A New Phase of Industrial Production: The Multimodal Approach

I’ve already written multiple posts on the changes expected to impact industry and manufacturing, but what is one more on such a dense topic, particularly when the information backs up my previous statements? The highly acclaimed McKinsey Global Institute generated their Manufacturing the Future: The Next Era of Global Growth and Innovation report in 2012 and shed a lot of light on the changes to come.

Manufacturing’s role is changing

The McKinsey report claims that by 2025, “a new global consuming class will have emerged, and the majority of consumption will take place in developing economies,” which in turn will “create rich new market opportunities.” These are the people in developing countries (which I discussed in past posts) who are advancing and are becoming a consuming class as the wages in these low income areas rise and the technological advancement spurs more development, innovation, and an ability to compete within the manufacturing markets. Within established markets, however, this new consuming class will fragment demand, as customers within established markets “ask for greater variation and more types of after-sales service” (McKinsey). This comes back to the shift towards services that I discussed in a previous post and will touch on again a little later in this post.

Furthermore, advancement in technology such as a “rich pipeline of innovations in materials and processes – from nanomaterials to 3D printing to advanced robotics” promise to “create fresh demand and drive further productivity gains across manufacturing industries and geographies” (McKinsey). This development will in turn, along with shifts in manufacturing operations and production processes, give manufacturers “the opportunity to design and build new kinds of products, reinvent existing ones, and bring renewed dynamism to the sector” (McKinsey). So, to sum this up, technological advancement will offer opportunity to create new products and more efficient production methods, while emerging markets will create the opportunity to cater to entirely new consumer markets.

That is a lot of information all thrown in at once, but it highlights the areas within which manufacturing and industrial production are changing. Demand is shifting to emerging markets as they grow and develop, which in turn shifts the entire dynamic of the manufacturing industry. Where a location was once a cheap manufacturing hub, there will now be a shift to cater to this market as a well of new consumer capital. What needs to be addressed regarding emerging markets, however, is that these new consumers in emerging economies will “require very different products to meet their needs, with different features and price points,” that manufacturers must meet (McKinsey). Meanwhile, customers in established markets are “demanding more variety and faster product cycles, driving additional fragmentation” (McKinsey). This differentiation, then, will require new processes and policies to emerge.

Manufacturing and Services

One way that manufacturing continues to evolve is through the increasing importance and integration of services. Service inputs, “everything from logistics to advertising,” are making up an increasing amount of manufacturing activity (McKinsey). Services such as “R&D, marketing and sales, and customer support” have over time become “a larger share of what manufacturing companies do” (McKinsey). In fact, the McKinsey report estimates that “30 to 55 percent of manufacturing jobs in advanced economies are service-type functions, and service inputs make up 20 to 25 percent of manufacturing output.” Moreover, the role that services play in the production of manufactured goods are become so engrained that manufacturing companies rely on them to produce and distribute their goods; these include: “telecom and travel services to connect workers in global production networks, logistics providers, banks, and IT service providers” (McKinsey) and supply chain services.

A New Approach to Manufacturing Policy

Manufacturers and policy makers need new approaches and capabilities: “neither business leaders nor policy makers can rely on old responses in the new manufacturing environment” (McKinsey). With rising wages in developing countries, many manufacturers will be forced to move their production elsewhere, or perhaps begin to rethink their strategy. As manufacturing innovates and becomes less labor-intensive and more technologically driven and complex, other factors become prevalent: manufacturers “with more complex needs, must weigh factors such as access to low-cost transportation, to consumer insights, or skilled employees” (McKinsey).  

Rethinking policy and procedure could result in what McKinsey has termed “a new kind of global manufacturing company,” which is an organization that

more seamlessly collaborates around the world to design, build, and sell products and services to increasingly diverse customer bases; a networked enterprise that uses ‘big data’ and analytics to respond quickly and decisively to changing conditions and can also pursue long-term opportunities. (McKinsey)

I will not get into Big Data here, as it will be the discussion of the next blog post, but this shift in how to think about production and manufacturing policy is significant. “After years of focusing on optimizing their value chains for low cost,” the McKinsey report suggests that “many manufacturing companies are being forced to reassess the balance between efficiency gains from globally optimized value chains and the resilience of less fragmented and dispersed operations.” Furthermore, as these new markets with their diverse demographics come into play, “companies will be challenged to make location trade-offs in a highly sophisticated, agile way. They will need to weigh proximity to markets and sources of customer insights against the costs and risks in each region or country” (McKinsey).

A main challenge will be companies trying to cater to such a wide and diverse customer base. Some of these emerging markets are not only exceedingly large, but they are also not monolithic, meaning that they are “made up of extraordinarily diverse regional, ethnic, income, and cultural segments, most of which can be large enough to compare to entire developed-nation markets” (McKinsey).

What is the solution to this challenge? Enter multi-shored corporations and multimodal plants.

Multi-modal Manufacturing

Multi-Modal Manufacturing offers a key advantage of being able to “produce different product lines within the same factory, thereby maintaining economies scale despite demand fluctuations for each individual product” (The Economist, “The Factory”). Taking things a step further from being onshore in multiple places, allowing the manufacturing company to be able to produce quickly, reduce transportation costs, and cater to the local demographic, this multi-modal production also allows them to produce multiple commodities alongside each other, making use that much more of the same production space. Why create only one thing where you can create two or more? As market taste diversifies, so should production methods.

