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York University
Administrative Studies
ADMS 1010
Troy Young

ADMS 1010 Lecture 1: September 6, 2012 Business In The Canadian Context The Economy • What is the economy? – The economy is a complex system that helps to define society. – Made up of many different important distinct but interconnected elements • Production • Allocation of economic inputs • Distribution of economic outputs • Consumption of goods and services • Composed of people, institutions, corporations, rules and regulations and the interpersonal relationships between all of these elements A Mixed Economy: What is it? • Canada has what is referred to as a Mixed Economy • A mixed economy contains both private ownership and state-ownership of the means of production, infrastructure, and institutions. • It allows for private financial decisions by businesses and individuals, but government has the ability to regulate business or prevent business from doing something *An example of government control in a mixed economy • In 1998, 4 of the 5 big Canadian banks were looking to merge (RBC with BMO, TD with CIBC). This was needed, thought the bankers, if Canadian banks were to remain competitive in the global marketplace. • Then Finance Minister Paul Martin would not allow the mergers to take place. • This is an example of the type of control the government can have over business. Types of Economies:  Feudal  Mercantile  Industrial  Technological Feudal Economy • Means of production and natural resources owned by central authorities (i.e. the King and the King’s appointed nobility) • Peasant farmers did not own the land they lived on. In return for being able to live on the land and reap benefits from its resources (mainly agriculture) the peasants were required to return a portion of their production to the feudal lords, in the form of labour or produce. Money was not often exchanged. • Feudal lords would provide protection to their serfs, but also could demand military service from them. Mercantile Economy • Mercantilism is the basis of early trade; the theory is that there is a fixed amount of wealth in the world and a nation should try to accumulate as much wealth as possible by exporting more than it imports. • Raw materials should not be exported, only finished goods as they are worth more. • Goods that can be produced internally should not be imported. Imports should be discouraged where possible; tariffs and non-tariff barriers to trade. • As a colony of Great Britain, Canada was to provide maximum material benefit to its homeland, with minimal investment or expenditure in the colony itself. • This was predominantly a Western European economic theory that dominated from the 16 th to the late 18 centuries. Industrial Economy • The transition from a low income economy based on agriculture or resource extraction into a higher income multifaceted economy that includes increased infrastructure, manufacturing and industry, increased education for its citizens and the development of financial institutions. • A modernization of institutions and society, often accompanied by technological advances. th th • The Industrial Revolution in the 18 and 19 centuries was a modernization in much of the Western world where incomes increased and the population started to grow rapidly. • Manufacturing becomes the predominant wealth generator. Technological Economy • Also referred to as a post-industrial economy, where the reliance on manufacturing is replaced by an increased reliance on the provision of services, information and research. • Knowledge is now a valued form of capital. • Spurred on by technological advances (i.e. the internet) and a by-product of globalization as manufacturing is often outsourced to other jurisdictions where labour capital is cheaper. What is an Ideology? • An ideology is a collection of ideas that allows us to view things in a common way and help form the basis of public policy development. • Nations tend to have dominant ideologies that have the greatest impact on how policy is developed. • Ideologies can change from time to time – Society alters its view on an issue; – New governments bring a different ideological bent to the way they do things; – Technological or great economic change can cause systemic shifts in ideology Examples of Ideological Change • Protestant Reformations in Europe: rejecting the authority of the Universal Church led to new yet similar religious organizations which in turn affected what was deemed to be the societal norm. • Calvinism vs. Catholicism – early church subordinated economic activity to spiritual growth; Calvinism embraced and even encouraged the development of personal wealth. • Economic Crisis of 2008: Conservative governments turned to corporate bailouts to avert financial disaster. Influential Political Ideologies • Socialism, Communism, Democratic Socialism (Collectivist Ideologies) • Liberalism, Utilitarianism, Libertarianism (Individualist Ideologies) • Conservatism • Corporatism Canada’s Dominant Ideologies • Political – Liberalism – Democratic Socialism – Conservatism • Economic – Capitalism within the context of a Mixed Economy Liberalism • Classical liberalism stressed the importance of individual property rights, natural rights, the need for constitutional limitations on government and freedom of the individual from any kind of external restraint. • Advocates the principles of representative government, the protection of civil liberties, and laissez-faire economics. • A natural union exists between Liberalism and Capitalism. • Globalization and Neo-Liberalism are often used interchangeably. Democratic Socialism • Democratic socialism took firm root in European politics after World War I. • Does not see capitalism as an evil that needs to be overthrown through revolutionary means. • Instead, tends to accept elements of capitalism, however, desire that government play an interventionist role in the management of the economy and markets. • Seen as an evolutionary process that works within the context of a democratic system. • Promotes the concept of a “welfare state” in which the government guarantees a basic level of services and protections to its citizens Conservatism • Classical Conservatism emphasizes the importance of tradition and continuity. • Generally sceptical of rapid change. • Advocates minimal but strong centralized government. • Can be further broken down into social conservatism and economic conservatism o Social Conservatism • Social Conservatives seek rather strong government intervention to prevent social change. Example: response to same-sex marriage legislation in Canada o Economic Conservatism • Opposes the Welfare State. • Seeks to eliminate government intervention and bureaucracy from business. • Taxation is seen as repressive and double taxation (taxing individuals and the companies they work for) is an impediment to free flowing business relations Economic Ideologies • Capitalism is the predominant economic ideology affecting the world today. • In the twentieth and twenty-first centuries, all capitalist societies have evolved to mixed economies with varying blends of political ideologies. • No single political ideology has a claim to capitalism. • The concept of capitalism can work under many different, even contradictory political ideologies. Capitalism • An economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market. • All modern Western economies contain some degree of capitalism. • The needs of the marketplace, not individuals, guide the decisions under capitalism. • Pure capitalism/laissez-faire capitalism advocates no government interference; this system in its pure form does not exist currently. • Western economies are mixed economies where production is mostly privately owned and governed by free market enterprise with varying degrees of government intervention. Settlement Patterns Influence Ideologies • First settlers in Canada were French – Pre-Revolution in France – Strongly Catholic – Agrarian in nature – Conservative in background; accepted the status quo Second Wave: The English • Influenced by the writers during the Age of Enlightenment – Protestant – Supporters of Liberalism – Arrived during the Industrial Revolution – Subjugated the French settlers by force (1759) Later Waves of Immigration th • 19 Century saw many different groups start to arrive in Canada; Social and economic changes created by the Industrial Revolution were major factors in waves of immigration crossing the Atlantic Ocean – Scottish – Irish – Germans – Italians – Jews – Eastern Europeans – Americans – Former Slaves – Chinese Canada’s Changing Ideology • Canada 1867: Early Mix of Conservatism and Liberalism • 1930’s – Depression leads into Democratic Socialism as the “safety net” is begun • Post World War 2: Things like Unemployment Insurance, Canada Pension Plan, Universal Health Care and Education become the norm • J.M. Keynes and his theories predominate until the mid 1980’s • Mid 1980’s – Rise of Neo Conservatism. • Current – Failure of unfettered capitalism, pendulum swings back towards Keynesian theory. John Maynard Keynes (1883-1946) • Keynesian economics stands as the most influential economic formulation of our time. • The free market could not succeed without direct and coercive government intervention. • He believed that high unemployment was a result of insufficient consumer spending and could be relieved by government-sponsored programs. • If necessary, governments should enter into a deficit in order to stimulate economic activity. • Unemployment could be reduced by government stimulus with a calculable cost to inflation. • Was attacked that his policies open the door to socialism, while others see his theories as being the balance between socialism and unfettered capitalism. Michael Porter • Michael Porter is one of the world’s most preeminent authorities on corporate strategy and the competitiveness of nations. • He has developed numerous economic theories and models to help ascertain competitiveness and strategy. • We will look at two: Porter’s Diamond Model