Economic disparity: the elephant in the room

By Dr. Roger Gibbins on August 7, 2008

The provincial and territorial leaders chose a festive location for their recent Council of the Federation meeting as Quebec City celebrates its 400th anniversary.

Unfortunately, there was nothing festive about the unrelenting bad economic news that confronted the premiers as stocks fell, inflation rose, and the American slump deepened.

As the premiers grappled with increasing economic uncertainty, the elephant in the room was the growing regional disparities in the national economy.

While neither the resource boom in Western Canada nor the weakening of the Ontario economy was on the formal agenda, you can be sure they came up as the leaders met over dinner and drinks.

Although we are not yet facing a crisis in terms of the economic management of the federation, storm warnings are all around. The question premiers face is whether today's economic developments are transitory or indicative of enduring structural change in the national economy.

If it is the latter, then next year the premiers will need more than a stiff drink as they grapple with some very difficult issues.

Let's consider the transitory scenario for the moment.

It is true the Ontario economy has been bent but not broken by a weakening American economy and increased global competition. However, things could turn around.

The resilient American economy could rebound more quickly than we expect, and the Asian economies could cool. In short, the underlying strengths of the Ontario economy could survive the current rough patch, and prosperity could return to the traditional core of the Canadian economy.

High resource prices in the West could also prove to be transitory, as they have in the past, and thus we could return to a more balanced national economy.

Unfortunately, the more likely scenario is that today's imbalance is structural and will persist. In this scenario, the Ontario economy continues to be knocked about by the American recession and growing protectionist pressure, and by increasing global economic competition. In this case, the ballast that Ontario's prosperity has provided for generations to the Canadian economy could be lost.

The fact that Ontario has for so long been Canada's largest and most affluent province has made all sorts of equalization programs work. If the Ontario economy loses that pride of place, then we have a problem, particularly if the economic growth in western Canada also reflects structural change rather than a temporary surge in resource prices.

It is hard for most of us to choose between these two scenarios, but the odds seem to favour structural change rather than temporary dislocation.

Manufacturing across North American is likely to face increasing rather than decreasing global competition, and in the face of that competition protectionism is likely to become more entrenched in the United States. At the same time, global demand for western Canadian resources is likely to grow.

If both predictions turn out to be correct, then we could face large and growing regional disparities. We know from the international experience that soaring energy prices have the capacity to generate large pools of wealth, and we worry about the effects of concentrated wealth on the international system. What, then, are the implications for Canada? The central question is how much disparity can the national political system tolerate? In the past we used equalization programs to level up, programs that were supported by the large and affluent Ontario tax base. However, the West as a whole, and Alberta in particular, simply do not have the population base to be the new Ontario.

Here it is important to stress that the problem is not one of envy or greed.

It is a very real challenge of national economic management. How do we handle growing regional disparities without dampening the one part of the national economy that is doing well? How do we handle regional disparities in resource wealth when natural resources fall under the constitutional umbrella of provincial governments? More generally, how do we move forward as a nation into a very uncertain global environment when different parts of the Canadian economy are moving not only at different speeds but in different directions?

The premiers were wise to duck such big questions this time around because there is too much uncertainty, uncertainty that is likely to persist at least until the next president takes office in the United States. However, when they gather next year, and if conditions do not change dramatically, the discussion of regional disparities in wealth will not be the topic of casual conversations over after-dinner drinks. It will be at the very core of the country's agenda, and it will be very tough as the elephant in the room comes out to dance.


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