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Financial Post, Weekly edition, June 12, 1982


Let's work with the tools we have

As expected, the Versailles economic summit did not produce a commitment by the U.S. to bring down interest rates. So, rates in Canada will stay high, for at least a time, unless we decide to abandon support for the C$.

Even though inflation in the U.S. has come down, the U.S. administration maintains that easing up now will only bring higher prices back with a rush and force another, more severe, period of tight money. This is the view of Bank of Canada Governor Gerald Bouey, as well. And Bouey's rejection of an independent interest rate policy is based on fears that such a course would also bring the C$ under even more downward pressure.

As Bouey has said, if we decide to let the C$ go, it's hard to say how far it would drop. An article on page one of this issue describes one economic model that projects a C$ worth US66 cents by 1986 if Canadian interest rates were permanently kept just one percentage point below what they otherwise would be, based on the Bank of Canada rate. The study estimates that inflation, primarily because of the higher cost of imports, would be 2.5 percentage points higher every year.

It is extremely difficult to forge a made-in-Canada interest rate policy without regard to U.S. rates. West Germany has had some success in this because its inflation rate has been low and it is moving toward a current account surplus. For Canada, with two thirds of our trade with the Americans and a large movement of capital across the border, an independent policy under present circumstances carries grave risks.

Nonetheless, the federal government can do more than wait upon a decision by President Ronald Reagan to get U.S. interest rates more in line with what the Americans have accomplished in their inflation rate (the gap is extraordinarily wide). Every possible effort should be made to increase investor confidence in Canada. As Alberta Premier Peter Lougheed said last week, it's not only the Canada-U.S. interest rate differential that determines the value of the C$ - it's also the general attitude investors have of Canada as a place to put or leave their funds.

Negative vibes

Certainly Ottawa should stop giving off negative vibes to investors - both foreign and domestic. As The Post has said before, the government is perceived as interventionist and cool toward the private sector. From the National Energy Program through to the November budget, federal policies are too often restrictive, negative and excessively regulatory.

The folly of emphasizing Canadianization measures, when at this point in the economic cycle we need to encourage productive capital inflows, is obvious. Even the British, for example, are unhappy with the Foreign Investment Review Agency. Trade Secretary Lord Cockfield says British firms have backed away from investment in Canada because of Fira's complexities and the delay in decisions from it. Streamlining Fira's procedures would be one way of signaling that we are not anti-foreign investment.

Along with creating a more favorable investment climate, Ottawa should be moving on other fronts to assault inflation. A tax-incentive program that would reward productivity improvement would be helpful. The federal government should also join in the effort being made by some of the provinces to limit wage increases in the public sector.

The Versailles summit is history. No miracles emerged. We must rely on the tools we have at hand to make our own progress toward economic recovery.

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Revised: June 3, 1995

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