The Lost Massey Lectures (41 page)

In brief, tariffs protect the strong and the established. They may protect viable infant industries where these exist, but these infant industries should have growing markets that will yield surpluses for reinvestment and further growth, and financial institutions that will be sufficiently imaginative and entrepreneurial themselves to support initiative and risk taking. All these conditions existed in Germany, or were provided by government in the last four decades of the nineteenth century. They all came together during the same period in the United States, a period in which the United States emerged as the most powerful industrial nation in the world. In these conditions, protectionism will work. In the conditions existing in Canada from Confederation to 1900, they did not exist; the dependence of the Canadian economy was firmly established at that time.

The United States' growth rate could not have been sustained in those years without the heavy flow of British capital, but flows were in the form of bonds and debentures placed by the wealthy and their investment trusts. The form of the capital flows was the important difference between the Canadian and the American experience. Canada has been the recipient principally of direct investment funds in its industrial and resource sectors, equity and ownership flows carrying property rights to perpetual streams of income. Thus the equity in and the control of basic sectors of the Canadian economy remained and remain firmly in the hands of foreign investors and entrepreneurs.

The United States, on the other hand, never lost control of its own economy, nor was it drained of the surpluses needed to maintain and expand its productive base after it had redeemed the
bonds and debentures on which it had borrowed. It was the American determination to keep control of its own economy that constituted the difference between the two economic policies. The United States grew an economic strength and military power financed by the surpluses that it kept at home.

Confederation had laid down the groundwork for the political control of British North America by the people of Canada, the new nation. With political control assured, the challenge to acquire control of the economy followed. The question is not whether a new nation should or should not acquire control of its own economy, but how it should do so. Political unification would have little significance or meaning if economic control did not come with it. Ideology comes into the equation when the government rules on the method and means of acquiring that economic control. Does the new nation utilize the private sector or the public sector to develop and to expand the economy? And if the private sector, will the major responsibility rest with domestic investment or with foreign investment, or with some combination of both?

The government's choice, in the heyday of laissez faire and unlimited faith in the individual, could only be to rely on the self-interest, efficiency, and profit motivation of the private sector. In practice, however, this meant reliance on the foreign private sector, for there were neither the markets, the domestic capital formation, nor indigenous entrepreneurship of sufficient quality and quantity available to spark the Canadian economy. As a result, Canadian growth languished for an entire generation while the government of Canada, struggling with the finances of railways and other megaprojects to span the continent, had no funds for development, and the provinces struggled to stay afloat on the subsidies provided by the Dominion.

The framers of the tariff policy extolled it as a protectionist
measure to preserve the Canadian market for domestic infant industry. They did not realize that a tariff could not possibly ensure national control of an industrial sector in a continental economy—Canada and the United States—where there was already a free movement of persons, capital, services, and goods. A tariff on goods, then, could raise revenues for the federal government, but it could not protect. In fact, imports from the United States, as a percentage of total imports, doubled between 1870 and World War I.

The Canadian experience with continental integration following upon Confederation provides clear evidence that the assumption of a greater wealth upon the allocation of factors of production in a larger market, perhaps even a world market, may be valid, but that there are still bound to be winners and losers. As Canadian resources and people moved southward, the reallocation of these factors of production strengthened the American economy significantly, while leaving Canada weakened by the loss of much of its resource and manpower strength. The mobile Canadians did well as they strengthened and enhanced the growth rate in their new homeland, but at the cost of the stagnating and increasingly dependent economy in the land of their birth. From 1860 until 1900, Canada was not a land of hope and immigration, but a land of frustrated ambition and emigration. This was the period when we set ourselves firmly in the role of economic satellite and suppliers of our resources, our land, and our labour, to the American economy, a role that we still play and that Williamsburg intends us to play in the future.

Given the free movement of Canadian factors of production to the south, what did Macdonald's Tariff of 1879 really accomplish? Basically, it increased the cost of living by reducing the incomes of Canadians, and little else. The tariff was a revenue-gathering device, not a protective instrument. Few of the industries that did
exist could qualify as infant industries worthy of protection. They were small, single-product, and community-based firms in a largely barter environment, fully protected by transportation costs and local loyalties, and themselves indifferent to expansion and larger markets. Markets in Canada were not national, as the Fathers of Confederation had vociferously and confidently predicted, but a jumble of separate markets sustained by geographic barriers and transportation costs, plus the fierce regional and cultural loyalties that made market penetration a costly affair.

If the tariff had been effective as a protective measure—that is, if it had succeeded in preserving Canadian markets for Canadian entrepreneurs—one could have expected a flow of the new American branch plants during this period. In fact, there was little direct investment during the next twenty years, indicating that Canadian markets were too small and scattered to justify investment and that the most efficient way to supply the meagre market was still the shipping of American goods, not capital, over the tariff wall.

It was only when the frontier in the United States had been closed that American capital turned its attention northward. Confederation, to repeat, was a political union that never became a nation in control of its own economy. The national policy of 1879, often touted as Canada's declaration of economic independence, was nothing more than a sales tax on the Canadian consumer, a source of revenues to shore up declining customs and excise revenues and to avert national bankruptcy.

