Canada is an enormous economy in the global top 10, and even a major financial services sector wouldn't be enough to distort the entire economy. Even a massive financial sector would only be one component of a well-diversified whole, including natural resources and, hopefully, manufacturing. In terms of currency fluctuations, Canada has already been consigned to the realm of the petro-currency, so anything that would take the dollar away from tracking the price of oil would likely be a good thing.
Of course the failure of manufacturing is a failure of corporate management rather than society as a whole. German manufacturing companies were, on the whole, vastly better managed than their British--or for that matter American--counterparts. The steel industry is a good microcosm of manufacturing as a whole. The American steel industry is perennially on the verge of collapse, surviving only through trade barriers and unusually high prices. When you hear the steel industry lobbyists, they always complain about Asian competitors and the USW. But the Asians are not the only ones making steel successfully. Western Europe is filled with thriving integrated steel mills. Do they have no unions? Hardly. Their wages and benefits are far better than those of American steel workers. What's the difference? They've continuously upgraded their facilities. The newest integrated steel mill in North America is at Nanticoke and it's thirty-five years old--in the United States the newest was built in the 1950s. To give you an idea of how outdated these plants are, Stelco in Hamilton requires a dedicated powerline from dedicated generators at Sir Adam Beck I in Niagara because some of its equipment is so old that it is from before North America standardized on a 60hz electrical frequency. How the hell do they hope to compete with continuously upgraded mills in Europe, let alone brand new mills in China or Korea? Less spectacularly, much of the Big 3's equipment hasn't been upgraded in decades. That contributes to their perennial quality problems and inflexibility compared with their Japanese counterparts. While this is all obviously the fault of management and the breathtakingly short-term horizon of Wall Street, there are significant steps that governments can take to encourage better long-term management of industrial companies. Tax policy should be used to encourage continuous equipment renewal. I would even be very supportive of seeing government partner with private companies to make large, long-term investments that would be difficult to finance privately. For example, a steel company could partner with the government to build an entirely new, ultra-modern mill. Sure, it might seem like a boondoggle during the next steel price crash, but in the long term it would be a great asset. Lake Erie Steel would never be built today, but it's an absolute gem today making some of the highest quality steel in North America, and it kept Stelco alive through its bankruptcy. A more extreme example is the oil refinery in Newfoundland that was denounced as a catastrophic boondoggle and was even shuttered for several years. Today, it's a thriving and very profitable private business, and a major contributor to diversifying Newfounland's economy.
From a theoretical standpoint, the biggest problem is that so many people view the only alternatives as the polar opposites of protectionism and Schumpeter fundamentalism. In my opinion, both are deeply flawed in the present circumstances. As we all know, protectionism only coddles incompetent management. Domestic purchasers are forced to buy inferior products until finally the whole system collapses as people refuse to drive Ladas. Allowing creative destruction to run free is equally problematic since, in a global economy, it's quite likely that your steel mill that is destroyed by competition will be replaced by a new mill created across an ocean. That's why I think a happy medium between the two is the best option, helping companies to gain backing for investment from sources other than the quarterly-results-focused Wall Street and Bay Street. Any manufacturing company that doesn't invest in renewing its physical plant will inevitably fail. Tax policy should also be used to encourage new investment. More unusual approaches could include regulation on executive compensation designed to encourage a more long-term horizon. There are many possible solutions, but an important first step is to define the heart of the problem: a lack of investment.
Exactly, Ed! Charlotte has become a major financial centre (though declining with the loss of Wachovia) and one of the U.S.'s fastest growing cities because of two dynamic institutions. Obviously Wachovia made mistakes, but Bank of America has built a large and relatively successful franchise without abandoning its Charlotte base. It's definitely a model that the Canadian banks should consider emulating. You can't go two blocks in New York City these days without running into a TD Bank, so they're starting. I'd like to see them buy some of the big, high-profile American franchises while they can get them for virtually nothing. Even better, they should buy some of the Asian and Latin American subsidiaries of the huge American institutions. Citibank is selling its massive Mexican division for a pittance. That seems like a perfect fit for Scotiabank. Canada's insurance companies, especially Manulife, have been much more international than our banks. Toronto has real potential to become a major global insurance centre.
