1010 Class 5: The CNR and Crown Corporations. Midterm 1010. The midterm is Oct 14th @ 7:00 pm. In Curtis Lecture Hall C.

1010 Class 5: The CNR and Crown Corporations

Midterm

• 1010. The midterm is Oct 14th @ 7:00 pm.

• In Curtis Lecture Hall C

Reminder

• The Next Class – Quiz on Classes 1-4

• Closed Book

• 40 minutes

• 10 Mutliple Choice

• 5 Short Answers

• Based Facts from Cases and Slides

Class 2 Review: Canada Expands: Agriculture and Manufacturing

The Role of Government in the Early Development of Canada

• Sir John A. MacDonald's national policy.

• Exercise of residual legislative powers to establish a strong central government to unite, expand, develop and settle a newly established nation.

• Regulate trade and commerce.

• Establish trading patterns.

The Staple Thesis of Harold Innis

• Asserted the origins and purposes of the federal government can be understood in terms of an economic territory dependent upon the export of certain staples.

• To make it commercially feasible, production entailed heavy public expenditures on railways and canals.

• The government filled an important vacuum by being the substitute for private enterprise in the building and developing Canada.

• Thomas Hockin later argued that the Canadian government was given an active role in national development and fostering and protecting of certain cultural and economic characteristics.

The Evolution of Protectionist Intervention in Canada

SIR JOHN A. MACDONALD’S SIR JOHN A. MACDONALD’S NATIONAL POLICY (1879)NATIONAL POLICY (1879)

• Designed to encourage manufacturing growth in Central Canada

• Imposed high tariffs on manufactured goods– Machinery in the natural resource industries:

• Exempted from tariff or charged low rates of duty– Resulting east-west flow of goods helped make the

Canadian Pacific Railway viable• Established open market for foreign

investment– “The bigger the capitalist and the

more he has invested in the country, the better the country.” Sir John A. Macdonald.

– Attracted both foreign and domestic investors to Canada’s protected markets

Copyright © Captus Press Inc., 2009 Copyright © Captus Press Inc., 2009

SIR JOHN A. MACDONALD’S SIR JOHN A. MACDONALD’S NATIONAL POLICY (1879)NATIONAL POLICY (1879)

• Designed to encourage east-west trade rather than north-south with the U.S.

• Development of harbours and fast steamship lines to England and Asia

• Encourage the grow the a wealthy business class in Canada

• Strong Immigration Policy to promote the population of Western Canada

http://www.thecanadianencyclopedia.com/index.cfm?http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=A1ARTA0005632PgNm=TCE&Params=A1ARTA0005632

http://faculty.marianopolis.edu/c.belanger/quebechistory/federal/npolicy.htmhttp://faculty.marianopolis.edu/c.belanger/quebechistory/federal/npolicy.htm

Macdonald believed the future of Confederation, he thought, hinged upon the development of the West. Without such development, the Americans would take over the West, encircle Canada and inevitably bring about its annexation. Hence, the dream of creating a sepearate, peaceful and orderly society on the northern half of the continent would die.

IMPLICATIONS OFIMPLICATIONS OFTHE NATIONAL POLICYTHE NATIONAL POLICY

• Foreign firms importing goods into CanadaForeign firms importing goods into Canada– Disadvantaged by the tariffDisadvantaged by the tariff

– Free to invest in Canada and establish subsidiariesFree to invest in Canada and establish subsidiaries

– Developed “branch-plant” mentality (inefficient) Developed “branch-plant” mentality (inefficient)

• What are the consequences?What are the consequences?

• Foreign firms able to open resource frontiers before Foreign firms able to open resource frontiers before Canadian firmsCanadian firms– Vertical integrationVertical integration

• National Policy made Canadian industries very National Policy made Canadian industries very attractive investmentsattractive investments

• Concentration of ownership and market powerConcentration of ownership and market power


CORPORATE SECTOR IN CORPORATE SECTOR IN CANADACANADA

• Compared to United States:Compared to United States:– Canadians never fully trusted the market Canadians never fully trusted the market

mechanism to allocate resources and rewardsmechanism to allocate resources and rewards• Did not encourage the growth of the free enterprise Did not encourage the growth of the free enterprise

systemsystem

• Did not discourage conditions that inhibit growthDid not discourage conditions that inhibit growth

• Empire Loyalist who were mostly small business men had Empire Loyalist who were mostly small business men had rejected the liberal views that resulted in U.S. revolutionrejected the liberal views that resulted in U.S. revolution


CANADA’S UNIQUECANADA’S UNIQUECORPORATE SECTORCORPORATE SECTOR

• Ownership and control:Ownership and control:– To a significant extent, corporations controlled by foreignersTo a significant extent, corporations controlled by foreigners– Controlled by a relatively small group of individuals and firmsControlled by a relatively small group of individuals and firms

• Competitive environment:Competitive environment:– Relatively small number of corporations in any particular Relatively small number of corporations in any particular

industry.industry.