A protective tariff appealed to the national sentiment for a protected market and the desire to build a more balanced, diversified—hence less vulnerable—economy. The assumptions were: a) That there was a strong and concentrated market to justify domestic investment and to support industry; b) That there was a sufficient number of infant industries and firms to protect;
and c) That a banking and financial community existed, ready and willing to devote resources to the financing of industrial growth in preference to the less risky short-term commercial financing at which they were adept. All three assumptions were mistaken.

The continuing pilgrimages to Washington that are a feature of our own times commenced before Confederation and continued in the years after, as Ottawa strenuously tried to have the Reciprocity Treaty renewed. But it was useless and—from Washington's point of view—unnecessary. They already had all the control over the Canadian economy that they required. More fundamentally, the Fathers of Confederation found the institutions and elements of the Canadian economy to be completely subject to the needs and wants of American market mechanisms. Thus the purpose of political unification—the control of one's land, resources, and capital to achieve an improving standard of living for the people—was beyond them.

The growth of the Canadian economy, then as now, depended on decisions taken elsewhere. Canada was, for all intents and purposes, a market in real estate and raw materials, without large enough markets to throw off surpluses nor domestic capital sufficient to finance a greater share of our own growth.

The course of Canada's dependence on foreign investment took form in the first decade of this century, although the pattern itself had been set well before Confederation. In 1983, Canadian economic dependence is without parallel in the developed world. An analysis of the operations of some 220,000 non-financial corporations in 1980 showed that 36 per cent of the equity ownership and 38 per cent of all the profits in the group accrued to foreign-controlled companies. Such is our present vulnerability to outside pressures.

By comparison, the total sales of foreign subsidiaries in the United States amount to approximately 2 per cent of their
GNP
.
Does the United States take a relaxed view of this 2 per cent direct-investment problem? By no means. The findings of various research groups in the United States are widely publicized and debated in their media, and this has increased the activity of American agencies in the areas of trade and commerce, banking, oil and gas, justice, the securities-and-exchange commission, communications, and defence procurement. In fact, as one consultant has noticed, the scope of United States restrictions on and barriers to foreign investment is so vast that it has taken almost three volumes just to set them out. Very simply, no comparison is to be made between the measures and practices introduced by the United States to restrain a foreign investment that touches only 2 per cent of their gross national product and the single timorous investment-review agency that Canada has put in place after more than a third of her economy has been found to be in foreign control.

A strategy for greater independence means that the Canadian economy must be switched into new directions—not overnight, since one does not overcome the errors and inertia of more than a century with a brutal turnaround. The damage to the present structure would be immediate and biting. But slowly, perhaps over a generation, we can accomplish new directions that will give an assurance of a more promising and sovereign future.

Sweden faced much the same dilemma, and introduced a policy in 1916 whereby the Swedish parliament insisted that the ownership and control of natural resources, lands and forests, markets and manufacturing must remain firmly in Swedish hands. This policy contains many lessons for Canada. The Swedish government argued, and the people agreed, that to have permitted foreigners to own and control Swedish lands and resources, the life-support system of their economy, would have been detrimental to the interest of the nation. Such a policy would have, of
course, made the Swedish consumer vulnerable to exploitation by Swedish manufacturers and industrialists, but Sweden also introduced at the same time a free-trade policy which forced her businessmen to meet world standards of performance. In sum, Swedish economic policy reversed the road taken in Canada by insisting on free trade in goods and limiting the movement of her factors of production.

The beginning of economic wisdom is the control of our own money and credit, as Mackenzie King pointed out. An independent monetary policy does not mean that we can ignore the policies and practices of our neighbour to the south, but it does mean that we do not blindly accept its objectives and policies as our own. We should not be the thirteenth federal branch of its reserve system, nor should we adopt practices in the interest of harmony with the International Monetary Fund at the expense of efforts to resolve domestic problems such as inflation and unemployment. We need to reject the follow-the-leader practices that have kept us dependent for more than a century.

Money and credit policies can force the direction of all other elements of economic planning—fiscal, trade, energy, employment, and industrial—into a monetary framework. A monetary policy totally aligned with that of another nation means that all economic policies will be similarly contained. But a central bank is not responsible for the definition of the best interests of the nation. It is the government, elected by the people, that alone can decide on the economic, political, and social objectives of the community. As an agency, the bank must accept and adapt to the directions laid down by government. It is not the other way around, as is now the case.

No other nation in the world is so controlled by foreign capital and multinational corporations as Canada. The problem posed by the threat of the corporate cathedrals to the processes of
democracy are immediate and urgent. One cannot expect nations such as the United States, Japan, and Germany, which benefit from the number of multinationals headquartered in their capitals, to raise questions about the role of these monoliths in the world community. The international legitimation—that is, freedom from national sovereignty—that these commercial giants seek is not an acceptable answer. It will not be tolerated by nations whose objectives of a fair distribution of what is produced in their country, and a rising standard of living for their people, are not compatible with corporate goals of concentration of wealth and power in the private sector.

Philosophically, politically, socially, economically, and culturally, society has yet to examine the awesome impact of these self-determining, self-propelling, perpetual money-making machines. Whether they are foreign owned or not is beside the point. Who is to ask the real questions about corporate growth? To whom are you responsible? To yourselves alone, to the people who own you, to the nations in which you operate? What are your goals and are they ethically justified?

More than any other nation, Canada has a stake in the answers to these questions. Until they are answered, Canada will remain a country that cannot answer the question, who is in charge here?