Moving Beyond the Pandemic in Ontario

 

With each passing day, the new COVID-19 case count has been diminishing in Ontario.  Today’s tally was 114 and there were zero deaths.  Indeed, the number of daily deaths has been in the single digits since July 1^st.  For Thunder Bay District, the last while has  seen a zero daily case count more often than not  There are only two active cases in the District and the hospital has no COVID cases.  And vaccination rates continue to grow with 69 percent of all people in Ontario having received at least one dose and 47 percent being fully vaccinated with two doses.  For the time being, the pandemic is practically over, and the province is slowly reopening its economy with the third stage set to begin this Friday.

 

 

 

Moving forward, the challenge is many-fold.  First, the damage done to the economy is significant.  Ontario had the most protracted lock down in Canada and indeed in much of the developed world.  There are many businesses that after such a protracted lock down will not reopen.  The implications for business formation and investment is serious.  Moreover, the reopening is proceeding at such a slow pace that it may indeed be too late for many businesses.  Employment is rebounding but we are still not where we were before the pandemic.  In 2019, total employment in Ontario stood at 7.377 million employed persons.  In 2020 it fell to an annualized 7.022 million. As of June 2021, the most recent numbers suggest that at 7.273 million, we are still not there yet.

 

And, try getting anything done.  Employment and labour force participation have both shrunk.  The labour shortage which has been underway due to the aging of the population has been made worse with the shutdown and withdrawal of labour not to mention the reduced immigration of the last year.  Indeed, if Thunder Bay is any indicator, trying to get anything done in terms of household repairs and services is very difficult. Everyone is booked and prices have gone up.  Thunder Bay was always a difficult place to get things done without a bevy of personal connections often acquired in high school and the problems seem to have become worse in the wake of the pandemic. 

 

Yet the recovery continues, but much depends on what happens next with the pandemic.  The summer is a golden time and for the post-pandemic recovery to continue beyond September vaccination rates must continue to rise.  With new variants percolating around the world and travel resuming, getting total double vaccination rates above 80 percent is crucial.  September and the return to more indoor activity will be an important test as to whether or not we really have got things under control.

 

While it is important to relax restrictions as normalcy returns there is one restriction that should be maintained for the remainder of the summer and into the fall and it should be a very simple one – if you are in an indoor public space, you must wear a mask.  It is true other provinces are already moving away from this but in my opinion this is premature.  I think you can probably open everything up for indoor activity – gyms, theaters, dining etc… with fairly generous capacity constraints but the one thing that should be maintained is a face mask particularly this fall. Even in a restaurant, except at your table with your designated dining partner or party, there needs to be a face mask on the way in and as soon as you leave your table with servers always masked.  It’s a simple rule and one with the greatest benefits in preventing a resurgence until the vaccination rates are much higher.  

 

Whether we are up to this final task or plan to throw this modest caution to the winds remains to be seen.

 

Ranking Canada's COVID-19 Performance: It is Not as Pretty as We Like to Think

 

The IMF has released the October 2020 edition of its fiscal monitor and economic indicator numbers for world economies and its World Economic Outlook report titled “A Long and Difficult Ascent”  paints a pretty gruesome picture of the carnage wrought by the COVID-19 pandemic.  While the global economic growth outlook has improved somewhat from its June 2020 report, it is still projected at -4.4 percent and is surrounded by a fair amount of risk. 

 

However, in the end, performance is relative and what is more interesting is how different advanced economies are expected to fare in 2020.   Moreover, what is also of interest is their performance economically and fiscally relative to their pandemic performance – which certainly should be of interest to Canadians.   Polling results have often indicated that Canadians have largely approved of the way that their governments have responded to COVID-19 and an international ranking places Canada near the top of countries whose public thinks their country has handled COVID-19 well.  How justified is this perception by Canadians?

 

In understanding how well Canada has done dealing with COVID-19, one has to start with how Canada ranks in terms of the severity of the disease which in itself can indicate how good a job Canada has done in limiting its spread.  Figures 1 and 2 plot the ranked total number of COVID-19 cases per 1 million population and the deaths from COVID-19 per 1 million people as of October 17th (as taken from Worldometer) for 35 advanced economies as defined by the IMF.  Cases per 1 million ranged from highs of 32,914 and 25,083 for Israel and the United States to lows of 490 and 376 for Korea and New Zealand respectively.  COVID deaths per million people ranged from highs of 893 and 722 for Belgium and Spain (with the USA third at 675) to lows of 5 for both New Zealand and Singapore.  