• IndustryIndustry– Significant proportion are involved in the extraction and Significant proportion are involved in the extraction and

processing of natural resourcesprocessing of natural resources

• In total, a negative effect In total, a negative effect


CANADA’S UNIQUECANADA’S UNIQUECORPORATE SECTORCORPORATE SECTOR

• Initially:Initially:– Supplier of raw materialsSupplier of raw materials

– British-controlled firmsBritish-controlled firms

• Loyalists - Loyalists - – State should protect small businessesState should protect small businesses

– Started their own industrial enterprisesStarted their own industrial enterprises


FOREIGN VERSUS CANADIAN FOREIGN VERSUS CANADIAN OWNERSHIPOWNERSHIP

• Canada has high level of foreign ownershipCanada has high level of foreign ownership• Ownership and control of corporations:Ownership and control of corporations:

– Canadian preferred to foreign Canadian preferred to foreign

• Profits of Canadian-owned corporations go to Profits of Canadian-owned corporations go to CanadiansCanadians– Contribute to wealth and material well-beingContribute to wealth and material well-being

• Profits of foreign-owned firms do notProfits of foreign-owned firms do not


Before the National Policy• The Canadian American Reciprocity Treaty,

also known as the Elgin-Marcy Treaty, was a trade treaty between the colonies of British North America and the United States. It covered raw materials and was in effect from 1854 to 1866. It represented a move toward free trade, and was opposed by protectionist elements in the United States, who joined with Americans angry at apparent British support for the Confederate States of America during the American Civil War, ended it in 1866.

Protectionism

What is Protectionism?

• Refers to government policies that shield domestic production and producers from foreign competition.

How does Protectionism Work• Degrees of Intervention

• Persuasion (Minimum)

• Manipulation of the tax system

• The awarding of government contracts

• Granting subsidies and tax concession policies

Trade Restrictions as Protectionism

• To protect domestic Industries from foreign competition

• Tariff refers to a tax imposed by the importing country when a good crosses an International boundary

An Example of a Protective Tariff

• A Canadian Tariff of 15% is imposed on foreign automobiles. The automobile costs $5,000/ This means the tariff will be $750. When exported to Canada the Canadian price will be $5,750.

Economic Losses from Tariffs Often Exceed their Benefits

• A tariff is wasteful• It leads to the

substitution of higher cost domestic products and lower cost imports.

Trade Restrictions as Protectionism

• Non-tariff barrier refers to any action other than a tariff that restricts International trade

1. Quotas

2. Licensing

3. Regulations

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Nontariff Barriers: Quantity Controls

• Trade controls that directly affect quantity and indirectly affect price include:– quotas– voluntary export restraint (VERs)– “buy local” legislation– standards and labels– specific permission requirements – administrative delays– reciprocal requirements – restrictions on services

Political Realities Ensure Protectionist Policies

• Politicians are likely to ignore tariffs or pay lip service to free trade elsewhere.

• To support tariffs where the protectionist vote is concentrated

• Politicians who would gain by repealing tariffs may vote against it in trade off for other issues they are interested in.

Canada Pioneers Canadian Content Provisions

• Easier for companies to import when they produce in Canada a certain proportion of the content of goods they sell.

• Became ingrained in Canadian broadcast and magazine production. Major mandate of Canadian Radio and Television Commission (CRTC)

Cultural Protectionism

The CRTC's Over-the-top 'Fact Finding Mission': Key Submissions Submitted by Adam Webb on Wed, 07/13/2011 - 02:04 Front Page Media News Post

For the second time in two years the CRTC has requested submissions from concerned parties on the increasing prevalence of over-the-top (OTT) services. Like so many of the Commission’s actions, the decision to prematurely reopen discussion is derived from a mix of obsessive cultural concern, private sector lobbying and a dependence on external research.

Arguments for Protection

• Infant Industries.

• National Defense.