and his Five Forces Model Porter’s Diamond • Porter’s Diamond is helpful in assessing the position of a nation in global competition. • 4 main factors, with two outside factors: – Factor conditions – Demand conditions – Related and Supporting industries – Firm strategy, structure and rivalry • Factor Conditions: determinants such as infrastructure, skilled labour, resources, etc. which can give a firm or nation an advantage over another. • Demand Conditions: What do consumers want? • Related and Supporting Industries: Do we have the subsidiaries to make our industry successful? i.e. a car manufacturer needs access to quality auto parts manufacturers. • Firm Strategy, Structure and Rivalry: Does domestic rivalry spur on innovation? Make firms competitive? • Chance Events: developments outside of a company or governments control, such as extreme weather or national disasters, wars, technological breakthroughs, etc. can influence the diamond’s results indirectly. • Government: can enact policies that influence each of the four determinants. • All of these factors (the 4 direct and 2 indirect) can have a major impact on the success or failure of a company and/or nation in any industry or venture Porter’s Five Forces • While the Diamond Model deals mainly with a nation’s ability to compete, the Five Forces Model deals mainly with industry and corporations. • The 5 Forces are: – The threat of entry of new competitors – The threat of substitute products or services – The bargaining power of customers – The bargaining power of suppliers – The intensity of competition The Stern Diamond • Also called the Diamond of Sustainable Growth, this was developed by economists at NYU’s Stern Business School. • It is modelled after a baseball diamond, with each base representing a different stage in development. The idea is to get to home plate. • Home Plate: Non-predatory government • First Base: an efficient financial system • Second Base: entrepreneurs • Third Base: modern management • For a country to get rich, they start at home plate and progress through each base, arriving again safely at home. • A country can be evaluated based on what base they are currently on.  “The growth diamond”, a country must first possess a solid home plate, a government that at a minimum protects the lives, liberty, and property of its citizens. Next, it must develop an efficient financial system capable of linking savers/investors to people with good business ideas, the entrepreneurs at second base. The managers at third take over after a product has emerged and matured.” Lecture 2: September 13, 2012 What is Canadian Business? Canada’s Economic History • Canada first caught the attention of European nations due to the abundance of fish off of our eastern coasts. • Many European nations, particularly Catholic ones, fished in our waters. • The French and the English were the first to establish settlements, mainly to preserve the fish they caught before transporting back home. • The fur trade soon begins to outdistance fishing as the major economic activity. Fur hats were all the fashion rage in Europe. • Fishing settlements tended to be seasonal, while those that grew up due to the fur trade were permanent (Montreal and Quebec City became important ports for the fur trade). • In what is now the US, agriculture played a bigger role. This labour intensive activity caused the population there to grow much faster than in Canada, as the majority of the fur trade was done in conjunction with Canada’s existing Aboriginal population. • The importance of the fur trade led to the development of the Hudson’s Bay Company, which was both an important trading company and property holder. HBC is North America’s oldest commercial venture, having been formed in 1670. • Timber would replace the fur trade in importance, as fashion no longer dictated the need for fur pelts. • Great Britain was fighting a series of wars in Europe. As an island nation, it relied heavily on the Royal Navy for protection and expansion of its colonial assets. • England’s meagre forests were all used up. There were limited places left in Europe to get the timber that was needed to build its fleets. • Canada had timber in abundance. The short growing season also contributed to the growth of tall, sturdy trees. • Great Britain became the world’s first true superpower, due in large part to Canada’s forests. • The labour intensive timber trade helped to spur immigration to Canada. Immigration patterns spread out along waterways. • Canal development (like the Rideau Canal linking Ottawa with Kingston and the Welland Canal, bypassing Niagara Falls) became very important in opening up Canada’s interior. • Railways, including lines linking Canada to US cities, also began to grow, further pushing immigration further and opening up new resources. The National Policy • Sir John A. Macdonald sought to strengthen the new Dominion both at home and abroad • It was based on high tariffs to protect the manufacturing industry. US firms were dumping surplus goods into Canada at below costs. • Macdonald hoped that by creating a strong manufacturing base in Canada, the nation would become far more secure and less reliant on the United States. • Construction of railways to link the two coasts of Canada and aid in the movement of goods. • Encouragement of immigration to Western Canada. • Exercise of residual legislative powers to establish a strong central government to unite, expand, develop and settle a newly established nation. Tariffs A Tariff is a tax on imported or exported goods. – A revenue tariff is set with the intent of raising money for the government. – A protective tariff, usually applied to imported goods, is intended to artificially inflate prices of imports and "protect" domestic industries from foreign competition. • If a country's major industries lose to foreign competition, the loss of jobs and tax revenue can severely impair parts of that country's economy. • Protective tariffs have been used as a measure against this possibility. • The disadvantages of protective tariffs are that they increase the price of the goods subject to the tariff, disadvantaging consumers of that good or manufacturers who use that good to produce something else Negative Side Effects of Tariffs and Quotas • It leads to the substitution of higher cost domestic products and lower cost imports. • Protectionist quotas can cause foreign producers to become more profitable, mitigating their desired effect. • This happens because quotas artificially restrict supply, so it is unable to meet demand. • As a result the foreign producer can command a premium price for its products Influence of Tariffs • Reduces both imports and exports • Collapse of trade when tariff barriers increase • The decline of tariffs are often accompanied by growth of non-tariff barriers Canada’s Economy Today th th • In the late 19 and early 20 centuries, manufacturing and agriculture became increasingly important. In the year’s leading up to World War 1, Canada had the world’s fastest growing economies. • In recent years, Canada has moved back to a resource based economy as oil and mining have taken on a larger role, while manufacturing, particularly in Ontario, has suffered a set back. • Canada still remains one of the world’s largest and strongest economies – Canada has weathered the current global economic crisis better than many other nations What are the questions concerning governments role in business? • Does government intervene too much in the marketplace? • Does the government have an obligation to its citizens to regulate business and protect consumers from unfair practices? • What is the appropriate role of government? Relationship Between Business and Government • Striking a balance between protecting the rights of Canadians while providing a stable and competitive economy for Canadian Business. The Role of Governments • Power Broker • Benefactor • Regulator • Protector What Business Wants • Stable and predictable relations with government. – Protecting native business from outside forces – Providing clear rules to operate under – Create an efficient and productive economy – Regulation of influences and costs to business i.e. hydro, insurance, etc. What Business Fears • An excessive amount of red tape and bureaucracy • Unstable playing field where changes are made due to political expediency • The decisions will be made that will affect the economy without the input of business • New regulations which will impact how business operates The Relationship Between Business and Government Governments Loves Business – Business provides jobs for the population – Governments derive tax revenue from the actions of business Business Loves Government – Government provides a stable economic environment – Government offers inducements to business – Government helps business enter the global market Government Hates Business – Business is often more concerned about profits than people – Business is always lobbying for tax cuts and other self-serving benefits – Business always wants something from government Business Hates Government – Governments regulate and place barriers before business – Governments tax business activities – Government never leaves business alone What is an Interest Group? • Defined as “an organized body of individuals who share some goals and who try to influence public policy.” groups are any group, organization or businesses that has a stake in government policy or the legislative process. • They can be from the business community, the non-profit community or even from a transnational organization • They are concerned with the process by which demands brought to the attention of the public and policy makers. • Representative of a broader group of individuals. • Not limited to influencing policy; may have other purposes too. • Examples include: Automotive Parts Manufacturers' Association of Canada , Canadian Manufacturers and Exporters, Canadian Association of Retired People. Features of Interest Groups 1. Multi-member organizations 2. Membership is voluntary 3. Highly dependent upon