An Exaggerated Demise

Let us, for a moment, pity poor Ontario.

The litany of affronts, indignities and embarrassments over the last two decades is long and inglorious: free trade agreements foisted upon it, careening business cycles and a roller-coaster dollar, wrenching and radical changes in government, ever-increasing taxes and an end to cheap power, never-ending sporting failure and Olympic disappointment (twice), separatist movements in the north, city-state rumblings from Toronto, mayors who provoked blizzards of national mockery, massive power failures and ice storms and G20 fiascos.

All have ruthlessly descended upon the province and its capital like a series of biblical plagues, not to mention a real plague—SARS—in 2003.

In the last two years, Ontario hit rock bottom. To add insult to injury, in 2008 it was announced that Ontario would qualify for equalization. Then, in the summer of 2009, the auto industry, the province’s industrial cornerstone, went bankrupt. When the smoke cleared from the economic meltdown, the province’s deficit was $25 billion. Once Confederation’s frugal accountant, the province is now derisively referred to as “Ontari-owe.” Economically, it is a basket case.

Pity, however, is not so charitably given in some quarters. For all its woes, there exist longstanding resentments of Ontario’s prosperity, built into the very DNA of Confederation. For quite a few Canadians, Big Bad Ontario, which long lorded its exalted economic status, is finally being knocked from its pedestal.

Job losses are the biggest part of this story of decline. Almost every week for the last half-decade has seen headlines of layoffs and downsizing. In 2006 Ontario’s unemployment rate exceeded the national rate for the first time on record, and continues to do so. Manufacturing has lost nearly 300,000 jobs since 2004, devastating many families in the province.

Business failure, office closures and foreign acquisitions are the new order of the day. Mining giants such as Falconbridge and Inco were bought out. Hamilton is Steel City no more, with Stelco and Dofasco idled or sold. Firms such as Nortel Networks have had public and painful deaths. Toronto’s snub as national securities regulator seems par for the course.

Ontarians are voting with their feet, too, reflecting this perception of decline. In 2008–09, 20,000 more people left Ontario than came from other provinces. Meanwhile Alberta gained 23,000 Canadians, Saskatchewan 4,000 and British Columbia nearly 5,000. Even Newfoundland, famous for “goin’ down the road,” boasted 2,000 interprovincial migrants. More than a few were probably from Ontario.

Given the evidence, being bullish on Ontario’s future invites mockery and scorn. It smacks of misguided boosterism or outright delusion. Yet there are reasons to question the prevailing narrative, and reasons for optimism. In scratching the supposedly rusting surface of Ontario’s economy, it is not so obvious that the province is deindustrializing, or that its auto sector needs to be put out of its misery. On closer inspection, Ontario’s economy is much more diverse than its industrial heritage indicates. Its massive service economy, anchored by the most important and dynamic city in Canada, is flourishing. Its regions are experiencing an unprecedented resource and technology boom.

Ontario, far from withering, is on the cusp of an economic renaissance.

First, some history.

In order to really understand Ontario’s current predicament, one has to look at the province’s industrial past. As any good undergraduate history student knows, this prosperity was a product of John A. Macdonald’s National Policy. A protectionist tariff built a manufacturing base, immigration was dispersed westward along the Canadian Pacific Railway, while grain from the West and goods mostly from Ontario were shipped across that railway to cement a transnational economy.

Ontario had its own “national policy,” too. “The Manufacturing Condition” required that natural resources be processed here and not simply ripped from the ground and sent to the United States. Lumber was sawn, minerals refined and processed in province. Cheap power, through Ontario’s vast hydroelectric resources, fuelled these enterprises. ((The best study of Ontario’s economy in the 19th and early 20th centuries is The Politics of Development:  Forests, Mines and Hydroelectric Power in Ontario, 1849–1942 by H.V. Nelles (McGill-Queen’s University Press, 2005). ))

By the Second World War’s end, northern forestry and mining, steel mills in Hamilton and Sault Ste. Marie, Sarnia’s Chemical Valley, consumer goods, farm implements and plane building in and around Toronto, and auto factories in Windsor, Oakville and Oshawa made Ontario wealthy. The 1950s saw greater industrial intensification as highway construction, housing and services boomed, especially in the Golden Horseshoe.