 

 

 

 

 

Canada ranks 21^st in total cases per million – putting it in the bottom half of incidence severity – but 10^th highest in deaths per million population putting it in the top third.  So, while Canada was not hit as hard by infections compared to many countries, it was among those seeing higher death rates – largely because of its poor handling of the long-term care sector where over 80 percent of the deaths occurred.  While Canada is not the United States or Spain or Belgium in terms of the incidence and mortality of COVID-19, it is not Australia or New Zealand or Korea either. One might argue being an island helps but it did not help Cyprus or Malta that much.

 

How about the economic impact?  Figures 3 to 6 are based on the IMF October 2020 World Economic Outlook Report.  Figure 3 ranks the 35 advanced economies in terms of their projected 2020 real GDP growth rates and here Canada ranks 24 out of 35.  While everyone is going to see their economy shrink, some are going to be hit worse than others. Canada is basically at the top of the bottom third with an anticipated drop in real GDP for 2020 of -7.1 percent.  Overall, it is sandwiched between highs of -1.8 and -1.9 percent for Lithuania and Korea and lows of -10.6 and -12.8 for Italy and Spain. Figure 4 ranks these same countries according to their estimated 2020 unemployment rate and here Canada is an honorary Mediterranean country where at 9.7 percent it is coming 4^th out of 35 countries – behind Greece, Spain and Italy.  And if one looks at the percentage point increase compared to 2019, Canada’s is a 4 percent point increase.  Based on Figure 5, we are the second worse increase of the 35 advanced countries, behind the Americans who are expected to see a 5.2 percent point rise in their unemployment rate. 

 

 

 

 

 

 

 

Of course, one might think that Canada’s somewhat mediocre performance relative to other advanced countries when it comes to the spread of COVID-19 and its mortality rate may simply be due to the fact that Canada has been a cheapskate in terms of its public spending compared to other countries.  And, by extension, perhaps our economic performance has been so much worse than other advanced economies because our federal and provincial governments have been captured by deficit scolds who have foisted restraint upon Canadians.  Well, put those notions to rest.  When the government deficit to GDP ratios for these advanced economies are ranked in Figure 6, it appears that Canada is finally number one in something – the size of its 2020 government deficit relative to GDP.  It is expected in 2020 to have the largest government deficit to GDP ratio of these 35 advanced economies registering at 19.7 percent. 

 

 

 

Once again, Canada has been spending a lot and seemingly getting relatively much less for its money.  True, we have not done as badly as some countries when it comes to the effects of COVID-19 on our population (unless you are a resident of a long-term care home) but our economy appears to have been fairly hard hit even with the many billions of support and assistance that have been funneled into it.  Why Canadians have to date been so charitable towards their federal and provincial governments when it comes to performance during the COVID-19 pandemic is a bit of a puzzle to me. Perhaps we just like to be nice.

