Dollarization - for the UK?

The Wall Street Journal published an op-ed this week that raises the stakes for Canada's monetary regime. It asks: why should the U.K. limit itself to the Euro as a currency option? Why not consider dollarization? Indeed, the U.K. is at an important monetary watershed. It must decide between ceding its monetary independence to the continent - and suffer the consequences of a divisive and oft misguided EU - or continue to be weighed down by the cost of its "sub-scale and relatively illiquid" currency.

Competing monetary regimes are facing the same pressures global industries must. The cost of supporting a monetary regime weighs against competitive efficiency in capital and goods markets. Indeed, the dominant position of the U.S. dollar is enough to have tradition bound exchequer look across the Atlantic as a viable alternative to a marriage with the rest of the EU. Ted Hall of Mayacamas Associates makes some compelling arguments in his WSJ piece (April 11, 2006) for the dollarization of sterling, but his points remind us that Canada is even more positioned to adapt to dollarization. He states his case:

There is much at stake in the U.K.'s choice. Adoption of the dollar would eliminate exchange rate risk, improving risk-adjusted returns for all asset classes. More venture capital would stay in the U.K. (and flow to it from the U.S.), stemming brain drain and fostering a more innovation friendly environment in the U.K. The cost disadvantage and illiquidity premium associated with participating in a $40-trillion pool (euro zone plus the U.K.) will be significant compared to participating in a 40% larger $56 trillion pool (U.S. plus the U.K)

Canada would benefit in the same way should it negotiate a currency union - likely dollarization. The impact on our economy would be significant, in all the ways described above. Perhaps the arousal of a dollarization debate in the U.K. will bring our monetary regime some policy focus for Canadian politicians, business leaders, and, most importantly, ordinary Canadians. Certainly, U.K. dollarization would make the issue fait accompli in the Great White North. The loonie is dead with sterling dollarization.

Just as the U.K. must face this challenge to its monetary traditions, our current Canadian monetary regime demands a debate about its future. The sooner the better.

An end to marketing boards...please

There is a chicken glut that has sent prices down 50% over the past year. But that news seems foreign to my Canadian ears. And it is. The prices the USDA publishes for poultry prices are a quite a bit different from the prices posted north of the border. Indeed, the wholesale price of skinless/boneless chicken in Canada is about CDN $14/kg (CDN $6.37/lb) - nothing close to the CDN $2.58/kg (CDN $1.17/lb) posted in the United States. If this is just one example of the consumer cost of agricultural marketing boards, then it is time Canadians wake up and push for policy change.

Too often the interests of consumers are ceremoniously tossed to the wayside, all in the ill-advised defence of producers. The livelihoods of certain sectors of our population depend on the protectionism that brings forth all manner of consumer taxes. This is indisputable. But it is imperative that policy makers understand the crippling effect of protectionism. Far better to deal with global trade head-on by dismantling protectionist institutions like marketing boards and help redirect producing assets toward industries with some level of comparative advantage. The economic rewards for the nation would be substantial. My family's annual chicken savings alone could be over $1,000 at the current prices. That is the kind of tax cut Canadians could use.

Time for Canada to be proactive on regulatory co-operation

The CD Howe Institute published an important article on the need for regulatory convergence in Canadian - American trade relations. Michael Hart's article "Steer or Drift: Taking Charge of Canada - U.S. Regulatory Convergence" (see http://www.cdhowe.org/pdf/commentary_229.pdf ) correctly puts the weight on Canadians shoulders to effectively face up to its fears regarding North American integration and tackle the regulatory framework head-on. Our economy would benefit greatly with regulatory convergence - or reducing the "tyranny of small differences". The more Canadians wrestle with the inevitable integration that must take place, the more we penalize our nation. As Mr. Hart concludes, Prime Minister Harper would do well to turn the focus of the upcoming meetings in Mexico with President Bush toward positive efforts that promote regulatory convergence.

 

I would add that it is critical to move on the security front as well. The commercial regulatory environment is highly dependent upon the shared security goals of the member nations. On this matter, too, it is imperative that Canadians maturely address the nations dependence on America and its shared economic interests. It is time to put aside nationalistic pride and work toward an integrated security perimeter, with shared or co-operating institutions that ensure that the security of North Americans are effectively and efficiently administered. Only then will the commercial interests of the two nations flourish.

