Canadian Economy over the Last Two Years - Case Study Example

How successful have the Canadian government and bank of Canada been in running the Canadian economy over the last two years. In 2008, the economic growth of Canada slowed down sharply from 2.5% in 2007 to 1.8 in 2008 and the economy is projected to further contract in 2009 to a meager 0.8%. Due to the global financial downturn (Treasury Board of Canada) These dismal statistics lead observers to think that there is mismanagement somewhere in the Canadian economy. And so, this paper will explore how the Canadian government and the Bank of Canada had been running the country’s economy for the past two years and whether their policies have. In a letter by Progressive Economic Forum addressed to the government, it was stated that the current administration was responsible for the weak macroeconomic performance of Canada. Particularly, it cited the following statistics to underscore the point: Labour markets have weakened, and employment is poised to decline further as the slowdown takes hold... Over 300,000 jobs in manufacturing have been lost. Yet less than 40% of unemployed workers qualify for Employment Insurance benefits. The body of literature that have examined the Canadian economy points to the public policies that determine how the resources of the nation are to be distributed as the main reason for the dismal performance of the economy. Indeed, traditionally, economic policy and economic policy formation in Canada followed the conventional principles of stabilization policy, resource allocation and distribution. And so this is not surprising. What then are the roles of the Canadian government and Bank of Canada in the poor performance of the economy within 2007-2008? Were the above assumptions correct? Bank of Canada In the preamble of the Act creating the central bank, the main functions were: 1) to regulate credit and currency in the best interest of the economic life of the nation; 2) to control and protect the external value of the national monetary unit; 3) to mitigate by its influence fluctuations in the general level of production, trade, prices; and employment, and, 4) to promote the economic and financial welfare. (Salvatore, p. 153) The Bank of Canada is linked to the Canadian Department of Finance in economic policymaking, substantively called as the “monetary-fiscal mix.” The policies of the bank are implemented on the national level and together with the government fiscal policy constitute the Canadian economic policymaking mechanism. It must be underscored that the long-run objective of the Bank of Canada is overall price stability. More recently, the Bank has paid increasing attention to broader monetary aggregates, with special emphasis on exchange-rate developments as the Bank sees interest rates and exchange rates as the main channels of transmission of monetary policy. (Salvatore, p. 154) One of the indicators of this policy was how the bank has allowed currency appreciation in recent years. This has caused a sharp drop in the Canadian exports, slowing economic growth to a crawl. According to an OECD policy brief (2008), the effect of the appreciation of the Canadian dollar became adverse with the worldwide financial turmoil in credit markets and the slowdown in foreign demand. (p. 3) It is apparent that the currency appreciation has affected the Canadian competitiveness in the international market. Then there is the traditional austere zero inflation target of the bank of Canada as part of its mandate to achieve price stability. Engerman and Gallman argued that this low inflation policy seriously deflated the Canadian economy, slowing expansion and have kept unemployment rates high. (p. 224) All in all, however, the Bank of Canada’s and the government’s economic policies have been sound and has so far successfully navigated the numerous shocks experienced. This is demonstrated by an OECD examination of the Canadian economy in its OECD Economic Surveys published in 2008. To quote: From 2006 to 2007, the Bank’s target for the overnight rate remained unchanged at 4.25%, while headline CPI inflation ran above the 2% midpoint, reflecting inflationary pressures from an economy operating above potential. Wages were also growing strongly, and the rise in house prices was showing no sign of slowdown. Financial-Market Turmoil By the end of 2007, the Bank shifted its attention towards the global financial market turmoil, the associated tighter domestic credit conditions and to concerns about a slowing US economy. For the Bank, the main immediate challenge is to develop the appropriate policy in order to keep inflation on target in light of the ongoing US slowdown and the global financial turmoil. A case in point was the easing of monetary policy in December 2007, January and March 2008 so that the actual output growth remained close to potential. In Budget 2009: Canada’s Economic Action Plan which was released in January 2009, the government’s response to the recession was outlined. Here, a series of proposals and policy measures were laid out in order to resuscitate the economy. The Treasury talked about the Plan in its Performance Report for 2008-2009: Building on previous actions taken by the government to stimulate economic growth, the Plan introduced timely measures to reduce tax burdens for Canadians, help the unemployed and create new jobs, build Canada’s infrastructure, improve access to financing for households and businesses, and support industries and communities