the active involvement of their members 4. Have a narrow focus of concern Functions of an Interest Group • Act as signalling mechanisms – let government know what is going on in a particular industry sector or society at large • Aggregating Interests – brings multiple people together with one voice • Provide Information – offer specialised knowledge to government on an issue • Contribute to Policy Development – can exert considerable influence on the shaping of policy • Provide Resources - Politicians and political parties are often the biggest beneficiaries of resources (both in terms of financial resources and human resources) • Acting as agents of government – provide services at a lower cost, or key politically sensitive issues arms-length from the government Corporate Interest Groups • While many benevolent and charitable interest groups do exist, perhaps the most influential and best funded interest groups are those run by the business community. • These groups often represent a single company or industry and seek changes to legislation that will benefit their industry only. • Sometimes the legislation they seek to change may be seen as a benefit to society, but a detriment to their business (Non-smoking regulations) • Usually Corporate Groups are defined as Institutional Groups • Business also have conflicting interests that they may work against each other together on. • These include seeking competitive advantages over rivals, regulatory approval, tax differentials, drug approvals, government contract, trade exemptions and legislative advantages. • In the areas of conflicting interests companies often seek advice from either an in-house government relations specialist or an outside government relations firm. Government Relations Firms • Often made up staff that are either former public servants, political staff or former politicians. • GRFs have ties to many politicians and political parties and are often able to facilitate meetings faster and are more likely able to influence policy decisions than other groups. Why Do Interest Groups Try to Influence Public Policy? • Public policy development and legislation is a public process. • Legislation is tabled in the house or legislature, and is debated in committees. • The object of a government relations specialist is in introduce his opinions and thoughts into this process, often prior to it becoming debated in the public realm. • This can be targeted at many different entities in government. Targets for Policy Debate • Cabinet • Individual Elected Officials • Political Parties • Public Servants • Voters • Media How Interest Groups Operate • Interest groups use a great deal of money and resources to effect public policy change. • These dollars are derived from two sources. – Donations and grants from their members or monies from the broader community. – Government support, through tax deductions or otherwise. • They directly lobby government on an almost daily basis. • They contribute to the making and implementing of public policy. • They are viewed by governments in general as spokespeople for a segment of the electorate. • Whether you know it or not, some interest group is speaking for you. How Interest Groups Try to Influence Public Policy Direct Influence Techniques • Direct Lobbying – meeting with decision makers • Stimulation of the Grass Roots – engaging the public on an issue • Direct Action Activities – protest rallies, boycotts • Litigation – court challenge of legislation Indirect Techniques • Media and Public Relations - Use the media to pressure the policy makers to make the desired changes to legislation • Advocacy Advertising- similar to media relations, but using paid advertising to educate the public • Think Tanks – Draft policy papers regarding legislation • Election-Related Activities/Doing Favors – make contributions (monetary and volunteers) to political campaigns, endorsements of candidates or party platforms Lobbying vs. Advocacy • Lobbying is the practice of influencing a governing body, in order to ensure that an individual's or organization's point of view is represented in the government. • A lobbyist is a person who is paid to influence legislation as well as public opinion. • Lobbying is in many countries a regulated activity, with limits placed on how it is conducted, in an attempt to prevent political corruption. • Advocacy is a form of Lobbying, much as Lobbying is a form of Advocacy. • Lobbying is often a more direct form, seeking specific changes to legislation. Often out of the public eye. • Advocacy is the positive and non-deceptive sharing of information, using information to change policy. Usually a much more open and public process. Growth of Lobbying • As governments grew in the 1970’s and 1980’s in Canada and the United States, so did the business of government relations. • The business of government became increasingly more complicated and difficult for the public to understand. • Emerging from this was a proliferation of issue specialists, who often knew more about individual issues than most legislators. • They came from almost any group you can name. Tools of the Lobbyist • Most government relations’ work is done behind the scenes in informal settings. • Lunches, dinners, golf games, and nights out are the stock in trade of the lobbyist. • Why is this? The Best Approach to Lobbying • Draw attention to elements of public policy that are inconsistent with prior commitments or policies of the government. • Draw attention to elements of public policy that are consistent with prior commitments of policies of the government. • Persuade government to soften the impact of legislation that will damage or destroy the business of the industry in question. • Good lobbying also has a polling element attached as well. Lecture 3: September 20, 2012 Defining Canada: Federalism, Currency and Banks Definition of Federalism • Distribution of power in a federation between the central authority and the constituent units (as states or provinces) involving the allocation of significant lawmaking powers to those constituent units • A system of government in which power is divided between a national (federal) government and various regional governments. What is the State? • For the purposes of our discussion, the state is a geographically defined entity that exists under one political structure without being subject to another political authority. • The term state is often used interchangeably with the term government. • Is Canada a state? Is Ontario a state? Is the City of Toronto a state? Examples of Federalism • Canada is a federalist state, with three levels of government • The United States is also a federalist state with three levels of government • Federal government in both examples exerts strong central authority, yet leaves significant decisions and powers up to the regional constituencies. Differences Between US and Canada Canada • All powers not specifically reserved for the provinces are allotted to the Federal government. United States • All powers not specifically reserved for the Federal government are allotted to the States. The Unitary State: An Alternative Federalism • Power is located in one central authority. • Local authorities are subordinate to the central power. • The legislature may remove the power granted to it by the central government. • Example: Municipalities are subordinate to the provinces in Canada. Their decisions can be overruled by the provincial legislature that they are under. • Great Britain is an example of a Unitary state When Federalist Becomes Unitary • In times of great crisis, a unitary state can evolve from a federalist one – During World War II, the federal government assumed powers that were previously in the hands of the provinces; this went back to normal after the war What determines a Federal State? • There is a legal guarantee of authority to each of the regional authorities. • This justifies the coordination and cooperation with the central authority. Dual Challenge of Federalism • A federal state must attempt to build a national strategy. • Develop a transfer payment policy that redistributes Canada’s wealth fairly. • A federal state must attempt to appease regional interests. • Example: Canada must help poorer areas of the country with tax dollars generated in Alberta, British Columbia, Saskatchewan and Newfoundland. • Result: Alberta, British Columbia, Saskatchewan and Newfoundland send more money to Ottawa than they receive in services. Federalism in Practice • This arrangement not only allows provincial governments to respond directly to the interests of their local populations, but also serves to check the power of the federal government. • The federal government determines foreign policy, with exclusive power to make treaties, declare war, and control imports and exports; Provincial governments oversee the provision of education, health care, social services and the creation of municipalities. • Neither level of government can subordinate or overrule the authority of the other. • The power of the central authority (i.e. the federal government) extends throughout the country and is “higher” than the power of each regional authority • In the event of inconsistency between federal law and a provincial law, it is the federal or national law that prevails. The Government of Canada: An Evolution • France was the first European nation to colonize Canada. • France ceded its Canadian possessions to Great Britain after the Seven Years War (1763). • The English left much of the religious, political and social culture of the early inhabitants in place. • Many more English arrive after the American Revolution in the form of United Empire Loyalists. • Canadian identity begins to emerge after the War of 1812, mainly due to mistrust towards our American neighbours. • Canada becomes a nation unto itself with the British North America Act, 1867 Development of Canadian Federalism • The ultimate aim was to found a transcontinental nation in the form of a constitutional monarchy under the British Crown. • A strong central government was desired