The Economist takes this a step further, noting that “[b]rilliant factories will also change the process of innovation,” incorporating things like “[v]irtual reality test labs,” which will “enable designers to connect remotely with engineers, suppliers and technicians and collaboratively create, test and troubleshoot prototypes” (Economist). This not only changes what is produced and how it is produced, but changes the entire manufacturing processes behind this innovated production: the corporate policies and the services and R&D sectors. The adoption of “[c]rowd-sourcing will allow manufacturers to leverage an extended workforce, often through intermediaries such as Kaggle, a platform that enables companies to submit problems to a network of global data scientists for solutions (The Economist, “The Factory”). This will become particularly significant for large North American companies that have offshored the majority of their manufacturing and thus rely almost entirely on creative innovation, R&D, and manufacturing services.

A Needed Shift in Education & Training

As factories and manufacturing processes change, so do the skills required of the labour force, therefore these shifts in manufacturing will also spur a need for a shift in Education & Training.

As it currently stands, the Economist predicts the emergence of a significant skills gap that will pose a very difficult problem: by “2020, the global economy could have a 90-95m oversupply of low-skilled workers (those without university training in developed economies and without secondary training in emerging ones)” do to the shift towards automation and the use of more intricate technology, or “smarter machines,” both of which are making “routine and simple administrative tasks obsolete, leading, in turn, to the need for better-trained workers” (The Economist, “Blue”).

This shift in manufacturing towards technological advancement in “robotics, automation of knowledge work and new materials” can potentially generate $12.3trn of value per year for the global economy by 2020” (The Economist, “The Factory”). It is also an obvious shift because it offers “greater intelligence in product design and manufacturing […] boost[s] resource efficiency and track[s] activity in supply chains” (McKinsey). However, new “information technologies and new methods will require new tools, talent, and mindsets. To respond quickly to changes in market requirements and meet the demand for faster product cycles, companies will need to build integrated ecosystems of suppliers, researchers, and partners” (McKinsey). All of this advancement sounds immensely profitable; however, if the manufacturing talent pool doesn’t advance with it, these technological advances will only generate “a growing scarcity of technical talent to develop and run manufacturing tools and systems” (McKinsey).    

One way to ensure that this skills gap is bridged is to make sure that education and skills development is a key policy priority. As companies need to “build R&D capabilities as well as expertise in data analytics and product design,” there remains a need for “qualified, computer-savvy factory workers and agile managers for complex global supply chains” (McKinsey). In order to safeguard access to a diverse and well-trained talent pool, policy makers need to invest in “efforts to improve public education, particularly in teaching math and analytical skills” and  they need to “work with industry and educational institutions to ensure that skills learned in school fit the needs of employers” (McKinsey).

One possible solution to this shift in policy is to incorporate Vocational and Technical Education (VTE) programs concurrent with scholastic studies, which will help to develop the necessary skill-set that the industry is in need of, as well as reduce youth unemployment rates post-graduation. Ultimately, the answer is for manufacturing companies to “invest in their organizations. Manufacturers have to fight hard to win the war for talent – everything from experts in big data, to executives with deep understanding of emerging markets, to skilled production workers” (McKinsey).

Amanda Labelle

Sources:

“Blue is the new white: Upgraded vocational skills are changing the future of work and economies,” The Economist, Aug 3^rd 2014.

“Manufacturing the future: The next era of global growth and innovation,” McKinsey Global Institute, Nov 2012.

“The Factory of the 21^st century: Why the factory matters and how it will transform,” The Economist, Aug 6^th 2014.

The Economics of Going Green – Green Bonds That Is

Back in April I discussed how Canada is uniquely poised to become a renewable energy superpower: “windmills circling Hudson’s Bay might power the North American grid, the Bay of Fundy holds more power than a fistful of nuclear reactors, and geothermal could transform the way we heat and cool our buildings” (Rand 33). This is a position that could ensure Canada’s status as the next global super power, as it is one backed by “cold, hard economic interest,” because the country that seizes “the lead in the green technology market will get rich. Green technology exports and cheaper renewable energy in an age of rising fossil fuel prices will do wonders for the Canadian economy” (Edmonton Journal). In order for this future to be realized, however, there needs to be investment in developing renewable infrastructure right now.

Indeed it seems that this has become a general consensus, as Canada (and many countries globally) has implemented an environmental action plan. The Government of Canada has committed itself to long-term greenhouse gas and air pollutant reductions (60-70% by 2050), but the renewable energy infrastructure that will help achieve this goal is not yet in place (Rand 33). 

Enter Green Bonds! Green Bonds are a very good place to start to help invest in this infrastructure and work towards achieving this goal. As the rise in investments in the Green Bond market display, the majority of Canadians are in support of this initiative: “The worldwide market for green bonds in the last year has doubled” (Canadian Press). In 2013 $3 billion in Green Bonds were sold, whereas in the first six months of 2014, “the sum was about $20 billion, nearly twice as much as in 2013 as a whole” (Economist). The research group Climate Bonds Initiative estimates that the cumulative value of green bonds will be “around $50 billion by the end of 2014” (Economist). Although this figure is “tiny compared with the total size of the bond market ($80 trillion),” as a “[stream] of income for environmental purposes, it is huge” (Economist). 

What exactly are Green Bonds?