Canada must tailor trade practises for post-COVID world

The effects of COVID-19 will transform the international world order and affect Canada’s role in it.
First, the meteoric rise of China, with its aspirations of world leadership and greater respect, will come to a crashing halt. Despite the importance of China’s market to the world economy, there will be an increase in transactions and transport costs as the hyper-globalized pre-COVID world takes a pause given concerns about virus transmission.
There will still be global trade and travel but there will be new rules and precautions operating as a form of non-tariff barrier with resulting losses for producers and ultimately consumers. For Canada, trade with China will continue given the importance of our resource inputs to their economy. But they will eventually need us more than we need them and this should shape our trade policy accordingly.
Of course, there’s also the long-term fallout from the Chinese government’s delay in alerting the world to the seriousness of COVID-19 while simultaneously scouring the planet for PPEs. The Chinese government’s desire to be treated like a superpower runs counter to the leadership and stewardship we’ve seen over the last few months. With great power comes great responsibility, and perhaps the best example of it during the 20th century was the American assistance for European recovery. While self-interested, the Marshall Plan nevertheless helped former foes and allies alike rebuild their economies after the Second World War. Notwithstanding its later efforts, the Chinese government’s behaviour during the early phases of the pandemic has eroded trust. For Canada, the new rule in its international dealings with China should be trust but verify.
Second, the abdication of global leadership and retreat by the United States is nearly complete, reinforced by its chaotic handling of its own public health situation. While the U.S. has been far from perfect, during the 20th century it was a leader for free markets, international trade and humanitarian efforts to help bring about a better world. The last four years have seen a populist-fuelled retreat from this vision of America in the world and we will all be poorer for it. The COVID debacle in the U.S., due to a lack of coordination and response, sends a distressing message to its trade partners and allies. For Canada, there can be no retreat from dealing with the U.S. given its importance to our economy. But we can no longer assume that all American interests are automatically our own.
Third, given what has transpired with both China and the U.S., the Europeans and the United Kingdom will ultimately assert new leadership, engagement and involvement in world affairs though they will not always sing with one voice. The retreat of the U.S., the Chinese government’s lack of transparency and not-so-subtle bullying—combined with the ever-present Russian behemoth on their doorstep—means they will need to do more for themselves in terms of security and trade, and will need to reach out and strengthen their trade relationships around the world. Here, Canada has taken the first steps with the Comprehensive Economic and Trade Agreement but it must actively pursue opportunity and build further relationships. Trade agreements are not enough, you must work to implement them.
The ultimate result from all this uncertainty will likely be an even more competitive and multilateral world order with Russia, Saudi Arabia, India and Brazil constituting additional elements of change and disruption. Yet this world will also be a source of opportunity for a resource rich and diverse outward looking country such as Canada.
We can benefit, but we must be nimble and adaptable in this changing world. Canada must actively engage with all players, but on its own terms, and must seek like-minded allies who are also small trade-dependent economies with stable, democratic and market-oriented institutions. Canada, Australia, New Zealand, Taiwan and the Scandinavian countries can serve as champions of small open economies in this emerging and more competitive world order. A league of small open economies may seem naïve, but one should not underestimate the powerful effects of mice that roar.

This first appeared on the Fraser Institute Blog, May 12 2020.

A Very Brief Survey of Northern Ontario Economic History

I have been working on an article surveying the economic history of northern Ontario and thought a summary overview draft of where I am going with it would be a worthwhile post. The entire article is going to be much more detailed but this excerpt below provides a pretty good overview of the direction it is going. Enjoy.

 A Very Brief Survey of Northern Ontario Economic History

Livio Di Matteo

 Northern Ontario’s economy began in the 19^th century as a booming resource frontier as a result of favourable international market demand for natural resource commodities which were supplemented by government policy initiatives in transportation and protectionism. Export-led growth approaches to development suggest that such a growth process can ultimately expand population and market size leading to self-sustaining economic growth, but Northern Ontario never made that transition and in the latter part of the twentieth century and early twenty first century can be viewed as having undergone arrested development. 

Northern Ontario is a vast region of over 800,000 square kilometers covering about 90 percent of Ontario’s land mass.  While long the home of a substantial and well organized indigenous and First Nation population[1], industrial economic development of northern Ontario under European settlement began in the 19^th century as a booming natural resource frontier driven by rising international market demand for natural resource commodities – mainly forest and mineral products – combined with government policy initiatives in transportation infrastructure and economic protectionism via what was known as the Manufacturing Condition.

In defining the region, it is important to note that is geographically, geologically and biologically a distinct region traditionally defined as the area of Ontario north of the French River – Lake Nipissing – Mattawa River system.  It is essentially Precambrian shield made up of some of the oldest rocks in North America and as a result of glaciation scraping its soil consists of shallow soils with some alluvial soil deposits in areas such as the Clay Belt regions and a mainly boreal forest ecology consisting largely of coniferous forest.[2]

In defining the region there is the question of borders as some include the Districts of Muskoka and Parry Sound in northern Ontario – as indeed they are for the purposes of federal and provincial regional development policies – while other might consider them not as the north but the ‘near’ north.[3]  There is also the question of thinking about the north as a region given that it is a very diverse area that in many respects is not one north but ‘many’ norths.[4] 