 

The Canada - U.S. border should allow for free movement of goods and people. This implies much: shared immigration and refugee policies, regulatory and legal convergence or co-operation. All this may seem like a brave leap for Canadians, but it is far better to embrace the common values and interests we share as North Americans than to foolishly hang on to institutions that prevent the regional flowering that is so evidently nascent.

 

Yes, small steps are the political prescription, but what we need now is a voice - a strong voice - that bravely confronts the people of Canada with a plan for integration. There is no need for barriers to be drawn. No need for costly bottlenecks at the border. This may be far too much to ask of a minority government. For now, chipping away at "small differences" is the expedient option. But really...its time for the Canadian people to address the future maturely - and bravely. 

North American security

The Canadian tourism industry is starting to let its concerns be known about the effects of the proposed U.S. identity documentation required of travelers from America. It worries that Americans will forgo travel to Canada for business and pleasure because of these restrictions. Indeed, we can expect that this obstacle will result in reduced flows of money into this important part of our economy. This will affect many businesses and employees in the Canadian travel and tourism industry.

Understandably, the United States must take responsibility for the security of its citizens. They have every reason to make their border with Canada as secure as feasible. Unfortunately, until Canada embarks upon a harmonization of security and moves toward the ideal of a North American security perimeter, it will be forced to deal with unfortunate consequences for trade. It is important that the Canadian government tackle this vulnerability head on. That means clearly establishing a shared commitment to security and integrating North American security measures and forces. There is too much at stake to leave the U.S. government forced to invoke the documentation requirements. Better that Canada help offer alternative solutions. We are, irrevocably, partners in our own security. Canadians should take this relationship seriously.

Labour mobility

Recent newspaper articles about the surge in Maritime labour movements to Alberta and its high paying jobs reminds us of the importance of free movement of labour. Of course, Canadians are entitled and privileged to travel interprovincially to secure employment and to maximize their well being. We would not think of our Dominion in any other way. Certainly, the opportunities for labour to maximize earnings is an important cornerstone of open markets. Economic development is adversely affected by labour shortages. But more importantly, human resources are squandered when they cannot be put to their best use. While some people find it near impossible to pick up roots and look for a better life if their home region denies them that opportunity, we know that the New World was built on the very spirit of self preservation that guided our ancestors to this distant continent. Indeed, immigration is still a driving force of our economy. Inter-provincial labour mobility is an important conduit to economic growth.

This should remind us that such efficiencies are prevented from blossoming completely in North America. The border that separates Canada from the United States (and indeed the U.S. Mexican border that creates such fear in America) prevents individuals from maximizing their capacity to earn income and contribute to a more dynamic North American economy. One of the failings of the market system is that while capital moves relatively freely across borders, people do not. This puts individuals without capital at a disadvantage. Surely labour should be free to move to its best advantage. The U.S. - Canada border forces most human capital to take up opportunities that may be secondary in advantage - taking people even farther from their native regions than would be the case in a borderless North America. Would not an unemployed/underemployed native of Halifax prefer to relocate in Boston than in Toronto? The political boundaries give individuals poor choices sometimes. The result is often continued unemployment/underemployment. For others, it is a life far from where they were raised.

On a personal level, I know this well. I am celebrating my 20th anniversary of arriving in Toronto this month. When I first made the long trip from the prairies to begin a career in Canada's financial heartland I knew that Toronto was the place for a Canadian to find work in the financial services industry. And yet, my western roots were pure. I had never been east of Winnipeg previously. Indeed, my urban experiences were largely American as a young person. Cities like San Francisco and Los Angeles seemed to have more of a geographic affinity to my prairie homeland than Ontario's capital. I might well have made my way west to other financial centers, if only to be closer to my family. Instead I am in Ontario. It is a wonderful place, this place I call home now. But sometimes I wonder...

Energy exports to U.S. will shift balance of power in Canadian politics

The ascendancy of the west in the Canadian political economy is heavily weighted toward the development of oil & gas reserves. Energy exports to the United States will dictate a common interest between oil producing provinces and the American market. The value of energy exports is rapidly increasing, and the relative importance of energy in our balance of trade is growing. In 2001, energy products accounted for 13% of Canadian exports. Last year energy accounted for over 19% of exports. Indeed, the 16% gain in total exports to the United States recorded in December 2005 (vs December 2004) has much to do with the improved picture for the Canadian petro-economy.

This growing U.S. energy dependence on Canadian resources will eventually bring the interests of the oil-producing provinces into conflict with the political powers in the east. Federalist voices will be called upon to compromise the competing claims. This is a recurring battle in Canadian history, but the shear economic clout of the petro-economy of the west will force the federal government to accommodate the economic interests of the west. And those interests are tied to the United States.

