,518.6<br />2,750.7<br />2,471.9<br />2,421.6<br />2,181.4<br />1,894.5<br />1,737.3<br />1,704.1<br />1,484.7<br />U.S.A<br />Japan<br />Germany<br />France<br />Italy<br />U.K.<br />Canada<br />Spain<br />Brazil<br />China<br />India<br />Mexico<br />U.S.A<br />China<br />Japan<br />Germany<br />France<br />U.K.<br />Brazil<br />Italy<br />Russia<br />Canada<br />India<br />Spain<br />Source: IMF, May 2011<br />
  3. 3. The new global context: structural trends and pivotal events are reshaping economies, societies, politics, expectations … and “the drivers of success” are changing for all countries.<br />A new multi-polar world. The re-emergence of Asia: 50% of world GDP within decade. The great global financial crisis with lasting consequences. Geo-political risks rising; premium on security. Energy and commodities generating huge wealth transfers.<br />Globe is Restructuring<br />1.<br />_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ <br />Nature of competitiveness changing: premia on a global perspective; and the quality of “national capital”: intellectual (i.e. innovation) capital, human capital and natural resources.<br />Global Competitiveness is Changing<br />2.<br />_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ <br />Great Global Talent Hunt<br />Demographics: the West and China are aging … it puts an incredible premia on developing, attracting, and retaining skilled knowledge workers … multilingual, multicultural, entrepreneurial, and innovative.<br />3.<br />_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ <br />The 24/7 global digital universe is reshaping the value of information, how information can be used, how it can transforming businesses and markets, and its potential to reshape government.<br />Information is New Global Currency<br />4.<br />
  4. 4. The economics of the new global normal are: … slow and volatile recoveries in advanced countries, many with large fiscal burdens and recovering financial systems … and rapid growth in dynamic emerging economies, many with inflation pressures and income inequality challenges.<br />Peak to Trough Decline in Real GDP During Great Recession<br />Real GDP Growth: IMF Forecast<br />UK<br />Euro Area<br />Germany<br />US<br />Canada<br />Previous Peak to Current Employment<br />UK<br />-0.4%<br />-1.8%<br />Euro Area<br />Key Risks<br />1.3%<br />Germany<br />US<br />-3.5%<br /><ul><li>Inflation (Emerging Economies)
  5. 5. Consumption/saving imbalances
  6. 6. Sovereign Debt
  7. 7. Fiscal imbalances
  8. 8. Bubbles; inflating and deflating</li></ul>Canada<br />0.8%<br />Sources: Haver Analytics, IMF WEO Database, April 2011, IMF WEO Update, September 2011<br />
  9. 9. In the new global normal, balance sheets really matter, for governments as well as households and businesses … with pervasive globalization, no government with market bonds is immune from fiscal risk … and economies benefit from the “national insurance” of fiscal virtue.<br />TOTAL Government Fiscal Balance: % of GDP (2011)<br />TOTAL Government Net Debt: % of GDP (2011)<br />Canada<br />Canada<br />France<br />France<br />Germany<br />Germany<br />Italy<br />Italy<br />Japan<br />Japan<br />UK<br />UK<br />USA<br />USA<br />Greece<br />Greece<br />Provincial Budget Balance FY2011 (% of GDP)<br />Provincial Net Debt FY2011 (% of GDP)<br />New Brunswick<br />New Brunswick<br />Nova Scotia<br />Nova Scotia<br />P.E.I.<br />P.E.I.<br />Nfld & Labrador <br />Nfld & Labrador <br />Canada: Federal<br />Canada: Federal<br />Sources: Provincial budget balances and debt- Dept of Finance Fiscal reference tables; Federal Data: (June 2011 update); IMF World Economic Outlook, September 2011<br />
  10. 10. Fiscal reality today: governments need to confront both fiscal consolidation and fiscal sustainability … the fiscal double header for many western economies including Canada and most provinces.<br />FISCAL CONSOLIDATION<br />Cause(recession, stimulus)andConsequence (debt accumulation)<br /><ul><li>Slow recovery
  11. 11. Weak tax bases
  12. 12. Income support spending
  13. 13. Unwinding fiscal stimulus spending
  14. 14. Deficit-debt dynamics</li></ul>S<br />P<br />R<br />I<br />N<br />T<br />FISCAL SUSTAINABILITY<br />M<br />Cause (slower structural GDP growth, demographics)andConsequence (structural deficits)<br /><ul><li>Structurally weaker nominal GDP growth … i.e. tax bases (4% vs. 5 ½+ %)
  15. 15. Lower Cdn Labour force growth (0.9% vs. 1 ½ %)
  16. 16. Lower Cdn Productivity growth (0.8% vs. 1 ½ %)
  17. 17. Lower Cdn Inflation (2% vs. 2 ½ %)
  18. 18. Structurally higher spending growth in demographically sensitive areas
  19. 19. Health, pensions, training …</li></ul>A<br />R<br />A<br />T<br />H<br />O<br />N<br />
