Stephen S Poloz: Canada at 150 - it takes a world to raise a nation
Remarks by Mr Stephen S Poloz, Governor of the Bank of Canada, at the 50th Anniversary of
Durham College, Oshawa, Ontario, 28 March 2017.
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It is a real pleasure for me to be back in my home town of Oshawa, particularly given that
Durham College reaches its 50th anniversary this year.
From 205 students in 1967, Durham has flourished. The college developed partnerships with
both Trent and York universities and added the University of Ontario Institute of Technology as an
educational partner on campus. Today, Durham College has well over 50,000 alumni.
As we all know, Canada, too, is hitting a big milestone this year-150 years of Confederation. Let
me ask you this: Where in the world would you rather live? Over the past 150 years-not long by
global standards-Canada has progressed to become one of the wealthiest and happiest
countries in the world. The average income, adjusted for inflation, is about 20 times higher today
than it was at Confederation.
It is worth thinking about how this progress arose. Essentially, Canada's economic growth up to
around the end of the Second World War depended primarily on exploiting our natural resources.
To accomplish this, we needed three things: foreign investment, immigration and access to
foreign markets. Of course, being open to the world also meant that Canada would be affected
by global events, including policies in other countries, and this occasionally caused us to
question our commitment to openness. But over time, the evidence leads to a clear conclusion:
Canada fares better when we are open.
Today, I want to illustrate this by looking at six episodes in our history and talk about how our
willingness to be open to trade, investment and people has ebbed and flowed over the years.
Our Economic Story
The economic benefits of international trade have been understood for about 200 years. But
trade itself has been going on throughout history, including here in North America. At numerous
sites, such as the junction of the Gatineau and Ottawa rivers near what is now Parliament Hill,
evidence of trading stretches back centuries. Goods-and better methods of producing them-
spread via trade among First Nations-such as the Mississaugas of Scugog Island, on whose
traditional territories Durham College sits.
Trade grew even more following the arrival of Europeans. The colonial powers of Britain and
France had a strong interest in Canada's natural resources. Trade in resources like fish, furs and
timber, which was established long before Confederation, shaped how Canada would develop,
as the economist Harold Innis clearly spelled out more than 80 years ago in his seminal studies
of our economic history.
Colonial resources
So rather than start in 1867, let us set the scene by going back further, to see how Confederation
actually happened. In the years following the War of 1812, the area that would unite at
Confederation was still divided into four colonies: Upper Canada, part of today's Ontario; Lower
Canada, part of today's Quebec; and the Maritime colonies of New Brunswick and Nova Scotia.
At the time, our economic ties with the United States were frayed. No doubt that had much to do
with the fact that the Americans had just tried to invade Canada, but they had also imposed high
tariffs on our exports. In contrast, we had strong ties to Britain, which had a policy of preferential
tariffs-very low taxes levied on imports-on goods from the colonies.
Tariffs served a dual purpose in the 19th century. Until the First World War, governments relied
on tariffs for most of their revenue. But the second purpose of tariffs was the protection of
domestic business from foreign competition. Over the years, tension developed between those
who sought higher tariffs to provide protection from import competition and those who advocated
lower tariffs and open markets. In Canada, this tension has often had a regional component, with
consumers outside the protected industries resenting paying higher prices. This tension has
ebbed and flowed for the past 200 years.
During the first episode of our story, economic growth for the colonies depended on shipping
resources primarily, but not exclusively, to Britain. In Upper and Lower Canada, that meant
building canals, such as the Welland and Lachine canals. Immigration from Europe was crucial
to supply the labour needed for construction. And with little local capital to finance the projects,
governments looked abroad-mainly to Britain-for foreign investment. The uniting of Upper and
Lower Canada in 1841 was an important step in attracting the funds needed to build the canals
that would allow ships to travel efficiently from the Great Lakes to the Atlantic Ocean. The new
waterway allowed wheat shipments from Upper Canada to boom. It also attracted shipments of
US grain, because Britain considered everything sent through the St. Lawrence to be Canadian,
applying the same preferential tariff regardless of origin.
So, by the early 1840s our colonies were making economic progress, aided by foreign
investment, immigration and trade with the British Empire. But this business model was
disrupted in 1846, when the British government eliminated all tariffs on grain imports to reduce
food prices. That meant that grain shipped through the St. Lawrence no longer had preferential
access to the UK market compared with, say, shipments from New York.
Prelude to Confederation
The hard feelings from the War of 1812 had faded as our second episode began. The Canadian
colonies reacted to the loss of preferential access to Britain by becoming more open to trade
with the United States. After several years of negotiations, and after overcoming significant
protectionist sentiment on both sides, the Province of Canada struck a reciprocity agreement
with the United States in 1854-essentially, a free-trade agreement in resources.
