Given the dissension leading up to the G8/G20 meetings last month, achieving agreement for advanced countries to cut deficits in half by 2013 and to stabilize debt loads by 2016 was a major accomplishment by Canadian prime minister Stephen Harper. But it remains to be seen which countries will actually live up to the agreement.
Harper staked out Canada’s position with the May 28 announcement that federal stimulus money would end next March: “People can’t live on adrenalin, and economies can’t live on stimulus. We must return to the black, or drown in the red.”
Just days before British prime minister David Cameron arrived in Muskoka, his government announced the UK’s steepest deficit reduction measures since the 1930s, including a public-sector wage freeze, spending reductions of 25 percent over five years for almost all government departments and an increase in the value-added tax (VAT) to 20 percent from 17.5 percent. Euro zone countries are also proceeding with major spending reductions despite strong political headwinds. So far, so good for Harper’s deficit-cutting protocol.
US offside on deficit control
Then there’s the US. Arriving home from the G20 to reports of disappointing job growth numbers, president Barack Obama announced yet another costly stimulus project. In virtually every US community, stimulus projects totalling hundreds of billions of dollars continue apace.
With almost every other G8 leader firmly in the fiscal restraint camp, why does Obama keep on shovelling out borrowed stimulus cash? Doesn’t he recognize that it has been the resiliency and ingenuity of the US private sector that has always lifted the nation out of global recession? The answer to these questions may lie deep within his political DNA. The president is a man of fine character who cares deeply about his country. He entered the job facing a financial crisis of epic proportions, and he feels that solving it rests on government action alone. Unfortunately, that means failing to harness the only force that can create sustainable recovery and economic growth.
A review of his policy positions before he emerged as a presidential candidate, his rhetoric on the campaign trail, and his actions as president leads to the conclusion that he harbours an abiding distrust of private business and free markets. Rather than encouraging investor confidence, this is a president who berates business leaders for not investing and creating jobs. Rather than understanding the prosperity-creating power of what Adam Smith called “the invisible hand” of free markets, Obama believes only in government’s bureaucratic hand.
But it takes more than their president’s leftist political beliefs and discouraging populist rhetoric to stymie the resiliency and determination of the most formidable business sector the world has ever known. So why are American companies so cautious about undertaking growth investments? The biggest deterrent to private-sector investment and hiring is the very stimulus spending that the Obama administration depends on for economic recovery.
Washington needs to borrow more than $25-billion (US) per week to finance its massive deficit. So far, the greenback’s position as the world’s reserve currency has kept buyers going to weekly Treasury-bill auctions. Unless spending drops dramatically, the day will come when one of those auctions fails to attract enough investors, collapsing the dollar’s value and igniting an economic firestorm that would devastate consumer demand. The rational reaction of business to this threat is to keep a defensive balance sheet and, for international companies, to invest outside the US before the value of the greenback collapses.
Cross-border trade provides 75 percent of Canada’s export market. What would economic purgatory of our biggest trading partner mean to us? A collapsing greenback would make it tough for our non-resource exports to compete, while US exporters would find fertile ground here. Tourism and shopping would see more Canadians going south, and fewer Americans coming north. Canada’s huge economic dependency upon trade with the US is a risk we can no longer afford. But what to do?
Free-trade agreements, such as those recently concluded with Colombia and under negotiation with the European Union, are commendable trade diversification initiatives, but these are low-growth markets. The real action is spelled BRIC. A recent Historica-Dominion Institute survey found that Canada’s brand resonates in these high-growth countries; a strong majority of those polled in Brazil, Russia, India and China see Canada as a world economic power. Meanwhile, Americans ranked Canada below average, and respondents from our traditional European allies ranked our country near the bottom.
It appears Canadian CEOs are getting the message. A Gandalf survey found 70 percent think Canada needs to diversify its exports away from the US, with emphasis on China, India and Brazil. No one can say when and how low the US economy will sink under the deadweight of debt, but Canadian businesspeople would be wise to book BRIC flights soon.
Gwyn Morgan is the retired founding CEO of EnCana Corp.
Photo courtesy of Brazil’s Ministerio fo Turismo.