Strong Canadian dollar - time to negotiate currency union

The irony of the moment for Canadians is likely lost on all but the most ardent advocates for currency union. But for those that see the ultimate forces toward union inevitably at work, the current commodity cycle is both beauty and bane. Yes, the heightened demand for commodities has elevated the loonie back toward respectability as the balance of trade clearly indicates the ascendancy of our resources. And the prospect for continuation of this bullish trend in energy and mineral markets is notably positive. But as the loonie now approaches 90 U.S. cents Canadian nationalist sentiment swaggers. Thoughts of weakness are long lost. No fear of depreciation here, not like a short few years ago when a 50 cent dollar seemed imminent.

 

Unfortunately, it is lost upon policy makers now that the time to negotiate is in times of strength. When businesses seek merger opportunities they do so when their stocks are strong. It makes for a much better deal for the shareholders. So too for the Canadian shareholders. Far better that Canada parlay the current business cycle into a favourable currency union agreement now. The terms of the merger, likely dollarization, are favourable enough now to enable a smoother transition for the regional economies of Canada. Ontario, specifically, would benefit from the timing of a currency agreement now. Unfortunately, the political vision, the political will, is no where to be found. Too bad.

Economic impact of currency union

The political impetus for Canada's adoption of a currency union with the United States rests on the cost/benefit analysis of economists who must provide the necessary backbone for political voices. They must produce convincing arguments about the effects of currency union on the Canadian economy. In the end, the question will come to Canadians: is it acceptable to give up monetary autonomy? An affirmative answer will depend on the economic return, the degree to which Canadian industry thrives and adapts to the move away from a flexible exchange rate - the currency regime in place now. Indeed, there would be winners and losers across the diverse Canadian economic sphere, but the heightened level of economic integration between the two countries has now put the balance toward currency union.

 

One study that looks at this matter concludes that we are much nearer to meeting the conditions necessary for optimal currency union, although it does not expressly prescribe union. Have a look at this case study: http://aix1.uottawa.ca/~scoulomb/pages/Beine-Coulombe-WE2005.pdf

 

This kind of academic study is an important starting point, and I would expect to find more analysis in the coming years.

Consumers of the World, unite!

The global economy showed its face in Giant Tiger today. For those of you not from rural or suburban Eastern Canada, Giant Tiger is a chain of discount stores. It's the sort of place you can pick up household items and clothing at dollar store prices. It's the kind of store that many Canadians pick up their weekly wares, their back-to-school clothes - even their groceries. I was tempted by the 99 cent flax bread, since I know the same loaf goes for $2.30 at my grocery. But if you are shopping for clothes, take a look at the racks in Giant Tiger. You will find a world in the labels of these wildly inexpensive clothes.

Jeans for $19, made in Bangladesh. Long-sleeved shirts, khaki pants, and jackets for $13. All made in China. And a well-made bunny hug jacket made in Jordan, of all places. That will set you back $6. The garment makers of the world in Port Elgin, Ontario. That my visit to my wife's parents home town would result in another visit to Giant Tiger is little surprise - there are not many places to shop there. But what are we to make of this consumer mecca. For Canadians who survive on limited or even lower-middle class incomes, the growing global trade has unleashed a wonderful anti-inflationary world.

Silly that economists laud Alan Greenspan and the Fed for controlling inflation. Silly that they would even think that the out-going Fed Chairman had a lot to do with the relative containment of the price level over the past decade. No, the truth about Greenspan is more that he fueled the economy with more paper than we really needed. What consumers really have to be thankful about is not the bankers who control our money supply, rather they should celebrate trade liberalization and the growing global economy. They need to thank the workings of the market economy that brings products from places we would never have imagined before. They need to thank WalMart! (And in Port Elgin they will soon finally get their own WalMart, too.)

Clothes from Turkey and Central America. Juice from Montenegro, boots from Latvia, and scarves from Pakistan. And then, there is China and India. The North American consumer now basks in the affordable choices in front of him. For a family of four, the benefit is very real. Were it not for the competitive price pressure afforded by the global economy and liberalized international trade, the prospect of meeting the non-discretionary expenses in the modern world would be daunting. Inflation would certainly be the primary economic concern.