and if a legislative union was impossible because of the peculiarities of Quebec and its desire to retain these, then a strong and highly centralized federal union would be the answer. • Fathers of Confederation felt that the American government had given the individual states too much power and did not want to repeat these mistakes. • Federalism is suited for independent regional entities that find it necessary to address issues that they could not deal with individually – defence is a good example. • Quebec at that time saw the development of a federal Canadian state as a way to continue to guarantee the preservation of their unique culture. • Increasingly it was worried that the Canadian colonies were the targets of American aggression. • There were economic benefits for the individual colonies to come together as well. The Constitution • A country's constitution defines the powers and limits of powers that can be exercised by the different levels of government. • The British North America Act, 1867, by which the British colonial provinces of Canada (Upper and Lower), Nova Scotia and New Brunswick were united to create the Dominion of Canada, served as our constitution until 1982. • The BNA Act did little more than provide for confederation, not even having the inclusion of an amending clause. • Until 1982 any necessary amendments to the BNA Act were enacted by the Parliament in England. • The Constitution sets out the basic principles of democratic government in Canada. It also defines the powers of the three branches of government: the executive, the legislative and the judicial Division of Powers in Canadian Federalism Selected Federal Powers • The Public Debt • The Regulation of Trade and Commerce • Postal Service • The Census and Statistics • Militia, Military and Naval Service, and Defence • Sea Coast and Inland Fisheries • Currency, Coinage and Legal Tender • Copyrights. • Natives, and Lands reserved for the Natives • Naturalization and Aliens Selected Provincial Powers • Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes • The Establishment, Maintenance, and Management of Hospitals, Asylums and Charities • Municipal Institutions in the Province • Shop, Saloon, Tavern, Auctioneer, and other Licences in order to the raising of a Revenue for Provincial, Local, or Municipal Purposes • The Solemnization of Marriage in the Province • Generally all Matters of a merely local or private Nature in the Province The British North America Act 1867 Impact of Federalism on Business in Canada • 60% of Canada’s population live in Ontario and Quebec. • This is the “heartland” of Canada. • The majority of manufacturing occurs in this region. • This concentration into a relatively small geographic area (from Windsor to Quebec City) contributes to the alienation of other provinces in Canada. • Canada’s federal parliamentary institution and the representational breakdown aggravates these divisions • Ontario has 106 of 308 seats in parliament; Quebec has 75. • The West combined (BC, Alberta, Saskatchewan Manitoba): 92 • The East combined (Nova Scotia, New Brunswick, PEI and Newfoundland and Labrador): 32 Money and Federalism • Fiscal and administrative arrangements are a key component of federal-provincial relations. • How much and who gets what is the defining question of the Dominion of Canada. • Politics plays a key role, but there are other elements. Federal Activism • Since World War II, Feds increasingly involved themselves in Provincial affairs. • Used transfer payments to coerce the provinces into adopting new national programs. • Conditional grants can distort provincial budgetary priorities. • The federal government can increase their influence in areas of Provincial jurisdiction. Equalization Payments • Equalization payments have mostly been criticized by leaders of the wealthy provinces. Premiers of oil rich Alberta and Ontario with its large manufacturing base have both criticized the drain on their citizens' finances. • Some economists also believe that they have contributed to the Martimes' longstanding economic backwardness. Under the current system there is no encouragement for an area to develop new profitable industries. • Example: Newfoundland and Nova Scotia off-shore oil deals (Atlantic Accords) • What is Equalization? • Equalization is the Government of Canada’s most important program for addressing fiscal disparities among provinces. Equalization payments enable less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation. • The purpose of the program was entrenched in the Canadian Constitution in 1982: "Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation." (Subsection 36(2) of the Constitution Act, 1982) • Equalization payments are unconditional – receiving provinces are free to spend the funds according to their own priorities. • Equalization reduces fiscal disparities among provinces. • Equalization payments enable less prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of taxation. • Newfoundland, British Columbia, Saskatchewan and Alberta not to receive Equalization payments. • Currently at $14.7 billion a year. • Until the 2009-2010 fiscal year, Ontario was the only province to have never received equalization payments; in 2011-12, it will receive $2.2 billion in equalization, up from $347 million in 2009-10 • Quebec receives $7.8 billion. Why? • not-actually-means-has-no-oil • changes-tune-equalization-payments-203439161.html Other Federal Government Interventions • Federal government can also give economic incentives to an area to encourage the development of new industries and job creation – Loan guarantees – Tax incentives – Cash grants – Marketing and promotion – Bailouts Other Federal Government Interventions • Using these federal initiatives, the government can steer development from one area of the country to another. – Bombardier Example: In March 2005, Quebec was the winner in a bid to host a new Bombardier Jet plant. The federal government committed $400 million to the bid to have the plant located there. Ontario (Toronto) was the second place bid. Without the federal money, the Ontario bid would have been the most lucrative. Impact of Federalism on Business in Canada • Market forces alone no longer dictate a company’s response to emerging opportunities or its decision with regard to location. • Industrial Incentive Programs tend to direct new business to areas where unemployment is high. • Politics plays a very big part in the awarding of grants and capital for companies. • Earlier Bombardier example: Pundits believe the reason the federal government guaranteed the $400 million to chose Quebec over Ontario was in part due to the effects of the sponsorship scandal in that province. • Do the companies really need the grants, or would they have done it anyway? • Grants to one company could hurt other existing companies who have not received grants. • Industrial incentive programs may accrue to multinational companies in foreign countries. • Could lead to ‘bidding wars’ between neighboring provinces or countries to secure the relocation of large companies. • Government intervention can create artificial marketplaces. Compare Canada to the US via the Stern Diamond, 19 Centuryh Canada (Ontario)  Colony of Britain, with distant government. • Limited banking institutions. • This provides limited credit, stifling entrepreneurship. • Limited growth means limited opportunity for competent management to evolve. US (New York State) • Local, non-predatory government desperate to encourage growth in the economy. • Modern banking institutions. • Availability of credit encourages entrepreneurship. • Economic growth encourages efficient management. Lecture 4: September 27, 2012 A Mixed Economy: What is it? • Contains private ownership and state-ownership of the means of production, infrastructure, and institutions • It allows for private financial decisions by businesses and individuals • Government has the power to override these decisions through legislation A Market Economy: What is it?  A market economy is an economy in which goods and services are traded.  Governed by the law of supply and demand  Prices are determined in a separate market for each commodity Performance Criteria of a Mixed and Market Economy 1. The emphasis is on achieving maximum output per person or per person employed 2. Freedom of choice is available to both producers and consumers What is Competition?  Buyers and sellers interact to establish prices and exchange goods and services.  Causes firms to develop new products, services and technologies.  Consumers get greater selection and better products.  