From the “R” word to “D” word

We are paying the price of unabated spending on homes and consumer goods during last few years. Cheap and easily available credit (sub-prime lending), stable consumer goods prices, and technological & productivity gains created excesses and fueled the economy for most of current decade. Thus we got caught up in a housing boom in 2000 and onwards similar to the dot-com boom of 1990s.

Excessive sub-prime lending in the United States has taken its toll with rampant defaults on mortgage payments resulting in write-offs and tightening of credit by commercial banks. This checked the growth of Real Estate market. Simultaneously, oil prices rose to unprecedented level crossing US$140 mark in July 2008, which along with increased staple food prices sparked inflation. This decreased the consumer purchasing power and slowed down the demand for capital goods. Spillover from economic downturn south of border has adversely affected Canadian economy, especially the economy of Ontario, which is heavily dependent on sales to the US markets. In 2007, 83.5% of the total goods exports from Ontario were to the US<!–[if !supportFootnotes]–>[1]<!–[endif]–>. Furthermore, exports declined due to stronger Canadian dollar, while layoffs in auto industry further contracted the Canadian economy.

The United States and Canadian Central banks have consistently lowered the short term interest rates to resuscitate the ailing economy and held it down to 2% in the US and 3% in Canada for last few months. Though, it seems that the stretched-out consumers have not taken advantage of lowered interest rates and are not spending on goods and services as before. On the other hand, commercial banks and financial institutions have tightened the credit in order to fix sub-prime lending debacle. So the desired effect of lowered interest rates is not being passed on to consumers.

Last week, in a coordinated effort, the central banks of the US, Canada, Sweden, Switzerland, England and the European Union reduced interest rates again. Now the short term interest rates in the US and Canada are 1.5% and 2.5% respectively. The lowered interest rates along with the US government $700 billion bailout plan has not have a positive effect on the Wall and Bay streets markets yet.

Moving forward, slow housing market, mediocre performance by the financial sector, tighter credit conditions, price inflation, and high energy prices would not help. Most importantly, over-dependence on the US markets will remain a bigger challenge for Canada. Trade is a dominant feature of the Canadian economy, contributing 60% of the GDP and the US is the dominant export market for Canadian merchandise. In 2006, 79% of Canada’s merchandise exports were to the USA<!–[if !supportFootnotes]–>[2]<!–[endif]–>. Similarly, over emphasis on the “impending recession” will not help either. If you pick up a major newspaper, you would surely see news on recession and economic crisis but not much is shared on how to recover from it. Innovative and aggressive globalization strategies are required to diversify trade, move beyond the US markets, stop the economic slow down south of border and minimize it domestically.

It is prudent to shift focus from the R word to D word – the diversification of trade. Though diversification of trade is significant for all economies, it is vital for Canada in order to fix the current over-dependence on one market. Economic growth based on diversification will yield following benefits:

<!–[if !supportLists]–> <!–[endif]–>It will cut down reliance on a single market. United States is and will be our major trade partner due to geographic proximity, common language and culture, and ease of operations. Nevertheless, the imbalance in trade needs to be fixed for long term national interest.

<!–[if !supportLists]–> <!–[endif]–>It will help hedge against future recession, which is an economic phase. It is imperative to maintain a right mix of market fundamentals to minimize economic downturns. Diversification will help offset slowdowns that could be a side affect of too much dependence on an ailing economy.

<!–[if !supportLists]–> <!–[endif]–>Reduce unemployment, especially in new immigrants. The unemployment rate is three times higher in new immigrants (those living in Canada for less than 10 years). Government can facilitate self employment by encouraging new Canadians to actively explore and pursue viable trade opportunities with their country of origin.

<!–[if !supportLists]–> <!–[endif]–>Optimization of immigrant human resources. Besides unemployment, underemployment is also a huge problem among new Canadians with alarming disparity between incomes of new immigrants and others of similar skill set. Lack of Canadian experience, which is a catch 22 in itself, is cited as the reason for low income for immigrants. New immigrants could combine their Canadian know-how and past expertise to spot opportunities in foreign markets for Canadian products and service. Thus contributing their bit to national economy.

The idea is to leverage the diverse population base. There are people from 170 different countries in Canada. Most of them immigrated in skilled worker class, which means they meet the national criteria for higher education, language skills, functional specialization and have demonstrated drive and ambition by looking for success outside their home ground (comfort zones). Government should set forth policies to encourage these people to trade with their country of origin. There is higher possibility that immigrants understand foreign markets well. Imagine if a number of businesses from diverse population succeeds in trading with various countries, how diversified could our trade be. This will possibly give a boost to the SME sector, which is an economic driver per se.

Canada’s merchandise shipments to developing markets did rise by 18% in 2007; however, it is expected to grow by 10% and 6% in 2008 and 2009 respectively<!–[if !supportFootnotes]–>[3]<!–[endif]–>. The declining growth rate could be arrested by strategically utilizing the skilled human resource and adopting the above mentioned policy. The government has taken the initial steps, though much more needs to be done. The EDC (Export Development Canada) offers export financing, insurance and top level research. Ministry of Economic Development & Trade also supports with business consultancy and market research services. Additional facilitation in target market research, fiscal support, backward linkages, venture capital and performance recognition will kick-start trade with new markets.

Moreover, the G7 countries have been focusing on the BRIC (Brazil, Russia, India & China) for few years now. So there is a strong competition in these markets. Canada must also see beyond BRICs and explore other markets like Turkey (population 75 m), the GCC (38 m), Pakistan (165 m) and smaller EU countries, for example, Portugal (10 m). These countries have relatively large market base, higher economic growth rates, and strategic importance and are not fully tapped yet. Canada is uniquely positioned to effectively leverage the market knowledge and skills set of relevant immigrants to pursue business opportunities abroad and stay ahead of the competition.

Canadian businesses should develop globalization strategies and invest in market research, brand building, product adaptation, long term contracts and local operations. These businesses need to move fast and consider capital investment opportunities while Canadian dollar is strong. It is expected to go down by about 10% in future with the correction in commodity prices, by then the Canadian companies would be in a position to take advantage by expanding trade and risks to a diversified export base for long term national benefits.

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<!–[if !supportFootnotes]–>[1]<!–[endif]–> Statistics Canada, International Trade Division, August 2008

<!–[if !supportFootnotes]–>[2]<!–[endif]–> CRS Report for Congress, updated January 29, 2008

<!–[if !supportFootnotes]–>[3]<!–[endif]–> Global Export Summary Forecast, Spring 2008, EDC


About Fazal Siddiqi
Fazal Siddiqi Writes on current marketing, branding, communications, diversity and socio-economic opportunities & challenges. He lives in Canada and works for OPAL Marketing Group.

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