So what of this consumer world? For the most part, consumers have not had to speak out to protect this burgeoning domain. The loud voices of self-interest, narrow-minded self-interest of the protectionist union forces that seek to dismantle global trade - these are the voices that have garnered the political wings. Their fear-based convictions worry about uncompetitive domestic industries and lost jobs. The media gives full attention to labour unrest whenever the producers feel threatened. But what of the consumer? The silent majority lacks a political champion in the global trade arena. We need a broad consensus that explicitly champions the benefits of unimpeded international trade. We need the customers of Giant Tiger to speak out so they can protect their wallets from the self-interests of the powerful minority.

North America must embrace international trade, and the best way for it to prepare for its impending reality is to formulate even stronger trading relationships on the continent. An economic union of North America would provide a strong base for embracing trade relations with other regions of the world. The competitive advantage of North America, disperse as it is, would deliver new found wealth and protect the North American economy from the ravages of inflation and the unintended deflationary times that so often impede economies when they choose more insular, anti-trade domestic policies.

Canada - U.S. trade first

The "multi-" in trade is as complex as it is in culture. There is no telling where the complex world of multi-lateral trade agreements can co, but the WTO's relative stalemate at the Hong Kong table instructs us: agreement by committee is no way to pursue aggressive trade liberalization. It is in individual countries best interest to seek bi-lateral agreements - and for Canada, the U.S. and Mexico the trade framework should be a heightened agenda to improve cross-border trade, to build upon NAFTA.

Michael Hart and Bill Dymond are senior trade policy experts, and their recent article found in the February 2006 issue of Policy Options (see http://www.irpp.org/) spells out Canada's need to step back from the multi-lateral framework and focus on trade issues with the United States:

"The simple fact is that Canada's most basic economic interests are now inextricably bound up with those of the United States and can no longer be addressed multilaterally in the WTO."

Their conclusion:


"Today, however, further multilateral negotiations can make at best a marginal contribution to the most pressing Canadian trade and economic interests. Instead, the opportunities lie in elaborating the bilateral Canada-US agenda and crafting an accommodation with the United States that is commensurate with the reality of deep and irreversible cross-border integration. That agenda involves creating a less intrusive border, pursuing a more deliberative strategy of regulatory convergence, and establishing institutional capacity to manage deepening and accelerating integration. None of these issues can be addressed multilaterally, but they will be at the heart of Canadian tradecraft for the next generation."

North American integration is our best hope for continued economic growth. Better we work on bringing down trade barriers that affect our most important trading relationship than wait for the utopian outcome that is so distant at the WTO table.

U.S. identity cards

Although the implementation of U.S. identity cards for land cross-border crossings is a degree better than requiring passports of U.S. citizens, the implication is clear: Canada should act progressively toward a mutual security perimeter with the United States. The alternative is the path that the U.S. security measures imply: obstacles to trans-border crossings. This is an unsavoury outcome for Canadians and Americans. I hope that the new Conservative government works toward better solutions to the U.S. security concerns.

Manifest Destiny

It pains me, for the most part, to participate in these federal elections. The hypocrisy of my participation does not escape me. Admittedly, I have succumbed to the doctrine of Manifest Destiny. Why else would I gleefully read the editorials of The Wall Street Journal every day? The charade of Canada has pained me for many, many years. And yet, I have a duty to vote. But for whom? Is there a party, a political voice for the continentalist? Is there someone brave enough to ask: why Canada? Really.

Yes, I know there is a long pedigree of Quebecers who have sworn to separatism. But they are not continentalists, to be sure. No, they are twice buried in the sand. The spirit of Manifest Destiny is one that seems lost on Canada. We don't even use the term anymore. And yet...We are now in a world that has seen a re-invigorated form of Manifest Destiny take hold. Most people see it in a very negative light. That is the consequence of fear. But what have we to fear? The doctrine of manifest Destiny is grander than the United States. It is about freedom. About liberty. About economic vitality wrapped in the values of a free world. And this world is in the mold of the America.

I accept this as a wonderful proposition. But to accept it one must first accept the responsibility that goes with freedom. The responsibility for ourselves. The challenge of life is great, but the capacity of individuals to overcome obstacles and thrive should not be underestimated. Individuals need not be administered. And governments should serve the people.

Enough proselytizing. The Canadian political landscape is a Thomson simplistic collage of raw wilderness. It is certainly not the inspiring grand tableau of the Hudson school. Where is the romanticism? Where are the ideals? Nope. This election remains a battle of school-yard bullies trying to assert their own patronage on the existing hubris. If only one of them had the political courage to present the truth about Canada. And if only that person had the charisma and vision to give Canadians the will to embrace a new future.