Canada Moves to Join the Great Club of Relevance

Jan. 25 (Bloomberg) — Canada is facing up to one of those universal truths. A country can't merely show up at the summits. The country has to go beyond reacting to leading and competing. It can be in the G-8, but it also has to be a member of another club — we'll call that the Club of Relevance.

By giving Stephen Harper and his Conservative Party a plurality in Monday's election, Canadians are giving Canada a shot at relevance.

This may come as a surprise to Canada cynics. It is probably even a surprise to many Canadians, who thought their election was about the child-care subsidy. Still, with Harper at the head and the wounded Liberals going along with various adult, pro-growth projects, relevance may be the outcome.

And what a change that would be. Canada in the past has exhibited deep ambivalence about the relevance trait. The Canada we know didn't want to lead, or even to argue. It wanted to fiddle with its Blackberry. It wanted to kick sand in election cycles.

Just a year ago, Prime Minister Paul Martin announced he would not join the U.S. missile-defense plan after all. He had signaled the opposite at a summit with President George W. Bush. Martin, likewise, dissed Bush whenever possible on global warming, leaking memos to demonstrate U.S. arrogance on the topic. Martin talked about prosperity, but Liberal governments acted to serve their interest groups. Three monumental scandals have dominated Canada in the past decade.

My favorite, already almost forgotten, was the jobs scandal. It seems the government spent a billion Canadian dollars or so to create jobs without recording just how.

Lower Productivity

Economic growth overall has perked along, but the government kept too much of that money and real wages didn't grow sufficiently along with national wealth. In the end, such policies hurt relative competitiveness, a key qualification for the Club. The average growth in labor productivity for Ireland was almost 5 percent between 1995 and 2004. For the U.S. that figure was more than 2 percent.

In Canada, it was 1.5 percent, according to the Fraser Institute, a think tank in Vancouver. This placed Canada 18th among industrialized nations, according to author Jason Clemens. Canada's marginal effective tax on capital is second-highest in the same group. Such conditions have long made inventors and investors ask: Why bother with Canada?

Cut Taxes

To be relevant, Canada needed to tax capital less than the U.S. That's not even hard, since the U.S. overtaxes capital itself. Instead, Canada taxed and faded. The Liberals campaigned on cutting business taxes, but the rest of their agenda got in the way.

Now things look brighter. On foreign policy, Harper may not agree with the U.S., especially not the Bush administration. Nor will many of his countrymen. Indeed, notes David Frum of the American Enterprise Institute, Canada's Bush-bashing continues.

"Liberals did well, and not only in the 'Michael Moore' precincts, but also in a lot of areas where their scandals should have hurt them more," Frum said. British Columbia, for example.

Of course, some Canadians still think that America-bashing is a form of relevance. But sometimes bashing merely betrays weakness.

Abramoff for Senate

Harper is more likely to take a strong pro-Canadian stand than a strong anti-American one. Dismantling the interest-group culture also is a Harper goal. The prime minister now appoints senators for life, often as a reward for loyalty. Former Prime Minister Brian Mulroney even gave a senate seat to his director of appointments, Marjorie LeBreton. (Imagine: Jack Abramoff wouldn't have had to content himself with lobbying; he could have asked to be made senator.)

Harper wants to change things so voters have more of a say. Such moves should cut down on the scandals.

In economics, Conservatives should push through the laws that will make increased productivity possible. This year may even see an elimination of Canada's uncivilized capital tax — an asset tax that penalizes the very existence of business. Harper has a plan to eliminate capital gains taxes on proceeds from investments that are reinvested within six months. Clemens of the Fraser Institute sees new hope for cutting the corporate income tax.

Finally, there is the Conservative commitment to reduce Canada's goods and services tax to 6 percent, or even 5 percent, from 7 percent. Those dollars will make Canadians feel more relevant.

Irrelevant Separatists

The party most fundamentally opposed to pro-productivity changes, the New Democratic Party, failed to garner enough seats to hold the balance of power. The Conservatives did well in Quebec, pushing back the Bloc Quebecois. That's good news. Separatist groups are highly irrelevant.

A more relevant Canada will be good for the U.S. President Bush does not listen enough. The message from his Defense Department has often been "Go along or shut up." Harper, a new face in the club, will be in a good position to call Donald Rumsfeld on that.

The Bush administration has let Canada down when it comes to the nations' soft-lumber and agricultural disputes. The explanation always was the need to win elections. Maybe Canada can show the U.S. the way on this one.

But Canada is today's story. A Harper government will be a minority government. It may fall. Still, it represents the best chance in years for Canada to play a useful role in the Club of Relevance. Stephen, welcome.

(Amity Shlaes is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2006 Bloomberg

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