• Anti-Dumping – Fair Trade.

• Those intended to influence the distribution of income.

• Increased Employment – Protects jobs

Conclusion: Officially Countries Deny Protectionism and Favor Free Trade

•When economies are booming and jobs seem secure, most people tend to support free trade.

•When recessions occur, many countries become more protectionist because of national interest and pressure from organized labor and other interest groups.

Roles of Agriculture and Manufacturing Industries in

Canada

• Historically Canada industry and agriculture were impacted by Mercantilism theory

• Mercantilism is an economic theory that there is a fixed amount of wealth in the world and that a nation's prosperity depends on its success in accumulating wealth by exporting more than it imports. European nations attempted to put it into effect through commercial policies designed to produce a favourable balance of trade, through acquisition and development of colonies as exclusive markets and sources of raw materials.

Canada’s First Great Manufacturer: The Story of Massey-Harris

Group 1 Assignment Question

• One of the reasons for protectionist policies is to help infant industries to grow. One of the theoretical flaws of protectionism is that it makes firms less able to compete global.

• Using the case of Massey/Massey-Harris argue these two opposing views as to which of these two views applies to Massey/Massey Harris and support your answer with examples from the case. As part of your explanation describe the protectionist/Free Trade policies used by the government that how they affected his farm machinery business. Was protectionism overall good or bad for Massy-Harris? Why?

Group 1 Assignment General Comments

• Need to focus on what the question says. – Farm Implement Business not Farming business

• Very thin on the policies being used. There are the facts you are expect to understand for the mid-term and the exam.

• Need to explain your argument better. Not just list the policies and what they did and therefore say it was good. You need to sum up the impact there policies had and how Massey developed.

Settlers to Canada brought with them the ideologies of Old Europe

Conservatism• Aristocracy• The Church• The status quo

Liberalism• The rising

commercial class.• Change agents• Traders

What is an Ideology?

• It refers to a set of shared values, beliefs and ideas, and perceptions through which persons interpret events of the past, present and future.

• It also refers to an explicit doctrinal structure providing a particular diagnosis of the ills of society.

• It will include an accompanying action program for implementing the prescribed solution.

The Dominant Ideologies of Canada

Political• Conservatism• Liberalism• Social Democracy

Economic• Capitalism within the

context of a mixed economy.

What is a Mixed Economy?

• Government regulated Competition

• Government protect indigenous industries. (In Canada, timber, fish, mining, manufacturing.)

• Government protects and develops social programs.

Is Canada’s Economy Changing?

• In the 1960’s and 1970’s Keynesian economics with increasing government intervention in the economy was popular.

• Governments owned and operated airlines (Air Canada), oil companies (Petro-Canada), and steel companies (Sydney Steel).

• Government was interventionist in its approach to the economy.

John Maynard Keynes

• His ideas emerged out of the disaster of the great depression.

• Government is obliged to bring full employment.

• His contributions were well read in the US and Britain in the 1930’s and contributed to Roosevelt's ‘New Deal’.

• Keynes was a major contributor to the concept of the mixed economy.

• What is a mixed economy?

John Maynard Keynes

• "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." John Maynard Keynes - The Economic Consequences of the Peace (1919)

John Kenneth Galbraith

• In The Affluent Society Galbraith argued that the expanding United States economy needed more public services such as highways and educational institutions.

• The economy, according to Galbraith, had finally reached a point at which less time and energy had to be spent on consumer goods.

• Corporations often sought power through market share over the profit imperative.

Ludwig Von Mises

• “All people, however fanatical they may be in their zeal to disparage and to fight capitalism, implicitly pay homage to it by passionately clamoring for the products it turns out.”

Ludwig Von Mises

• "Government is the only agency that can take a valuable commodity like paper, slap some ink on it, and make it totally worthless"

Hyperinflation

German 50 Mark Note 1920

German 20 Billion Mark Note 1923

Frederick A. Hayek

• Felt that any government intervention in the marketplace was the first step towards totalitarianism.

• Limits on the the free market will ultimately results in limits on individual freedom.

• Defended individual liberty and the free-market in an academic environment where collectivism had been more fashionable

• Wrote The Road to Serfdom in the waning years of World War II.

Hyperinflation

Frederick A. Hayek

• Felt that any government intervention in the marketplace was the first step towards totalitarianism.

• Limits on the the free market will ultimately results in limits on individual freedom.