most affected by the global downturn. The only trouble is that Canada would have to incur deficits in order to fund the budget and stimulus package necessary for the Action Plan. According to Finance Minister Jim Flaherty, Canada will have to weather large deficits to “do what it takes to keep our economy moving” including cutting taxes while boosting infrastructure and worker training. (CBS 2009) Flaherty’s budget sees a deficit of $33.7 billion for the 2009-2010 fiscal year and $29.8 billion the following year, gradually diminishing in the next fiscal years. (CBS News) As policy actions begin to be implemented and results, along with the depreciation of the Canadian dollar, the Bank expects real GDP to rebound, growing 3.8% in 2010. This underscores the policies taken by the government which tremendously helped to counterbalance the negative drag from the global economic and financial developments. In a press release published in December 2008, the Bank stated: The depreciation of the Canadian dollar will continue to provide an important offset to the effects of weaker global demand and lower commodity prices. As well, money markets and overall credit conditions in Canada are responding to significant and ongoing efforts to provide liquidity to the Canadian financial system. (2008) According to the OECD, the Canadian monetary policy has room to maneuver in dealing with the growth slowdown, and tax relief being implemented as part of the government’s plan to resuscitate the economy are providing substantial support to the economy in 2008 but that fiscal policy is constrained by declining surpluses in the short term as would be demonstrated in the 2009 budget deficit. (p. 1) Conclusion It is important to understand that the Canadian economic policies are not developed based on economic variables alone. Besides the economic factors, there are the social and political forces that shape public policy. As a pluralist society, Canada develop policies, in general, with the government and other policymakers choosing policy directions based on the competing ideas that characterize the public arena. Such competition of ideas is facilitated by several pressure groups advancing their agenda for the government to accept their positions. And so if the economic performance is taking a beating, it is unfair to lay the blame on one agency alone, say, the Bank of Canada. A case in point: balancing monetary policies of the Bank of Canada – an institution afraid of inflation – becomes difficult when it has to deal with the fiscal position of a government that is susceptible to the whims of the public. Finally, there is the global financial crisis taking center stage during the middle of 2007 continuing further in 2009. Suddenly, there was a need to revise the Canadian economic policy in order to address its adverse effects. Suddenly, economic decision makers both in the government and the Bank of Canada had to struggle with an unprecedented series of global economic shocks and risks. Then there are other global developments such as the how the oil, food and other commodity prices have risen almost uninterruptedly for the past five years. The weakening in economic performance is akin to a force majeure – something that could not be prevented especially in the backdrop of the integrated global market wherein national economies are interlinked through trade. One must remember that Canada is a major commodity exporter. These factors underscore the fact that the weakening of the economy is not unique to Canada. It is a global phenomenon and inevitable particularly because of Canada’s association with the United States, the hardest hit by the recession. The bottom line is that the past two years resulted to an experience that was entirely new for the Canadian government and the Bank of Canada in comparison to the steady growth that have transpired in the previous years. And so, economic managers must come up with entirely new approaches and, certainly, funds just so the economy would not get slide further into recession. The economic performance as a result of these policies cannot yet be quantified, whether they are successful or not. At this point, authorities could only predict the statistics. References Bank of Canada. (December 2009). Bank of Canada lowers overnight rate target by 3/4 percentage point to 1 1/2 per cent. Bank of Canada. Retrieved 12 Nov. 2009 http://www.bank-banque-canada.ca/en/fixed-dates/2008/rate_091208.html Bank of Canada. (January 2009). Bank of Canada releases Monetary Policy Report Update. Bank of Canada. Retrieved 12 Nov. 2009 http://www.bank-banque-canada.ca/en/press/2009/pr09-1.html CBS. (2009). Bad-times budget delivers billions in tax cuts, spending. CBS News Online. Retrieved 13 Nov. 2009 http://www.cbc.ca/canada/story/2009/01/27/budget2009-main.html Engerman, S. and Gallman, R. (2000). The Cambridge economic history of the United States. Cambridge University Press. Organization for Economic Co-operation and Development (OECD). (2008). OECD Economic Surveys: Canada 2008. OECD Publishing. OECD. (June 2008). Economic Survey of Canada, 2008. OECD Observer. Progressive Economic Forum. (2008). Open Letter from Canadian Economists. The Progressive Forum. Retrived 13 Nov. 2009 http://www.progressive-economics.ca/2008/10/07/open-letter/ Salvatore, D. (1991). National economic policies. Greenwood Publishing Group. Treasury Board of Canada. (2009). Canadas Performance Report 2008-09: The Government of Canadas Contribution. Retrieved 12 Nov. 2009 Read More