https://www.huffingtonpost.ca/2019/01/15/canadian-wealth-declining-iisd_a_23643252/
BUSINESS
01/15/2019 14:53 EST
Canadian Wealth To Fall From Highest In G7 To Among Lowest: Forecast
Canada's "unsustainable" economy means we're burning through our wealth
to keep our paycheques coming.
By Daniel Tencer
Canadians enjoy the highest level of wealth of any people among the G7
countries, but our "unsustainable" way of growing the economy means
we're burning through that wealth, and setting ourselves up for harder
times ahead.
That's the conclusion of a research paper from the International
Institute for Sustainable Development, which pointed to "the depletion
of many of Canada's natural resources" as a major source of the problem,
along with the increasing flow of money into the housing market instead
of other parts of the economy.
The IISD paper, released last fall, points to data showing that Canada
has the highest level of wealth among the dominant G7 economies. But
it's also the only country where that wealth has been shrinking in
recent decades.
While most G7 countries have seen their wealth grow by around 1 per cent
per year since 1990, in Canada it has been shrinking by about 0.25 per
cent per year.
If this keeps up, Canada will lose its status as wealthiest G7 country
to Japan within five years, and will be near the bottom by the end of
the 2030s, the IISD report predicts.
Part of the reason why Canada's wealth is stagnating is that Canadians
are shifting ever more of their money to housing, which — other than
providing shelter — is not a very productive part of the economy.
As wealth flows into houses, it fails to flow into financial markets,
which helps explain why the Toronto Stock Exchange has seen among the
worst returns of any major stock market in recent years.
This trend is "inflating house prices and leaving the rest of the
economy reliant on foreign lenders for nearly three quarters of
investment flows after 2012," the report noted.
Canada's business investment is increasingly concentrated in just two
areas, housing and oil.
"We're putting a lot of eggs into a few economic baskets, and if those
baskets go south we could find ourselves in trouble more quickly than we
think," said Robert Smith, an Ottawa-based associate with IISD and the
lead author of the study.
Smith warned that all of Canada's economy could eventually look similar
to Alberta's, where a small number of industries dominate and the local
economy swings wildly with the conditions in those industries.
This matters a lot
The amount of wealth a country holds is important, because it plays a
huge role in determining how much income you can expect to earn going
forward.
Think about it in terms of individuals. Two people with identical skills
square off in a challenge to see who can make more money in the next 12
months. One of these is individuals is rich, the other poor. Who has the
upper hand?
The same logic applies to national economies.
'Recipe for impoverishment'
If Canada stays on this path, Canadians' incomes will eventually
decline, Smith said.
"If the wealth basis is declining, at some point in time real incomes
will decline as well. Or you simply continue to eat into your wealth,"
he told HuffPost Canada by phone.
"But you can't continue to eat into your wealth forever."
He calls Canada's current economic model "a recipe for impoverishment."
If you were a money manager and you grew a client's income by eating
into their wealth, "you wouldn't be in business very long," Smith quipped.
So why is Canadian wealth decreasing?
To answer that, we have to look first at what constitutes wealth.
The IISD study looked at what is called "comprehensive wealth" — a much
broader category than the net worth numbers that Statistics Canada
publishes (which for households mainly tell you how much debt Canadians
have, and what their houses are worth).
"Comprehensive wealth" includes, but is not limited to:
Financial capital (stocks, bonds, bank deposits and other financial
assets)
Human capital (the value of the skills and knowledge that a
workforce has)
Natural capital (land and the natural resources on that land)
Produced capital (buildings, machinery and infrastructure)
Not surprisingly, Canada is super strong on "natural capital." Canadians
enjoy four times as much per-capita natural capital as the second-place
country, the U.S.
But this is also the area where Canada has been losing the most ground.
The value of Canada's "natural capital" has fallen by about 17 per cent
per person since 1990 "as a result of depletion of many of Canada's
natural resources," the report said.
"We're putting a lot of eggs into a few economic baskets, and if
those baskets go south we could find ourselves in trouble more quickly
than we think."Robert Smith, associate, IISD
In some cases, this "depletion" has been extreme. For instance, Canada
has lost 99.4 per cent of its discovered reserves of lead; 92.6 per cent
of its zinc reserves, and more than half its silver, copper, nickel,
uranium, natural gas and conventional (non-oilsands) oil.
In many cases, "this is real physical depletion," Smith said. "This
stuff is gone, we've dug it up, and we'll never dig it up again."
But that's not the whole picture. The available data measures only those
resource reserves that are being actively exploited. So a decline may
simply mean that resource companies don't see extraction of a certain
mineral as economical, or they decided other activities would be more
profitable.
Either way, though, those resources no longer exist as part of
Canadians' wealth.
Value of Canadians' work is stagnating
Another area where Canada is falling behind is "human capital," that
part of wealth created by having a skilled workforce capable of
generating income.
"Canada's largest and most important asset — its human capital — did not
grow at all from 1980 to 2015," the IISD report noted. "In fact, the
average Canadian held just slightly less human capital in 2015
($496,000) than in 1980 ($498,000)."
Those numbers are in 2007 Canadian dollars.
"You can't continue to eat into your wealth forever."Robert Smith,
associate, IISD
One theory that's been suggested for weak human capital is an aging
population. Older workers with fewer years ahead of them have less
earnings potential than younger ones. But Smith says that doesn't
explain Canada's situation, because workforces in other countries are
aging as well, and their human capital is growing.
Despite increasing investments in higher education and retraining, "we
are still not getting an increased return on those investments," he said.
Smith suggested the problem could be partly "structural." The
disappearance of manufacturing jobs, replaced by lower-paying service
jobs, reduces the earnings potential of those workers. But again, other
countries are also struggling with the disappearance of factory jobs,
but aren't seeing this kind of stagnation in human capital.
Start measuring wealth, IISD urges
To address Canada's wealth problem, policymakers need to be aware of its
existence, Smith says.
Most developed countries do not regularly measure comprehensive wealth
as part of its regular calendar of economic data. In Canada, StatsCan
has only ever looked at the issue in occasional research papers.
If policy makers around the world looked at wealth as much as they look
at GDP (the measure of economic productivity), they would have a much
clearer view of things, Smith argued.
For instance, while it would be obvious that U.S. President Donald
Trump's tariffs against China are boosting GDP, it would also be obvious
that they're destroying wealth.
"The nonsensicalness of Trump's trade approach would become evident,"
Smith said.
Measuring comprehensive wealth "is not radical or crazy, it's just
common sense," Smith said.