FACULTY FOCUS

Walid Hejazi

Forecasts indicate that even if the economic recovery is uninterrupted, it won’t be until the end of 2021 before anything returns to pre-crisis activity. What are we in for in the coming months?

I would divide Canadians into two groups: People who have been able to continue to work from home and for the most part, have uninterrupted incomes; and people who have had their incomes interrupted or are required to go out and work in the community, and are therefore more exposed to the virus. For this latter group, there will be lots of challenges over the next two to three years.

The most optimistic estimate by the OECD is that it will be the end of 2021 or the beginning of 2022 before we get close to where we were in terms of economic activity. Due to the efficiency with which this virus spreads, as we begin to reopen, case numbers will inevitably start to increase. Governments everywhere will have to be very aggressive in moving quickly to reverse any emerging trends.

The other big issue is that a large percentage of the younger demographic really feels invincible and they are actually contracting the disease and spreading it to more vulnerable people in their circle. So what lies ahead are a lot of challenges, a lot of ups and downs, a lot of unemployment, and a lot of uncertainty.

As businesses reopen, Canada’s economy is actually projected to perform worse than the global average. Why is that?

There are three reasons why Canada is expected to be negatively impacted more than the average country. Number one, we have a small, open economy. We are very heavily dependent on international trade, which has taken quite a hit as a result of this pandemic. Seventy-five per cent of our exports go to the U.S., so in order to recover, we need the U.S. to recover. For as long as our biggest trade partner remains in trouble, the demand for Canadian exports will be weak.

The second reason is Canada’s reliance on oil. Investment in our energy sector has been falling for several years. Superimposed upon this pandemic and the big reduction in demand for oil is the ongoing global shift to more sustainable energy. Oil has taken a massive hit and the Canadian economy is significantly exposed to oil.

The third reason is that Canadians are, at the personal and household level, heavily indebted. In terms of financial acumen, Canadians are not where they need to be. Two of the most important personal finance practices are paying down high interest debt and making sure you have some funds available for a ‘rainy day’. On both of these measures, Canadians don’t do well. We’re really out of whack with other countries, which means that coming into this, many individuals and families were already stretched to the limit and

basically living month to month. It will take a bit longer for Canada to come out of this for all of these reasons.

You have closely studied the Great Recession of 2008. Did we learn any important lessons that have been helpful this time around?

Our former Dean Tiff Macklem — who is now Governor of the Bank of Canada — has said that the recession in Canada that came after 2008 was half as deep and Canada recovered twice as quickly as did the United States. That is good news for Canada. We have a resilient financial system. In 2008, financial markets were one of the main causes of the crisis, and this time around they will be a source of the solution. One thing that is not reported much is that after 2008, there was a big difference in the impact on globalization as it relates to the U.S. and Canada. After 2008, the propensity for foreigners to invest in Canadian industry actually slowed down, whereas in the U.S., it increased. Put simply, the U.S. became more attractive after 2008 as a place to invest and Canada became less attractive.

In terms of outward investment, after 2008, Canadian companies increased their propensity to invest abroad, whereas American companies did the opposite. That’s quite a distinction, and I think it’s a real warning sign for the Canadian government. My colleagues and I just wrote a paper called “Canadian FDI in a Post COVID-19 World; Have We Reached the Tipping Point?” This is important because there has been a widespread trend to reduce globalization, which is the result of rising protectionism and populism across the world. When Ed Luce of the Financial Times gave a presentation at Rotman last year, he spoke eloquently about Donald Trump, saying that Trump is not the cause of the increase in protectionism, he is a reflection of it.

The other point Mr. Luce made was that there’s not going to be a ‘snap back’ provision. Many people think it was a fluke that Donald Trump was elected in 2016. But the fact is, even President-elect Joe Biden has moved in the direction of protectionism. As a result, Canada’s ability to attract foreign investment will become more difficult post-crisis than it was before — which means our government has to redouble its efforts to make Canada more attractive.

Given all of the above, there have been many calls to develop more resilient supply chains. What will those look like?

There is a lot of emotion around this, because governments, companies, individuals, and frontline workers have been left so vulnerable by the crisis. We all saw how helpless people on the front lines felt, not being able to get access to critical things like ventilators and PPE. And we saw those heart-wrenching interviews with frontline doctors saying, ‘We literally have to decide who to put on a ventilator and who not to put on a ventilator’. These physicians never dreamed they’d have to make these kinds of decisions in a country like Canada or the U.S.

These stories highlighted how critical it is to have resilient supply chains in place — particularly in critical areas like healthcare. What will that look like? Number one, we need to have stockpiles. Hopefully, two or three years after this pandemic, governments don’t forget about it, and the public doesn’t forget about it. We need to build up a national stockpile that is refreshed continuously. Secondly, you want to have flexibility and redundancy. We have to be able to scale up production when we need to, and in terms of redundancy, we need to have more than one source of supply — so that if one area of the world gets hit particularly hard by something, we’re able to get supplies from somewhere else. What’s unique about the pandemic is the shock was global, and even if Canada had multiple suppliers, they would all have been unavailable, thus underscoring the need for flexible production and stockpiles.

Governments need to be involved in setting these things up, because without government intervention, what will happen is, two years after the pandemic, people will buy masks and other PPE at the lowest price available in the market. If you want the leanest and most efficient supply chains, those focused on the lowest cost do not have resiliency built in. They don’t have the inventories, they don’t

A lot of companies are moving their production from China to other parts of Asia.

have the flexibility, and they don’t have the redundancy. We need government involvement to ensure supply chain resiliency in critical areas.

