It's The Economy, Stupid

I always get in trouble when I talk about the auto sector but what the heck, here I go again.

There are 440 automtive OE parts suppliers based in Brazil, 22 automaker assembly plants & 10 parts plants. The vast majority of these plants were incentivized by government to locate anywhere but the top urban area of Sao Paulo. This chart is a little dated but it points out the level of incentives given to attract auto makers. The three Brazilian cities are pretty remote.

I wonder if Canada is the only country in the world that has made significant public investments to grow its auto sector in the strongest region of its economy?

I know this is a taboo topic, but I like to stir the pot once in a while.

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I am here. One of the side effects – benefits – of marrying a Brazilian. Especially one that misses her country a bunch.

Sao Paulo is an egregiously large city. 10 million in the city – in an area of 1523.0 square kilometres or about the size of the Moncton CA ( 2177 square kilometres). Imagine squeezing in 10 million people from Memramcook to Salibury. You´ve got yourself a visual image. To make things even more sizeable, there are 19 million people living in the metro area – an area smaller than the Halifax Regional Municipality.

Every time I come I am amazed at its size. From the air it looks three or four times larger than New York City becuase the majority of people live in high rise buildings. Maybe Mexico City or Tokyo look like this – but I have never been those hamlets.

It´s a gritty place where the fabulously wealthy live among the poor. Sao Paulo has the least poverty of any third word city (as a percentage of total population) but it still has a large share of poverty.

One day, I´ll have someone tell me the definition of ´poverty´. According to Wikipedia, about 9% of São Paulo’s population live below the poverty line.

That means there less poverty here – than in New Brunswick – in relative terms.

Somehow I think the definition of poverty line must vary based on where you are standing.

Anyway, not much to say from down here. No Al Hogan. No Tanker. No Ignatieff here. Just about 100 people per square foot trying to get by.

And as for national unity, everyone has a dozen flags or more (Sheila Copp´s cousin must be doling them out right and left) – hanging from windows, cars, worn on clothes, hanging on walls, etc. Sure it´s the World Cup but for some strange reason these folks are intensly nationalistic – not forced by government but by some sense of nationalness which I can´t quite put my finger on but it cuts across ethnicity (Brazil is the most multicultural country in the world), gender, class, employment.

Canada, in my opinion, has much less sense of nationalness than at least some other countries I have spent time in. 98% of Americans polled identified themselves first as Americans and then as Texans, southerners, etc. Only about 50% or so of Canadians felt the same way. The rest identified themselves first as Quebecker, Albertan, Newfoundlander, etc. and then second as Canadian.

I don´t know what that means. Or if it´s even important. But somewhere down inside (without a good, logical reason why) I think we need to work a little more on a sense of national unity. And it takes more than flags (Sheila) and a lot more than forced wealth redistribution.

In my opinion.

But I stake no claim to an expertise in this area – it´s way off my beaten track.

But worthy of someone~s attention, me thinks.

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You know that old saying if you can’t beam ‘em, join ‘em. Well, that’s what happened this week with one of New Brunswick’s largest call centres. TransWorks, a division of the large India firm Aditya Birla Group to purchase Minacs World Wide – a Toronto-based firm with major call centres in Moncton and Halifax.

I don’t have a problem with this. In fact, I like it. India is a global player in BPO and IT outsourcing. They will need nearshore facilities to service US markets. They will have to pay market wages just like everyone else.

This, is a good example of FDI. Of course, there is always a risk that the foreign company will come in, close it down and wreak havoc. But there is a better chance that they will succeed in New Brunswick.

Twenty years ago it was chic to have been to London or Paris. Soon it will be Bangalore and Mumbai.

Bring on the chana, toor, urad and mung.

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At the very heart of the matter, this is what is holding Atlantic Canada back.

Halifax-based Jim Meek in this article, clearly outlines Donald Savoie’s contention that federal public policies led directly to the growth of the auto sector in southern Ontario, the aerospace and pharmaceutical sectors in Montreal and the high tech sector in Ottawa.

