mike moffatt

6 / OGRA MILESTONES SPRING / SUMMER 2016

Interactionwith Canadian economist

Mike MoffattBY THOMAS BARAKAT

Policy & Advocacy,Ontario Good Roads Association

Mike Moffatt is a Canadian Economist, and Assistant professor at the Richard Ivey School of Business. With a combined honours B.A. in Economics and Political Science from the University of Western Ontario, he comments frequently, in print, radio and on television, about public policy issues. As a widely respected professional in his field he has appeared on television programs such as CBC’s The National and TVO’s The Agenda as well as CBC Radio. Today he sits down with Thomas to discuss Canadian infrastructure and economic issues facing Canada.

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interactionBarakat: The Government of Ontario has joined the Western Climate Initiative in introducing a cap and trade system to help reduce greenhouse gas emissions. The revenue generated from this initiative will be deposited into a fund dedicated for “green projects”. As an economist do you believe that the design of this cap and trade system will be effective in Ontario without seriously hindering competitiveness?

Moffatt: There are two pieces to the cap and trade that we have to look at individually. The first one is how the money is being collected and who it’s being collected from, so basically the “cap” portion. The large concern that companies have on these types of systems, particularly companies that are trade exposed to international competition, is that if they have a bunch of costs imposed on them, that for example their American counterparts don’t, that’s going to leave them at a competitive disadvantage. It looks like the Ontario Government has really gone above and beyond in taking that into account. They have tried to identify industries that are trade exposed and ensured that they were basically issued 100% value of full permits. They probably won’t have to go out and purchase permits so they’re fully protected. The government did a very good job of protecting trade exposed industries from any unintended consequences of the cap and trade system.

The second part is how that revenue is being spent. I think we need more details on that. We’re told that it’s going to go into green infrastructure, but that could mean a lot of different things, some of which could have productivity benefits. I think of things like high-speed rail which could have productivity benefits, but others might have a little less depending on where they put that money.

So as I said, I think they did a good job on the first part in how they allocated the permits, but the second part I think we need a little more details on before we can come to any firm conclusions.

Barakat: The new federal government has promised massive infrastructure investments to make the country more productive and in turn more competitive in the global economy. Do you believe these investments will have such an effect?

Moffatt: I certainly think that they could, however it’s fairly early to tell. The first two years’ worth of infrastructure spending looks to be more on repairs such as retrofits, repairing bridges, that kind of thing. These are all things that need to be done, but aren’t really transformative in nature.

However, years three, four, and after that get a little more interesting.

We heard that VIA is looking to expand their service in the Windsor-Quebec City corridor by getting their own dedicated rail line with an electric hybrid type of train. Something like that very well could increase our productivity and make us more competitive. First of all, it allows people to move between key cities in the corridor in a much more timely fashion. At the same time, it takes a lot of passenger rail traffic off of the tracks that are currently being used for freight which opens up our freight capacity significantly. That could have a very positive effect to productivity and in Canadian competitiveness. Again, we just need to kind of wait and see. Unfortunately, we haven’t got enough details from either government on the types of projects that this money is going to be spent on.

Barakat: If you could design the theoretical Phase II of the federal government’s infrastructure plan how would you do it to ensure that municipalities have their priorities funded while also ensuring that each region gets its fair share?

Moffatt: That’s going to be important. When they design this thing they need to have some sort of allocative formula, such that all the money isn’t going to Toronto or Vancouver, that the money isn’t necessarily spent proportionally, but there’s considerations given to each geographic region to make sure that the money is spent fairly.

It’s important for city councillors, mayors, and reeves to be able to identify projects for their regions. IT will be much easier for the federal government to say yes if they go to the table and have something in mind. For example, if a community has a four lane road and they want to expand it to six lanes, or if they have an airport that’s running out of cargo capacity and they want to expand that. Communities have to sit down and think about their most pressing needs. What are the one or two things they should ask for? If they go with 40 different priorities, they really don’t have any.

I also think it’s important for communities to present the government with ideas where shovels can be put into the ground quickly because that is a consideration of this government; they want to get that money out quickly and into local economies. So being able to identify those projects that could be started, if not immediately, but in 3, 6, or 9 months, is going to be incredibly important.


Barakat: Ontario is a tale of many regions with unique economies and I’d like to ask you some region specific questions. You’re obviously familiar with Southwestern Ontario and its history as a traditional manufacturing region. How do manufacturing centres that were hit hard over the past decade transition into competitive players in the digital economy?

Moffatt: Well I think you’ve hit the nail on the head. One of the first infrastructure needs is to ensure that all of our manufacturers have access to high-speed internet as currently that’s not the case for one reason or another. Some of them are just in small towns, but a lot of our manufacturers tend to be on the periphery of cities. Often, private sector carriers haven’t extended out that far so government can play a role there. They don’t have to actually build that last mile, but they need to work with the Rogers and the Bells of the world to make sure that they do in fact have connectivity. They can do so through a variety of mechanisms, but it’s just making sure that there’s awareness of that need.