Meanwhile, the Irish famine touched off waves of immigration into the colonies and the United
States, fuelling growth. The colonies actively sought foreign investment to support the
construction of railways, so goods could move in winter as well as in summer. Most of the
investment to finance these projects came from overseas, primarily from Britain.
With growing trade, an expanding population, foreign investment and improved transportation
links in the colonies, the years just before Confederation were generally a time of economic
growth. However, the fiscal cost of supporting the railroads was high. The Province of Canada
found itself forced to raise revenue, and it did so by imposing tariffs on some imported factory
goods. Not surprisingly, this did not sit well with manufacturers in the northern United States.
This resentment grew as Britain continued to trade with the southern states during the Civil War.
After the war, with the northern states in the driver's seat, protectionist sentiment carried the day,
and the United States backed out of the reciprocity treaty with Canada in 1866.
Once again, Canada's business model was disrupted as we lost preferential access to a major
market. This was a key driver to the event that we are celebrating this year: the founding of the
Dominion of Canada 150 years ago. Back in 1867, we became a nation of 3.5 million people, with
more than 80 per cent of the workforce involved in agriculture or other natural resources.
Nation building and struggles after Confederation
Our third episode begins at Confederation. With access to US markets restricted by high tariffs,
Canada needed railways more than ever to move goods and people over long distances, East-
West rather than North-South.
It is no exaggeration to say that without railways, there would have been no Dominion. In the
East, construction of the Intercolonial Railway was a condition for Nova Scotia and New
Brunswick to join Confederation in the first place. In the West, amid American dreams of
northern expansion, the Canadian government needed a railroad to assert sovereignty over the
Prairies. And it enticed the colony of British Columbia to join Confederation with the promise of a
transcontinental railway. When completed, Canada would have railways running from sea to sea.
The nation, and its economy, would not have worked without them.
However, building a railway with an all-Canadian route over the vast Canadian Shield would be
tremendously difficult and expensive. To get this done, Canada again had to turn to foreign
investment to help fund construction. Over its first 20 years, Canada was routinely running
current account deficits of between 7 and 10 per cent of gross domestic product (GDP),
financed by foreign borrowing. This was not a problem, of course, as the borrowing was being
used to increase the economy's capacity.
To complete the railroad, the government turned to a group that included Donald Smith-also
known as Lord Strathcona-and his cousin George Stephen, president of the Bank of Montreal
and, as it happens, an ancestor of mine. (Stephen is my mother's family name.) Just as there
would be no Dominion without the railroad, it is also fair to say there would be no railroad without
the effort and skill of these early entrepreneurs and financiers who helped attract foreign capital
and channel it where it was needed. The people who developed what has become the world's
soundest banking system were vital to Canada's development. In fact, the Bank of Montreal
served as fiscal agent for the Canadian government in the years after Confederation, a role the
Bank of Canada now fulfills.
The Canadian Pacific Railway (CPR) was completed by 1885, opening up the West to flows of
goods and people. This link may have been necessary for growth, but it would prove insufficient
on its own. The world was in the grips of the Victorian Depression, a generation-long economic
slump that followed the financial crisis of 1873. Looking back on the period, it is a wonder that the
CPR was completed during such difficult times. Even though thousands of immigrants continued
to arrive in Canada each year, a greater number of people were leaving Canada for the United
States, where economic conditions seemed better.
In these difficult circumstances, the Canadian government turned insular. Weak revenues and
concerns about the future of manufacturing led it to raise tariffs. By 1890, the average Canadian
tariff for manufactured goods had reached 23 per cent, with imported clothing subject to a 30 per
cent tariff. However, growth remained modest until just before the end of the century.
The tide turns with the century
The tide turned in our fourth episode, which begins just before the turn of the 20th century. The
railroads that now criss-crossed the land supported openness in both directions. They allowed
the trickle of immigrants into the West to turn into a flood. And they were the conduit for rapidly
growing exports. With rising grain prices, the country's income soared.
On the tariff front, the US market remained essentially closed. And in the 1911 elections,
Canadian voters rejected a renewed attempt at reciprocity with the United States. However,
Canada's natural inclination toward open markets asserted itself. The government launched what
became known as the Imperial Preference, which allowed for tariff rebates on goods of British
origin. And over time, Canada pointed the way toward openness by negotiating lower tariffs
through "most-favoured-nation" agreements with several other countries. Today, the concept of
"most-favoured-nation" is at the heart of the global trading system.