Geographically, there is the Northwest consisting of the Districts of Thunder Bay, Rainy River and Kenora while the other two-thirds of the region is the Northeast consisting of Cochrane, Timiskaming, Algoma, Sudbury, Nipissing and Manitoulin.  There is also the vast sparely populated area north of 50 which in some respects does not fit into either the northeast or northwest except by government fiat.  And of course, there is a rural remote north of small towns and Indigenous reserves as well as an urban north consisting of the five major cities – Thunder Bay, Sault Ste. Marie, Timmins, Sudbury and North Bay.  And the Northeast is also marked by a strong francophone population component while the region as a whole has a large Indigenous population.

The themes of Northern Ontario’s economic development are three-fold: natural resources, transportation and government.[5]  Northern Ontario’s economic development can easily be discussed within the framework of economic staples – products with a high natural resource content – given the importance of fur, lumber, pulp and paper and mineral products to the north’s economic history. As for transportation, this is a key theme given the importance of the Canadian Pacific (CPR) and Temiskaming and Northern Ontario Railway (TN & O) in providing access to northern Ontario resources in the 19^th and early 20^th centuries as well as providing the means for them to exit the region to world markets.  Finally, government is important given the federal role in providing transportation infrastructure that accessed and served the North such as the CPR, the Trans-Canada Highway and the St. Lawrence Seaway as well as the Ontario government given its parallel regional development program in the 19^th century consisting of the building of the TN & O as well as the protectionist Manufacturing condition and its own agricultural land settlement policy.

Given the importance of natural resources to northern Ontario’s economy, the analytical framework best-suited to outlining the causal relationships of the development process is the Staples Approach or more generally, models of export led development.  The Staples approach sees a region’s natural resource base as the most important determinant of both the pace as well as the patterns of economic growth with the classic exposition provided by Harold Adams Innis who viewed economic development as springing from the interplay between an industrial heartland and a resource reducing hinterland.[6]  In the case of northern Ontario, it can be viewed as a resource hinterland not only to the industrial south but also the rest of the world economy given the international market for its mineral and forest products.  More modern versions of the Staples Approach see economic development as the process of diversification around an export base with the degree of diversification a function of what are termed economic linkages.  These linkages involve producing inputs for the resource export sector or investing in industries that use the output of the export sector as an input as well as the final demand for domestically produced consumer products.[7]   

Figure 1 outlines the export led/Staples growth process with an increase in exports generating an increase in the regional economy’s output/income (Y).  The presence of rising income and economic opportunity in the resource sector leads to population increase both via natural increase but also migration into the region.  This leads to an increase in the labour force which feeds back into the generation of income.  As well, the increase in income leads to an increase in regional saving which fuels investment as well as external investment flowing into the region to provide the capital stock needed to expand production of the resource export.  This process continues in a circular fashion until both the income and population become large enough to provide a market for regionally produced goods and services on top of the export sector and it is this expansion of regional manufacturing production as well as services to meet local needs and substitute for imports that becomes the process of diversification.  A failure to grow and develop beyond the initial export industries that powered development can be seen as incomplete or arrested development.[8]

 Figure 1: A Model of Export-Led Growth

 

 The economic history of northern Ontario can be divided into a number of stages.  They are: 1) Pre-European Settlement to 1867, 2) Boom, Colonialism and European Settlement, 1867 to 1913, 3) Consolidation, Depression and War, 1914 to 1945, 5) Post-War boom, 1946 to 1969 and 6) Arrested Development: Economic Dependency and Decline, 1970 to the Present. 

The economic development of northern Ontario followed a process of export-led growth fueled in particular by the export of mineral and forest products.  International demand and private sector exploitation of the region’s resource abundance starting in the 19^th century was also accompanied by investment in transportation networks to bring resources out to market and government policies and initiatives designed to help facilitate development as well as take advantage of the public sector revenue potential of these resources.  Within this framework then, the three major engines of northern Ontario economic development are natural resources, transportation and government. 