Greater selection causes lower prices What is Protectionism? • Using Tariffs or other non-tariffs barriers to lower importation of goods. • Attempts to strike a competitive balance between imports and domestically produced goods. • Contrasts with the free trade model, the goal of which is to eliminate barriers to trade. • Protectionism tied to Mercantilism. • Sought to achieve a positive trade balance by limiting imports. • Modern economists feel protectionism impedes economic growth. • Most modern nations turn to protectionism to help industries deemed to be of great political importance. Types of Protectionism • Tariffs • Subsidies (direct or export) • Import Quotas • Manipulation of a country’s currency value Agriculture and Manufacturing • Agriculture and Manufacturing are two industries that often have protectionist policies attached to them. • Agriculture often has subsidies; Manufacturing can have subsidies but will often have tariffs as the main protectionist policy. Farm Subsidies • Governments want to make sure that they can feed their population. – The Dust Bowl during the Depression helped to create farm subsidies in the US. • They also want to make sure there is no overproduction; – Farmers will be paid to grow less. – If there is overproduction, the government will buy the excess crops. • This excess can often be given to poorer nations as a means to increase a nation’s geopolitical influence. • Critics of Farm Subsidies complain that most of these subsidies are given to large corporations that do not need them. – Industries like the corn industry, which is often tied to the obesity epidemic, receive some of the highest subsidies. • While subsidies can keep food prices low, it is often only the wealthiest nations that can afford to give them. • Developing nations often have a comparative advantage in agriculture, but this is erased by wealthy nations providing subsidies. • Most countries have some form of agricultural subsidy. – Agriculture is an important and financially lucrative industry. • These subsidies lead to great distortion in international trade. • The WTO has attempted to rectify this, but these types of subsidies are hard to do away with since countries are reluctant to drop them. – Farm subsidies in the US alone are about $20 billion a year. – Mexican farmers, which were protected prior to NAFTA by heavy tariffs, were dramatically hurt when the tariffs were removed and Mexico could not match the US subsidies. Manufacturing Tariffs • Manufacturing often has tariffs applied to it. – It is highly labour intensive. – Finished goods are easily traded. – Is greatly impacted by economies of scale; those countries with larger markets can often be more competitive than smaller nations. – New industries often need protection to establish themselves. The History of Canadian Protectionism • The Reciprocity Agreement of 1854 • The National Policy of the 1870’s • The Reciprocity Agreement of 1911 • The General Agreement on Tariffs and Trade in 1947 (GATT) What are Free Trade Agreements? • Free Trade Agreements are designed to increase trade between the signatory countries. • The layout the limits and allowability of tariffs, quotas and other protectionist policies. • Can cause economies to grow by adding new markets and encouraging comparative advantage; can also cause job loses as jobs shift to jurisdictions with lower costs. Reciprocity Agreement of 1854 • Canada needed to find new avenues to sell its products due to the cancellation of the Corn Laws in Great Britain which put tariffs on goods coming from outside the British Empire. • The United States represented a huge opportunity with its large growing market and proximity to Canada. • Americans were granted the right to fish in Canadian waters while Canadians could sell raw materials and agriculture products without tariffs in the US. • Tariffs were reduced on many non-manufactured products. A 15% tariff was introduced on manufactured goods; later increased to 20% by the Galt Tariff of 1858. • Pressures around the American Civil War and the desire by American businesses to return to protectionist ways lead to its repeal in 1866. • This repeal helped to push Canada towards Confederation. The National Policy • Macdonald sought to strengthen the new Dominion both at home and abroad • It was based on high tariffs to protect the manufacturing industry. • There were few factories in Canada when the policy began. • Wanted Canada to be secure and less reliant on the United States. • US imposed high tariffs on Canadian goods, thus making it impossible for them to compete in the US. • US companies were dumping products at lower cost in Canada. • Canadian business would have preferred free trade. • Tariffs on raw materials were lowered to help manufacturers. • The National Policy was popular in Toronto and Montreal, but not in Western Canada • Made agricultural equipment more expensive • Made Canadian farmers have to compete on the international market Did it Work? • Manufacturing played a relatively small role in Canada’s economy when introduced • Raw material industries suffered due to the policy • Canada did see an economic boom and the creation of a strong manufacturing base, but this was occurring globally at this time • It increased prices and hurt Canada in global competition. • Too many inefficient companies that could not compete without these protectionist polices in place were created. • Prices were higher than necessary due to a lack of competition. • On a positive side, it did create the railway which led to an interconnected nation. • Westward settlement expansion. • Economists will say the National Policy was bad, while historians will say it was good. The Reciprocity Agreement of 1911 • The Liberal Government in the lead up to the 1911 election negotiated a free trade agreement with the US. • The West, seeking markets for its agricultural products, had long been a proponent of free trade with the United States. • The protected manufacturing businesses of Central Canada were strongly against it. • The powerful manufacturing interests of Toronto and Montreal switched their allegiance and financing to the Conservatives. • The Tories argued that free trade would undermine Canadian sovereignty and lead to a slow annexation of Canada by the U.S. • Liberals lost the election. • Free Trade put on hold until 1988. • It is important to note: • THIS AGREEMENT WAS NEVER RATIFIED! GATT • General Agreement on Tariffs and Trade functions as the foundation of the WTO trading system. • It is an international agreement that intends to limit tariffs and other trade barriers. World Trade Organization • The WTO was created on January 1, 1995 to replace the General Agreement on Tariffs and Trade. • Deals with regulation of trade • Formalizes free trade agreements between nations • Dispute resolution panels • 157 members, representing 97% of the world’s population, including Canada, currently belong to this organization. The Evolution of Protectionist Intervention in Canada • Keynesian ideas and formulas were no longer working; he believed “stagflation” was impossible • Inflation erupted • Unemployment rose • Critical shortages and rising costs of energy changed the economy • Social Welfare spending by government continued to grow What is Stagflation? • Stagflation is a term in macroeconomics used to describe a period of characteristic high inflation combined with economic stagnation, unemployment, or economic recession. • It occurs when demand for products is high, but is also accompanied by high unemployment • The 1970’s was a time of high stagflation in western economies. Arguments for Protectionism • To develop new industries and allow them time to become competitive. • To influence the redistribution of income. • To expand employment. • It can weaken domestic industries • Without competition, innovation is stifled and products and services never improve • Consumers end up paying more for goods and services for lower quality products • Job outsourcing can occur, as companies can find innovative solutions to problems by employing people in other countries to do the work • Slows economic growth • Invites other nations to retaliate with protectionist policies of their own * Arguments for and against protectionism * Smoot-Hawley Tariff Act: A warning against Protectionism • The Smoot-Hawley Tariff Act was introduced in the US in 1930. – It was in response to the Great Depression. – Instead of helping, it shows the retaliatory nature of protectionism. – Global trade decreased, making it harder to get out of the Great Depression. – Lead to the wave of more open global trade that occurs with the introduction of GATT after World War 2. Offshoring and Outsourcing • Offshoring is the physical relocation of a plant or business to another jurisdiction. • Outsourcing is the removal of part of a businesses internal process to an external company; in this context, that means to a company in another jurisdiction. • What has the effect been in Canada? • Both have seen the transfer of jobs to other jurisdictions. • Increased demand in Canada for skilled workers, as most jobs affected are low- or unskilled jobs. • High tech jobs are the anomaly to this as many are turning to computer programmers for example from other countries who are willing to do the work for less. • Low value-added processes (payroll, call centres) are often outsourced. • High value-added processes (human resources, financial strategy) stay here. • The net result has been limited job losses (low-skilled jobs replaced by high-skilled jobs). • Requires a re-education of the existing workforce. • Canada, due to its proximity to the US, can in fact lose some of its higher level functions to the US. Officially Countries Deny Protectionism and Favor Free Trade • People support free trade when economies are booming and jobs seem secure • Non-protectionist activities are enforced by international treaties and organizations such as the World Trade Organization or NAFTA. • Many countries place protective and/or revenue tariffs on foreign products to protect some favoured or politically influential industries `reduce the taxation on domestic manufacturing making their products more competitive • When recessions occur, many countries become even more protectionist because of national interest and pressure from organized labor and other interest groups. Protection of Canadian Culture • An example of protection of a Canadian industry is Canadian content laws in the broadcasting and print media. • Canadian Radio and Television broadcasters must air a certain percentage of content that was at least partly written, produced, presented, or otherwise contributed to by persons from Canada. • The Canadian Radio-television and Telecommunications Commission (CRTC) regulates this industry. How this is done in the music industry • To qualify as Canadian content, music must generally fulfil at least two of the following conditions: – the music is composed entirely by a Canadian. – the music is, or the lyrics are, performed principally by a Canadian. – the musical selection consists of a live performance that is: • recorded wholly in Canada, or • performed wholly in Canada and broadcast live in Canada. – the lyrics are written entirely by a Canadian. Massey-Harris • The story of Massey is one of the great Canadian entrepreneurs. • The Masseys started out in Cobourg, renting land and clearing the timber, selling the timber and using the profits to buy the land he just cleared, which he would farm until he could sell it as cleared farmland. – With