Then, according to the narrative, the wheels fell off. The nasty 1970s spread deindustrialization across North America. Just as today, Ontario faced high unemployment, skyrocketing oil prices, a high dollar, brutal interest rates and automotive near-bankruptcies and bailouts. Then as now, there was much fretting about Ontario’s future. Deindustrialization studies appeared, mostly examining the American Midwest, but also on Ontario and Canada. ((See, for instance, David Sobel and Susan Meurer’s Working at Inglis: The Life and Death of a Canadian Factory (Lorimer, 1994) and Daniel Drache’s The Deindustrialization of Canada and Its Implications for Labour (Canadian Centre for Policy Alternatives, 1989). ))

Yet, unlike in Michigan, Ohio and Illinois, where countless steel and auto towns were left to rust, large-scale deindustrialization did not occur in Ontario. Certainly some sectors of the industrial economy retracted or disappeared. The Inglis and Massey Ferguson factories in Toronto famously closed forever. But the “eastern bastards” did not freeze in the dark, and Ontario retained its golden hue.

Why? Given its industrial preponderance, Ontario should have rusted like the rest of the Great Lakes economy. One of Canada’s leading scholars on deindustrialization and the author of Industrial Sunset: The Making of North America’s Rust Belt, 1969–1985, Concordia historian Steven High, assumes that deindustrialization did occur to some extent, but that nationalist worker activism forced politicians to legislate advance warnings of shutdowns, better packages and, in some cases, even slowed plant closures. This nationalist discourse—Bob White declaring that he would “wrap the fucking flag” around himself to fight for union jobs—contrasted with an American localism that was ineffective in marshalling political support to stem the tide of rust. Hence, in High’s view, Ontario worker nationalism was a proxy for industrial regionalism, and deindustrialization was delayed, if not largely prevented.

Less romantic interpretations question whether the province actually experienced deindustrialization. Deindustrialization is usually measured by a decrease in manufacturing’s share of gross domestic product, or by job losses. On these scores, manufacturing has certainly shrunk. Goods production in Ontario has declined from about 35 percent of GDP in the 1980s to around 25 percent in the last few years. Manufacturing jobs have declined more suddenly, plunging from 1.1 million in 2006 to less than 800,000 today.

Both of these measures, however, are problematic in gauging deindustrialization.

First, GDP figures ignore the value of the sector’s output versus its volume and how that can skew manufacturing’s impact. According to Statistics Canada, when it comes to industrial output, the price of manufactured goods has declined significantly in the last four decades, although the volume of the goods produced has stayed the same. A decrease in the value of industrial products is not necessarily a bad thing: the relative decline in the price of manufactured goods is partially a result of the increase in costs of services versus manufactured goods over time, and also a consequence of productivity growth.

Overall, productivity growth (that is, producing as much with fewer workers) has been fantastic in some segments of manufacturing in Ontario, and has been rising by about 1 percent a year for four decades. Thus, as with the value of manufactured goods versus their volume, the decreasing number of workers in manufacturing does not necessarily point to deindustrialization, but is an indication of growing productivity.

Finally, simply looking at GDP does not take into account the growth of other sectors of the economy relative to manufacturing. The economy is divided into goods-producing and services sectors. Yes, manufacturing has declined within the overall Canadian economy, of which Ontario makes up the lion’s share. But it is not an absolute decline. Indeed, between 1980 and 2000, in terms of the volume of goods produced, Canadian manufacturing actually increased, even in the face of two free trade agreements that many felt would kill off manufacturing in the province. Although this increase was slight (1.2 percent), the massive growth of the service economy makes it look as if it is shrinking.

In other words, it might not be the case at all that manufacturing in Ontario is going the way of the dodo. Taking the longer perspective shows that over the last two decades Ontario’s manufacturing is actually becoming leaner and even more productive.

Of course, none of this history is about Ontario’s here and now. Dealing with Ontario’s current economic circumstances means dealing with the economic elephant-in-the-room: Ontario’s auto sector. Automotive is historically the largest employer and the largest exporter (and importer), and produces the greatest value of goods within the Ontario and, thus, Canadian economies.

Ontario’s auto industry provokes emotional and sometimes irrational responses. People really hate its unionized workers and their bloated pay, its ungodly government subsidies and its fat cat executives, crappy cars and creaking, inefficient companies.

When Chrysler, and especially GM, declared bankruptcy in 2009, these emotions came to a boil. Over the airwaves, in chat rooms and in letters to the editor, there was an outburst of Schadenfreude at the humbling of the industry and, indirectly, of Ontario.

Similarly, nothing was more galling than the government’s $14 billion bailout of the two companies. Why, pundits and ordinary people raged, should tax dollars be used to save a dinosaur industry? GM’s demise is proof positive that supporting automotive (at least North American automotive—the Japanese are often still excluded from this condemnation) was simply throwing good money after bad. Just let the Ontario industry die.

This is an incredibly short-sighted view. Canadians and Americans are not going to suddenly stop buying cars. They may not purchase an astounding 17 million cars a year, as they did between 2000 and 2007, but neither will they purchase as few as 11 million a year, as they did in 2009. With built-in obsolescence, a rebound in the auto industry is as inevitable as the rising sun.

