Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Sunday, October 07, 2012

Hey, small spender -- With the government and consumers exhausted, officials are begging firms to pick up the slack

CANADA’S ruling Conservatives like to boast that their country weathered the world recession better than any other G7 member. Though they tend to attribute this success to their own policies, one of the main causes was Canada’s conservative corporate culture. Its banks had barely dabbled in subprime mortgages when America’s housing market imploded.

That caution, widely seen as a virtue during the financial crisis, now looks problematic in a recovery that is at risk of choking. In 2010 and 2011 Canada’s GDP grew by an average of 2.8% a year, more than America’s and than the economies of other rich commodity-dependent countries like Australia, New Zealand and Norway. The OECD now predicts it will grow by 1.9% in 2012, the same as New Zealand and less than the other three countries.

This slowdown is partly owing to lower prices for Canada’s resource exports, weak demand for its goods from Europe and a strong currency. But home-grown factors have also played a part.

First, the government launched a stimulus programme in 2009 to prop up the economy. In 2010-12 its deficit averaged 5.1% of GDP. It is now retrenching. Stephen Harper, the prime minister, has promised to close the gap by 2015 via spending cuts alone. Total public expenditure in 2012 is forecast to be 5% below its 2009 peak.

Meanwhile, consumer spending has been spurred by a housing boom that is often compared to America’s pre-crisis bubble. The central bank has kept its benchmark interest rate at 1% for two years, encouraging Canadians to pile up debt, particularly in mortgages. In Toronto house prices have risen by 8.3% in the past year. Mark Carney, the bank’s governor, has issued repeated warnings about these growing liabilities. Consumers’ ability to borrow and spend may be nearing its limit.

That leaves businesses as the last potential source of continued growth. Unfortunately, their penchant for accumulating rainy-day funds was only reinforced by the tumult of the recession. Their cash hoards now amount to 30% of GDP, three times the historical average. They have not stopped investing altogether—private-sector non-residential investment has almost recovered after falling by 21% in 2009—but they are not spending nearly enough to compensate for declining consumption and government outlays.

Moreover, Canadian private investment is divided evenly between machinery and equipment, which boost productivity sharply, and structures that store and transport goods, which have less of an impact. In the United States structures account for a far smaller share. This discrepancy may simply be a result of Canada’s dependence on natural resources such as oil, which requires pipelines. But it means that the country’s investments yield fewer gains in productivity than those south of the border do.

The government is doing its best to talk firms into investing. Mr Carney has demanded they start spending their “dead money”, which earns little interest thanks to his low rates. “Their job is to put money to work,” he said recently, “and if they can’t think of what to do with it they should give it back to their shareholders.” Jim Flaherty, the finance minister, sounded almost plaintive when he reminded a group of executives last month that the government had reduced tax rates, cut red tape and increased tax incentives to encourage them to invest. “Ultimately, it is up to you in the private sector to take advantage of all of these strengths and to invest, to create jobs and to grow our economy,” he said. For now, however, their entreaties seem to be falling on deaf ears. Michael Holden, an economist at the Canada West Foundation, a think-tank, says that urging firms to move faster was like “people who honk at the car in front of them in a traffic jam”.

The government is not relying on moral suasion alone. It has redoubled efforts to sign trade and investment deals to diversify Canadian exports away from slow-growth markets, where 85% of them are now directed, and towards racy Asian economies. Last month Canada and China signed an investment-protection pact.

Officials could also push education reform to encourage schools to train bolder executives, though that has not been a priority so far. Bill Currie of Deloitte, a consultancy, says Canada could produce managers more comfortable with risk by making university courses for businesses and engineers broader and more creative, and by teaching more economics in secondary school. But Mr Carney and Mr Flaherty will be long gone by the time such projects bear fruit. Just now the bully pulpit is all they have got.

Original Article
Source: economist
Author: from the print edition

No comments:

Post a Comment