the influx of settlers, farmland was highly desired. Cleared farmland meant that the new immigrant could start farming right away without having to clear the land themselves. • Ended up founding a new farm implements business in Newcastle in 1847. Daniel Massey started out using license purchased from US manufacturers. – These same implements if purchased directly from the US would have had a tariff attached. – Purchasing existing licences freed Massey from the cost developing their own products. • Hart Massey, Daniel’s son, shared the same entrepreneurial drive. – He imported the latest machinery before his competition. – He altered existing designs to make them more suited to the needs of Canadian farmers. • The following things benefitted Massey as well – The new Grand Trunk Railway linked Toronto to Montreal; his factory in Newcastle had access to this rail link. – The development of Red Fife Wheat made wheat farming more profitable in Canada, expanding the demand for Massey’s products. – Scarcity of labour made it necessary for farmers to become more automated. – Limited transportation prevented foreign competition from being developed. – The Reciprocity Treaty of 1854 allowed for the increased sale of Canadian agricultural products into the US. It also allowed Massey to import timber cheaper (lowering his input costs) and allowed farmers to import coal cheaper (thus making it more cost effective to operate coal-powered machines, increasing the demand for Massey products). – Open trade with Britain allowed Massey to import British steel, which was of greater quality to US steel, thus improving his products. • Massey was also effective in marketing their products. They developed a catalogue and started to offer credit. • Being chosen to represent Canada at the 1867 International Exposition in France was a huge benefit to Massey, but also perhaps stifled long-term growth. – Massey started to export to Europe. Europe demanded new farm machinery; European produced implements were of lesser quality. – It was cheaper to export to Europe than to the Western Canadian provinces (this was before the construction of the railway to BC). – Because of their European success, Massey failed to establish itself in the US and the Canadian West, which would eventually hurt the company. • The National Policy proved to be a near disaster for Massey. – It was aimed in part to encourage the use of Canadian steel by adding tariffs to US steel producers. Canadian steel could not handle the demand, forcing Massey to buy from the US and pay the tariff. This drove up input costs and made them less competitive internationally. – Massey merges with the Harris company to take advantage of economies of scale and remain successful in this new economic climate. – Government eventually reduces the tariffs on farm implements and offered back a 99% rebate on tariffs paid on US materials used to make implements for export, making their international venture profitable again. • Massey-Harris was not without challenges. – Their lack of presence in the Canadian West opened the door for US companies. – Their failure to develop a branch plant in the US prevented them from making huge inroads into the US market. • Massey-Harris did continue to grow internationally, becoming the largest farm implement company in the British Empire. • It would merge with Ferguson in 1953, becoming Massey-Harris-Ferguson, eventually becoming Massey- Fergusson in 1958. By 1962 they were the world’s largest tractor brand, with most of the tractors in the world being Massey Ferguson. • Massey-Ferguson would continue to expand and merge and buy international companies. The recession in the early 1980s and the general decline in the demand of farm implements would hurt the company. • Massey-Ferguson was eventually bought by a variety of different companies, and is now owned by AGCO out of Georgia. It exists today only as a brand name (tractors are still sold under the Massey-Ferguson brand). Lecture 5: October 4, 2012 The Government in the Economy Keynesianism and the Depression & Crown Corporations Why does the Government Intervene in the Economy? • In a free market economy, market forces determine the allocation of resources based on the decisions of consumers and business. • The government can intervene to correct what they perceive to be an inefficient allocation of resources (known as a market failure). • The main reasons they intervene are: – To correct for market failure – To redistribute wealth – To improve economic performance • The government can intervene through: – Legislation – State provision of goods and services • In Canada this would be done through the use of Crown Corporations – Fiscal Policy • Taxes and subsidies Rise of Keynesianism • The Great Depression brings previously unheard of economic despair to Canada and the Western World • Due to our reliance on exports, agriculture and manufacturing, the Great Depression hurt Canada more than most other countries. • The Great Depression changed the view of state intervention into the economy. • Ultimately, it was decided that the marketplace could not correct itself. • It was up to government intervention to kickstart the economic recovery. • John Maynard Keynes’ theories become prevalent in Canada starting in World War II. • The government needed to take an activist role in the economy by increasing spending and reducing tax rates. • Creating Crown Corporations and growing the size of government was just one way to achieve this. • We recall that the rise of the public service was created out of the demands of easing the Great Depression. • Increases in business regulation. • Increases in social welfare services. • The idea that government could solve every problem from unemployment to socialized medicine. • The electorate voted in political parties who promised more government services. Decline of Keynesianism • Keynes’ theories continued to dominate until the 1970’s, when other external and internal pressures made it impossible for government to intervene – i.e. increased cost for oil; high unemployment, high inflation • Unfortunately, it was paid for with borrowed money. • The impact of the recessions of the 1970’s and 80’s left governments broke. • Governments turned from expenditure to inflation and budgetary control. • Rise of Neo-Conservatism. The Return of Keynesianism • With our current economic crisis, there has been a return to Keynesian economics. • Governments are now going into debt to try to stimulate spending. • The Ontario government in 2012 posted a $15.3 billion deficit; expected to continue to run a deficit until 2017/18 • The Federal government budgeted for a $21 billion deficit in 2012 with the deficit expected to be eliminated by 2014/15 An era of Nationalization and Canadianization • Nationalization is the act of taking assets into state ownership • Occurs when government purchases an existing company or creates a new one • Done to enable the government to manage the economy better in terms of long-term development and medium-term stability • Give a recent example of where this is happening in the world? • The creation of crown corporations in the 1960’s and 1970’s, plus the ever expanding role of government after World War 2 helped kick start this era of Nationalization (Canadianization) Critics of Nationalization • Claimed that government measures distorted market values and resulted in inappropriate compensation. • The impact of the recessions of the 1970’s and 80’s left governments broke. • Governments turned from expenditure to inflation and budgetary control. • Rise of Neo-Conservatism Neo-Conservatism • Neo-Conservatism takes hold of western nations, starting with the election of Margaret Thatcher in Britain and followed by the elections of Ronald Reagan in the US and Brian Mulroney in Canada. • Privatization, sliming down of the civil service, competitive treaties like NAFTA become the norm. • Mike Harris’ “Common Sense Revolution” is a prime example of Neo-Conservative ideals. The Welfare State • Term first coined during World War II • Becomes very prominent in Canada in the 1960’s • Has three main provisions: – Minimum income – Protection from economic insecurity due to sickness, old age or unemployment – A variety of social services • While important, it is costly. – Deficits grew as government became involved in more aspects of peoples lives. – Government grew; every new program needs workers to administer it. – Governments became almost broke. Government in the Economy • The 60’s and 70’s saw the creation of many Crown Corporations that competed directly with other private corporations. • Governments intervened heavily in the economy. • Deficit spending was common in the late 70’s and early 80’s as governments tried to spend their way to prosperity. • The Federal Government ran budget deficits every year from 1975 until 1995. • With the various stimulus packages, governments are once again trying to spend their way into prosperity, and the return of budget deficits. Two Approached to Running the Economy • One camp favors government intervention believing politicians and bureaucrats can orchestrate the economy from above. • Ideology: Democratic Socialism, John Maynard Keynes • The other camp argues for tax cuts and a reduction of governments role in the running of citizens lives. • This they argue is the only way to achieve productivity • Ideology: Neo-Conservatism, Liberalism, Adam Smith Growth of Government • Canada’s well-developed welfare state has contributed to the creation of a large public service • Areas in which governments employ people: – Education – Health Care – Protection (i.e. police, fire and military) – Administration of programs How did the Canadian Government Grow? • Most of the increased spending between 1965 to 1975 occurred in the form of transfer payments to individuals through higher unemployment insurance, family allowance and old age security payment. • Creation of new departments to administer new initiatives. • Significant growth of crown corporations and regulatory boards. • Increased