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The New Canada: Dazed And Confused

International Business


It's just five years old, but C-Mac Industries Inc. is one of those high-tech successes that entrepreneurs dream about. The producer of integrated microcircuits expects sales to almost double--to some $150 million this year. C-Mac President Dennis Wood says he's selling to "300 of the world's top 500 producers of electronics," who use his products for applications in the automotive and medical industries, among others. So C-Mac is thriving all right, but not in Silicon Valley. Instead, it is doing just fine in, of all places, Sherbrooke, Quebec.Canada, long known for its dependence on timber and grain, is developing a new entrepreneurial class that's dotting the landscape with startup companies and reviving old ones. This transformation of the economy stems directly from the 1989 Free-Trade Agreement penned by former Prime Minister Brian Mulroney, which wiped away most of the restrictive tariffs between the U.S. and Canada. Dropping these barriers goaded Canadian industry into its most dramatic restructuring since World War II. The result: a new Canada, with economic growth in the first half of 1993 of 3.4%, more than twice as fast as in the U.S. "Canada has the potential to grow faster than any of the other G-7 industrial powers for the rest of the decade," says Edward Neufeld, chief economist for Royal Bank of Canada.

FREE-TRADE PAIN. Yet Canada has won this success at enormous social cost. With protection from foreign rivals gone, inefficient Canadian companies have shed more than 300,000 manufacturing jobs since 1988--some 15% of the total. The resulting jobless rate of 11.3% places intense pressure on Canada's generous welfare programs. To preserve the social contract, the government has run up a net debt burden that now totals 90% of gross domestic product. Like the U.S., Britain, and even Sweden, Canada is encountering firsthand the brutal realities of the global economy.

Little wonder, then, that in national elections this Oct. 25, voters seem ready to give Mulroney's Conservative Party and Kim Campbell, his successor as Prime Minister, a thorough thrashing for all the free-trade pain they inflicted. Yet the Tories are not the only victims of voters' wrath. The Liberals, their traditional archrivals, lead the polls but may not win a solid majority. Instead, protest votes are piling up rapidly for two splinter groups: The separatist Bloc Quebecois and the Reform Party, which wants drastic spending cuts.

With Canada's electoral politics in an uproar, it would be easy to conclude that many Canadians are a step away from burying Mulroney's legacy and demanding a recreation of their country's once snug, protected economy. The sense of deprivation is certainly there. "The vast majority feel they are worse off than five years ago," says Bob White, president of the Canadian Labor Congress. George Karatsoreas, a Greek immigrant who owns a hair salon in Toronto, says he's "very worried about the loss of jobs," especially since that may make it harder for his two teenage sons to get work.

But like other Canadians, Karatsoreas harbors another, opposite feeling: "Canada has been living beyond its means," he says. This ambivalence is the key to understanding Canada's mood now: a sense of anger and fear, but also a reluctant realization that there's no holding back the new Canada of free trade for business and greater economic insecurity for ordinary citizens.

Reflecting this ambivalence, only one of the major parties--the socialist New Democrats--favors abrogating Mulroney's free-trade deals and increasing social spending. Yet the New Democrats appear destined for virtual annihilation in the upcoming election, dismissed by most voters as wildly unrealistic. And although the Liberals favor some renegotiation of free trade, they have softened their once strident opposition.

OUTPUT BOOST. Nor are the Liberals talking about undoing most of the other key planks of Mulroney's revolution, which also loosened Ottawa's grip over huge sectors of the economy, including telecommunications, energy, and transportation. The result has been an economic transformation that is impossible to reverse, and that has changed the corporate mind-set in Canada. Only a few years ago, "globalization and competitiveness were just concepts to many executives," recalls Paul Tellier, CEO of Canadian National Railways. Today, "most recognize we have to take radical measures to cope."

There's growing evidence the measures are paying off. Canadian manufacturing productivity jumped 4.2% last year--five times the average annual pace of the previous seven years. Meanwhile, inflation is down to 1.6%, one of the lowest rates in the industrial world.

The restructuring goes beyond cost-cutting. While Canada remains a powerhouse in natural resources, it now boasts its share of high-tech manufacturers. Already, the Canadian computer industry employs 62,000 people, twice as many as the oil and gas industry.

Even grungier manufacturers are excelling at exports. Take Magna International Inc., Canada's largest auto parts producer. Heavy debt and the auto downturn had Magna on the ropes. But after drastic restructuring, earnings soared 43%, to $105 million, on record sales of $1.95 billion in the fiscal year ended July 31. About 75% of Magna's sales go to the U.S.

As the restructuring continues, Canada is well poised for a pickup in the world economy. Ultimately, predicts Lloyd Atkinson, chief economist at Bank of Montreal, "this could lead to improved living standards the likes of which we've never seen."

Many Canadians, reluctantly or gladly, recognize the overall benefits of free trade to business and the economy. But they remain bitterly divided about the next, necessary stage of Canada's transformation: taming the deficit and restructuring social programs, including national health care. Many conservatives such as Calgary businessman Barry McDonald have ditched the Conservative Party in favor of the Reform Party, which pledges to eliminate the $27 billion deficit in three years. McDonald blames Canada's welfare state for that number: "So many programs have been out of control and mismanaged."

FRACTURED. Yet others want to preserve the social programs and deeply regret the peril they face on account of Canada's huge debt. "I think the direction we've been going in is very destructive," says Brian Gifford, the maintenance supervisor for St. Joseph's Children's Center in Halifax, N.S. "Free trade has destroyed jobs and created downward pressure on social programs."

This unresolved debate on the deficit is not going to get clearer anytime soon. The surging support for the Bloc Quebecois and the Reform Party may produce a Parliament so fractured that the resulting minority government won't be able to tackle the deficit. True, Liberal front-runner Chretien has promised to trim the deficit, provided he cobbles together a willing majority. But that pledge is vague compared with his popular plan to create jobs with a $4.5 billion infrastructure program.

Yet if free trade has taught Canada anything, it's the need to adjust to new realities, however unpleasant. There's no doubt that Canada is facing a day of reckoning, and whatever the electoral outcome on Oct. 25, the next government won't be able to duck the debt problem forever. The only question--and it's a big one--is how messy and painful things will get along the way. The new Canada faces plenty more turmoil before that question is answered.William C. Symonds in Toronto

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