So, with tariffs starting to trend downward globally, market access rising and population growth
accelerating, the Canadian economy boomed early in the century. Foreign investment remained
a key ingredient, hitting a record 18 per cent of GDP in 1911. By 1913, more than $2 billion had
been invested in railways alone, equal to about $43 billion today, in a country of just 7.5 million
people.
Another important trend began to emerge during this period-our economy was becoming more
diverse. Canada's manufacturing sector, centred here in Southern Ontario, began to expand
rapidly. Several factors helped this rise, including the development of technologies that raised
productivity in agriculture, allowing workers to leave farms for new emerging jobs in cities. In the
fledgling auto industry, Ford opened its first Canadian plant in Walkerville in 1904. In Oshawa,
McLaughlin Carriage Company began making cars in 1907. McLaughlin later merged with Buick
and evolved into General Motors. This industrialization would, in time, help encourage a more
open trading relationship between the United States and Canada.
Wars and the Depression
Our fifth episode starts with the outbreak of the First World War and continues until the Second
World War. The First World War led to higher tariffs as governments scrambled to raise
revenue. Income tax was introduced in 1917, which finally gave governments another important
source of revenue and made tariffs what they are today-purely a tool of protectionism. Foreign
investment into Canada slowed sharply, immigration came almost to a halt and a major
recession followed the First World War.
Things improved briefly during the Roaring Twenties amid industrialization in both Canada and
the United States. But the US stock market crashed in 1929, and shortly afterward, the Western
world fell into the Great Depression.
Foreign investment and immigration to Canada slowed again during the Depression. From 1929
to 1932, Canada's economy shrank by 25 per cent. With public sentiment turning against the
banking system, then-Prime Minister R. B. Bennett set up a Royal Commission, leading to the
establishment of a central bank to act in the public's interest. And since 1935, the Bank of
Canada has been operating with a mandate to promote the economic and financial welfare of
Canada.
Meanwhile, in a bid to protect American workers and farmers from foreign competition, the US
Congress pushed up the average tariff rate on dutiable goods to nearly 60 per cent by 1932. This
policy backfired spectacularly. Most other countries, including Canada, retaliated with tariffs of
their own. The trade war had no winners; everyone suffered as international shipments
collapsed. Canadian trade fell by more than 50 per cent during the Depression; US trade, by 70
per cent. Unhappily, the Second World War is what happened next.
Post-war success
Our final episode follows the Second World War. After the Depression and war, many countries
-including Canada-were determined to create international institutions aimed at preventing
such disasters from happening again. At the 1944 international conference at Bretton Woods,
Canadian economist and future Bank of Canada Governor, Louis Rasminsky, not only led the
drafting of many of the documents but was also credited with breaking deadlocks between the
British and American delegations. Canada would benefit greatly from this international push
toward openness.
A consensus emerged on the wisdom of an open trading system, and three years after Bretton
Woods we saw the General Agreement on Tariffs and Trade (GATT). Over the next 50 years,
successive rounds of GATT talks led to lower and lower tariffs, from the roughly 22 per cent
average seen before the war to about 4 per cent following the Uruguay Round in the 1990s,
reducing costs for consumers everywhere.
Here in Canada, the government co-operated with the US government to invest almost half a
billion dollars in the St. Lawrence Seaway, and it invested another billion dollars to build the
Trans-Canada Highway. To get an idea of what these figures would be today, multiply them by
roughly 10. The pattern of importing capital resumed, while the banking industry, along with the
Bank of Canada, facilitated the development of domestic financial markets. These markets would
provide a link to global financial markets and help attract and channel foreign capital.
During the 1950s and 1960s, large numbers of people immigrated to Canada, and this has
continued to be the case, more or less, until today. Simple arithmetic shows just how important
immigration has been to Canada. Take away the force of international migration since
Confederation, and Canada would be around 10 million people, not 36 million as we are today.
With all of the right ingredients in place, Canada enjoyed years of sustained, strong economic
growth in the post-war period. It is not a surprise that some of Canada's most famous
economists made their mark during this time. I am thinking of Nobel laureate Robert Mundell,
whose work with British economist Marcus Fleming led to a greater understanding of how small
open economies such as Canada's function, and why flexible exchange rates are a key
ingredient of success, especially for an economy reliant on foreign capital flows. Other Canadian
economists who gained prominence around this time include John Kenneth Galbraith, with his
international work and insights into economic cycles and financial bubbles, and Jacob Viner and
Harry Johnson, both of whom did pioneering work on international trade.
With industrialization continuing during the post-war period, Canada's economic ties with the
United States strengthened. The 1965 Auto Pact created a single, tightly linked market for
automobiles and parts between the two countries. This gave Canadian producers both the
opportunity to develop economies of scale and the ability to specialize production. Over the
agreement's first 40 years, auto production in Canada roughly tripled, while employment in the
industry doubled.