• Defended individual liberty and the free-market in an academic environment where collectivism had been more fashionable

Milton Freidman

• Founded the so called Chicago School of Economics. A great follower and student of F. Hayek.

• Argued for the elimination of social security and other elements of the welfare state.

• Friedman argued that the concentration of political power inherent in socialist countries was detrimental both to economic prosperity and individual liberty.

• Proponent of negative tax schemes.

Milton Freidman

• “Underlying most arguments against the free market is a lack of belief in freedom itself.” Milton Freidman

The Neo-Conservative Movement

• Led by leaders like Thatcher in Britain they believed in minimal but strong centralized government

• Free but regulated markets.

• They were but tough on crime and were Free Traders.

Is Canada’s Economy Changing?

• In the 1980’s and 1990’s Neo-Conservative ideas began to emerge in Canada and governments felt they no longer needed to protect domestic industries.

• NAFTA, Canada-US Free Trade, Privatization, and the dismantling of the social welfare state became normalized.

• J.M. Keynes Out (well, not really)

Major Influences in the Redefining of the Marketplace

• Liberal economic theorists believed that the pursuit of profit will serve the best interests of society

• That the market will self regulate.

• Government should not intervene in the marketplace.

• The ‘invisible hand’ of the marketplace.

Reinventing Business and Government Relations

• A new role for government was envisioned and defined:

• Elimination of the burden of overlapping federal and provincial jurisdictions.

• The downsizing governments role through deregulation

Reinventing Business and Government Relations

• A new role for government was envisioned and defined:

• More lenient enforcement of regulations.

• Offering economic incentives to companies to meet the challenges of the global marketplace.

Why Should Governments Own Business?

1. Perhaps a monopoly exists in that sector.

Regulators have shifted to a more flexible incentive based regulatory approach.

Crown Corporations

• A crown corporation is any enterprise that is substantially owned by the government.

• It is an institution brought into existence by government to serve a public function.

• It may function in many ways like a private company.

Why do Governments Create Crown Corporations

• Where the industry itself may lend itself to a natural monopoly (power, water)

• Where the industry might experience wide price fluctuations and incomes (natural resource sectors)

• Cultural issues

Why do Governments Create Crown Corporations

• As nation building tool in the promotion of transportation, communication and resource development.

• As a defense against expansionism• As a means to promote regional

development.• To go where the private sector refuses to

go (EDC Canada)

Crown Corporation Under Attack

Crown Corporations were attacked by their critics as being:

1. Costly2. Bloated3. Unresponsive4. Unaccountable5. That they compete

unfairly against the marketplace.

6. They have outlived their useful lives.

Critics of Nationalization

• Claimed that government measures distorted market values and resulted in inappropriate compensation.

• There was, however, great concerns about the extent to which crown corporations might be acquired by foreign interests.

Case: The Creation of the CNR

• Railroad maps

• Immigration to Canada

• Settlement of the West

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Factors the Lead to the Development

• Expansion of Agriculture in the Prairies

• Immigration to Canada

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“I think that we can claim that it is Canada that shall fill the 20th century”

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Laurier in 1903

What was Wilfred Laurier trying to accomplish by building two

Railroads?• Continue Sir John A

MacDonald’s nation-building

• Boundaries

• Provinces

• Agriculture and infrastructure

• French-English connections

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6 June 2011 Alison Kemper ADMS 1010 68

Railway Boom and Crash

What did Robert Borden inherit when he was elected PM?

• The Railway Mess– Three intercontinental

railways– Fewer than 7.5 million

people– Financially weak– Unable to meet debt

obligations– Banks at risk

1917 Royal Commission

• 3 people, two recommendations

• Smith, the American, recommends – Canadian Northern take over Grand Trunk

Pacific in the West, – Grand Trunk take over Canadian Northern in

the East,– Government take over the routes in the middle

(uneconomic ones)..

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Royal commission

• The Majority Report– All lines be

nationalized.

Too Much Capacity

Three railroads to serve a population of 8 million people

In the meantime.

World War One (The Great War) began August of 1914 and ended Nov 11, 1918.

Prohibition

The outcome

• Dominion (Canadian) National Railways

• Non-partisan board

• Permanent company

• Not subject to the parliament

Canadian Pacific opposes the deal

• Not fair competition

• They offer to operate the railway

• Claim (along with the Liberals) that this was bad public policy motivated by friends in trouble

5 November 1919

The Grand Trunk Acquisition Act is passed and the Railway is Nationalized.