specialization and professionalism of the public service to deal with greater complexity of problems. Crown Corporations • A common target of government for privatization is crown corporations • A crown corporation is any enterprise that is substantially owned by the government • It is an institution brought into existence by government to serve a public function • It is a hybrid; somewhere between a private business and a government agency • The theory behind a Crown Corporation is that it is more efficient than a government department because it is arm’s length from the government, allowing it to be run like a business • Have the following characteristics: • A majority of the ownership must be vested in government • Management of its affairs must be relatively independent from government • Its primary role must be to provide goods or services to the private sector, not to the government • The prices its sets for these goods and services must reflect the costs of providing them Why does government create Crown Corporations? • As nation building tool in the promotion of transportation, communication and resource development. • As a means to promote regional development. • Unwillingness or inability of private firms to provide important services. • Where the industry may lend itself to a natural monopoly (power, water). • Where the industry might experience wide price fluctuations and incomes (natural resource sectors). • Control industry that has “undesirable elements” in it (alcohol distribution, gaming). Some examples of early Crown Corporations • Hudson’s Bay Company: while not owned by government, managed the majority of the land in Canada on behalf of the British Crown. • Canadian National Railway: Created to prevent a bankruptcy and monopolization of an important industry. • LCBO: Created to control the sale of alcohol (seen as an undesirable commodity) Canada’s First Crown Corporation: CN • Let’s set the stage: – Canada was in the middle of World War I – There were political divisions between English and French Canada – 3 Transcontinental railways helped to create “The Railway Mess” – Royal Commission on what to do with the Canadian Northern Railway The Railway Mess • 3 transcontinental lines for a population of 8 million lead to overcapacity. The lines were not economically sustainable. • The government already had an equity position in the Canadian Northern Railway from a bailout in 1913 and took over part of the Grand Trunk in 1915. • The railways all had substantial debt. • Inadequate rolling stock. • Great Britain bans the export of capital. • Canada’s creditworthiness as a nation and its ability to continue in the war effort were being called into question. • CNR and GT continued to ask for bailouts. • To allow these two railways to collapse would have been devastating financially to Canada. • Provincial governments had provided financial guarantees. • The Bank of Commerce would likely have failed as CNR was heavily indebted to it. The Crown Corporation: CN • The Royal Commission minority report gave three options to Prime Minister Borden: – CNR take over the GT in the west – GT take over CNR in the east – The Government run the uneconomical linking railway between Quebec and Manitoba • The majority report recommended the government take over all rail lines except those operate by Canadian Pacific. – CP was worried about having to compete against a government owned railway. – Ultimately the government agreed to this recommendation. • The creation of this Crown Corporation was the best of many undesirable choices: – The government was heavily invested in these railways already. – Collapse of the railways would have been devastating to our banking industry and to our creditworthiness as a nation. – Pressures due to the war were contributing factors to the failings of the railways. – Ultimately it was the government’s allowing for the creation of the third line that brought the railways to the edge of disaster. • Government had no choice but to fix the problem them helped create. The Attack on Crown Corporations • Crown Corporations were attacked by their critics as being: • Costly • Bloated • Unresponsive • Unaccountable • That they compete unfairly against the marketplace. • They have outlived their useful lives Privatization of Crown Corporations • The reasons that government undertakes privatization are: • To improve efficiency • To reduce public sector borrowing requirements • To reduce government involvement in decision making • To gain political advantage Arguments for Privatization Economic • Government may need to rid themselves of various enterprises to allow them to be more flexible and compete against the global marketplace. • Creates a negative impression for incoming foreign investment. Efficiency • Crown corporations are not efficient in achieving their goals and the public policy aims that they were created to meet can be better met thorough private sector ownership. Arguments Against Privatization • Great skepticism in the free market • Underlying questions about the role of crown in nation building. • Concerns about big companies becoming even bigger. • Loss of government control in the economy What has been the Impact of Privatization? • No substantial impacts of government deficits. • Receipts from sales could be negative as in some cases the governments overall investment exceeded market value. Accountability in Government • How are government officials held accountable? • What is the difference between the elected officials and those that work in government? A Government Divided • Any government in Canada is made up of two distinct parts that have very defined roles: – The Elected Officials – The Civil Service Elected Officials • Elected officials are accountable to the public through the election process. • Elected officials derive their right to govern from the election process, and from the Rule of Law as laid out in the Constitution. • When government members are no longer deemed to be acting in the best interest of the citizens, they are often replaced. Role of the Civil Service • While the civil service is theoretically supposed to be concerned only with the administration of policy, in practice the vast majority of government initiatives originates within the civil service. • This is because the civil service is a solution provider. While politicians are good at identifying problems they are not so good at fixing them. Responsible Government • Keeps the best interests of the people as its ultimate goal. • Best interests are not always the most popular belief. – Often, politics ensures that the popular belief, not the right decision, is the one that ultimately is acted upon. The Growth of Bureaucracy • Modern government bureaucracy really begins in the mid 19 century. This is when professional employees begin to handle the tasks of government. • Bureaucracy brought structure to organizational chaos. • Yet today, the word bureaucracy conjures up negative thoughts. Why? • Would we be better off returning to a time when there was no bureaucracy? Perception of the Civil Service • While the perception of civil servants in the past was of a loyal, noble and professional civil service, that is not perhaps the prevailing view today. • During the 1970’s and 1980’s the Canadian economy was in a very difficult situation. The inability of the government to deal with this crisis and the growth of the welfare state led to broad mistrust and dissatisfaction. Why Separate Administration from Politics? • Why is this necessary? – Civil servants must be able to present unbiased information to the decision makers. – Onus of decision and communication is on the elected officials. – Much like the law, the civil service must attempt to be impartial and impersonal. Lecture 6: October 11, 2012 The Automobile Industry • Canada is the only major car producing nation to not produce a domestic car. – USA: Ford, Chrysler and GM – France: Citroen, Bugatti, Peugot, Renault – Italy: Fiat, Ferrari, Lambourghini, Alfa Romeo, Lancia, Maserati – Germany: BMW, Mercedes Benz, Volkswagen, Opel, Porsche – UK: Jaguar, Land Rover, Aston Martin, Vauxhall, Bentley, Rolls Royce, Lotus – Sweden: Volvo, Saab – Japan: Honda, Toyota, Mazda, Nissan – Korea: Kia, Hyundai, Daewoo A History of Car Manufacturing in Canada • The world’s first car was built in Germany by Karl Benz in 1885. • 25 of his vehicles were sold between 1888 and 1893. • By 1899, Benz was producing 572 cars a year. • The first car built in North America was built by the Duryea brothers in Massachusetts in 1893. • The first large scale production of automobiles in North America was in 1902, when Ransom Olds started building his Oldsmobile. • The car was here to stay. • The first Canadian foray into car manufacturing was Gordon McGregor’s licensing of Henry Ford’s Model C in Canada in 1904. • Henry Ford had founded his company the previous year. • The Ford Company was located in Detroit; Ford of Canada was started in Windsor. • Ford of Canada produced 117 cars its first year of operation. • In Oshawa in 1907, Robert McLaughlin founded the McLaughlin Motor Car Company, and started producing cars using engines built by Buick. • McLaughlin produced 154 cars in 1908. • The Buick Motor Company had been incorporated in 1903 in Detroit. • Other car companies began to spring up in Canada. • Many were small companies that switched from producing carriages to motor cars. • All of them, but for Ford of Canada and General Motors of Canada failed; there is no domestic production of a truly Canadian car today. • Why did these succeed while others failed? Why did two US-based car manufacturers license their products to Canadian manufacturers, when in the case of Ford, they were just across the river from each other? • It goes back to the National Policy and protectionist policies of the British Empire (imperial preference). • As you know by now, the National Policy had high tariffs on manufactured goods produced in the US and sold in Canada. • This tariff reached 35%; this means that cars produced in the US were 35% more expensive to