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Separatism in Quebec
By Oleg Nekrassovski
In his speech in Quebec City on February 13th
, 1991, Prime Minister Brian Mulroney
(Office of the Prime Minister, 1991) clearly suggested that without an in-depth cost-benefit
analysis or market study, no business person would put the future of his/her company on the
bargaining table. Consequently, the bargain over the future of a country must deserve, at least, an
equally serious economic analysis. Hence, the Prime Minister stressed that Quebecers must look
carefully at the facts before making a decision to separate; as such a decision necessarily
involves their and their children’s economic well-being (Office of the Prime Minister, 1991).
Also, according to the Citizens’ Forum (1991, p. 119), Canadians are incredibly ignorant of the
economic costs of Quebec independence. In the hope of remedying these problems, the present
paper will look at the economic consequences of Quebec separation and will strive to
demonstrate that the economic arguments advanced in support of the separation of Quebec from
the rest of Canada, are not compelling.
According to the views that the PQ held about 20 years ago, Quebec has to be a sovereign
nation state in order to fully participate in the global economy. This, the PQ asserted, is because
the rules of international trade favour nation-states, and all international trade organizations are
composed exclusively from countries (Fidler, 1991, p. 35).
Within a year of its inception, the Bloc Québécois argued that Canadian federalism is
unacceptable to Quebec. In particular, the Bloc cited constant federal deficit and public debt; a
federal economic policy unsuitable for Quebec ; inadequate federal job training; poor federal
funding for research and development; a swollen and costly federal public service; and a growing
regional and social inequality (Fidler, 1991, p. 47). Hence, in order to overcome these federal
shortcomings, the Quebec government must be allowed to take on a role of a national state. This,
according to the Bloc, will only become possible when Quebec becomes fully sovereign (Fidler,
1991, p. 47).
Also, according to the Bloc, Quebec, in virtue of being a province of Canada and subject
to interference from the federal government, is unable to coordinate its major social and
economic policies (Fidler, 1991, p. 49). Moreover, the Bloc asserts that promotional, and
research and development tools are heavily concentrated at the federal level, but do not get fairly
distributed among the provinces; with Quebec in particular not getting the share it deserves.
Also, Quebec gets proportionately less than Ontario in federal transfer payments, while high
interest rates and an overvalued dollar, created by the Bank of Canada, are damaging to the
Quebec’s economy (Fidler, 1991, p. 49).
According to a comment in a 1990 study by one of Merrill Lynch’s analysts, a separate
Quebec would be just as viable economically. After all, Quebec’s GDP for 1988 was U.S. $120
billion, which exceeds that of Denmark [$101 billion] and Austria [$117 billion], and is only
slightly below that of Belgium [$138 billion] (Grady, 1991, p. 31). Moreover, since monolingual
Anglophones form only 6.7% of Quebec’s population, there is little reason to believe that if
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Quebec separates, there could be an economically damaging exodus of English speakers. And
besides, many dissatisfied English speakers have already left Quebec during the tumultuous
1970s (Grady, 1991, p. 31).
Political and fiscal decentralization, and hence separatism, are economically
advantageous when individual mobility is costless and, in different localities, differentiated
bundles of public goods can be efficiently provided (Alesina, Perotti, and Spolaore, 1995, p.
753). On the other hand, there are at least four arguments which point to the economic benefits
of large jurisdictions (and hence show that separatism is economically unsound): (1) economies
of scale in the production of public goods and their ensuing benefits, are more likely to occur in
large jurisdictions; (2) problems of tax competition are frequently caused by externalities which
are more likely to be internalized by a large jurisdiction; (3) regional economic shocks are
considerably smaller under large redistributive systems that encompass several regions; (4) little
redistribution of wealth can occur in fragmented jurisdictions, even if taxpayers are concerned
about the welfare of others (Alesina, Perotti, and Spolaore, 1995, p. 752).