First things first, what are Green Bonds? Green Bonds are a “government-backed financial instrument designed to engage the public by raising capital to accelerate renewable energy production” (Rand 47). The concept revolves around lending “capital at low rates to energy producers who choose renewable methods of production” (Rand 33). Similar to a Canadian Savings Bond, Green Bonds are a government ensured safe investment with a reasonable interest rate, but the proceeds go towards exclusively financing approved environmental projects.

Why do we need Green Bonds?

The Canadian Green Bond initiative is a temporary solution to a difficult problem in sustainable advancement. The problem that exists with the renewable sector in Canada is that renewables are seen as new technology, and therefore as a higher-risk investment. Any capital cost is then quite high; however, even with high capital costs, the operating costs are quite low, which make them “perfect for a low-cost debt solution” (Rand 33), and Green Bonds give renewable energy innovators access to this low-cost debt.

As Tom Rand[1] eloquently points out,

If I want to build a coal plant today, I can borrow from the bank at a super-low rate. Why? Because commercial banks are comfortable with coal; it’s been around a long time. It’s safe. If I want to build a commercial-size bio-gas plant, or an industrial scale tidal plant, the rate at which I have to borrow is really high” (Rand 33).

This means that renewables face a significant disadvantage.  Green Bonds, however, are a way to “address that market gap by supplying cheap debt to qualified companies for qualified technologies" (Rand 33). As low-cost debt, Green Bonds reduce “the cost of renewable energy production, making it competitive in the short-term” (Rand 47).

Green Bonds, according to Rand, are therefore “one of the cheapest and most effective ways for the government to reduce carbon emissions” (Rand 47), and are therefore a significant step towards innovation and competition for a leading advantage on the renewable energy global market. Moreover, Green Bonds also engage fellow Canadian citizens in the development of the renewable energy sector within Canada.

What are Green Initiatives that Green Bonds Finance?

What is currently needed as Green Bonds grow in popularity is a policy to determine what initiatives can be funded by Green Bonds. The difficulty lies in the fact that there is no unifying agreement on what constitutes a green initiative. Some view nuclear power, fracking, and Carbon-Capture Storage (CCS) as green initiatives, while others do not. The market does not have a singular definition of green, but as The Economist points out, it doesn't need one; what it does need is “to strike a balance between accepting anything (which would dilute the attraction of green bonds as instruments to diversity climate risk) and being so strict that hardly anyone can meet the criteria” (The Economist).

So far in Canada, Green Bonds have been used to fund “a variety of projects, depending on the level of government and its objectives, including public transit, renewable energy, and energy efficiency” (Sustainable Prosperity). Ontario has actually issued Green Bonds to help fund public transit expansion (Canadian Press). Green Bonds are not only issued by the Government, but large multi-national corporations have also tried to get in on the green while the going is good, for example, automotive giant, Toyota, sold a “$1.75 billion bond […] to finance sales of zero-emission cars” (Economist). Where the next bulk of Green Bonds will come from is anybody’s best guess.  

The effect of Green Bonds on FDI

According to The Economist, Green bonds also “attract new investors.” Traditionally large financial corporations, like the World Bank, issue such bonds and other ‘official bodies’ purchase these bonds, usually about 75% (Economist). Green Bonds, however, have been proving to be a completely different sort of investment and they are attracting different kinds of investors:

When Unilever, a consumer-goods company, issued a £250m ($416m) green bond in March, 40% of the issue was snapped up by people outside of Britain – an uncommon response to a sterling bond […] when the AfDB (African Development Bank) issued a green bond last October, asset managers, insurers and pension funds took over 70%” (Economist). 

Green Bonds are therefore attracting investment from major corporations (both national and international), as well as well as citizens and both foreign and domestic venture capitalist investors; they are therefore becoming a lucrative source of Foreign Direct Investment (FDI).

Conclusion

Ultimately Green Bonds are not meant to be a permanent solution; they are meant to “fill a temporary market gap until a carbon pricing signal can take over," but, for now, Green Bonds will "accelerate the rate at which we build our renewable infrastructure” (Rand 33). So if you are considering a lucrative financial investment this year, why not think green? The excitement around these bonds is justified, as Green Bonds are a good way to invest in our future: the future of our country’s economic prosperity, the future of our own wealth with the return on our investment, and the future of our environment for generations to come.

 Amanda Labelle

Sources:

“Climate (change) may be right for Green Bonds: What’s a Canadian worried about climate change to

do?,” Edmonton Journal, June 12^th, 2008. Web. http://www.canada.com/edmontonjournal/news/story.html?id=cd97106d-71a5-449b-a3dd-9907c51f378d, accessed July 5^th 2014.

“Green grow the markets, O,” The Economist, Web.

http://www.economist.com/news/finance-and-economics/21606326-market-green-bonds-booming-what-makes-bond-green-green-grow July 5^th 2014.

“Ontario to use green bonds to fund transit expansion,” The Canadian Press, Oct 30^th 2013. Web.

http://www.cbc.ca/news/canada/ontario-to-use-green-bonds-to-fund-transit-expansion-1.2288381, accessed July 5^th 2014. 

Rand, Tom. “Green Bonds: Creating a landmark Green Bond in Canada was not an easy task,” Corporate

Knights Food Issue 2008. Print. Page 33.

