1. The New Global Normal: What it means for Canadian Competitiveness Background Perspectives for the 4Front Atlantic Conference By Kevin G. Lynch Vice-Chair BMO Financial Group

2. We are entering a new global normal… with “China soaring, India poised, Asia re-emerging” … where many advanced economies going through difficult economic, financial and fiscal restructurings … and all countries need to adapt to succeed. 2011 1990 Country GDP $US (B) Country GDP $US(B) 5,800.5 3,030.0 1,547.0 1,248.6 1,135.5 1,017.8 582.7 520.7 507.8 390.3 313.7 262.7 15,227.1 6,515.9 5,822.0 3,518.6 2,750.7 2,471.9 2,421.6 2,181.4 1,894.5 1,737.3 1,704.1 1,484.7 U.S.A Japan Germany France Italy U.K. Canada Spain Brazil China India Mexico U.S.A China Japan Germany France U.K. Brazil Italy Russia Canada India Spain Source: IMF, May 2011

3. The new global context: structural trends and pivotal events are reshaping economies, societies, politics, expectations … and “the drivers of success” are changing for all countries. A new multi-polar world. The re-emergence of Asia: 50% of world GDP within decade. The great global financial crisis with lasting consequences. Geo-political risks rising; premium on security. Energy and commodities generating huge wealth transfers. Globe is Restructuring 1. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Nature of competitiveness changing: premia on a global perspective; and the quality of “national capital”: intellectual (i.e. innovation) capital, human capital and natural resources. Global Competitiveness is Changing 2. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Great Global Talent Hunt Demographics: the West and China are aging … it puts an incredible premia on developing, attracting, and retaining skilled knowledge workers … multilingual, multicultural, entrepreneurial, and innovative. 3. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ The 24/7 global digital universe is reshaping the value of information, how information can be used, how it can transforming businesses and markets, and its potential to reshape government. Information is New Global Currency 4.

5. Consumption/saving imbalances

6. Sovereign Debt

7. Fiscal imbalances

8. Bubbles; inflating and deflatingCanada 0.8% Sources: Haver Analytics, IMF WEO Database, April 2011, IMF WEO Update, September 2011

9. In the new global normal, balance sheets really matter, for governments as well as households and businesses … with pervasive globalization, no government with market bonds is immune from fiscal risk … and economies benefit from the “national insurance” of fiscal virtue. TOTAL Government Fiscal Balance: % of GDP (2011) TOTAL Government Net Debt: % of GDP (2011) Canada Canada France France Germany Germany Italy Italy Japan Japan UK UK USA USA Greece Greece Provincial Budget Balance FY2011 (% of GDP) Provincial Net Debt FY2011 (% of GDP) New Brunswick New Brunswick Nova Scotia Nova Scotia P.E.I. P.E.I. Nfld & Labrador Nfld & Labrador Canada: Federal Canada: Federal Sources: Provincial budget balances and debt- Dept of Finance Fiscal reference tables; Federal Data: http://www.budget.gc.ca/2011/plan/chap5-eng.html (June 2011 update); IMF World Economic Outlook, September 2011

11. Weak tax bases

12. Income support spending

13. Unwinding fiscal stimulus spending

15. Lower Cdn Labour force growth (0.9% vs. 1 ½ %)

16. Lower Cdn Productivity growth (0.8% vs. 1 ½ %)

17. Lower Cdn Inflation (2% vs. 2 ½ %)

18. Structurally higher spending growth in demographically sensitive areas

19. Health, pensions, training …A R A T H O N

21. Market opportunities shifting to dynamic emerging countries

23. Premium for multi-lingual, multi-cultural workforces

26. Technology and logistics lever resourcesEmerging economies need resources to sustain growth … Natural Resources

27. US=100 100 95 90 85 80 75 73.6% 70 1984 1987 1990 1993 1996 1999 2002 2005 2008 1981 A universal reality … productivity is core to a nation’s competitiveness and the standard of living of its citizens … AND, Canada is lagging. Annual % Labour Productivity Growth in the Canadian Business Sector: 1947 - 2008 “Productivity isn’t everything, but in the long run, it is almost everything.” 4 4.0 3 2 1.6 –Paul Krugman (Nobel Prize Winner) 1 0.8 0 1973- 2000 2000- 2008 1947- 1973 Relative Labour Productivity in the Business Sector: Canada as % of US Paradox: Canada has a larger productivity problem than the U.S. --- indeed, our Can-U.S. productivity gap “costs” us $300B annually --- but U.S. has greater urgency in improving productivity