So, naturally, Mr. Meek followed up with a clear case that Ottawa should support similar economic development programs in Atlantic Canada.

Actually, no. Take it away Mr. Meek:

It will be our premier’s job to push for similar, and fair, treatment as Prime Minister Stephen Harper enters a protracted set of negotiations with the provinces over transfer payments and equalization – the programs designed to give all provinces the money to fund crucial programs in health and education.

So, the federal government’s policies that led to strong economic development in central Canada can be equated to the fight for more Equalization in Atlantic Canada.

Sigh.

Now, to be fair, Meek continues:

A fair deal on equalization is one thing. But the real key to this region’s future will be persuading Ottawa to help create some winning economic conditions Down East – on the Ontario and Quebec models. Absent economic growth, all the moneyed and honeyed promises of the recent campaign – better health care, better education, better roads, less crime, more help for seniors – will end up proving as empty as they now sound.

That makes sense for sure. But the previous argument is dead wrong. There is considerable evidence that the more Equalization and transfers this region gets the less likely it is to get serious about economic development. Consider the last six years in New Brunswick as an exaggerated example of this.

What we need is a Federal-Provincial agreement alright. But not on Equalization. On the most ambitious economic development agenda ever put forth for this region.

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I know some folks in Atlantic Canad were working a project similar to this one. I have no idea if it was the same, but it still would have been nice:

A new Fidelity Investments Customer Contact Center is planned to open in Jacksonville, Florida and will provide jobs for more than 1,000 workers in the River City.

I suspect these are good paying jobs (financial services call centres in Atl. Canada are the best payers) and this would have gone a long way towards my vision of the region becoming a financial services back office hub.

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One of the things that bothers me the most about corporate taxes is the fact they everyone always looks at tax rates rather than actual taxes paid. And in the world of corporate taxation those things couldn’t be much farther apart.

Let me explain my frustration.

Ontario still has the highest corporate tax rate in the country, according to the C.D. Howe Institute. At 42.2%, Ontario’s rate is also the highest among 36 industrialized countries excluding China, the think tank said in a report on business tax reform released on Tuesday.

What frustrates me is that they should be looking at actual taxes paid and not the ‘rate’ per se. Let me give you an example. Someone once said that Ford Canada makes no profit in Canada because the tax rate is higher. Basically, they jigger the production costing so that the profits are shown in Detroit where the tax rate is lower. I believe that CCRA is cracking down on this somewhat but I still think a lot of this goes on.

Particularly in a place like New Brunswick. If a call centre sets up here – they don’t give a rip about the corporate tax rate because they actually pay corporate taxes in Pennsylvania or Boston or elsewhere. I have never gotten a straight answer on this but I believe that you are supposed to pay taxes on the amount of business done in the country or province. But I don’t know this for sure.

That’s why I like Ireland. One of the lowest corporate tax rates in the OECD at 12.5% but massive amounts of corporate tax generated. Microsoft alone has paid something like $1 billion in corporate tax between 2001 and 2004.

The issue here is not Ontario, it’s New Brunswick. People talk about cutting the corporate tax rate to stimulate investment. Again, folks, do the math.

New Brunswick’s total estimated government revenue for 2006-2007 will be $5,882,645,000 ($5.9 billion). The total corporate income tax take will be $178,000,000. Now, for those of you that can’t do the math in your head that’s 3% of total government revenue from corporate taxes – it’s 12% in Ontario.

New Brunswick gets twice as much revenue from provincial property taxes, 32% more from gas taxes and 8 times more from Equalization that corporate income taxes.

That, coming full circle, is why the corporate tax rate means absolutely nothing.

It is a sure thing that the Irvings and McCain’s combined generate at least $2 billion or more in corporate profits each year. The general NB corporate tax rate is 13%. If these two firms paid the 13% rate in New Brunswick that would be $260 million – well above the total take from all companies – from just two firms.

Now before I get nasty responses, I have no way of knowing what McCain’s and Irvings make for profit – they may lose money for all I know. That’s an example – but I think it makes the point.

