Ron Freedman

Planning Through the Rear-View Mirror

By Ron Freedman

Here's a thought experiment that you might find interesting. Imagine if Canada had to survive in the world of the future without a manufacturing industry or a natural resource industry. That is, if we had no manufactured goods or raw materials to trade with the rest of the world. How would we do that?

With the continuing shrinkage of Canadian manufacturing and large elements of our natural resource sector under pressure (oil and agriculture being current exceptions) that might not be a far-fetched question in the years to come. Especially if oil trading at $135 a barrel stimulates the rapid introduction of alternative technologies, such as electric cars and synthetic fuels that in turn displace our high-cost oil sands production. (The US Air Force is planning to replace 50% of its oil-based fuel with synthetic equivalents derived from coal or natural gas by 2011, saving $30-$50 a barrel in the process.)

The reality is that we are already in the post-industrial society; roughly 68% of GDP is generated by services and 32% by goods. The Finance, Insurance and Real Estate industry alone produces more GDP ($230 billion) than all of Manufacturing ($187 billion). Service output is expanding and goods output is shrinking. If you were an investor looking for long term macroeconomic opportunities, where would you put your money?

common challenge in most oecd nations

Of course, we're not alone in this. Most OECD countries are in the same boat. (Did you know that the US now has a trade deficit in high technology goods?) Only, most OECD countries have little or no natural resource sector to fall back on. And, with their high wage structure they're even more uncompetitive with China and India and the other emerging economies than we are. So, the question of how to survive and prosper in the post-industrial economy is even more relevant to other OECD countries. That's a dilemma facing economic strategists around the world.

In general terms, the answer to the dilemma is that we need to export more services. But services are notoriously hard to scale up or to export. At least that is the conventional thinking. On the other hand, the recent purchase of Reuters by Canadian multinational Thomson Corporation has produced a global business information company with around $13 billion in annual sales — most of that outside of Canada. (For comparison, RIM's sales are around $6 billion.) So, it's not entirely fanciful to imagine an economy that grows by expanding its exports of value-added knowledge products on top of a base of manufacturing or natural resource exports.

The US understands this very well. It's Copyright Term Extension Act 1998 extended copyright in the United States by 20 years. Under the previous 1976 Act, copyright would last for the life of the author plus 50 years, or 75 years for a work of corporate authorship. The 1998 Act extended these terms to life of the author plus 70 years and for works of corporate authorship to 120 years after creation or 95 years after publication, whichever endpoint is earlier.

The Act also affected copyright terms for copyrighted works published prior to January 1, 1978, also increasing their term of protection by 20 years, to a total of 95 years from publication. This was done, many say, to protect the intellectual property exports of Walt Disney Corporation, many of whose iconic characters were about to enter the public domain.

focus on the future

So, how is Canada doing in terms of supporting the economic and export potential of the service sector? Are we orienting (or re-orienting) our innovation support programs to services and knowledge? Probably not. In the words of my old professor, Marshall McLuhan, "We look at the present through a rear-view mirror. We march backwards into the future." Our natural reaction is to concentrate on what we're losing today (manufacturing) rather than on what we could gain in the future (services).

We invent a new stimulus program each time a different manufacturing sector runs into trouble (autos, forestry, etc.). Shoring up these important industries is unavoidable in the near term, but it is only a matter of time until we begin to import even more autos and natural resources from lower-cost producers.

Unfortunately, most of our innovation programming (i.e. government support programs) is firmly rooted in the past. Either by design or by habit they concentrate on our traditional strengths — manufacturing, agriculture, natural resources — rather than on future opportunities.

Even our programs to support research in the life sciences — which have expanded the most rapidly of all — are predicated on the underlying assumption that research will yield compounds or devices that will be manufactured in Canada. Our track record is not stellar. Is there any reason to believe that future inventions will not be subject to the same forces that are now driving manufacturing offshore?

Certainly, all is not doom and gloom. There will always be opportunities for Canada in manufacturing and natural resources when our products and commodities have such high quality or value-added that their production costs are a comparably small part of selling prices.

We have much to learn from countries such as Germany that offset high production costs with even higher selling prices. A $100,000 Porsche does not cost five times as much to produce as a $20,000 Ford. Nor does it perform five times better. Customers are willing to pay the difference because of the real and perceived quality difference and exclusivity. We need to continually re-invest in our traditional areas of economic strength. But simultaneously, we need to explore new opportunities.

It's not too late to start thinking about how Canada will earn its way in the post-industrial future. We're more fortunate than most countries in that we have viable manufacturing and natural resource industries to fall back on. But it's no sure thing that the goods- and commodity-producing industries will flourish in the future and give us the standard of living we now enjoy. We need to think more seriously about how to harness the country's services potential, in everything from creative industries to financial services.

Ron Freedman is co-publisher of RE$EARCH MONEY and a co-founder and principal with The Impact Group.