28. Canada’s productivity deficit versus the U.S. is both large and pervasive … most sectors have productivity levels considerably less than comparable U.S. sectors … and contributing to this, we invest much less in ICT and machinery. Source: State of the Nation 2010 Report by the Science, Technology and Innovation Council

29. 1 Business Sector R&D Expenditures % of GDP 2.7% Japan Our public sector investments in R&D spending as a % of GDP, delivered largely through universities, are well above OECD averages, and even the U.S. 2.7% Sweden 2.5% Finland 2.2% Korea 1.9% United States 1.8% Austria 1.8% Germany 1.7% Denmark 1.5% Iceland 1.4% Luxembourg 1.3% France 1.3% Belgium But, the Canadian business sector ranked 15th among OECD countries in business R&D expenditures. Canadian business R&D spending is only 1% of GDP, well below the OECD average of 1.6%; half the U.S. and a third of leaders like South Korea, Sweden. 1.2% Australia 1.2% United Kingdom 1.1% Canada 15th 1.0% Netherlands 1.0% Czech Republic 0.9% Ireland 0.9% Norway Source: OECD, Main Science and Technology Indicators. Volume 20 Innovation is the core to the new competitiveness because it alone has the capacity to create new products not compete on standardized ones and build new markets not fight for share in existing ones … BUT, Canada is not an innovation leader, particularly in the business sector. “The first step in winning the future is encouraging American innovation.” … “We need to out-innovate, out-educate, and out-build the rest of the world.” President Obama, 2011 State of the Union Address

30. Canada’s markets are “over-weighted” in mature, slower growing economies (many with structural fiscal challenges) and linkages are weaker to dynamic emerging markets. Canada's Top 10 Trading Partners () in 2010 (1% or more of Cdn. Exports) Export Markets Import Markets Missing major export markets in dynamic emerging economies including: India, Brazil, South Korea, Taiwan, South Africa, Russia, etc. Sources: Industry Canada; http://www.sse.gov.on.ca/medt/investinontario/en/Pages/coca_401.aspx; IMF WEO Database Note: Numbers may not add to totals due to rounding.

32. Math

34. Natural resources matter … Canada is one of world’s most secure, largest producers of natural resources … energy, minerals/metals, agriculture … and as global demand rises, so do global prices … and the incentive to better apply technology (innovation) and logistics to maximize returns. Natural Resource Ranking* Agricultural Resource Ranking* Bank of Canada’s Index of Real Commodity Prices in the Post-War Period And, the second largest oil reserves in the world, and large shale gas reserves Sources: Canadian Minerals Yearbook, U.S. Geological Survey (USGS), Food and agriculture organization of the United Nations (FAOSTAT) * latest year Source: Bank of Canada

36. Flex time workers

37. Pay for performance

38. Reward process innovation

40. Enter a new market

41. Invest in operational R&D

43. Customer analytics

44. Cloud computing

45. Social media for client interaction

46. Collaboration software* Source: EIU (Gearing for Growth: Future Drivers of Corporate Productivity, 2011)

48. Robust resources; both natural resources and human resources

49. A sound financial system, with strong financial institutions.Nice + “Other” Brand Characteristics: Nice Canadians … or … Opportunity: ? Branding of Canada by Canadians

50. Canada has enormous strengths that have served us well, built one of the highest standards of living in the world, and one of the most civil societies. Solid public finances Actuarially balanced public pension plan Competitive corporate taxes (12 percentage pts. less than U.S.) Stable, secure financial system (rated #1 in world by WEF) Well educated, diverse population Huge natural resource assets Stable institutions Universal safety nets and public services (education, health, …)