Americas

June 27, 2012

Legislating Common Sense: Canada’s Lesson on Managing Growth

Just this week, Prime Minister Stephen Harper, Finance Minister Jim Flaherty, and Bank of Canada Governor Mark Carney announced plans that make it harder for Canadians to own a home. The average Canadian might not like the government’s plans, but they’re based on strong economic sense. Canadians will have to meet higher standards in order to qualify for borrowing, including finding down payments of at least 20% and paying back their mortgages in a maximum of just thirty years. For those whose finances aren’t rock solid, the standards will be higher still.

Canada has weathered the world financial crisis incredibly well because of a historically conservative approach to finance and greater emphasis on stability over growth, allowing the economy to avoid the ebbs and flows of their big neighbour to the south. That sounds great now that we have the last five years as a point of comparison, but before that it was difficult to convince the public to forgo the spectacular windfalls being seen in the United States. Canada’s banks did not make the risky investments in housing that their American counterparts did – indeed the Canadian government legislated against it. The concept of buying a house with 0% down was completely foreign. The banks were also required to keep more cash on hand, they maintained more diverse investment portfolios, and they didn’t lend to overly risky borrowers. They had actual money – not the fleeting, pretend variety that much of the developed world had grown used to – and so when American banks began to falter the Canadians were ready and able to pick up some valuable assets at bargain prices. They paid for them in cash. Canadian banks also have significant investments in jurisdictions where cash, not credit, is king – the types of jurisdictions that hardly noticed the “global” financial crisis taking place.

For Canadians this was a two-pronged sword. Yes, they lived in a more stable economy, but that meant they weren’t able to own their own homes as quickly. Furthermore, the homes they did live in weren’t as big as they could be, it cost them more, and they had to pay back what they borrowed more quickly. Businesses felt the same pressures. Credit, while readily available, was not free. That’s a status quo the government is trying desperately to maintain.

Canada commands an enviable position. The country has vast and exceedingly valuable natural resources and a comparatively small population. It’s an internationally respected nation with a powerful voice despite having a population comparable to Mexico City and Canada is a partner is the largest single bilateral trading relationship ever known. A partnership, one might add, that usually only sees dollars flowing north. This is real growth.

Growth fuelled by debt is not real growth. It creates bubbles of unsustainability – of the same variety that leaves tens of thousands of properties vacant in Miami and allowed Dubai’s skyline to magically rise out of the desert.  It’s the type of ‘growth’ that gave Greece one of Europe’s most unsustainable standards of living and subsequently caused today’s Greek tragedy.

Canada’s ability to weather the crisis is down to the government’s ability to act decisively, without the constraints of a stubborn opposition. Crisis after crisis had the potential to hurt Canada, but both fiscal and monetary policy reigned in frivolous spending while simultaneously encouraging real growth. The Bank of Canada has maintained a trendsetting 1% interest rate and Harper’s government has created the conditions necessary to ensure that those who take advantage of the cheap credit do so to their benefit and to the benefit of the wider economy.

Canada has forgone immediate gratification for years and today they reap the rewards. That’s a lesson in common sense that many other governments need to learn.

[twitter style="horizontal" source="@intlpolitical" float="left"][fbshare type="button"]



About the Author

Donovon Kellyman
Donovon Kellyman is a student from the Cayman Islands currently studying Political Science in London. He was educated at St Ignatius School in Grand Cayman, Trinity College School in Ontario, Canada, and at the University College of the Cayman Islands, the School of Oriental and African Studies, and Regent’s College London. Donovon has worked with the Ministry of Foreign Affairs and Foreign Trade of Jamaica in the United Kingdom and South Africa, the Cayman Islands Government, and Cayman-based charity IAMCO. His contributions reflect a broad interest in politics, global finance, social development, and issues affecting the Caribbean region.




0 Comments


Be the first to comment!


Leave a Reply