The Americas | Don’t drill, plant

What’s next for Canada’s economy

Old sources of growth are running dry. The government is looking for new ones

|GATINEAU
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“EVERYBODY thinks this is a 50-pound sack of seeds,” says Steven Fabijanski as he hefts a large white bag onto a table. “Actually, it’s 8,000 litres of jet fuel.” That is what Agrisoma Biosciences, the company Mr Fabijanski runs in Quebec, plans to make from the bagful of carinata, or Ethiopian mustard seed. In January a Boeing 787 Dreamliner operated by Qantas flew from Los Angeles to Melbourne on a mixture of jet fuel and juice extracted from Agrisoma’s mustard seeds. Eventually, a third of biofuel for aviation will come from seeds bred by the company, Mr Fabijanski predicts. His slogan is: “don’t drill, plant.”

Biofuel looks like an industry of the future in a country that depends on those of the past. Oil and vehicles, Canada’s two biggest exports, are both declining, and may continue to do so. Oil from Alberta’s tar sands is expensive to produce. The United States, by far its biggest foreign customer, is fracking more and importing less. Carmaking has never fully recovered from a recession in the United States in 2008. Production has dropped from a peak of 3m vehicles in 1999 to 2.2m last year.

With Donald Trump in the White House, Canadians worry that things will get worse. No one knows what will come out of the renegotiation demanded by Mr Trump of the North American Free-Trade Agreement (NAFTA) with the United States and Mexico, under which the trade in vehicles takes place. Businessmen also worry about the new American tax law, which slashes the tax on corporate profits from 35% to 21%, below the average Canadian rate of 26.7%. Jack Mintz, an economist, has called it a “tax tsunami” for Canada. That and the threat to NAFTA are encouraging American businesses to keep their money at home rather than investing in Canada, says the central bank.

This comes on top of other discouragements to growth. The workforce is shrinking as ageing baby-boomers retire. Economists worry that consumers, who have built up record levels of debt, will spend less as interest rates rise. Dominic Barton, the managing partner of McKinsey, a consultancy, has warned that, without changes, GDP will grow by an average of 1.5% over the next 50 years, half the rate of the previous 50. The economy grew 3% last year. But the government forecasts a slowdown to 2.2% this year and to 1.6% in 2019.

These gloomy expectations were in the air when Bill Morneau, the finance minister, presented the government’s budget in parliament on February 27th. Business-people were hoping he would give the economy a quick boost, perhaps by reducing taxes to match Mr Trump’s corporate cut or with a dose of deregulation. Mr Morneau disappointed them. The budget continues the government’s methodical approach to fixing the economy’s problems. Mr Morneau and the prime minister, Justin Trudeau, prefer to plant patiently rather than to drill aggressively.

That was evident in the “equality and growth” budget’s big idea: putting more women to work. Just over 61% of working-age women have a job or are looking for one, compared with around 70% of men. Women working full time earn 88% of what men do on average. That is not bad by the standards of other rich countries. But Mr Morneau reckons that much could be gained by doing better. If female participation in the labour force rose to that of men, an unlikely scenario, the economy would be 4% larger, according to RBC, a bank.

A woman’s place is in the office

Mr Morneau quoted that prediction to justify a range of female-friendly policies. He will raise the child benefit, which parents can spend on day care, and improve incentives for new fathers to take time off work. There will be extra money for female entrepreneurs and to fight sexual harassment. The federal government will close its own pay gap, Mr Morneau promised.

Female-friendliness is fashionable, but it also fits with the strategy of removing economic roadblocks advocated by Mr Barton, a Canadian who leads a panel that advises the government on how to promote growth. Encouraging women to work is a politically palatable alternative to raising immigration. Polls suggest that Canadians do not want to increase the target from its current 310,000 a year. The government plans to spend C$180bn ($140bn) on infrastructure over 12 years. It has not yet followed economists’ advice to improve competitiveness by lifting restrictions on foreign ownership of airlines and telecoms firms.

More appealing to the Liberal government is the idea of trading more with countries besides the United States. The value of foreign trade is equivalent to 64% of Canada’s GDP. The United States buys three-quarters of its exports. Apart from threatening NAFTA, the Trump administration has slapped tariffs on Canadian softwood and newsprint, and may impose them on steel and aluminium. Canada needs friendlier partners.

It is making progress. An economic and trade deal with the European Union, negotiated by the previous government, took effect last September. Canada is due to sign a deal with ten Pacific countries, including Japan and Vietnam, on March 8th. But its quest for further agreements has faltered. Mr Trudeau failed to launch trade talks with China on a visit there in December. His trip last month to India, with which Canada has been conducting fruitless talks since 2010, was a disappointment. Mr Morneau did not mention India when he listed “new markets” Canada hopes to enter.

Canada is unlikely to make much impression on those markets with the same old industries. That is where companies like Agrisoma come in. It exemplifies the idea, promoted by Mr Barton among others, that tomorrow’s winners will come from adding technology to yesterday’s successes, especially agriculture. The Saskatchewan Food Industry Development Centre, a non-profit lab in Saskatoon, is working with growers of pulses, wheat and soya beans to produce meat substitutes. It has produced passable chicken fingers, says Shannon Hood-Niefer, its chief scientist. James Cameron, a Hollywood director, has invested in a plant in Vanscoy, Saskatchewan, to make new foods from peas. “Shame on us if we don’t develop agri-food as a focal point of growth,” says Philip Cross, an economist at the Macdonald-Laurier Institute in Ottawa.

In January, BlackBerry, a Canadian technology company, announced a partnership with Baidu, a big Chinese internet firm, to work on ways to use artificial intelligence in cars. Last month the government said that it would spend nearly C$1bn over five years to help groups of firms and research institutes working on artificial intelligence, food protein, marine vehicles, advanced manufacturing and digital technology. It hopes that these projects will lead to the development of Silicon Valley-like “superclusters”.

Subsidising such things probably has a lower economic pay-off than encouraging women to work and improving infrastructure. Mark Wiseman of BlackRock, an American investment firm, who is a member of Mr Barton’s advisory panel, worries that support targeted at specific industries risks “spreading the proverbial peanut butter too thin”. The government should back proven winners, not potential ones, he says. Others think it should let individual firms and sectors fend for themselves.

The criticism aimed at Mr Morneau’s budget is blunter. He responded to gathering threats from the United States with “deep denial”, fumed the Fraser Institute, a free-market think-tank. John Manley of the Business Council called the budget “disappointingly thin”. But Mr Morneau, who has abandoned his promise to balance the budget by next fiscal year, cannot afford the tax cuts many of his critics favour. The government’s patient planting strategy makes sense, as long as a storm does not ruin the harvest.

This article appeared in the The Americas section of the print edition under the headline "Don’t drill, plant"

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