  20. 20. In this fiscal reality, economies need to increase longer term growth … and this requires embracing the “New Global Competitiveness” = globalization + human capital + innovation + natural resources … and Canada is no exception.<br />DISRUPTIVE IMPACT<br />COMPETITIVENESS DRIVERS<br />CONSEQUENCES AND OPPORTUNITIES<br /><ul><li>Strong macro fundamentals “provide national insurance”
  21. 21. Market opportunities shifting to dynamic emerging countries
  22. 22. ITC offers transformative ways to go global from anywhere</li></ul>Unbelievably inter-connected markets …<br />Globalization<br /><ul><li>TALENT HUNT goes global
  23. 23. Premium for multi-lingual, multi-cultural workforces
  24. 24. Address challenges posed by demographics—to the workforce, pensions and healthcare</li></ul>Aging populations, put premium on talent …<br />Human Resources<br /><ul><li>Moving up the value-added curve requires continual innovation and productivity
  25. 25. Innovation creates opportunity to shift the demand curve, the market curve, and the cost curve; or else, risk competing with low-cost suppliers on price</li></ul>Innovation drives productivity gains and economic growth …<br />Innovation<br /><ul><li>Opportunities for producers of food, energy and minerals/metals
  26. 26. Technology and logistics lever resources</li></ul>Emerging economies need resources to sustain growth …<br />Natural Resources<br />
  27. 27. US=100<br />100<br />95<br />90<br />85<br />80<br />75<br />73.6%<br />70<br />1984<br />1987<br />1990<br />1993<br />1996<br />1999<br />2002<br />2005<br />2008<br />1981<br />A universal reality … productivity is core to a nation’s competitiveness and the standard of living of its citizens … AND, Canada is lagging.<br />Annual % Labour Productivity Growth in the Canadian Business Sector: 1947 - 2008<br />“Productivity isn’t everything, but in the long run, it is almost everything.” <br />4<br />4.0<br />3<br />2<br />1.6<br />–Paul Krugman (Nobel Prize Winner)<br />1<br />0.8<br />0<br />1973- 2000<br />2000-<br />2008<br />1947- 1973<br />Relative Labour Productivity in the Business Sector: <br />Canada as % of US<br />Paradox: Canada has a larger productivity problem than the U.S. --- indeed, our Can-U.S. productivity gap “costs” us $300B annually --- but U.S. has greater urgency in improving productivity<br />
  28. 28. Canada’s productivity deficit versus the U.S. is both large and pervasive … most sectors have productivity levels considerably less than comparable U.S. sectors … and contributing to this, we invest much less in ICT and machinery.<br />Source: State of the Nation 2010 Report by the Science, Technology and Innovation Council<br />
  29. 29. 1<br />Business Sector R&D Expenditures<br />% of GDP <br />2.7%<br />Japan<br />Our public sector investments in R&D spending as a % of GDP, delivered largely through universities, are well above OECD averages, and even the U.S.<br />2.7%<br />Sweden<br />2.5%<br />Finland<br />2.2%<br />Korea<br />1.9%<br />United States<br />1.8%<br />Austria<br />1.8%<br />Germany<br />1.7%<br />Denmark<br />1.5%<br />Iceland<br />1.4%<br />Luxembourg<br />1.3%<br />France<br />1.3%<br />Belgium<br />But, the Canadian business sector ranked 15th among OECD countries in business R&D expenditures. Canadian business R&D spending is only 1% of GDP, well below the OECD average of 1.6%; half the U.S. and a third of leaders like South Korea, Sweden. <br />1.2%<br />Australia<br />1.2%<br />United Kingdom<br />1.1%<br />Canada<br />15th<br />1.0%<br />Netherlands<br />1.0%<br />Czech Republic<br />0.9%<br />Ireland<br />0.9%<br />Norway<br />Source: OECD, Main Science and Technology Indicators. Volume 20<br />Innovation is the core to the new competitiveness because it alone has the capacity to create new products not compete on standardized ones and build new markets not fight for share in existing ones … BUT, Canada is not an innovation leader, particularly in the business sector.<br />“The first step in winning the future is encouraging American innovation.” … “We need to out-innovate, out-educate, and out-build the rest of the world.”<br />President Obama, 2011 State of the Union Address<br />
  30. 30. Canada’s markets are “over-weighted” in mature, slower growing economies (many with structural fiscal challenges) and linkages are weaker to dynamic emerging markets.<br />Canada's Top 10 Trading Partners () in 2010 (1% or more of Cdn. Exports)<br />Export Markets<br />Import Markets<br />Missing major export markets in dynamic emerging economies including: India, Brazil, South Korea, Taiwan, South Africa, Russia, etc.<br />Sources: Industry Canada;; IMF WEO Database<br />Note: Numbers may not add to totals due to rounding.<br />