Ontario’s sector is poised to benefit immensely from the next great automotive boom. It is the only jurisdiction on the planet where five assemblers are clustered together, a comparative locational advantage that India and China have spent two decades building. Why should Ontario (and Canada) let this advantage wither?

After all, the industry is actually in much better shape than one would expect. In 2009 automotive jobs numbered about 100,000, or slightly more than during the dark days of 1980–82, the last time the auto sector was being written off as extinct. The productivity and ability of these workers are much higher, too. Ontario’s factories have the capacity to build as many cars today as in 1975, but with half the workers.

More importantly, the sector is growing again. Toyota, notwithstanding its recently overblown quality problems, is one of the smartest and most valuable companies in the world. Toyota is not running away from Ontario. Its new $1.2 billion plant in Woodstock opened in 2008 with 1,200 workers, and just hired 800 more this year to build hot-selling RAV4 SUVs. Even during their difficulties, Ford, Chrysler and GM made huge investments in their flexible manufacturing facilities in the province (more than $7 billion in the last five years). All of these companies are in the midst of hiring back hundreds and thousands of workers.

Cynics will remark that these are foreign companies and that none of them does any significant research and development in Ontario, where the real value-added innovation takes place. This overlooks the 400 Ontario parts firms, many Canadian owned and part of the massive automotive production chain. The largest of these, Magna, Wescast and Linamar, are some of the leading spenders in Canadian R&D and are already taking a significant role in the next generation of high-tech vehicles.

Although the industry itself has a smokestack image, the reality is that the cars on the road today are incredible technological marvels, products of a creative class of innovators and entrepreneurs. There is greater computing power in a single car than in any of the latest consumer gadgets that have come to represent innovation. Far more importantly, the shift from the internal combustion engine to electric, hybrid or hydrogen-powered vehicles may be the most important technological and social development since, well, the automobile first appeared. By spending tax dollars to ensure a continued presence in a rebounding auto industry, Ontario will be at the forefront of that shift.

Thankfully for Ontario, cars are not becoming extinct, and neither is car making.

In Canada, the irrational hatred that exists for Ontario’s auto sector is perhaps surpassed only by hatred of Toronto. But just as with the auto industry, Toronto is, for all of its supposed problems, Ontario’s—and Canada’s—economic city of the future.

Visitors driving from Pearson airport to downtown Toronto (the airport railway link is still a few years away) will be struck by two things. First there is the traffic, which reassures people of Toronto’s dysfunction. Second is the simply unbelievable amount of construction. From the airport itself (the largest construction project in the country—no, the tar sands do not really qualify as a construction project) all the way to the downtown core, there are countless residential, commercial and institutional construction projects on the go worth billions of dollars. For all of its perceived economic blight, Ontario’s capital is undergoing a remarkable building boom.

The building boom is a consequence of two things: population growth and a growing service economy.

Toronto has reached a critical mass in its population and economic size that will continue to propel it forward. In 2009 the Greater Toronto Area accounted for 47 percent of the province’s population, a figure expected to grow by 2030 to more than half of Ontario’s population, from 6 million to over 8 million. While Ontario might have an interprovincial migration loss, its overall net migration is an astounding 100,000 a year, many immigrants coming to Toronto. In other words, Ontario is growing at a rate of more than one Saskatchewan every decade. In 20 years, Ontario’s population will jump from over 13 million to almost 17 million.

This boom includes Richard Florida’s people: the young, digitized, multilingual creative class workers who populate the condos sprouting on Lake Ontario’s edge, drawn from other parts of the city and the rest of the province and country to where economic and educational opportunity beckons. ((For a good brief sense of Florida’s views on Ontario’s creative class service economy, see Ontario in the Creative Age (Martin Prosperity Institute, 2009), the report that he and Roger Martin wrote. It is also available online. ))

They are coming in droves to take part in an incredibly diverse service economy. As much as it relies on a steady manufacturing sector and a revitalizing auto industry, Ontario’s economic future depends on the four fifths of the province’s workers who are service employees. As the most populous region in the country, Toronto offers a greater scale and depth of employment choices than any city in Canada, and most in North America.

Financial services, for example, have weathered the economic meltdown extremely well, and the city has become a global destination for banking. Cultural industries such as publishing, broadcasting, film, music and fashion show little sign of slowing, even in a depressed economy with a high dollar. Newer industries, such as software, communications, information technology and biotech have emerged as nodes within Toronto, attracting talent and investment from around the world. The frenetic campuses of Ryerson, York and Toronto are a testament to the exploding post-secondary education sector. As a tourist destination, there is a slew of new hotels, while convention and theatre attendance has largely recovered from the post-SARS difficulties, not to mention innovative new festivals and events along with old attention-getting standbys.