So, don’t talk to be about ‘corporate tax rates’. Don’t talk to me about cutting ‘corporate tax rates’. Talk to me about why New Brunswick only generates 3% of its revenue from corporate taxes while Ontario generates 12%.

We should be looking at attracting more industry and trying to generate more corporate tax – not less.

Clarity, folks. That’s all I ask.

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I am starting to think that Ontario Intergovernmental Affairs Minister Marie Bountrogianni is the new nemesis on the Equalization battle.

I told you before that she ‘wasn’t going to sit idly by and watch Ontario become a have-not province’ as a result of a bad Equalization deal.

Now, she says this:

“There are more poor people in Toronto than in all the Maritime provinces combined”

I won’t comment on this much as I think the spirit is self-evident but if she is somehow inferring that Toronto is poorer (is that a word?) than the Maritimes…..

Hmmm.

Anyway, she continues:

“We’re proud to continue paying” the $5 billion Ontario pays in annually [to Equalization] but she wants to get back some of the $23 billion less than it sends Ottawa in taxes.

Gracious of her. Keep your $5b – we’ll take back our $23b.

The fun continues.

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Funny how times change, huh? In 1998, then leader of the Opposition Bernard Lord criticized the Liberals for attracting low end call centre jobs to New Brunswick and promised a ‘made in New Brunswick’ solution to economic development.

In the past seven years since the Lord government has been in power, call centres have made up the vast, and I mean vast majority of new jobs created through formal economic development. In fact, the majority of those jobs have come from companies that were attracted here during the Liberals time in office.

Take Virtual Agent Services. A company I know something about as I was involved in attracting them to NB in the first place. I remember shuttling around Bob C. from the firm before they had one rural call centre agent working anywhere – it was just an idea.

Now, the rest is history.

Daily Gleaner
June 20, 2006
Premier to announce call centre
By SHAWN BERRY

A new call centre operation that is already training employees in Nackawic is expected to create up to 50 jobs in Nackawic over the next year.

Premier Bernard Lord will be in Nackawic today to formally announce funding for the Virtual-Agent Services (VAS) call centre. The site will be the Illinois-based company’s 15th New Brunswick operation.

The centre’s employees have been training since last week.The province is investing in the project in the form of a forgivable loan. The dollar amount will be made public this morning at an official announcement at the Nackawic municipal office.In the last two years, the province has provided the company with a forgiveable loan of $7,500 for every job created.

The funding assists the company with the costs of training new employees, implementation and administration.VAS has more than 700 employees working in centres in Bouctouche, Doaktown, Minto, Saint-Louis-de-Kent, St. Andrews, St. George, Neguac, Petitcodiac, Chipman, Norton, Rogersville, Hillsborough and two operations in Sussex. The call centre industry is worth more than $1 billion a year to New Brunswick. There are 20,000 workers employed at more than 100 call centres around New Brunswick.

Lord hinted there would be an announcement last week while attending the official opening of the AV Nackawic mill that put 290 people in the community back to work.

About 400 jobs were lost when the mill closed in September 2004.Lord said the community needed to diversify its economy and not rely solely on the forestry sector.

700 employees in rural New Brunswick. Now, grant it, the pay is certainly not spectacular but respectable given the cost of living. Sure, the jobs aren’t for everyone but I think the company is playing a neat role in support of rural development in New Brunswick.

The questions I have are:

1. Where’s the ‘made in New Brunswick’ solution? Seven years later and still harvesting the McKenna call centre initiative.

2. Where are the new ‘growth sectors’? Scroll through the press release section of GNB.ca, beyond a few call centre announcements you could could on one hand the number of new investment projects in the past 12-18 months.

The bottom line is that the call centre sector must be reaching saturation and maturity in New Brunswick. I hope that somebody is cultivating the next round of investment projects (growth sectors).

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I never understood why government towns don’t just admit the tremendous economic impact of the government sector in their communities? It’s almost as if it’s a dirty word or something. Check out the government of Ottawa’s web site some time, you’ll get my point.