  31. 31. In the new global competitiveness, talent is key … and a well educated, entrepreneurial, multi-lingual, globally oriented and innovative work force is a competitive advantage.<br />How is Canada Doing? … Some Talent Indicators<br />Education attainment results for International Student Assessment (PISA)<br /><ul><li>Science
  32. 32. Math
  33. 33. Reading</li></ul>8th place (OECD)<br />10th place (OECD)<br />6th place (OECD)<br />(ii) Percentage of population with tertiary education<br />1st place (OECD); 49% of population<br />(iii) Percentage of population with university-level education<br />16th place (OECD); 34% of population<br />(iv) PhD graduates<br />23rd place (OECD); 146 per million <br />Universities in Global top 100<br /><ul><li>MBA schools in global top 100</li></ul>4 universities (1 in top 20)<br />6 schools (none in top 40)<br />(vi) Multi-cultural and diverse population<br />Over 40% of populations in Toronto and Vancouver foreign-born … <br />
  34. 34. Natural resources matter … Canada is one of world’s most secure, largest producers of natural resources … energy, minerals/metals, agriculture … and as global demand rises, so do global prices … and the incentive to better apply technology (innovation) and logistics to maximize returns.<br />Natural Resource Ranking*<br />Agricultural Resource Ranking*<br />Bank of Canada’s Index of Real Commodity Prices in the Post-War Period<br />And, the second largest oil reserves in the world, and large shale gas reserves<br />Sources: Canadian Minerals Yearbook, U.S. Geological Survey (USGS), Food and agriculture organization of the United Nations (FAOSTAT) * latest year<br />Source: Bank of Canada<br />
  35. 35. Global benchmarks for business productivity growth … an Economist* survey of 400+ global CEO’s identifiedthree main drivers of productivity and the imperative of innovation … lessons for Canadian business.<br />#1<br />TODAY: Areas for biggest payoffs<br /><ul><li>Functional training
  36. 36. Flex time workers
  37. 37. Pay for performance
  38. 38. Reward process innovation
  39. 39. Management training</li></ul>#2<br />TODAY: Choices with greatest impact<br /><ul><li>Introduce new products/services
  40. 40. Enter a new market
  41. 41. Invest in operational R&D
  42. 42. Acquire strategic partners with complementary know-how</li></ul>#3<br />TODAY: Maximum impact today<br /><ul><li>Mobile working
  43. 43. Customer analytics
  44. 44. Cloud computing
  45. 45. Social media for client interaction
  46. 46. Collaboration software</li></ul>* Source: EIU (Gearing for Growth: Future Drivers of Corporate Productivity, 2011)<br />
  47. 47. Branding matters: in a transforming and volatile world, brands reduce uncertainty … a clearer Canadian brand … and Atlantic Canada brand within it … would help business sell abroad, attract investment, entice immigrants, facilitate education/research alliances, and open markets.<br />Financial Crisis<br />Wall Street Journal<br />Risk:<br />Oil Sands<br />Seal Hunt<br />Branding of Canada by Others<br /><ul><li>Solid economic fundamentals, including lower debt and corporate taxes than the U.S.
  48. 48. Robust resources; both natural resources and human resources
  49. 49. A sound financial system, with strong financial institutions.</li></ul>Nice + “Other” Brand Characteristics:<br />Nice Canadians<br />… or …<br />Opportunity:<br />?<br />Branding of Canada by Canadians<br />
  50. 50. Canada has enormous strengths that have served us well, built one of the highest standards of living in the world, and one of the most civil societies.<br />Solid public finances<br />Actuarially balanced public pension plan<br />Competitive corporate taxes (12 percentage pts. less than U.S.)<br />Stable, secure financial system (rated #1 in world by WEF)<br />Well educated, diverse population<br />Huge natural resource assets<br />Stable institutions<br />Universal safety nets and public services (education, health, …)<br />
  51. 51. In the new global normal, Atlantic Canada can win … provided it builds on its strengths, not rests on them … embraces the new global marketplace strategically, and tackles its weaknesses, particularly productivity and innovation …<br />Atlantic Canada has many strengths: the key is to understand our comparativeadvantages, and lever them globally<br />Changing world brings opportunities as well as risks: markets and market opportunities are shifting; Atlantic Canada needs to adjust well and early<br />Need to fight the tyranny of “short-termism” and “status quo-ism”: the status quo is not a strategy for the future in a dynamic, changing environment<br />Sustained productivity improvements will take national effort, and sustained corporate focus on global markets, talent, and innovation<br /><ul><li>And, we need to avoid complacency risk … Atlantic Canada has the potential … BUT… we need to compete to win</li></ul>“Innovation is the oxygen that fuels the star runner …”<br />