During each of northern Ontario’s development periods outlined here, economic growth was most robust during eras where all three engines came together to provide the impetus for economic growth and employment creation.  The most robust economic growth and development occurred during the eras from 1867 to 1913 and 1946 to 1969.  Both of these eras coincided with good global economic conditions which fostered a demand for resource products and led to private capital investment in production facilities and transportation networks.  Both of these eras also saw a large spending and policy role for government which facilitated development.  The first era also saw northern Ontario as a major source of provincial government revenue.

Growth was poorer in the 1914 to 1945 as a result of erratic global markets, private sector weakness and the retreat of government involvement in northern development after the onset of the Great Depression and yet this was still an era of substantial population growth.  Economic growth since 1970 in the region has essentially stagnated along with population growth as a result of long-term technological change which reduced the labour intensity of natural resource extraction in the region.  While government did undertake more interventionist activity in an effort to arrest northern decline, it has failed to reverse the slow growth nature of the region given the absence of supporting private sector investment. 

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[1] By the 17^th century, the mainly Algonkian culture Anishnawbe and Cree indigenous population had developed a seasonal woodland economy and lifestyle centered on hunting and trading. See Bray and Epp (1984: 8).

[2] See Robinson (2016: 8-9) for a fuller description of the region.  The glaciers of the various ice ages periodically scraped topsoil off in northern Ontario and deposited it further south ironically enough making nature responsible for the first set of “resource transfers” from Ontario’s north to the south. According to Louis Gentilcore (1972: 7-8): “The acid nature of the podzols, the slower breakdown of the vegetable matter, and the prevalence of peaty soils create problems in the utilization of the soils of northern Ontario for commercial agriculture.”

[3] The 2011 provincial Growth Plan for Northern Ontario (2011) for example includes Parry Sound.

[4] For one point of view, see Miller (1985).

[5] See Di Matteo (1991, 1999) for overview of these themes.

[6] Innis (1930/84).

[7] These are generally known as backward, forward and final demand linkages.  See Watkins (1963).

[8] Part of this process of arrested development could also be referred to as a Staples Trap whereby an economy is not able to move beyond its initial export sector activities.  For a discussion of the Staples Trap see Watkins (1963).

References

Bray, M. and E. Epp, eds. (1984) A Vast and Magnificent Land: An Illustrated History of Northern Ontario. Ontario Ministry of Northern Affairs.

Di Matteo, L. (1991) “The Economic Development of the Lakehead During the Wheat Boom Era: 1900-1914,” Ontario History, LXXXIII, 4, December, 297-316.

Di Matteo, L. (1999) “Fiscal Imbalance and Economic Development in Canadian History: Evidence from the Economic History of Ontario,” American Review of Canadian Studies, Summer, 287-327.

Innis, H.A. (1930/1984) The Fur Trade in Canada, Toronto: University of Toronto Press.

Miller, T. B. (1985) “Cabin Fever: The Province of Ontario and its Norths.” In D.C.D.C. MacDonald, ed., The Government and Politics of Ontario. 3rd ed. Scarborough:Nelson, Canada, 174-191.

Ontario (2011) Places to Grow: Growth Plan for Northern Ontario.  Toronto: Ministry of Infrastructure and Ministry of Northern Development, Mines and Forestry.

Robinson, D. (2016) Revolution or Devolution?: How Northern Ontario Should Be Governed. Northern Policy Institute. Research Paper No. 9, April.

Watkins, M. (1963) “A Staple Theory of Economic Growth,” Canadian Journal of Economics and Political Science, 29, 141-158.

Crime and the Economy: Are Low Interest Rates a Factor?

The most recent set of crime statistics for Canada revealed that police-reported crime in Canada, as measured by both the crime rate and the Crime Severity Index (CSI), increased for the fourth consecutive year in 2018, rising 2%.  The accompanying figure below further reinforces the fact that after years of decline – a decline that stretches back to the 1990s – crime rates are rising.  Of course, all of this begs the question as to why crime rates are rising again after years of decline.

Explaining the drop in crime rates has been a source of some debate.  The fall in crime rates since the 1990s in Canada as well as the United States has been attributed to a number of factors including new policing strategies, changes in the market for illegal drugs, an aging population, a stronger economy, tougher gun control laws and increases in police numbers. As for the impact of the economy on crime, well that is also a source of debate. 