As far as interregional transfer payments are concerned, a political separation would, in
principle, only be beneficial to a region which is “subsidizing” the rest of the system. Quebec, on
the other hand, has been a net subsidized region from 1973 (and as of 1981 has remained as
such) (Polese, 1981, p. 15). And since political separation is incompatible with interregional
transfer payments, a politically sovereign Quebec would lose this income (Polese, 1981, p. 15).
Hence, if Quebec happens to be a net subsidized region at a time when it decides and manages to
separate, it will suffer a considerable economic loss.
In a report, regarding Quebec’s potential for independence, submitted in 1991 by Jean
Chrétien; Chrétien shows the downside of Quebec’s separation. He points out that Quebec
exports 53% of all of its exports to other parts of Canada, compared to 35% for Ontario; and asks
whether Quebec’s independence will preserve, if preserve at all, this trading relationship so
beneficial to Quebec’s economy (Fidler, 1991, p. 78). Chrétien also points out that Quebecers
support the NAFTA a lot more than any other Canadian nationals because they view it as being
highly important to their economic wellbeing. He then goes on to argue that an independent
Quebec may have considerable problems retaining all such beneficial treaties, as all economic
partners of Canada will likely want to examine an independent Quebec on its own terms before
re-establishing their economic relationships with it by agreeing to sign analogous treaties (Fidler,
1991, p. 78).
This uncertainty regarding the continuation of Quebec’s membership in the NAFTA in
the case of secession was stated by then federal finance minister Paul Martin, during the
campaign leading up to the 1995 sovereignty referendum in Quebec, to put 90% of Quebec’s
exports and hence almost one million jobs, at risk (Young, 2000, p. 314).
Also, according to Chrétien’s 1991 report, if Quebec separates, the public debt would
have to be divided between Quebec and the rest of Canada. To make it fair, Quebec would have
to take on, a per capita share of the federal debt, as of 1991, which when added to its own
provincial debt, as of 1991, will make Quebecers, on a per capita basis, some of the most highly
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indebted people in the industrial world (Fidler, 1991, p. 75). Finally, Chrétien points out that the
federal government, in fact, invested into Quebec more, on a per capita basis, than into the rest of
Canada. So he asks how the federal government will be compensated by Quebec, in the case of
separation, for all these investments (Fidler, 1991, p. 75).
In the view of most economic experts at the time of 1995 sovereignty referendum in
Quebec, even though a sovereign Quebec may not be worse off economically on its own, the
period of transition to sovereignty may very well have serious economic repercussions (Young,
2000, p. 324). In fact, transition to sovereignty could very likely involve a serious recession
which would damage both Quebec and the rest of Canada. In particular, in the view of most
experts, a vote in favour of secession would create great uncertainty among all investors, which
would lead to reduced flow of trade, reduced tax revenues, growth in deficits, emigration of
talent, and so on (Young, 2000, p. 324).
Also, not long before the sovereignty referendum in Quebec took place, Daniel Johnson,
the leader of the Quebec Liberal Party at the time, stated that a victory for the separatists, at the
referendum, will raise interest rates on various goods, adversely affect the mortgage rates, and
the value of the Canadian dollar. And if Quebec decides to produce its own currency, the value
of Quebec dollar would be 63 Canadian cents (Young, 2000, p. 327).
Also, not long before the referendum, the provincial premiers had their annual meeting, at
which they indicated that a sovereign Quebec should not expect to remain a party to
interprovincial trade agreements. The federalists also pointed out, at that time, that equalization
payments along with other transfers, currency, labour mobility, milk quotas, along with the
deployment of armed forces and associated jobs, were all under federal control. However, due to
their campaign strategy, the federalists avoided stating what exactly will happen to all these
variables in the case of sovereigntist victory (Young, 2000, p. 327).
According to Young (1999, p. 62), during the short period preceding the 1995
sovereignty referendum in Quebec, it was widely expected that a vote in favour of separation
would cause a sharp decline in the stock market. In one systematic retrospective study of this
feared event, that used implied volatility indexes, it was found that right after a sovereigntist
victory, the TSE index would have seen an immediate decline of 7-10%. Also, according to the
same study, a pro-separatist majority vote would not have caused significant differences in the
volatility of stock prices from province to province. In other words, a pro-separatist vote would
have devalued the shares of companies fairly equally, regardless of the province in which a
firm’s head office was located (Young, 1999, p. 62-63).