purchase in Canada. • Licensing their cars to established manufacturers of carriages was cheaper than building new plants in Canada. • Cars built in Canada could not only be sold in Canada without having the tariff applied, but also could be sold throughout the British Empire without being assessed additional tariffs. (Massey benefitted, was able to attain British Steel) • By the 1920’s, 80% of Canadian auto exports were to imperial markets. • Locally produced cars, without the benefit of the much larger US market and dependent on the limited domestic market in Canada, had more difficulty being successful. Some that were successful became the target of acquisition by foreign investors. • Some wholly Canadian car companies include LeRoy, Russell, Tudhope, Thomas and Galt. • The Russell Motor Car Company, for example thrived in Canada until 1915 when it was purchased by the Willys-Overland Company (makers of Jeep; Willys-Overland became part of American Motors in 1970 and Chrysler in 1987) • Car companies began to amalgamate to form larger companies, more capable of competing internationally. • Bill Durant, the owner of Buick and Robert McLaughlin formed General Motors as a holding company. • Eventually GM would acquire a variety of other car companies: Oldsmobile in 1908, Cadillac and Pontiac (Oakland) in 1909, Chevrolet in 1917. • McLaughlin Motor Car Company became General Motors of Canada in 1918. • From 1918 until 1923, Canada was the second largest vehicle producer in the world, and a major exporter. Those car companies allied with American producers were thriving. The Importance of the Auto Sector in Canada • Canada is the ninth largest vehicle producer in the world, accounting for 3.7% of total global production. • Canada’s global trade surplus in vehicles is more than $13.8 billion. This is 31.4% of Canada’s 2007 global trade surplus. • These numbers will have been greatly impacted by the affects of the 2008 global financial crisis. • The auto sector is the biggest contributor to Canada’s manufacturing Gross Domestic Product and its largest manufacturing employer; over 1 in 7 Canadians are directly or indirectly employed by the auto sector. • GDP in manufacturing decreased by $20 billion from 2002 to 2011 • The auto sector directly supports over 550,000 jobs in Canada. • Not just the manufacturers: • Parts manufacturers • Car dealerships Foreign Investment in Canada • Foreign investment is larger in Canada than anywhere else in the world. • Why is this? – Proximity to the much larger US – Holdover from our days as a British colony • The British supplied capital to help establish Canada, looking to reap the benefits of the natural resources here. • Americans opened branches of their domestic companies, often to better access Canadian natural resources, or to avoid the tariffs of the National Policy. • Foreign investment then has a long history in Canada, so when it came to cars this was considered a normal way to do business. • Why didn’t Canadians start their own companies? • US firms had the enormous advantage of much greater capital and experience and strongly established, valuable connections in the larger US marketplace. • A Canadian firm catering only to the domestic market could not compete with the economies of scale enjoyed by US branch companies. • Why didn’t Canadians start their own companies? • Canadians were already familiar with American products through advertising in American publications readily available in Canada and due to the extensive travel that Canadians did to the US. • Given these advantages, Canadian firms had a tougher time establishing themselves. • Many that did become successful were ultimately purchased by larger US firms. Negative Aspects of Foreign Investment • Higher level functions (research and development, finance, marketing) are often done at the parent company’s head office depriving Canada of this high skilled labour. • Any profits from the business activities conducted in Canada reside with the parent company, meaning these profits are leaving Canada. Why does Canada encourage Foreign Investment? • Foreign investment is preferable to no investment. • Canadians reap the benefits of foreign investment through jobs, taxation and access to lower priced goods due to increased competition. Protectionism and Car Manufacturing in Canada • National Policy and the 35% tariff is the first protectionist step. • In 1926 (The Robb Budget of 1926), this tariff was eased somewhat to 20%, due in part to a complaint that cars sold in Canada were more expensive than the same car sold in the US. The Robb Budget of 1926 • There was a feeling that the auto industry had more protection than it needed. • Canadian content (i.e. 50% of the value of the completed car must be made in the British Empire) offered a 25% reduction in duties. • It becomes far more profitable to make a car in Canada than to import it. • This move had the added benefit of encouraging a domestic parts manufacturing base. • Eventually the move was supported by Ford and GM • Other companies like Dodge Bros, Studebaker and Chrysler opposed it because they did not have high enough Canadian content. • Prices dropped. • Canadian Parts producers almost doubled their sales by 1929; sales of cars did double. Protectionism and Car Manufacturing in Canada • The main reason behind the lowering of the tariff and the addition of Canadian content was political expediency. – Prime Minister King needed the support in the House. • In Week 3 we discussed that the government has to balance the needs of regional interests and that government intervention can sometimes distort market forces. • We already saw this in the automotive sector with the licensing of cars to be produced in Canada rather than imported directly. • We are seeing this again today with the large buyouts given to GM and Chrysler by the Ontario and Canadian Governments. The Great Depression • When the Great Depression hit, car sales plummeted. – People held on to old cars longer rather than buy new. • The tariff returned: 30% on vehicles over $1,200 and 40% on vehicles over $2,100 • Used vehicles were no longer allowed to be imported. • There was a concern that increased protection would actually hurt the industry, as global markets were closed to Canadian cars. • Tariffs were eventually reduced again. Protectionism and Car Manufacturing in Canada • In 1960, a number of issues were plaguing the Canadian automotive sector: – Tariffs were still high, driving up prices for cars – There was a large and growing trade deficit – The parts sector was in severe trouble • Even though the industry was relatively strong, it could be performing even better. • In 1923, Canada was the second largest producer of cars in the world. – Plants however were still relatively inefficient due to the levels of protectionism around the industry. – High consumer prices and production inefficiencies stay in place until the Auto Pact. • In 1960 the federal government initiated the Royal Commission on the Automotive Industry. • In its findings, it recommended that the Canadian content laws be continued, and the size of the tariffs on vehicles be tied directly to the amount of Canadian content. • The US challenged this under GATT. The Auto Pact • The Auto Pact was signed in 1965 to prevent a trade war over the findings of the Royal Commission. • It was agreed the production in automobiles in Canada could not fall below 1964 levels. As many cars had to be built in Canada as were sold in Canada. • Canadian plants began to build single models instead of a variety. This further integrated them into the North American market. • Canadian cars were mainly shipped to imperial nations; only 7% of vehicles made in Canada were exported to the US in 1964. • By 1968, 60% of cars built in Canada were being exported to the US. • 40% of cars purchased in Canada were made in the US; prior to the Auto Pact that number was 3%. • With the signing of the Auto Pact, vehicle manufacturing became Canada’s most important industry. • Vehicle prices dropped. • Thousands of new jobs were created. • Salaries to auto workers increased. • More cars were built in Canada than were sold in Canada. • Canadian divisions of Ford and General Motors (and others) lost some of the autonomy that they enjoyed previously as the integrated more fully with their American parent company. End of the Auto Pact • The Auto Pact effectively ended when the Free Trade Agreement was signed with the US in 1989. • However, the Pact was still technically in place until 2001, when Japanese and European car manufacturers argued that the Pact was contrary to World Trade Organization rules because it gave preferential treatment. Globalization: What is it? • Describes the changes in societies and the world economy that result from dramatically increased international trade and cultural exchange. • A “shrinking of the state” in face of more world-wide pressures. • Technology, particularly in communications and transportation, has increased this level of inter-activeness. • Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact. Increasing international trade is the primary meaning of "globalization". • Globalization in its complete form eliminates nation states. • Globalization became more prevalent after World War II. The establishment of GATT and the WTO are examples of globalization taking root. • Neo-conservative movements in the 1980’s are made possible through the development of globalization. The Mobile Economy • Access to technology continues to grow. • Borders are eroded as markets are integrated. • As barriers fall, private capital seeks new markets. • Government anxious to reduce deficits and shift spending to social needs, increasingly welcomes this investment. The Principles that Influence International Trade • International trade is the exchange of goods and services across international boundaries. • For centuries under the belief in Mercantilism most nations had high tariffs and many restrictions on international trade. • In the 19th century a
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