http://www.theglobeandmail.com/news/national/time-to-lead/why-canada-needs-a-flood-of-immigrants/article2423585/

It is no cliché to remark that our world is small and that it is getting smaller.

It is also fair to say there are important lessons that countries can learn from each other.

When Nancy Singh called me about speaking to you, we discussed my 15 years in Japan, the rise of the Chinese economy, and the themes developing in my book Canada’s Excellent Future.

From our conversation came the title, ‘The Economies of Japan and China - Lessons for Canada.’

I think there may be three lessons.

First, never believe your own good press.

Second, things are not always what they seem.

And third, Canada’s key advantage, essential to an excellent future, is immigration.

First, lesson one; don’t believe your own good press.

In 19-79 Harvard economist Ezra Vogel published the book Japan As Number One.

The book was embraced in Japan where the Japanese translation became a best seller.

Vogel celebrated Japan’s interventionist state, selfless managers, an iron triangle of bureaucrats, businessmen, and politicians, an education system that produced world class outcomes, and vitally, a culture of national not individual purpose.

It was a story the Japanese were hungry to hear and soon a whole industry of commentary was born that celebrated Japan’s uniqueness and its emerging global leadership.

Who can forget the airport bookstores whose shelves were bursting with tomes about the special characteristics of virtually everything Japanese even including ‘studies’ confirming that the Japanese brain was unique.

In 19-79 the book’s timing was perfect.

The centerpieces of American capitalism, at that time, General Motors, Ford and Chrysler, were being pushed to the brink of extinction by Japanese automotive companies whose cars only a decade earlier could not hit the speed limit of a North American highway without the hood flying off.

In 19-89 with the Nikkei at 39,000 and rising, the value of the land on which the Imperial Palace in Tokyo sat was famously estimated to be worth more than all of California, Japan, as I put it once during an interview on CNN, had become the ‘Godzilla economy’, devouring prized American real estate like the Rockefeller Center and Pebble Beach, Vogel’s thesis had, it seemed, come true.

Of note, my first job in Tokyo in 1988 was to help the Japanese insurance company Nippon Life buy an office building in Toronto to ‘round out’ their overseas real estate portfolio, like some global real estate toy collection.

Well, we know now, it didn’t turn out so great.

The commentary on why this fate has befallen Japan is rooted in a reverse analysis of why Japan became so strong in the first place.

Namely, an overbearing state, incestuous elites mostly from my ala mater Todai, an education system that produced mono-lingual zombies not creative thinkers, and a new national purpose, to sink together, rather than risk American-style inequality.

This first lesson of not believing your own good press has meaning for Canada today.

The fact that Canada has escaped the worst of the recent financial market meltdown left many looking in envy at the Canadian economy particularly Canadians.

In fact, the normally dour Economist said in an editorial in May that Canada was an economic ‘star’, and the Prime Minister made sure that Canada’s better than average recent good fortune was a key talking point in the summer summits held in Toronto.

Be careful, a few cautionary points.

First, Canada’s current fiscal good fortune, notwithstanding the record annual Federal government deficit, is a consequence of having had our own brush with fiscal catastrophe in the mid-1990s, and being forced into doing something about it.

Second, Canada’s productivity performance continues to be among the lowest of the high income countries.

In 20-07 Canada was 17th among OECD nations in comparison of output per hour per worker.

Finally, the argument that individual Canadians are more fiscally conservative than Americans hence avoiding the worst of a US-style housing downturn is nonsense.

As Canada’s housing boom extended into 20-07 almost 40% of all new mortgages beyond one year were for more than 25 years, and by 20-08, almost 60 per cent of first-time home buyers were opting for a 40-year mortgage until the option was removed by regulators.

It remains to be seen how vulnerable Canada will be to a housing market correction particularly Vancouver and British Columbia.

Lesson two.

Things are not always what they seem.

Consider the following two cuts in history.

In 19-10 Europe was the centre of the world, entering its 95th year of continental calm, as science was replacing ancient Middle Eastern fairy tales as the new dominant narrative.

Yet just ten years later Europe was shattered; this began a quarter century of catastrophe that would divide the continent for most of the twentieth century with new fantastic modern pseudo-scientific fairy tales explaining everything and putting in place the script for terrible genocides and economic sclerosis.

In 19-80 the Soviet Union was on the verge of invading Afghanistan, the United States was in retreat having been defeated in Vietnam and humiliated by Iran, and Moscow seemed to have the upper hand over Western liberal democracies.

