Sunday, July 4, 2010

G7: Good Comparison Group for Canada?

Canada likes to compare itself to other G7 countries on economic matters. Our fiscal situation is better than all 6 of our peers, and our material standard of living is better all but America's. For a decade, no Minister of Finance has seemingly ever missed an opportunity to remind us of this (especially the former). Given that we don't want US-style inequality, there really isn't much to improve, is there?

Unfortunately, G7 comparisons may lead us to unwarranted complacency. Out of 28 OECD countries (there are 31 OECD countries total, but no data for Chile, Mexico and Turkey), Canada ranks a middle-of-the-road 12th for lowest net debt as a percentage of GDP, projected for 2011. All 6 other G7 countries are among the 10 worst offenders. Do we really want to compare ourselves to them?

Most Scandinavian countries, as well as Korea, Australia and New Zealand, have little or negative net debt - the latter meaning that they actually set aside assets over and above their gross debt in anticipation of population aging. We're in a good fiscal position, but with looming increases in pension and health care costs, we're definitely not out of the woods.

In terms of GDP per capita, out of the 33 advanced economies identified by the IMF, Canada ranked 11th in 2008. That's still good, but doesn't sound as great as "second only to the US". (It looks like we stayed 11th in 2009 - Australia passed Canada, but Iceland fell behind - and the IMF thinks we'll still be 11th in 2015.)

Of course, Canada is not quite as resource-rich relative to its population size as Australia or Norway, and there is no way our financial sector could be as large relative to our population as Hong Kong's, Singapore's, Luxembourg's or Switzerland's. We don't want the instability of the Irish model or the inequality of the American model.

But the other two countries in front of us - the Netherlands and Austria - as well as Denmark and Sweden, which closely follow us, can probably provide some lessons: all 4 of them have much larger government sectors than Canada, and yet their economies are just as vibrant as ours. This suggests that Canada has room to become more egalitarian without sacrificing output, or to become richer without sacrificing social justice.

Moreover, Korea and Taiwan, which are rapidly catching up (they are already at Western European standards), have small governments and relatively little inequality (though the latter is increasing there as well). How do they achieve that? Just chalking it up to culture might prevent us from learning valuable lessons.

By all means, the Canadian economy is among the healthiest in the world at this moment, and we can all be proud of that. But although G7 comparisons may suggest that we're head and shoulders above everyone else, we need to remember that the world is more than just the G7, and a few other countries - mainly small Germanic and East Asian ones - have an economic and fiscal situation just as enviable as ours. Complacency is therefore to be avoided if we want to keep Canada among the top. Remember that the next time you come across an international comparison from the Department of Finance!

No comments: