Canada’s Winter of Discontent

Did Canada squander its boom days?

Five years ago, I sat in an office in Johannesburg and listened to Moeletsi Mbeki explain how South Africa was living on borrowed time. He had just published an article in the local media saying that it was a matter of time before South Africa was ripped apart by something similar to the Arab Spring then roiling the Middle East. Mbeki, brother of the more famous Thabo and owner of one of the sharpest minds I have ever encountered, reasoned that South Africa was living on borrowed time, that her already-struggling economy was being kept afloat by high commodity prices, kept high by China’s voracious appetite for inputs to her factories. But Mbeki predicted that by 2020, ‘give or take a couple of years,’ China’s mineral-intensive development phase would end. At that point, South Africa would be forced to cut its social expenditure, and the existing model would collapse.

Mbeki was, if anything, too optimistic. Last year, commodity prices collapsed, and a wave of unrest spread from South Africa’s university campuses onto the country’s streets as the #FeesMustFall movement presses its demand for profound reform of higher education. But while Mbeki’s analysis restricted itself to South Africa, much the same point could be applied to any country that rode the resource-boom as if it would last forever.

Last summer, I returned to Canada to do some teaching at one of my alma maters here. When I landed, I had a deja vu feeling that brought me back to a moment fifteen years before. In the summer of 2000, when the dotcom boom was at its height, I’d landed in Washington DC at the start of a year-long fellowship at Georgetown University. After arriving, I went for a stroll through the neighbourhood I would make my home over the coming year, Georgetown. Strolling alongside the banks of the Potomac, I remembered staring in awe at the conspicuous consumption of designer fashions, streets filled with stretch limos, packed bars and restaurants, and free-flowing money. Americans were richer than ever, and were being egged on by a President and media who were feeding them a story that they’d continue growing rich forever. They were building up huge debts, but they were happy to run up their credit-card bills and home-equity lines of credit because their stock-market portfolios were making them richer by the day, driven higher by the surging tech sector. My warnings that the bubble would sooner burst, leaving everyone exposed, got little hearing.

I guess I have the charms of Cassandra, because I was back at it again, with the same success. Arriving in a Canada that seemed joyously rich, I encountered the same sense of abandon, spending on credit, and complacency that asset-values — this time around, their homes — would continue rising forever because the fundamentals were strong. The world needed Canada’s oil and minerals and the country was coming off a solid decade, having weathered the 2008-2009 global financial crisis better than most countries.

And then the oil price collapsed. The Alberta energy sector, which had been powering the Canadian economy, imploded. The Canadian dollar collapsed, and now the economy is sliding sharply. With oil prices plumbing depths not seen in a long time, and with structural factors in world oil markets suggesting it could be years before prices recover, if they ever do, Canada is suddenly looking at a bleaker future. To paraphrase Warren Buffett’s pithy quip, the tide went out and the country was shown to have been skinny-dipping all along.

Canada has many virtues, but economic inventiveness has not been among them — at least, not when compared to other Western countries with similar per capita incomes. As I always tell people, Canada is essentially a rich Third-World country. Ridiculously well-endowed by nature with natural resources, and with a relatively small population to share it out, the nation has been able to ride its way to prosperity on the back of strong commodity prices. But when you look at the figures for labour productivity, when you look at the environment for entrepreneurs, when you look at the number of start-ups in new industries and their success in penetrating foreign markets, Canada sadly doesn’t stack up so well. Canadians do create lots of new successful ventures; but they tend to do it in the USA, a country more receptive to innovation and entrepreneurship.  Its self-image has been of a country that has got everything right; but its economy is largely a reflection of a country that has just got lucky.

Now Canada’s luck has run out, and it will have to make some hard choices about its future. The coming years will provide a real test of the country’s character, and reveal if it has as much genius and adaptability as it would like to think it does.

 

Photo: City hall in a snowstorm, Kingston, Canada, January 2016

 

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