Rand, Tom. “Green Bonds Redux: Build the bond, the buyers will come,” Corporate Knights Best 50 Issue

2008. Print. Page 47.

Simpson, Jeffrey. “Selling Canadians Green Bonds to wean us from carbon,” Globe and Mail, Jan 3^rd

2014. Web. www.globeandmail.com, accessed July 5^th 2014.

Policy Brief, Sustainable Prosperity, June 2012. Web.

http://www.sustainableprosperity.ca/dl854&display , accessed July 5^th 2014.

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[1] Tom Rand is an Action Canada Fellow, a Clean Tech venture capitalist, and one of the brilliant minds behind the initial concept and proposal of Canadian Green Bonds – the others are Action Canada Fellows Andrew Sniderman, Emily Paddon, Ben Fine, and Oliver Madison (Simpson).

What’s all this Hype about Income Inequality?

Income inequality has been a hot topic as of late, but what is the conversation really about and how does Canada fare in this discussion?

Income inequality has found its way into the media spotlight recently because current economic income disparity is higher now than in what is known as the first gilded age, or the income inequality of the roaring 20’s. It is being speculated that just as the 20’s saw a crash and a reform in policy, so too will this current income disparity, or what Armine Yalnizyan has termed the “neo-gilded age.”

It is an indisputable fact that income inequality in North America “is at historic highs” (Stiglitz). While the top 1 percent “takes in about a fifth of the income, and controls more than a third of the wealth,” the remaining 99% are faced with overwhelming obstacles: “those in the middle are faring badly, in every dimension, in security, in income, and in wealth – the wealth of the typical household is back to where it was in the 1990s” (Stiglitz). Ultimately the North American ideals of being a ‘land of opportunity’ and the American dream are just that, dreams. With the ever growing gap segregating the population by economic status, North America has become a land of the least equal opportunity.

The dominant argument against income inequality has rested on a premise of a moral principle of fairness and social justice. More recently, however, acclaimed economist like Joseph Stiglitz have argued that “it is no longer just a moral issue, a question of social justice,” but in fact, “the extremes of [North] American inequality, its nature and origins, are adversely affecting our economy.” 

The obvious economic hindrance is market crashes and financial crises: “as inequality rises, people on the bottom of the income scale tend to borrow more in order to keep up, which, in turn, increases the risk of a major crisis” (Conference Board of Canada). The response to these crises is increased “social and, in turn, political instability, which reduces foreign investment” (Conference Board of Canada) – foreign investment, as you recall from the last blog post, is crucial to the health of a country’s economy.

This type of social unrest was evident in the wake of the 2008 recession when income inequality was thrown into the lime-light by the efforts of the Occupy Wall Street movement that has spanned into a global initiative for change. The U.S., with its history of going ‘soft’ on financial crime and negligence, bailing out bankers while the average citizens lost out, some losing almost everything, was the last straw. But I don’t need to recap all of the tragic events. Everyone knows the plight of the Occupy movement, unless you've been occupying space under a rock for the past few years. That they bring the issue of income inequality to the forefront is indisputable, but what are the major implications of income inequality that they are trying to raise awareness of?

Primarily, aside from equal opportunity, what the Occupy Movement tries to shed some light on is the larger political, and let’s call them patriotic, implications: put more simply, how income inequality hurts democracy, economy, and national identity.  

Hold the Phone Eh! What is this you're saying about Income Disparity?

Before I trudge forward with all of the nasty implications just listed above, let's just get one thing out of the way. Occupy Wall Street may have shed light on American Income Disparity, but don't be fooled if you think that Bay St (the center of Toronto’s Financial District) is that far off. If you think we are all equality friendly Canadians, think again.

Are you ready for this, because this is going to go fast? In his article “The Rise of Canada’s Richest 1%,” Armine Yalnizyan offers a thorough run-down of this disparity in a Canadian context.

Here are the highlights:

Canada’s richest 1% — the 246,000 privileged few whose average income is $405,000 — took almost a third (32%) of all growth in incomes in the fastest growing decade in this generation, 1997 to 2007. The last time the economy grew so fast was in the 1950s and 60s, when the richest 1% of Canadians took only 8% of all income growth.

The richest 1% has seen its share of total income double, the richest 0.1% has seen its share almost triple, and the richest 0.01% has seen its share more than quintuple since the late 1970s.

A recent private sector study shows that by the end of 2009, 3.8% of Canadian households controlled $1.78 trillion dollars of financial wealth, or 67% of the total.

In 2005 household wealth was $4.862 trillion and there were 13.4 million households. If wealth was divided equally, each household would have a financial cushion of $364,300. According to Statistics Canada’s Survey of Financial Security, about 80% of families had less than that to fall back on. In 2005, median wealth (the half-way point in the distribution) was $148,400. The richest 10% held almost 60% of the total wealth in the household sector, leaving the rest of the nation to divvy up the remaining 40%. On average, those in the bottom 20% were standing in a $7,800 debt hole in 2005.

What Are the Causes of Income Inequality?

Contrary to somewhat popular opinion, income disparity is not just based on market forces. Income inequality exists in the face of prosperous markets and suffering markets: “capitalism has been plagued with booms and busts since its origin” (Stiglitz). So to argue that income disparity is owing to poor economic climate is a cop-out, and, as Branko Milanovic points out, the question of income inequality cannot be “taken out of the social arena by evoking ‘the market.’ The market economy is a social construct, created, or rather discovered, to serve people, and thus raising questions about the way it functions is fully legitimate in ever democratic society” (Milanovic).