On the one hand, the intuitive feeling is that a weak economy should cause people to turn to crime.  Yet, many studies of the relationship between the economy and crime have found statistically small relationships between unemployment and property crime and often no relationship between violent crime and unemployment.  It has also been argued that economic downturns may actually reduce criminal opportunities as when unemployment is high more people are at home "protecting" their property and when out and about they carry less cash and possessions.

If the latter is the case, one could make the argument that the strengthening economy of the last couple of years has been a key factor in fueling the recent surge in crime.  Unemployment rates in Canada are at historic lows and to add fuel to the fire – so are interest rates.  Low interest rates mean that even if more employment today is part-time or uncertain, people are still able to consume more and go out more simply by borrowing more.  Indeed, Statistics Canada also noted recently that the seasonally adjusted household credit market debt to disposable income ratio increased to 178.5 percent in the 4^th quarter of 2018. 

More debt to fuel spending on homes and basic consumption frees up resources to spend on more illicit things like illegal drugs and much of the recent crime increase is drug related. 

With unemployment low and cheap money sloshing around both fueling spending and consumption, the opportunities for crime may have mounted. It is certainly a point worth considering.

Reflections on a Town Hall: Trudeau in Thunder Bay

Well, in the wake of the release of the 2019 Budget, Prime Minister Trudeau is off to Thunder Bay where he will be hosting a Town Hall on the campus grounds of Lakehead University on Friday March 22nd.  Indeed, the preparations for his arrival are already underway as the grounds of the C.J. Saunders Fieldhouse where the event will occur are being swept and tidied up from the accumulated grit of a harsh winter.  This is apparently Trudeau’s first visit to Thunder Bay since 2016 which is a signal that the election campaign is already underway.  The festivities get underway at 7 pm (but if you want a front row seat you need to register and arrive by 5:00 pm).

Thunder Bay can be considered a relatively politically safe place for the federal Liberals to have a Town Hall given the two ridings have returned mainly Liberals to Ottawa for nearly 100 years.  Thunder Bay voters are actually very conservative voters in the sense that they dislike change and always do the same thing – that is, return Liberals to Ottawa.  The only way they deviate from their inherent conservatism is to actually vote Conservative. Indeed, the last federal Conservative party politician who was elected was Robert Manion, who if memory serves me correctly, was around in the 1930s.  Of course, there was MP Joe Commuzzi circa 2007 – who started as a Liberal but then switched to the Conservatives and served as a Minister– but he was not elected as a Conservative so my initial point stands.

So what issues will Prime Minister Trudeau have to face in Thunder Bay? Well, the audience is likely to be filled with gushing supporters who will hang on his every word and engage in numerous standing ovations despite the recent disillusionment over the SNC-Lavalin-Raybould Affair.  Indeed, the Prime Minister is probably looking forward to an evening’s relief from the stress and acrimony of Ottawa.  There is nonetheless the potential for some fireworks and charged questions on a number of topics should the Town Hall decide to deviate from what is likely to be a large pep rally.  For those who might be interested, here are the parameters of just two interesting question areas.

What is the Federal Government going to do to help Thunder Bay address the December 2018 report by the Office of the Independent Police Review Director on relations between Indigenous People and the Thunder Bay Police Service? It is true that the local police are a municipal function and municipalities are creatures of the provinces, but it remains that First Nations and Indigenous peoples are a very important responsibility for the Federal government.  The recommendations for the Thunder Bay Police Service are going to involve a substantial increase in expenditures on an already stretched municipal tax base.  Is there any real federal financial assistance coming or is Thunder Bay on its own in dealing with this? Indeed, given that Thunder Bay is a regional centre for health and education services for area First Nations, what can the federal government do to assist in this regard?

As well, what is the Federal Government doing to actually implement its own growth plan for the  Northern Ontario economy?  All of us are familiar with the 2011 Northern Growth Plan released by the Ontario Liberal government which, over the course of the next 25 years, was supposed to assist the North in reversing its economic decline.  Well after five years of the provincial Northern Growth Plan – the plan to end all plans – the population of the North remains flat, employment is down and the value of new investment is also down.  