Yet, just ten years later, the Soviet Union disintegrated like a dust ball taking Marxist-Leninism with it.

Then there is China and today.

In 19-78 China’s Communist Party could no longer toy with Maoist economic experiments not just because millions of Chinese would once again most have certainly died from starvation but because the human cost would have created an unacceptable political cost, the disenfranchisement of the Communist Party with the loss of the ‘mandate from heaven’ upon which all Chinese rulers depend.

Beginning with agricultural reforms in 19-78 and special economic zones in 19-79, China embraced the free market economy, at least as far as the production of manufactured goods for exports was concerned.

Thirty years later having taken advantage of free trade in manufactured goods and their own cheap labour, having encouraged foreign direct investment in manufacturing and built roads and ports to accommodate external trade, and having joined the World Trade Organization, China became the world’s second largest economy.

It is now fashionable to forecast that China will easily become the world’s largest economy surpassing the United States.

However, there are some important reasons why China may not be able to sustain its current growth rate, and in fact, may enter a long period of relative underperformance.

The reasons are shared with China by all rapidly developing countries, shared with China by many Asian countries like Japan, and are specific to China.

First, rapidly developing economies all enjoy a one-off surge in growth due to a high rate in what economists call ‘total factor productivity growth’.

This surge occurs as companies and workers gain access for the first time to finance, roads, ports, computers, medicines, capital imports, technology, and other productivity endowments, not to mention new access to foreign markets.

It really is like golfing with a new high-tech driver and ball for the first time having played with sticks and rocks for 100s of years.

However, this improvement fades over time, as anyone knows who has bought new golf clubs, or has followed the growth trajectory of any rapidly developing economy.

Second, the structure of the Chinese economy has many of the same woeful characteristics as Japan.

The reason is simple; Japan’s modernisation strategy was the blue print for China.

This should not be surprising given the geographical proximity and the Asian heritage of both countries, and of course at the time that China emerged from self-inflicted isolation in 19-79, Japan was viewed as ‘Number One’.

The mantra was simple.

Maximize savings, investment, and exports, and minimize borrowing, consumption, and consumer goods imports.

And flood the American market with cheap manufactured goods.

China like Japan also used state directed financing to encourage export maximisation strategies that favoured the goods producing sectors over all others.

Consequently, economic reform was focused entirely on product markets but maintained huge distortions in things like the price of capital, labour, resources, and the environment which created subsidy equivalents for producers, exporters, and investors mostly on the backs of Chinese consumers and importers.

This tremendous bias to investment, savings and exports, coupled with the communication, transportation, financial, information and manufacturing improvements in the global economy, at the very moment that China developed, has led to investment as a percentage of GDP to reach a level not seen anywhere before, over 35%.

This bias is also captured in the change of the size of wages as a percentage of the economy in China over the past two decades.

In the Great People’s Republic, wages as a percentage of GDP, labour’s share in the country’s wealth, have collapsed from 57% in 1983 to just 37% today.

Not surprisingly personal consumption as a percentage of GDP has imploded, in fact, to the lowest level in modern economic history.

From 50% in 1980, personal consumption is now just 30%.

In addition, like Japan, capital for the most part has been directed by the state, and like Japan bad loans have been stuffed onto banks’ balance sheets for decades.

Currently, the losses in Chinese financial institutions are estimated to be as high as 30% of GDP.

Third, for reasons specific to China, there are some uniquely troubling issues.

It is important to remember that the crushing of the democracy movement in 19-89 symbolised by the tanks of Tiananmen also resulted in the re-assertion of the state over the levers of economic power symbolised by the rise of state owned enterprises in China.

Remarkably, China’s roughly 120,000 state-owned enterprises and countless subsidiaries receive about 75% of all bank loans, and during the massive stimulus to the economy in 20-08, received about 90%.

The stories of corruption, favoritism, price fixing, and illegal activities that constantly crop up are usually rooted in the small and privileged group of people that run these state owned firms and the long line of people that benefit.

It is also very important to remember that China despite its economic size is a still a very very poor country.

In 20-09, China was ranked 99th in per capita income by the IMF, on par with Panama.

Moreover, not only is China relatively poor, there is a rapidly widening income gap.

According to the World Bank, China has become the most unequal country in Asia on an income basis.

In fact, over the last decade, 400 million Chinese have seen their net incomes fall.

This income gap is particularly pronounced between urban coastal and rural interior cities.

This difference will only risk revisiting the most consistent theme in the country’s 5000-year old history, the ebb and flow of great centralisation and great regionalization often marked with violence.