And on that note of democracy, let’s take a look at how government plays in. According to Stiglitz, income inequality is a result of government policies, or the lack thereof, which “have played a critical role in creating and maintaining these inequities.” As Stiglitz notes, inequality “has increased as a result of ineffective enforcement of competition laws, inadequate financial regulation, deficiency in corporate governance laws, and ‘corporate welfare.’” The cause and effect scenario of income inequality is quite simple to Stiglitz: “[when] competition laws are not enforced, monopolies grow, and with them the income of monopolists. Competition, by contrast, drives profits down.” Competition is the key to more equal opportunity, but it is overwhelmingly difficult to try to compete in a monopolized environment.

Stiglitz outlines three major misconceptions perpetuating income inequality:

1.       Trickle-down economics works (“a rising tide lifts all boats”)

2.       Markets are self-regulating and efficient and any government interference with markets is a mistake.

3.       The cost involved with reducing income inequality would be too great, it would be like killing the goose that lays the golden egg

I've already spoken on the second point, so now I will speak to this first point. This argument presupposes that the rich are the ‘job creators’ and therefore that allowing them to make as much profit as possible will in turn lead to more job creation. It assumes that money flows downstream, but as the rich get richer and the poor stay poor, we know that this simply isn't true. The rising tide does not raise all boats, but instead while some boats rise, others capsize. Having a vast majority of income remain in the hands of the top 1% or even top 10% has proven to be economically unsound.

What is more, many of these wealthy, business savvy proponents did not become wealthy by creating jobs onshore, but by ‘restructuring’, ‘downsizing’, and moving jobs offshore or abroad (Stiglitz). As Stiglitz sees it, traditionally the rich “take their money where the returns are highest.” In other words, they are motivated by capital, not country, and they are often motivated by short-term profit instead of long-term investment. Innovation that does spawn jobs and foreign investment is, as pointed out by Stiglitz, not usually achieved through the efforts of the very rich, but rather “transformative innovations,” have been largely achieved through “government-financed research and development;” in other words the pool of financial liquidity created through taxation that the middle and lower quintile contribute to the most – a thought which I will develop shortly.

Ultimately, this ‘rising tide’ drowns the bottom dwellers while the top float carelessly on calm seas. The rich business savvy venture capitalist is not interested in a bountifully flowing fountain of trickle-down economics, he/she is interested in spanning out his/her reach in all directions to catch every last drop that might fall from any other possible wealth pool, and then, in turn, harboring it away in a self-sustaining reservoir of liquidity.  

I admit that last sentence was a mouthful, but I hope you are following me because we’re about to ask the big question: how do we go about fixing this? And by attempting to answer this question, I can then speak to the last misconception perpetuating the issue at hand – the costs involved with the solutions. 

This Tricky Thing Called Taxes

So, knowing this is all well and good, but how do we go about fixing it? It isn't as simple as redistributing income in a Robin Hood fashion of stealing from the rich and giving to the needed. What a more sensible, legal, and conscientious solution would be is to ensure that “those at the top pay a fair share of their taxes,” and to ensure that “those at the bottom and in the middle get a fair start in life, through access to education, adequate nutrition and health, and not being exposed to the environmental hazards that have come to plague many of our poor neighborhoods” (Stiglitz).

So who’s to say what’s fair in taxing? For this we turn to the numbers, because numbers never lie. At the end of the Second World War, the richest 0.01% of tax filers “paid an average tax rate of 71%. By 2000, the average tax rate of the richest 0.01% stood at 33%,” and between 1990 and 2005 “the richest 1% experienced twice the reduction in taxes as the average Canadian (4% versus 2%). In fact, by 2005 the richest 1% was taxed at a slightly lower rate than the poorest 10% of taxpayers” (Yalnizyan). It doesn't take an acclaimed economist or a highly regarded mathematician to tell you that these numbers just don’t add up.

This is where unequal taxation gives way to income disparity. Ultimately, the very rich are not paying their fair share of taxes because there are “numerous loopholes that favor the rich and the capital gains taxes that are taxed are taxed at less than half the rate of other income” (Stiglitz).

Put clearly, the rich are rewarded for being rich and receive a plethora of reductions and tax exemptions: “reductions in personal income taxes, tax exemptions for savings, and cuts to consumption taxes” (Yalnizyan). The same taxation rules apply to all you say? Well let’s not forget that it is exceptionally much easier to save and receive a savings tax exemption when you have a larger amount of disposable income. For most, their salary just pays their bills and helps them get by and keep their debt manageable, but hardly ever expunging it completely. Thinking that this is merely a problem for the middle and bottom to deal with is short-sighted. This becomes an issue of national economic concern because, as Stiglitz notes, “the engine of our economic growth is the middle class,” and if “those at the middle and bottom have to spend all or almost all of what they get, while those at the top don’t” this in turn “weakens aggregate demand” (Stiglitz).

As Yalnizyan puts it quite simply, “by 2000 Canada’s elite were no longer shouldering as much of the cost of running a nation that rewarded them so handsomely” (Yalnizyan). We see the bottom 47 percent, in contrast, paying large amounts in taxes, which include “payroll taxes, property taxes, exercise taxes, and even part of the corporate income taxes that our major corporations manage to pass on to their customers” (Stiglitz). Even after paying such high taxes all of their lives, our attention is then drawn to “the many older [North] Americans barely above poverty who receive social security payments, for which they contributed through a lifetime of work” (Stiglitz). It seems to be an inescapable prison of just getting by.     

