Argentina’s Cautionary Tale For Canadian Economy

Canadians shouldn’t take our economic prosperity for granted. Argentines did early last century, and they’ve been paying the price ever since. Misguided government policies caused Argentina’s fall from economic grace, and misguided government policies could cause our economic downfall.

Speaking at the World Economic Forum in Davos, Switzerland, in January 2016, shortly after becoming prime minister, Justin Trudeau said: “My predecessor wanted you to know Canada for its resources. I want you to know Canadians for our resourcefulness.”

Lofty sentiment, if not for the crumbling of Canada’s industrial base — GM announcing plans to shutter its Oshawa plant on Monday, was simply the latest in a long line of setbacks on the automotive and aerospace fronts — and natural resources rapidly becoming our country’s predominant exports.

Argentina’s downfall

After a relatively slow start compared to most South American countries, Argentina was an economic juggernaut from the 1860s up until 1930, with talk at the time of it becoming the “United States of South America.”

The country’s impressive economic growth was powered by the export of agricultural products, especially beef and wheat, which it had a definite comparative advantage given the vast amount of highly fertile land in the pampas.

Argentina outgrew two other immigrant societies, Canada and Australia, in terms of population, per capital income and total income during the first three decades of the 20th century, becoming the world’s tenth richest country on a per capita basis by 1913.

Since then, the proverbial shit has hit Argentina’s economic fan. The country has defaulted on its foreign debt a total of eight times, has suffered numerous bouts of double digit inflation — the worst as high as 5,000 per cent — leading to several large currency devaluations, and large budget and current account deficits.

Argentina benefited from global trade liberalization, especially over the 1880-1929 period, but in reaction to the Great Depression and the rise of trade protectionism adopted a strategy of import substitution in an attempt to achieve industrial self-sufficiency to improve the country’s balance of international payments in an age of fixed exchange rates.

Unfortunately, the country’s import substitution strategy, which lasted from the 1930s to 1976, caused irreparable damage to the Argentine economy. It diverted investment from the agricultural sector, leading to a dramatic decline in production and economic stagnation.

This in turn led to increasingly expansionary monetary and fiscal policies in a vain attempt to boost economic growth, which continues to plague Argentina to this day through large foreign and government debt — after having impressively conservative macroeconomic policies prior to the Great Depression.

Canada’s downfall?

The federal government has long favoured the manufacturing sector over the natural resource sector in Canada, a fact that becomes all the more apparent in times of crisis. In a new era of trade protectionism, this could spell disaster for the Canadian economy.

The 2008-09 global financial crisis hit Ontario’s auto industry hard, and the Harper and Ontario governments provided $13.7 billion bailout to keep GM and Chrysler afloat — with the feds providing the lion’s share. Bombardier, the aerospace and urban transit company, has received nearly $3.7 billion in subsidies from the federal and Quebecois governments in recent years primarily in an attempt to keep its aerospace division in business.

Despite this government largesse, on Monday GM announced plans to shutter its Oshawa auto plant at the end of 2019, throwing the remaining 2,500 employees out of work — at its height, in the 1980s, GM had roughly 23,000 employees in Oshawa.

At the beginning of the month, Bombardier announced it was planning to lay off 5,000 employees over the next year and a half — the third round of layoffs in three years — and has sold off its turboprop and flight training businesses. This after effectively giving its C Series commercial jetliner program to Airbus for free a year ago, after receiving a $1 billion backstop for the project from the Quebecois government in 2016, and a $372 million interest-free loan from the feds a few months later.

And what does the Canadian natural resource industry get when it’s in crisis? During the 2014-16 global oil price crash and the 2018 western Canadian oil price crash, the federal government has provided our embattled oilpatch with no industry-specific financial support.

Instead of financial assistance for our oil industry, the Trudeau government has flubbed federal regulatory approval of the Trans Mountain expansion, killed two additional crude pipelines to tidewater — Enbridge’s Northern Gateway and TransCanada’s Energy East — while conjuring up the Oil Tanker Moratorium Act and Bill C-69.

Bill C-69 is widely seen as an industry killer, not just for oil and gas but natural resources as a whole. Alberta Senator Doug Black possibly put it best during an interview with BNN Bloomberg on September 6: “Under this proposed legislation, we’re not going to need to worry about the time for projects and the opposition of projects, because we’re hearing from companies that would be natural proponents to develop the Canadian resource industry, simply saying: ‘We’re not even going to apply.’”

Despite a lack of financial support during times of crisis and discriminatory federal policies, Canada’s natural resource sector — energy, forestry and mining — continues to directly account for five per cent of the country’s employment, roughly 12 per cent of our GDP — two percentage points more than manufacturing, and around half of that involves value-add to our resources — and 38 per cent of non-residential private sector capex.

More importantly, the natural resource sector’s share of Canadian exports has jumped from around a quarter in 2000 to almost a half in 2017, whereas the country’s manufacturing sector has seen a commensurate collapse in its share of exports. Canada’s comparative advantage obviously lies with our abundant natural resources, not manufacturing, just as Argentina’s comparative advantage lay with agriculture back in the 1930s.

In our new age of trade protectionism, it is imperative that the Canadian government learns from Argentina’s past mistakes and adjusts policies to support, or at least not hinder, natural resource development. Fortunately, the target of trade actions tend to be manufactured goods, not natural resources as they are needed as inputs in manufacturing processes, and to move goods and people, playing to our great country’s comparative advantage.