Canada's economic role, clout shrink

'Size matters,' Finance Department report warns minister

Canada has, and will continue to, become a much smaller player in the global economy, Finance Minister Paul Martin has been warned by his department.

And as the relative size of the economy shrinks so will Canada's clout, leaving it exposed to international deal-making that favours global giants at the expense of smaller economies, according to a frank background paper prepared for Mr. Martin in advance of last year's meeting of the seven major industrial countries.

While Canada is a member of the G-7, its economy has already been surpassed in size by some poorer, developing countries such as Indonesia, it noted.

Others, such as Thailand, are not far behind.

The size of Canada's economy has already fallen to ninth place in the world, from fourth in 1970, the paper said. And it predicted it could shrivel to 14th by 2020.

"It is clear that Canada's economic role in the world has greatly diminished over the past 50 years, and will likely continue to diminish as developing countries catch up to us," concluded the 10-page report obtained by researcher Ken Rubin under the access to information law.

"Lower-income developing countries, such as Brazil and Indonesia have surpassed Canada, while countries such as Mexico, Korea and Thailand are not far behind."

Other developing economies that could also overtake Canada's in size, include Pakistan and Nigeria, it said.

And "size matters," it warned.

"Institutional arrangements that suit the largest economies are likely to be less desirable from the standpoint of mid-size or smaller economies."

As such, "we need to know how we are likely to stand compared to other countries in the years ahead."

As an example of the relative decline that has taken place over the past half-century, the paper noted that "in 1946, our billion-dollar loan literally kept Britons from freezing in the dark. Nowhere in today's world, with the possible exception of some small Caribbean island states, would we possibly play such a role even were we so inclined."

By 2020, the paper continued, "our likely peers, in terms of size and wealth, would be Korea, Thailand, Brazil, Mexico, Argentina, and possibly Turkey."

For example, Canada is projected to have a $1.223-trillion U.S. economy by 2020, while Turkey's will be worth $1.293 trillion U.S., and Nigeria's $1.292 trillion U.S. In 1995, Turkey's economy was worth about one-half of Canada's and Nigeria's about one-quarter.

The paper might shock some Canadians, who have been spoon fed since childhood on the view that the 20th century would belong to Canada.

But the country's diminished economic stature as the century closes has not gone unnoticed by outsiders and bodes poorly for Canada's role in the 21st century.

The respected and influential Economist magazine earlier this decade argued that Canada, the smallest of the G-7 members, should be booted out of the prestigious and influential club, and replaced by Spain.

There was some reassurance in the Finance Department's analysis that Canada would be able to maintain its relatively high fourth-place ranking in terms of standard of living.

But even that has since been challenged by both the Canadian government and international experts.

"Although other countries will eventually become larger than Canada, we would remain a wealthy economy," the Finance paper reassured Mr. Martin. "Canada would maintain its high ranking in per-capita terms.

"Canada would continue to converge on U.S. wealth levels: per-capita income as a percentage of U.S. income would rise from about 78 per cent in 1995 to about 87 per cent by 2020."

But a month later, the Paris-based Organization for Economic Co-operation and Development warned that in fact Canada's relative standard of living has been falling, especially against the U.S., and would drop into the bottom half of the industrial world unless it reversed its lagging productivity.

While the OECD has since admitted that Canada's productivity gains are better than it originally estimated, it maintains that Canada remains far behind its closest and largest competitor -- the U.S.

Further, Industry Canada, in an internal report obtained by the Citizen last month, warned that compared with the U.S., "Canadian industry is less dynamic, and our economy is more reliant on mature sectors.

"The risk in the longer term," concluded Industry Canada, "is that Canada could be relegated to a hinterland status in the North American economy."

The Finance Department paper, however, goes further in suggesting that Canada risks being left behind by not just the U.S., but also by more than a dozen other industrial and developing countries. The paper, according to deputy finance minister Scott Clark, provides a "glimpse of what the world might look like in 2020 if one is prepared to make a few heroic assumptions and apply a standard neo-classical catch-up model to forecast growth rates for the major industrial and developing countries."

The U.S. dollar values for the various economies are based on the domestic buying power of each individual currency, not on foreign exchange rates.

Using that formula, the Canadian dollar, for example, is currently estimated to be worth about 80 cents U.S, meaning consumers can buy here the same goods and services for $1 as an American can get for 80 cents U.S.