And if this isn't enough to persuade a recalculation of our tax system, there remains a looming tax avoidance scheme that acts as a reverse Robin Hood; it works in the manner of stealing from your nation (and the poorer 99%) to keep it for yourself. Remember when I said the numbers never lie? I lied. Numbers frequently lie, when income is sitting in an offshore bank account and avoids being taxed, that’s an outright lie and is downright disingenuous and harmful to the economy. There is a very real and legal practice of hiding money in “tax havens like the Cayman Islands” (Stiglitz). “That the practice is legal is not an economic justification,” warns Stiglitz, “the loopholes that allow it were put in place by the rich and the bankers, lawyers and lobbyists who serve them so well.” Plain and simple, hiding money in the Cayman Islands (or any tax haven) should not be legal, it is merely a method to hide your money from Uncle Sam and Revenue Canada; regardless of any hallow justifications, this is a way for the top 1% who already have the majority of the country’s income to avoid giving their fair share of that income back. As Stiglitz cheekily reprimands, “we can be sure that the money is not in the Cayman Islands just because it grows in the bright sunshine there.”

So even though it is only one proposed solution to an age-old problem, it is definitely a good one. It won’t be easy to implement without some serious changes in governing policy, but if the rich were paying their fair share, “our deficit would be smaller, and we would be able to invest more in infrastructure, technology and education – investments that would create jobs now and enhance growth in the future […] all three of these are crucial for future growth and increase living standards” (Stiglitz). 

Political Influence: Bills for Ballots

You may be thinking at this point, ‘ok, so I get what you mean by it hurting the economy and people, but how does income inequality hurt democracy and national identity, isn't that a bit of a stretch?’ I, along with many esteemed scholars, will assure you that it is not a stretch. One of the biggest concerns of disparity in income that was particularly brought to light through the recent recession and the 2012 American Presidential election is the sway that the top 1% has over politics and policy: their “big contributions to the presidential and Congressional campaigns are, too often, not charitable contributions. They expect, and have received, high returns from these political investments,” investments which “bought deregulation and a huge bailout” in the 2008 recession (Stiglitz). As Stiglitz eloquently points out, “America is fast becoming a country marked not by justice for all, but by justice for those who can afford it.” The very good example that Stiglitz offers for his claim is that “no banker has been prosecuted, let alone convicted, for banks’ systematic lying to the court regarding the fraudulent practices that played so large a role in the 2008 crisis.” As long as a society’s public policy is determined by an increasing influence of money, that society’s political process is governed by cold hard cash instead of citizens: “our political processes are becoming more like one dollar, one vote than one person, one vote” said Stiglitz about America. In the end, such political investments by the very rich “undermine and corrupt our democracy” and threaten the very “fabric of our society and democracy” (Stiglitz).

Point and case, the top 1% has the financial liquidity to support electoral campaigns and therefore have influence over politics, the same influence that governs the public policy allowing them to skirt their patriotic duties to ‘do their part.’ This perpetuates a vicious cycle “because political inequality leads to economic inequality, which leads in turn to more political inequality” (Stiglitz). For there to be any real chance at bridging the income gap, this cycle needs to be broken. Although there is never going to be a simple solution, better policing and cracking down on tax evasion as well as a reform in tax policy, along with strict policy prohibiting political swaying and more backbone and scruples from politicians are a good place to start. Unfortunately this all requires strength of character, and there is no way to ensure that any of the major players develop that. 

Amanda Labelle

Sources:

"How Canada Performs," The Conference Board of Canada, Web.  http://www.conferenceboard.ca, accessed June 3rd 2014.

Milanovic, Branko. Worlds Apart: Measuring International and Global Inequality. Princeton: Princeton University Press, 2005. Print. 180–81.

Stiglitz, Joseph E. “Some Are More Unequal Than Others,” The New York Times, Oct 26, 2012. Web. http://campaignstops.blogs.nytimes.com/2012/10/26/stiglitz-some-are-more-unequal-than-others/?pagewanted=print. Accessed June 23^rd, 2014.  

Yalnizyan, Armine. “The Rise of Canada’s Richest 1%,” Canadian Centre for Policy Alternatives. Print. 2010.

  

Schools Out: Canada’s Economic Performance Report Card 2014

Having looked at exports and trade and the changing political climates that may affect these economic aspects, the conversation now turns to Foreign Direct Investments (FDI). The shift to this topic is probably quite obvious: FDI impact production and trade, and obviously political climates affect FDI. So where does Canada rank in regards to its FDI in relation to GDP?

You are about to be educated. And no, not because I’m some authority on the matter, but because Canada has actually received a report card breaking down its economic performance. The Conference Board of Canada has released its annual “How Canada Performs” report card, grading Canada’s performance (provincially and internationally) in the areas of income per capita, gross domestic product (GDP) growth, employment growth, unemployment rate, inflation, and labour productivity growth.   

Overall, Canada appears to be a solid economic performer, earning an overall GPA of “B.” Alberta is definitely the forerunner, scoring “A’s” and “A+’s” in the majority of graded categories, its lowest mark only being a “C,” while others show grades sitting as low as “D-.” The Maritimes continue to be lower performers, but the territories have proven to be quite strong.