A survey of Canadian money managers was also conducted prior to the 1995 referendum.
It revealed that an overwhelming majority of these professionals expected that in the case of
separatist victory, there will be a downgrading of Quebec securities and there will be a widening,
by 100 to 150 basis points, of interest rate spreads between Canadian government and Quebec
bonds. The Canadian money managers also expected a downgrading of Ontario bonds and a
widening, by another 100 to 150 basis points, of interest rate spreads between Canadian and
American government securities (Young, 1999, p. 63). Moreover, if foreign investors thought
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that Ottawa might have no choice but to assume the whole national debt, or anticipated a long
period of uncertainty, then the downgrading of federal government bonds would certainly occur,
possibly to such an extent that it would be illegal for many investors to hold them. What’s worse,
the financial uncertainty following a separatist victory, could be great enough to make Canadian
government and corporate bonds go from downgraded to unrated, because the risk of holding
such bonds might be declared by the rating agencies as being impossible to evaluate (Young,
1999, p. 63).
In the event of Quebec’s separation, Quebec’s dairy industry will likely sustain a heavy
blow. In Canada, legislation achieves much higher prices for Canadian dairy products, than on
the world market, by setting production quotas and limiting imports. The dairy producers in
Quebec hold 48% of Canadian production quotas, and are entitled to sell a third of their produce
in other provinces (McCallum and Green, 1991, p. 28). Now, if Quebec separates, the rest of
Canada will most likely give Quebec’s quotas to its own dairy producers. This will nearly double
the supply of milk in the rest of Canada and completely eliminate the demand for Quebec’s dairy
products. So the Quebec’s dairy industry will lose a third of its market (McCallum and Green,
1991, p. 28). Alternatively, Quebec’s dairy producers might be able to sell their products to the
rest of Canada at, much lower, U. S. prices. Consequently, Quebec’s dairy producers will earn,
collectively, $150-250 million less per year, than they did in the days when Quebec was part of
Canada (McCallum and Green, 1991, p. 29).
Thus, as this paper has demonstrated, Quebec will suffer great losses in many economic
spheres, if it ever decides and manages to separate. Consequently, the economic arguments
advanced in support of the separation of Quebec from the rest of Canada, are not compelling.
5. Interdisciplinary, unpaid research opportunities are available. Various academic specialties are required. If interested, email me at
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References
Alesina, A., Perotti, R., & Spolaore, E. (1995) Together or separately? Issues on the costs and
benefits of political and fiscal unions. European Economic Review, 39, pp. 751-758.
Canada, Office of the Prime Minister. (1991) Notes for an address by Prime Minister Brian
Mulroney, Chamber of Commerce, Quebec City, Quebec.
Citizens’ Forum on Canada’s Future. (1991) Report to the people and government of Canada.
Ottawa.
Fidler, R. (1991) Canada, Adieu? Quebec debates its future. Halifax: The Institute for Research
on Public Policy.
Grady, P. (1991) The economic consequences of Quebec sovereignty. Vancouver: The Fraser
Institute.
McCallum, J., & Green, C. (1991) Parting as friends: the economic consequences for Quebec.
Toronto: C. D. Howe Institute.
Polese, M. (1981) Economic integration, national policies and the rationality of regional
separatism. Journal of Regional Science, 4(1), pp. 1-19.
Young, R. (1999) The struggle for Quebec: from referendum to referendum? Montreal: McGill-
Queen’s University Press.
Young, R. (2000) Quebec 1995: The rhetoric of the referendum. In: Galeotti, G., Salmon, P., and
Wintrobe, R. eds. Competition and Structure: the political economy of collective decisions:
essays in honor of Albert Breton. Cambridge: Cambridge University Press, pp. 309-336.