Economic Challenges Canada Faces in Recent Years  Term Paper

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Economic Challenges Canada Faces

In recent years, the challenging economic condition in Canada has emerged as a concern for citizens, policy makers and the government alike. Canada faces challenges in terms of creating a more innovative society, as the country continues to experience a significant productivity gap compared to other advanced industrial economies. The Canadian industry appears to be slower in successfully developing, applying and marketing innovative products, processes and services than a majority of other nations. This lack of innovation is the cause of Canada's low productivity growth and competitiveness, and therefore must be addressed in order to increase employment growth, a higher standard of living and an improved quality of life for all Canadians.

Current research predicts that although Canada's economic performance will gradually strengthen out of the recent mild slowdown into a better pattern of growth in 2004, Canada's economy still faces the longer-term challenge of increasing productivity growth vis-a-vis the U.S. By accelerating innovation, competition and skills (Organization for Economic Co-operation and Development, 2003). An affluent, high-tech industrial society, Canada today closely resembles the United States in its market-oriented economic system, pattern of production, and high living standards.

Since World War II, the impressive growth of the manufacturing, mining, and service sectors has transformed the nation from a largely rural economy into one primarily industrial and urban. As a result of the close cross-border relationship to the United States, the economic sluggishness in the United States in 2001-02 had a negative impact on the Canadian economy. Real growth averaged nearly 3% during 1993-2000, but declined in 2001, with moderate recovery in 2002-03 (Canadian Industry in the Global Marketplace, 2001). Unemployment is up, with contraction in the manufacturing and natural resource sectors. Despite this, due to its great natural resources, skilled labor force, and modern capital plant Canada enjoys solid economic prospects. One of the long-term concerns is the flow south to the United States of professionals lured by higher pay, lower taxes, and the immense high-tech infrastructure. This paper will analyze and discuss the economic challenges currently faced by Canada, and offer possible solutions to the economic crisis.

One of the most significant economic challenges for Canada is to raise living standards. The quality and cost of Canadian living standards is related to the employment and unemployment statistics. Raising living standards depends not only on productivity growth but also on the average hours worked by each member of society. Research indicates that the employment rate is estimated at about 7% of the labor force (Economic Survey Canada, 2004). This unemployment rate could be improved through the implementation of more effective case management techniques and activation requirements. The rules governing unemployment benefits must also be evaluated and rewritten to provide stronger incentives for job seekers.

The Canadian welfare system is also problematic, and contributes greatly to both the housing standards and the unemployment rate. Although incentives to move from social assistance to work have improved since the mid-1990s, social assistance remains linked to health care and housing (Economic Survey Canada, 2004). Those unemployed have no incentive to seek work, and no skills to acquire decent long-term employment. As a result, the welfare system is overcrowded and continues to rise. The welfare system could be improved through the use of back to work benefits, effective job oriented case management, and a stronger emphasis on the shift from welfare into work (Economic Survey Canada, 2004).

At the end of 2004, living standards have improved since 2002, as a result of low interest rates which continued to support housing activity. Residential investment increased 3.3% in the third quarter of 2004, down from 6.3% in the second and 9.0% in the first, the slowest growth rate since the second quarter of 2003 (The Economy in Brief, Department of Finance Canada, 2004). A slight increase in housing starts in the last quarter of 2004 supported modestly higher growth in new construction activity of 4.7% after a second-quarter gain of 3.9% (The Economy in Brief, Department of Finance Canada, 2004). Renovations rose 12.3% following growth of 2.1% in the second quarter of 2004 (The Economy in Brief, Department of Finance Canada, 2004). House resales, however, fell in the third quarter, dropping real estate transfer costs 15.6% from their second-quarter level and moderating growth in residential investment (The Economy in Brief, Department of Finance Canada, 2004).

Research indicates that Canada's educational system has not confronted any immediate challenges, however, improving the skills of those who are already well qualified could contribute to capital growth. The educational problem concerns those Canadians that have not obtained a high school qualification and thus have both a lower earnings capacity and higher unemployment risk. Their difficulties are closely related to improving their basic literacy skills, but the quality of the available programs are low. More effective programs need to be redesigned to make them more effective. Improving the efficiency of such investments could pay significant returns over time through better labor market outcomes, especially for younger people (Economic Survey Canada, 2004). An improved educational system for all could lead to an improved economy, and lower unemployment numbers.

Many Canadian households are at below income levels, and this labor supply could also be improved through greater participation by those in older age groups. The population in Canada is largely comprised of senior citizens, many of whom have no motivation to work. Although significant numbers of Canadians already work into their late 60s and even their early 70s, research indicates that higher proportions would follow, if they did not suffer a financial penalty for doing so, as is currently the case under the Canada and Quebec Pension Plans (CPP/QPP) and many employer sponsored pension plans (Government of Canada, Sustainable Development: A Canadian Perspective, 2002).

The CPP and QPP and other retirement income programs must be changed to make actuarially neutral adjustments for early or late commencement of benefits (Government of Canada, Sustainable Development: A Canadian Perspective, 2002). Furthermore, the requirement to stop working in order to start drawing an early pension should be lifted (Government of Canada, Sustainable Development: A Canadian Perspective, 2002). Measures such as these would also improve the unemployment and employment rates, in turn improving living conditions for all.

With such a high amount of elderly individuals in the Canadian population, health care is also a major economic concern. Demographic forces and rising health care spending in Canada endanger the sustainability of public finances in the long-term and a key challenge for the Canadian economy is to ensure fiscal sustainability across all levels of government. A solution is the possibility of extending the public health care system to provide coverage for home care and placing a limit on out-of-pocket costs for prescription drugs. This would lead to more appropriate use of hospital services as a result, by reducing present biases in clinical decisions due to differences in coverage. Mixed payment methods could be used more extensively for primary health care providers. Doctors could be provided with better incentives by increasing combining a salary or capitation component along with fees for services rendered. Finally, the establishment of electronic patient records would help to provide a more integrated approach to health care.

Since 1991, the federal government and Bank of Canada have maintained an official target range for the inflation rate. This target range was gradually lowered to 1.0 to 3.0% (The Economy in Brief, Department of Finance Canada, 2004). The commitment to keep inflation within that target range was renewed in February 1998 and again in May 2001, with the latter in effect until the end of 2006. The commitment to a low and stable inflation environment enables policy to best contribute to a sustained economic expansion in Canada, thereby leading to the likelihood of lower unemployment and improved productivity (The Economy in Brief, Department of Finance Canada, 2004). With the slowdown in global economic growth and a movement toward a position of excess supply becoming evident in early 2001, monetary policy began to ease in the United States and Canada at the beginning of that year (The Economy in Brief, Department of Finance Canada, 2004).

In the April 2002 Monetary Policy Report, the Bank of Canada noted the strength of demand for Canadian production. Believing the Canadian economy would approach capacity in the second half of 2003 and that there was a need to lean against these trends in order to preserve the low and stable inflation environment that has been benefiting the Canadian economy, it raised its target rate by 25 basis points (The Economy in Brief, Department of Finance Canada, 2004). However, concerned about the sustainability of a robust recovery from the U.S. recession, the U.S. Federal Reserve so far has refrained from increasing its target rate. The Bank of Canada has continued with the system of eight "fixed" or pre-specified dates each year for announcing changes to the bank rate and the target for the overnight rate (The Economy in Brief, Department of Finance Canada, 2004). This system was adopted at the end of…

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