Suffice it to say that today’s China story has a degree of unsustainability that at least ought to give us all pause before we extrapolate today’s trends to tomorrow’s inevitability.

Recall that in 19-89 Bill Emmott of the Economist wrote a book about Japan, The Sun Also Sets: The Limits to Japan’s Economic Power; take note, that tigers that may seem powerful and fierce and invincible, may also be paper too.

The simple lesson for Canada must be to resist the temptation to take as permanent some recent trends like the rise in the value of the Canadian dollar against the US dollar, particularly since the country remains hostage to commodity prices to pay its way in the world, and productivity performance has been awful.

Forecasts, and I have heard reasonable people make them, that the Canadian dollar will trend significantly above parity against the US dollar in the coming decade are an example of how current trends can blind us.

Lesson three.

The third lesson from the Japanese and Chinese economies is the importance of immigration for an excellent Canadian future.

This lesson may not be obvious when thinking about China and Japan, but it will be to anyone who takes a moment to look at the frightening population trends in both countries.

At the heart of what really ails Japan is that since 20-06 more Japanese die each year than are born, the country’s fertility rate is the second lowest in the world, and Japan’s version of xenophobia prevents a reasonable immigration strategy from being adopted.

Japan, a country of 126 million, and falling, hands out less than 15,000 new citizenships a year, and pats itself on the back for these.

In fact, it has been calculated by an old friend of mine Jesper Koll that the Japanese, like the Last of the Mohicans, will die out in about 400 years.

Thankfully things are not always what they seem, but you get my point.

Japan is not alone in this demographic trap because China will become the world’s fastest ageing country by 20-20 no matter what it does to inflect its fertility rate up in the next decade.

The combination of modernisation, easy access to state funded abortion, a deep cultural bias to preferring baby boys over girl babies, the quiet rural acceptance of female infanticide, and most importantly, the One Child Policy, has created the greatest imbalance between males and females in recorded human history.

Against a species norm of just under 1.1 males to one female, today the ratio in China for under 4 year olds is 1.23 males to one female, and for under 15 year olds 1.2 to one.

China then is short about 70 million women, and 20% of Chinese men will not be able to marry a female.

Thus the most vital trend since 19-70 is not the rise in the size of the economy but the fall in the fertility rate from 5.8% to 1.4%.

For Japan and China this demographic reality imposes tremendous constraints on real growth that can only come from either increase in the labour force or productivity.

Already Japan’s labour force is shrinking at a rate of about 0.5% or 300,000 people per year.

Just to keep the labour force stable Japan must permanently triple the current number of migrants.

In fact, the UN has estimated that by 20-50 the number of migrants would have to increase from 2% to 30% of Japan’s population to prevent the labour force from shrinking.

This is difficult to imagine for any country never mind Japan where there is a deep cultural bias against foreigners staying permanently and receiving Japanese citizenship.

As far as China’s labour force is concerned, while not an issue for another decade, it is obvious that if the scale of immigration required to make any difference in a population of 126 million Japanese is difficult to imagine then the scale required in a population of 1.3 billion Chinese is entirely unimaginable.

However, the vital difference between Japan and China that will make the ageing of Chinese society more problematic and its future fragile is that Japan got rich then aged; China will become aged before it gets rich.

This will put enormous pressure on Chinese society by mid-century and perhaps earlier.

China’s economic fate it seems is to be big but poor.

Canada by contrast with a population of 33 million is in an immigration sweet spot.

In Canada, the scale of immigration required to grow the labour force is consistent with recent trends yet big enough to have a positive defining impact on the country as a whole.

Today, Canada has annual immigration levels of about 220,000, averages about 170,000 new citizenships, and 21% of all Canadians originate from outside Canada.

Immigration is already a good Canadian habit that matters tremendously.

The manageable scale makes a blessing out of a necessity.

Canada can use its immigration advantage to attract the best and brightest the world has to offer, and if Canada is smart, will make sure they bring their extended families with them.

I will conclude by making the following point, that just encouraging people to immigrate to Canada has not been, and will never be enough, to help guarantee our excellent future.

To date, Canada’s immigration strategy has been successful because those people that do immigrate to Canada have been able to depend on a country that is governed by the rule of law protecting all that live here from arbitrary power, to depend on a country that makes key instruments of social justice like best in class education outcomes and the science of good health accessible to everyone, to depend on a market economy that gives all its citizens the chance to become very wealthy, and to promise to each new generation of immigrants, and their children, a permanent invitation to sit at an ever larger Canadian table and make their unique contribution to their new home.

Thank-you