I think most people would agree that PPE and ventilators are critical inputs and that there should be government intervention to ensure resiliency in those supply chains. But what other products should we put in that bucket? We could see a lot of companies lobbying government to say, ‘Hey, we are critical too, and we also need government support’. We have to make sure that these demands don’t become too widespread. But certainly for critical industries that we can all agree upon, we must build up more resilience immediately.

You touched on government efforts to stabilize the economy. How would you rate the Canadian government’s efforts to date?

I think we have to give our government a lot of credit. The speed with which it moved to assist Canadians was truly impressive. It quickly went from having a deficit of about $25 billion to a deficit of $350 billion. This is a historic, massive number, and it came about because they did exactly what Canadians expected: They got money into the hands of people who needed it as quickly as possible. On the monetary side, low interest rates and the Bank of Canada’s quantitative easing have basically stabilized our financial system, and all of the pre- and post-crisis monetary and fiscal policies have worked together. They’ve done a truly great job at stabilizing the economy.

The challenge is that we’re not expected to come out of this for a couple of years, which means the government is going to have to spend a lot more. Here’s the issue: Rather than simply spending money the way it did at the beginning of the pandemic, going forward, it would be great if we had a real vision for Canada’s future. The stimulus money that gets rolled out in the months and perhaps years to come should not just be aimed at stabilizing individuals and households. It should be done in the context of a bigger-picture, nationbuilding vision.

Government policies are backward looking, and we need a big idea around how to move Canada forward. The pillars of prosperity that have brought Canada to where we are now are not the same pillars that will deliver prosperity in the future. Pivoting Canada towards a more innovationbased economy is one example of how funds could be deployed to give people jobs and get money into the economy — while at the same time, achieving an important outcome. Governor Macklem has said that one possible vision is to use a lot of the funding to pivot Canada towards sustainable energy. Others have suggested we should develop more pipelines.

Deciding which road to take is not without its challenges, but the idea is that going forward, rather than just continuing to send money out the door, there should be a strategic national vision for the country that we work towards. Winston Churchill once said, “Never let a good crisis go to waste.” Well, we are in a crisis, and the government has carte blanche to spend hundreds of billions of dollars.

Looking ahead, how do you see China’s role in the global economy evolving?

Since the early 1970s China has truly emerged on the world stage, with growth rates that are simply remarkable. It is now the largest economy in the world when measured in purchasing power, and the second largest when measured in terms of U.S. dollars. The Trump administration worked really hard to decouple itself from China. The idea was that if the U.S. cuts China off, somehow it will go back to the poverty it was in 100 years ago. But that is not going to happen. China is going to be a major player from now on.

Because of the trade war between the U.S. and China, putting production facilities in China and exporting products to the U.S. is far less attractive than before. A lot of that production is moving from China to other parts of Asia. One person I spoke to recently works for an American company that no longer wants to import from China directly, so instead, it is working with Chinese companies to integrate into supply chains throughout Asia. This indicates to

me that China will continue to play a very important role — whether the U.S. is fully engaged with it or not.

At the same time, there is no question that China needs to play by the rules. In my work we have surveyed companies in Canada doing business in China and vice versa, and people are saying two things. First, they want the Canadian government to be more assertive with China, and to make it clear that they have to play by the rules. And second, they are calling for the Canadian government to be more clear and transparent about its China policy. There’s a lot of ambiguity about how China fits into Canada’s long-term international view, and this impedes further development of the bilateral relationship.

Of course, China isn’t the only country that is not playing by the rules. Neither is the U.S., and this is troubling. If you look back to the period after 1929, the lack of international cooperation really contributed to the Great Depression, and many people argue that this is what gave fuel to the rise of fascism and enabled World War II. I think it was back in 2010 that the European Union won the Nobel Peace Prize. It was recognized for the fact that, since the creation of free trade within Europe, there haven’t been any intra-european wars. The argument is that countries that trade with one another don’t fight with one another. Having systems of international cooperation in place is truly critical.

Looking ahead, are you optimistic about our collective future?

We’ve had several webinars looking at the impact of COVID-19 on different dimensions of management and the economy. In one of them, I spoke to the CEOS of Moneris and Payments Canada, and the last question I asked was this: “Suppose in 10 or 15 years you’re taking your grandchild for ice cream and the issue of this pandemic period comes up. Your granddaughter looks up at you and asks, ‘What was the biggest lesson you learned from the pandemic?’”

Angela Brown, the CEO of Moneris, answered as follows: “I would tell her that we managed to adjust to harsh new realities and we were able to do lots of things that we never thought we would be capable of.” That is a real testament to the human spirit and to our ability to adjust to really difficult times. Not that there haven’t been — and will continue to be — significant challenges for all of us. But there are so many great stories coming out about individuals and communities stepping up, and about governments stepping in to help people in really difficult situations. Alongside all the bad news, there have been plenty of good news stories amidst this once-in-a-century event — and that makes me hopeful.

Walid Hejazi is an Associate Professor of Economic Analysis and Policy at the Rotman School of Management. His forthcoming book, Everybody’s Business: Ensuring Canada is a Global Leader at 200, co-authored with Dany Assaf and Joe Manget, will be published later this year.

Having systems of international cooperation in place is truly critical.