Here is an overview of the economic performance report card by province as dictated by The Conference Board of Canada. 

REPORT CARD SUMMARY

PROVINCIAL RANKING REPORT CARD

CANADA

NL

P.E.I.

NS

NB

QB

ON

MB

SK

AB

BC

YK

NWT

NU

Income Per Capita

C

B

D-

D

D-

D

C

D

B

A+

C

A+

A+

B

GDP growth

A

A+

B

B

C

B

B

A

A+

A+

A

B

A

A+

Labour Productivity growth

C

D-

C

B

C

C

C

B

C

C

C

A

D-

A+

Unemployment rate

B

D

D

C

C

B

B

A

A

A

B

A

B

D

Employment growth

A

A

A+

D

C

A

A+

B

A+

A+

C

A+

C

A+

Inflation

B

A

A

A

B

B

A

A

A

A

C

A

A

A

Inward Greenfield FDI

C

A+

A+

C

B

D

C

D

C

B

C

-

-

-

Outward Greenfield FDI

D

D-

D-

D-

D-

D-

C

D-

D-

B

A

-

-

-

The highest grades are awarded to the provinces that are rich in resources, which are Canada’s primary exports and account for over 70% of its GDP, so really this doesn't come as a shock. Where Canada seems to be lagging, however, is in innovation and by extension Foreign Direct Investment (FDI).  

According to The Conference Board of Canada, there are three aspects to measuring the economic aspect of quality of life for any given country or province/state; these are:

1.       Economic wealth, measured by income per capita – the ability for the province our country to sustain living standards, i.e. the ability for its residents “to purchase the goods and services needed to live, such as housing, food, and clothing,” and the ability for a province or country to “sustain living standards through public spending on education, health, and infrastructure.” In other words, the ability for a province or country to be self-sufficient.

2.       Economic disadvantage and hardship, measured by the unemployment rate, affecting “labour productivity and its GDP growth,” as well as a link to “elevated rates of poverty, homelessness, income inequality, crime, poor health outcomes, low self-esteem, and social exclusion.”

3.       Economic sustainability, measured by economic growth, macroeconomic stability, and global integration – this is a country or province’s ability to “sustain its economic growth and prosperity into the future.”

Where Canada needs to see some improvement is in the Economic Sustainability sector, which is tied heavily to global integration; this is primarily inward and outward FDI.

So where do we stand on this matter of FDI? The data paints a picture of steady decline, dropping from 16% in 1970 to 3% as of 2009. Meanwhile, our neighbour to the south has risen from 8% in 1970 to 29% in 1986 before falling back down to a modest 12% in 2009 (Conference Board of Canada).

     This decline in FDI isn’t actually as devastating as the numbers perhaps suggest. When considering something like Foreign Investment, it helps to look at it in context. This context is called the inward FDI performance index, which compares a country’s share of global FDI with its share of global gross domestic product (GDP). The index rates performance on a numerical scale: 1 is at par with economy size, “anything greater than 1 means the courting is attracting more inward FDI than its economy size would warrant. A value of less than 1 indicates it is attracting less inward FDI than it should, based on size of the economy” (Conference Board of Canada).

      In other words, the index offers a performance review relative to economy size. Based on the size of the Canadian economy, 16% was above and beyond the FDI that its size warranted, situating us at around a 6.0 on the index scale, whereas, at 3% we are hovering around a 1.1 to 1.2 on the index scale, meaning that “its share of global inward FDI is still larger than its share of global GDP,” and therefore “it is not correct to say that Canada is not attracting its ‘fair’ share of inward FDI” (Conference Board of Canada).

      Why is FDI so important? Well, for many reasons, but mainly because, as the Conference Board of Canada notes, “in this new era of integrative trade, global supply chains are driven by FDI.” Inward FDI helps to “expand trade” and can also “boost productivity by providing access to new technology, business and manufacturing processes, and management know-how, as well as by fostering a competitive and innovative business environment” (Conference Board of Canada).

      Coming back to the statistics of Canada’s FDI verses that of the USA, one must beg the question, what is the U.S. doing differently? Mainly, they employ a vastly competitive market that thrives on invention and beating the other guys to the punch. Taking the terminology of the Human Race to heart, from the arms race to the space race, and now the marathon of technological invention, America tends to place itself on the front-lines of the new and the revolutionary. This Kennedy mentality, to not “look at things that are and ask why,” but instead “look at things that never were and ask why not,” is the medicine that the Conference Board of Canada prescribes to get Canada back into shape. Put more specifically, where Canada is lagging which is affecting its ability to secure FDI is in innovation. What the Conference Board of Canada suggests that Canada needs to do to attract FDI is “focus on creating a business environment that is more open to competition and conducive to innovation – especially in key industries such as telecom and air transportation.” 

    

      I would like to suggest, however, that air transportation has been a very successful industry in Canada as of 2013 and 2014 and is expected to fare well in 2015, as was suggested by the export forecast by EDC. Where Canada has been investing funds in R&D and innovation has been in the clean technology industry, as was mentioned in a previous blog post as well. It isn't fair to say that Canada doesn't invest in R&D and innovation; however, it might actually be fairer to say that Canada has yet to see a return on its investment. There are a few industries where Canada is poised to be a leading innovator, and sustainable clean technology is one of them.