Also, check out this article in the Ottawa Citizen, if you can.

Ottawa eclipses Calgary in economic momentum
The nation’s capital has the most economic momentum of any urban area in Canada, even more than fuel-fired Calgary, reflecting both the diversity of its economy and the strength of its high-tech sector, according to a ranking by a major Canadian financial institution.Calgary, however, clearly had the hottest economy and was a close second in the rankings.

The country’s largest city, Toronto, placed third, followed by Vancouver, CIBC World Markets said in its “economic snapshot” of some two dozen Canadian cities.

Ottawa-Gatineau’s top ranking score of 28 in part reflects the “city is recovering from a relatively low base at an impressive pace,” the report stated, adding that the surge in high-tech activity in Silicon Valley North is a major driver of that increased activity.

Tee hee hee.

From Statistics Canada CANSIM data:

Ottawa-Gatineau, Ontario/Quebec Total employed, all industries: 631k (last 12 month’s average). Growth since 2002: +10%.

Ottawa-Gatineau, Ontario/Quebec Total employed, Information, culture and recreation industries: 32.8k (last 12 month’s average). Growth since 2002: -13%.

Ottawa-Gatineau, Ontario/Quebec Total employed, Public administration: 130.3k (last 12 month’s average). Growth since 2002: +15%.

There are four government workers for every worker in the Information, Cultuer and Recreation sector in Ottawa. And the public admin sector is up 15% since 2002.

And according to our journalist friends, its growth is due to the ‘high-tech sector’.

High tech government jobs? Sure, why not.

Just admit it, Ottawa. You have a massive concentration of government jobs. When one out of every five people works in government, that’s quite a concentration.

And for Calgary?

17k people work in the public sector in Calgary – eight times less than in similarly sized Ottawa and the growth rate of public admin jobs has been 4%.

I’m not being sarcastic here. The government is a major economic engine in Canada. Look at Fredericton. But communities that are government towns shouldn’t pretend that they are all ‘high tech’ and whatever else.

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This one hurts.

A Canadian company plans to build an aircraft maintenance, repair and overhaul facility at Plattsburgh International Airport that is expected to employ up to 760 people.Gov. George Pataki was in Plattsburgh Monday to announce that Laurentian Aerospace Corp. plans to build a 262,000-square-foot, two-bay hangar complex, at a cost of $50 million, on the ramp at the airport. It is expected the facility would attract support industries and companies creating at least that many additional jobs. Laurentian Aerospace President and Chief Executive Officer Paul Gorbeil said the facility will be used for maintenance checks required every 15 months and others required every four years. They cost $500,000 and $1.5 million, respectively.

Gobeil has been the chairman of Export Development Canada’s Board of Directors since January 2002. He was a Liberal member of the Canadian National Assembly for the riding of Verdun from 1985 to 1989, including time as a cabinet minister.

I know our guys were trying to get some MRO jobs attracted here to Moncton. The NBCC/CCNB has been graduating qualified maintenance and repair technicians for decades and the majority of them have left to work in Montreal, Toronto and beyond.

These facilities do not have to be located on the ‘beaten track’.

I get a little weary every time I see Bombardier make another multi-million dollar investment in the US – and nada (oops, very little) in Atlantic Canada. This guy, Gobeil, chairman of EDC. Former politician.

Is Plattsburgh, New York that much better than Moncton? Or Saint John? Cripes, I say give them the SJ airport if they will create 760 aerospace jobs (and a similar amount out in the community as spinoffs).

For me that’s a great idea. Keep some commuter traffic from the SJ airport to Toronto maybe Boston – but give the rest of it to one of these large MRO operations.

Probably not going to happen. Our guys have no interest in attracting aerospace jobs – it would seem from the cough cough results – and Quebec’s aerospace industry is more interested in investing in the US (unless it’s Canadian government work that requires Canadian content).

Who’s the bonehead back in the 1970s that decided to stop industrial development in Atlantic Canada in favour of ‘small business’ development?

Look where that’s gotten us.

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