Arthur Meighen

The father of railroad nationalization.

Unionist Party of 1917

Results of the election

• Borden is elected by a landslide.

• His CNR plan is accepted.

• Troops and goods moved freely.

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http://upload.wikimedia.org/wikipedia/commons/3/3a/Canada_1917_Federal_Election.svg

Problems with CN Part 1

• Abnormally high operating costs. In seven of the ten years between 1985 and 1995, the CNR's revenue from freight operations failed to cover its operating costs. To compensate for the shortfall, the railway raised the fees it charges other carriers to use its lines, driving down traffic and increasing shipping costs. But its owner, the federal government, acted as a patron and covered most of the difference. Because it could rely on this support, the CNR was able to avoid taking the steps necessary to become profitable.


• Excess trackage. After railroads were deregulated in the U.S. in 1982, they shed 25% of their unprofitable lines. Between 1985 and 1995, the CNR trimmed only 15%. That left one-third of its track carrying only 1% of its freight volume. Less than half of its runs made money. It had failed to close more because of government regulations and its mandate as a service-oriented Crown corporation. Hearings to authorize more closings became political minefields, and the railway was forced to keep many open because of pressure from elected officials and voters.


• Labour problems. For decades, the CNR employed many more people than necessary to run its operations. To remain competitive after American deregulation, it was forced to rationalize its workforce. It cut about a third of its workforce between 1992 and 1995 - about 11,000 jobs - but remained overstaffed. Labour costs, which represented 43% of the CNR's revenue in 1992, had fallen to 38% by 1994, but above the U.S. average of 36%. Arcane rules set up in past negotiations with labour unions made it more difficult and expensive for the CNR to cut staff.

Privatization of CN

• In 1993, the National Transportation Act Review Commission recommended that the CNR be privatized. Transport Minister Doug Young took up that cause two years later. In his 1995 spring budget, he announced the government's intention to sell the railway, saying, "If the government doesn't need to run something, it shouldn't . . . and in the future, it won't.”

• Deregulation of railroads in the United States caused a massive restructuring of the industry, and the CNR's ability to keep pace with rapidly shifting circumstances was compromised by its Crown corporation status. The changes that the CNR needed to implement to become a strong competitor like dropping unprofitable track or reducing its bloated workforce, could not be made without running a political gauntlet.

Privatization of CN

• In September 1995, all shares in the CNR were sold to the public and it became a private company. The conversion was the largest initial public offering of shares in Canadian history. The deal had some conditions:

Privatization of CN

CNR Privatization 1994

CNR Privatization 1994

The Rationale for Privatization

• Improving Efficiency• Reducing the public sectors borrowing

requirements.• Reducing Government involvement in

enterprise decision making.• Easing Public Sector pay determination• Gaining political advantage• Improve Service

The Rationale for Privatization

• Easing problems of public sector pay determination.

• Widening share of ownership.

1. Improving Efficiency

• It can sharpen corporate incentives to cut costs and set prices in line with costs.

• The achievement of efficient standards depends largely of the framework of competition that the new private company will operate within.

2. Reducing the Public Sectors Borrowing Requirements

• The capital and financial requirements the crown corporations will not longer be the responsibility of governments

• It may result in a lowering of deficits.

3. Reducing Government Involvement in Enterprise Decision Making.

• A major weakness in crown corporations is that they are vulnerable to short term political thinking.

• Privatization provided a credible way of giving industry management independence to develop business strategies free of interference.

4. Easing Problems of Public Sector Pay Determination

• Nationalization can increase the power of unions if public sector managers and their supervisors have weak incentives to reduce labor costs.

• Management may be underpaid compared to the private sector.

5. Gaining Political Advantage

• Government saddled with deficits and besieged to sell public enterprises have opted for the political advantage of privatization.

• What would you rather own, hospitals or liquor stores?

6. Improve Service

• Create competition and market forces that would increase innovation and service.

Arguments Supporting Continuing Government Enterprises

• Great skepticism in the free market

• Underlying questions about the role of crown in nation building.

• Concerns about big companies becoming even bigger.

1010 Class 5: The CNR and Crown Corporations. Midterm 1010. The midterm is Oct 14th @ 7:00 pm. In Curtis Lecture Hall C.

Documents

canada slide

canadian ownership canada

manufacturing slide

slides slide

central canada

national policy foreign

canada disadvantaged

canadian government