      Nevertheless, Canada seems to have a habit of getting into the game slightly late instead of being a game changer. “Canada has been slow to adopt leading-edge technologies,” remarks the Conference Board of Canada, which is problematic, because “innovative products have increasingly short cycles.” Which means that in a short time after being introduced to markets, innovative products then need to be upgraded or replaced. In these circumstances, “slow adopters never catch up; they are always at least one generation behind the advancing frontier of possibilities that new technology represents” (Conference Board of Canada). It would appear that Canada is playing catch-up with too many new technologies.

   

     There remains a sort of catch 22 situation, however, because investments are necessary to be able to produce innovative products and by extension boost trade, but without innovative products being produced, this market is not an attractive investment opportunity. As was mentioned in past blogs regarding Canada’s export and trade performance, we tend to be falling short. Like a child struggling to grasp course material, Canada is not meeting the performance level of its peer countries; it is essentially being left behind and being left out of a significant piece of a rather delicious economic pie:

     “Between 1990 and 2007, global GDP increased by an average of 5.5 per cent per year and exports by 8.5 per cent; the flow of FDI worldwide grew by a whopping 14.6 per cent per year” (Conference Board of Canada).

     Ultimately, the Conference Board of Canada offers the critical feedback that Canada’s sub-par performance is of its own doing. To keep with the metaphor, this is the equivalent of the parent-teacher conversation wherein the teacher advises that the struggling child just needs to apply him/herself more. But this advice, however well-intended, is always easier said than done. The Conference Board of Canada notes that:

     “Canada does not take the steps that other countries take to ensure research can be successfully commercialized and used as a source of advantage for innovative companies seeking global market share. Canadian companies are thus rarely at the leading edge of new technology and too often find themselves a generation or more behind the productivity growth achieved by global industry leaders” (Conference Board of Canada).

      Again, we may be tempted to ask, why is it such a big deal for a country to be invested in innovation? According to the Conference Board of Canada, “Innovation is essential to a high-performing economy.” As statistics would suggest, countries that are more innovative are “passing Canada on measures such as income per capita, productivity, and the quality of social programs” (Conference Board of Canada). Innovation also proves to be “critical to environmental protection, a high-performing education system, a well-functioning system of health promotion and health care, and an inclusive society” (Conference Board of Canada). Without innovation, all these systems stagnate; and as statistics seem to suggest, if your are standing in one place, you may very well not be moving backwards, but you are definitely not moving forward. Eventually this lack of forward momentum will leave you behind everyone else, and that appears to be what has happened to Canada. Moreover, FDI is linked to labour productivity. Higher productivity increased FDI attractiveness; however, it often takes FDI interest to increase productivity. Again we find ourselves in this vicious cycle.

    

     Canada unfortunately has a rather low productivity level compared to other peer countries, which is only one reason that it is not seen as a particularly attractive investment market. There are three main factors, according to the Conference Board of Canada, that drive firms to invest in a host country; these are:

1.       Markets

2.       Resources

3.       Efficiency

      Canada is not seen as a particularly attractive market for foreign companies to invest in to expand their reach because Canada “has a small domestic market base, an aging population, and slowing population growth” (Conference Board of Canada). Although it would seem that investing in Canada would offer better access to the larger US market (accounting for 15% of global FDI), particularly because of the Canada-US Free Trade Agreement and the North American Free Trade Agreement, there seems to be very little interest in making use of this trade tether.

     What is more, out of all of the peer countries, Canada has “the second-highest FDI Restrictiveness Index” which measures “regulatory restrictions on FDI that focuses on ‘equity restrictions, screening and approval requirements, restrictions on foreign key personnel, and other operational restrictions (such as limits on purchase of land or on repatriation of profits and capital)’” (Conference Board of Canada). So many rules and regulations decrease the appeal for foreign investment. If it becomes too difficult or too expensive a market, why waste the time and energy investing in it? To jump through these hoops, the incentive would have to be considerably high; something that Canada doesn't exactly have in its back pocket at the moment.

  

      Where Canada is very strong, however, is in natural resources. Between 2005 and 2009, the mining and oil and gas extraction sector “received an average of 32 per cent of FDI inflows into Canada” (Conference Board of Canada). Canada also holds appeal because of its highly skilled and educated workforce: “With high rates of high-school and university attainment, high literacy rates, and strong student skills, Canada performs well on the education report card, ranking 2^nd overall in this category” (Conference Board of Canada).

      Canada needs to harness these strengths and, when coupled with some investment in R&D and innovation, step off of the sidelines and become a key player and even game changer on the front of technological production. We are, after all, the nation that taught the world to type with their thumbs with the revolutionary Blackberry. Although Blackberry is floundering now, surely we have something else up our sleeves that has the same revolutionary power: we are considerably bright people who are capable of impressive things. I believe that the investment in aerospace is a good start, as well as all of the investment in clean technology and sustainable energy, we just have to see these investments materialize enough results to spark further FDI interest. 

Amanda Labelle

      Sources:

      "How Canada Performs," The Conference Board of Canada, Web. http://www.conferenceboard.ca,  accessed June 3rd 2014. 

      "Northern Lights: Canada's Territories Shine in Economic Performance," News Wire, Web.  http://www.newswire.ca/en/story/1356487/northern-lights-canada-s-territories-shine-in-economic-performance, accessed June 3rd 2014.