The next step in strengthening these ties was the Canada-US Free Trade Agreement (FTA) in
1988, which was expanded five years later to include Mexico in the North American Free Trade
Agreement (NAFTA). As had been the case in earlier attempts at reciprocity, these agreements
would not come easily. Many Canadians resisted continental free trade, fearing job losses, the
possible loss of our health care system, and a general loss of Canadian economic or even
political sovereignty. None of these concerns have come to pass, although heightened
competition did result in job losses in some sectors. But these losses were more than offset by
gains in other areas, and consumers have continued to benefit from lower prices and increased
purchasing power as most tariffs were eliminated.
Beyond the FTA and NAFTA, Canada has kept pursuing other opportunities for openness.
Canada has continued to push for reduced barriers through the World Trade Organization-
which succeeded the GATT framework-and through agreements with other individual countries
or trading blocs.
Lessons of the Story
So what can we say about the lessons of our story, and how can we apply them today? Now, I
know that I have greatly oversimplified matters and have not taken into account a host of other
factors in Canada's development. But I find the correlation between economic progress and
openness to be striking. When trade barriers are falling, when people are coming to our shores
and when investment is rising, Canadians prosper. We saw this before Confederation, in the
early 1900s and after the Second World War. The flip side is that responding to tough economic
times by turning inward rarely succeeds. We saw this after Confederation and during the Great
Depression. The bottom line of our history is that openness and economic progress go hand in
hand.
It is intuitive that a country like Canada would want open access to foreign markets. Indeed, given
our abundance of natural resources, we have needed export markets to pay for the imports and
the investment required for our development. Similarly, it is not hard to see how we have been
bolstered by a growing population that includes immigrants who bring their skills, labour and
demand. Canada is not unique in this.
It is less intuitive to see the same point from the other direction. Historically, there has always
been some resistance within Canada to lowering tariffs and exposing our businesses to foreign
competition. But what experience has shown is that the fears of openness are misplaced.
Protectionism does not promote growth and its costs are steep. First and foremost, higher tariffs
and other trade barriers make things more expensive for people and limit their choices, while
lower tariffs make things cheaper and increase choice. Specific companies might benefit from
protectionism, but that imposes a cost on everyone else. Conversely, the gains from free trade
are spread throughout the economy.
Beyond this, exposure to competition has been an important driver of innovation. Through
competition, companies are exposed to new technologies, which they can then adapt for their
own use. And higher productivity leads to sustained employment and rising living standards. So
there are compelling reasons why Canada should continue pushing for open markets, both here
and abroad.
Similarly, there are compelling reasons to keep our borders open to immigration. Last month,
Statistics Canada issued a report projecting that in less than 30 years, Canada will rely entirely
on immigration to keep its population growing. Along with productivity, we need continued labour
force growth to keep our economic potential expanding.
There are also compelling reasons to ensure that Canada remains open to foreign capital flows.
Because of our vast geography and relatively small population, we have always had major
infrastructure needs. Historically, our domestic savings base has not been large enough to
finance these infrastructure projects, so we have needed foreign capital.
A final, related point: this quick romp through our history illustrates the importance of dreamers
and visionaries, leaders who can turn difficult odds into win-win outcomes. In short, success is
not guaranteed, but the key ingredients must be there for the entrepreneurial to capitalize upon:
open markets, immigration and foreign investment.
Conclusion
Allow me to conclude. Canada's development owes much to people who had a vision of what it
takes to build a great nation, and the willingness to take risks to achieve that goal. Our history
shows that it takes a world to raise a nation, and nation building works best in an environment of
openness for trade, people and investment. Canada has prospered by looking outward and being
engaged, bilaterally and multilaterally.
It can be hard to remember this in times of global stress such as we have seen in recent years.
The quest for progress and higher productivity can disrupt people's lives. Automation has meant
that workers in some specific industries have borne the cost of change in a very difficult and
concentrated way, and we can expect this to continue.
But remember that we have been through similar disruptions before, and turning inward has
never been the answer. Rather, committing to openness has always been the right choice. What
is crucial is that we deploy some of the benefits of being open to assist those who need help
adjusting to global forces. Failing to do so invites doubt and puts everyone's progress at risk.
Canada has prospered over its first 150 years. Mistakes have been made, and lessons have
been learned. But overall, our openness to the world has helped us build a nation that I believe is
the best place to live in the world. Imagine what we can build over the next 150 years.
I would like to thank James Powell for his help in preparing this speech.