Furthermore, then I think the big things are just to be able to get products to market. That’s ensuring that our regional road system, air capacity, and rail system, which again the rail is private, but there are things that governments can do to help the private carriers expand capacity such as getting the VIA trains off of those rails. We’ve got two new trade deals which are coming which could be quite transformative, the European trade deal (CETA) and the Trans-Pacific Partnership (TPP). They are going to open up large markets that are going to be quite helpful to many of our manufacturers. Agri-food in particular has massive opportunities in the Asian area under TPP.

In order to be able to take advantage of those opportunities they need to first of all be able to connect to consumers around the world, so that’s through high-speed internet connectivity. They also need to be able to get products to market in a reasonable amount of time. So that’s ensuring that our air capacity, our rail capacity, and our shipping capacity is there so that our small to midsize companies in Southwestern Ontario can take advantage of those things.

Barakat: You’re probably less familiar with Northern Ontario, but I’ll ask you about it anyways. From a macro-economic perspective, how do we create conditions that allow primarily resource-based economies to diversify and compete in the digital economy?

Moffatt: A lot of the issues that Northern Ontario has are similar to the issues I mentioned for Southwestern Ontario, but are in fact more so. You have even larger gaps

when it comes to digital, you have even larger gaps when it comes to infrastructure, particularly in roads and bridges. The provincial government at some point needs to figure out what it’s going to do with the Ring of Fire. We either need to put the infrastructure in place,

which I think we all understand is going to be hugely expensive, or just acknowledge that it’s too expensive and not do it. It’s been very hard for companies and individuals

We’ve got two new trade deals which are coming which could be quite transformative

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to make long-term plans if they don’t know whether the Ring of Fire is going to happen, to what extent, and that sort of thing.

Some of the issues the provincial government had in the past is that it wanted some funding from the federal government and the federal government wasn’t really playing ball. Now that there’s a new federal government that could always change.

Barakat: Rural Ontario faces both a declining and aging population. How do we stimulate economic growth in rural areas to help attract and retain young people to these places?

Moffatt: Well I think Rural Ontario, particularly again I’m going to focus on Southwestern Ontario because I know it best, has some real advantages. I think of places like St. Mary’s, Ontario for instance. Real estate costs are relatively low, actually quite low, and you do still have access to Toronto through the 401. Assuming again that you get the high-speed internet there, you see that a lot of tech companies like to go into these sort of big old Victorian warehouse type buildings which Rural and Southwestern

Ontario have in spades – they’re all over the place. Part of what needs to be done in these communities is ensure that those heritage buildings are kept up to standard, and that heritage preserved, because I think that’s part of the big attraction.

I think the rail piece is important: I would like to see GO service expanded beyond Kitchener-Waterloo to these small communities so that you could have a company in a place like St. Mary’s, but they could easily hop on the train, or their employees could hop on the train, and go to Toronto for conferences and that sort of thing. I think these small towns, these five to ten thousand person communities, I mentioned St. Mary’s, but also places like Clinton, Ontario or even bigger communities like Goderich, have all kinds of potential. So even though they’re aging quite rapidly and in many cases they’re depopulating, there’s a lot of opportunities as well. If you get the infrastructure right I could see those communities becoming real beacons because they offer a real nice quality of life and nice old architecture at a very low cost.

interaction


Barakat: If the Trans-Pacific Partnership is signed, how do you believe it will affect Ontario’s different regional economies?

Moffatt: Well I think TPP is going to affect different industries in different ways. For the most part, aside from dairy where I know there are a few concerns, it is a big win for agri-food. You look at a country like Japan, they don’t have the farmland capacity to compete. Their agriculture prices are relatively high and in the past have been protected by high tariffs. Those tariffs are going away and

that’s going to open up a lot of opportunities for both manufactured food products and commodity type food products like pork. I think that agri-food, food manufacturing, is going to do quite well.

Where people have more concerns is with the automotive side. It’s not even so much that we’re worried about Japanese cars coming into Canada tariff free, we’re actually more worried about Japanese cars going to the United States tariff free because 85% of the cars that we produce in Southwestern Ontario actually go to export to

the US, that’s a big market for us. So the open question now is with all these changes in TPP, are we going to start to see more Hondas and Toyotas produced in Japan and going to the American market? Or on the flip side you could see Honda’s and Toyota’s Canadian operations become a little bit more competitive because now they can source even more parts from Japan and do better and in fact create jobs like the Toyota plant in Woodstock. So I think automotive is the one where there’s a lot of question marks.

The last federal government talked about assistance funding for the industry to help the industry modernize and compete on a global scale. We don’t know whether or not the new government will follow through on that, but I suspect they will. That’s sort of the one industry where people aren’t quite sure how it’s going to turn out.

Then there’s a few others like textiles, clothing, leather goods, that sort of thing. They will certainly see more competition, but a lot of those have already left Ontario in the last ten to fifteen years. We used to have a lot of apparel manufacturing in Eastern Ontario, most of that has disappeared. So there isn’t a lot left to lose these days when it comes to those industries.

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