This lacklustre result has not deterred the Federal government from announcing its own Prosperity and Growth Strategy for Northern Ontario in April 2018 with twelve areas of action.  However, since then there really has not been much to be seen and heard as to specifics of what this strategy entails, aside from mentioning the strategy whenever there is an announcement of federal money from FEDNOR as was the case in Sudbury in December 2018.  Aside from this, there is little to be found in a Google News search when the term "Prosperity and Growth Strategy for Northern Ontario" is typed in.  So, is there an actual Federal action strategy for Northern Ontario or is it just another election marketing ploy?

I guess we will have to wait until tomorrow night to see if we learn anything new.  I for one expect there will indeed be some entertainment involved in this Town Hall Meeting.  Who knows, maybe we'll even get yet another announcement of federal support and commitment for the Ring of Fire? At the very least, in an election year one might expect some federal infrastructure dollars to finish four-laning the highway to Nipigon.

Long Run Economic Performance: Comparing China, the UK and USA

In light of my recent contributions on China’s economic performance which have appeared in The Hill and on the Fraser Institute Blog, I thought it might be useful to provide the figures which underpin the longer-term analysis of their performance.  The data I used is from the Angus Maddison Database – the 2018 update – and the data is summarized in the accompanying Figures 1 and 2.

Figure 1 plots total real GDP from 1820 to 2016 in 2011 USD for the United States, the United Kingdom and China.  In 1820, China had a vastly larger economy than either the US or the UK with a real GDP of $325 billion compared to $69 billion for the UK or $21 billion for the USA.  Indeed, for much of economic history, China has always been the biggest economy in the world as a result of its massive population.  In 1820, China had a population of 381 million people compared to 10 million for the United States and 21 million for the UK.  However, the 19^th century was not kind to China and by 1870, China’s economy had shrunk to $270 billion but it was still larger than the United States at $150 billion and the UK at $179 billion. 

 

Total GDP of both the US and the UK grew quickly as a result of late nineteenth century industrialization with the US matching the UK in 1878 and then pulling ahead in terms of total GDP.  By 1887, the US economy at $306 billion was larger than China at $274 billion and the UK at $228 billion.  By the eve of the First World War in 1913, the US economy at $791 billion was nearly twice the size of both the UK and China at $368 billion and $344 billion respectively. In the period since WWI, the United States grew rapidly and by the mid 1970s was over five times the size of the UK economy and about five times larger than China’s economy.

China had a Communist revolution in 1949 but economic performance in its aftermath - while substantial - was not as robust when compared to the last forty years.  From 1950 to 1975, China real GDP grows from $348 billion to $1.2 trillion – a tripling of output.  However, things for China really take off with the first economic reforms and liberalization of the 1970s and from 1975 to 2016, its economy expands from $1.2 trillion to $17.3 trillion.  Over the 1975 to 2016 period, the US economy expanded from $5.6 trillion to 17.2 trillion while the UK expanded from $1 trillion to $2.5 trillion.

In 2016, China re-assumed its historical role as the world’s largest economy.  Yet, as I pointed out in my oped pieces, this is not the end of the story.  Despite its impressive and rapid economic growth in terms of total output, China still lags when it comes to per capita output. As Figure 2 shows, over the entire 1820 to 2016 period, China has always had a lower per capita GDP than either the UK or the US and the relative gap has not changed all that much despite the rapid growth of the last 40 years.  In 1820, per capita GDP in China was about 26 percent that of the UK and 41 percent that of the USA.  By 1975, its per capita GDP was 7 percent that of the UK and 5 percent that of the United States.  After the robust growth of the post 1975 period, by 2016 per capita Chinese GDP now stands at 34 percent that of the UK and 24 percent that of the US.

 

So, China has done very well but it still has a long way to go.  Its rapid extensive growth masks the fact that large swaths of its population are still quite poor.  Its economy is showing signs of economic and political fragility given its aging population, large debt levels and economic inequality and this has global implications.  Such fragility is probably a reason for its more authoritarian turn in recent years under President Xi Jinping.  After the rapid growth and improvement in living standards of the last few decades, any economic slowdown may create a politically volatile domestic mix of discontent.