Supporting these service industries are traditional goods-producing activities that have experienced their own boom. New home sales and construction show all the signs of a bubble, but new land-transfer taxes, increasing interest rates and sheer supply have not burst the sector yet. There is also an infrastructure rebirth. After decades of neglect, the province’s MoveOntario 2020 initiative, coupled with Toronto’s Transit City, will see $20 billion for public transit building over the next two decades (Ottawa, Hamilton and Mississauga will also see a burst of transportation construction). A revitalized waterfront, a rebuilt Union Station, major projects in the cultural sector and entire new neighbourhoods in the downtown core all point to a city that is percolating, a far cry from its gridlocked image.

It may pain many Canadians to hear it, but the country needs Toronto to work, and to work well. The city needs to continue attracting talent, investment and ideas. Toronto may not really be the centre of the universe, but there has to be recognition that it is the economic incubator of the country.

Many Ontarians outside of Toronto hate the city, too. Even in towns as close as Peterborough, only an hour and a bit away, there is a palpable divide between Toronto and the rest of the province.

But most people also realize that Toronto is an economic engine and asset to the province. The city is a gigantic hub with spokes poking ever outward to the increasingly connected regions of the province, regions that are themselves diversifying.

The Kitchener-Waterloo region is a good example of this. K-W’s proximity to Toronto gives it the benefit of having a close-by source of talent and capital while keeping enough distance to maintain its identity as a high-tech incubator. RIM’s success is well known, but K-W is also an educational hub, not to mention a live theatre hub, because of nearby Stratford. It is unlikely that this diversification could have occurred as extensively without the anchor that Toronto’s population and consumptive appetite provide.

Other regional centres are specializing and diversifying in unexpected ways. Education has become a major employer in places such as Brantford, Sudbury and North Bay. Medical research is transforming London (known more for beer and financial services), Hamilton (steel and football) and Kingston (prisons). Instead of killing it, free trade has allowed Niagara’s wine industry to flourish.

In Northern Ontario the economic prognosis is good, too. Sault Ste. Marie’s long-troubled Algoma steel operation was recently purchased by an Indian firm for nearly $2 billion. This was a reflection of the growing influence of India and especially China upon Ontario’s resource future. Commodity prices that have skewed oil and gas to Alberta’s benefit are also affecting areas such as Ontario’s Ring of Fire, where untapped mineral deposits have ushered in a resource boom. Forestry, diamonds, copper and a host of other minerals have spurred a rush reminiscent of the days of the manufacturing condition.

Northern Ontario is also becoming a leader in green energy. The province’s 2009 Green Energy Act, which included North America’s first feed-in tariff, has spurred a building boom of alternative energy sources in the region. The Prince Wind Project is the largest wind farm in Canada by size, covering 20,000 acres, and is only one of dozens of environmental energy start-ups.

This kind of economic rekindling is happening all across Ontario. It points to an economy in transition, one that is righting itself after decades of difficulty. For all its problems, from industry to industry, sector to sector and region to region, Ontario’s economy has remained surprisingly resilient.

No doubt, Ontario faces serious issues going forward. An aging population and the retirement of the baby boomers will put a massive strain on social services in the province, one already seen in ballooning healthcare costs. Health care threatens to derail another pressing need: the ongoing demand for skilled and educated workers continues to challenge Ontario, even as the province pours billions into apprenticeships and post-secondary education. Deindustrialization still threatens as China and India and many other countries continue to seek what the province now possesses, and to leapfrog places like Ontario. Similarly, the massive appetite for Ontario’s natural resources that is being fuelled by the Chinese manufacturing boom will lead to dramatic fluctuations and instability as the Chinese economy slows its breakneck growth.

Across the border, the relative decline of the American colossus threatens Ontario’s best market. With nearly 80 percent of goods shipped to the United States, the province needs to continue diversifying the destination of its products and services so that it does not depend so much upon this one market. At the same time, the province still needs to ensure continued access to this market by hastening the building of better cross-border infrastructure (especially at Detroit-Windsor), fighting bureaucratic clogging of these strategic crossings and lobbying against American protectionism.

Ontario will need to assert itself more strongly within interprovincial politics as an Alberta that is addicted to oil revenues skews the country’s economic priorities to its detriment. The sooner Canadians realize that fossil fuels are the real dinosaur industry, the sooner they can refocus their energies on environmentally and socially conscious goods and services production. Indeed, notwithstanding Ontario’s emphasis on green initiatives—fuel-efficient car production, wind power, the closing of coal-fired generating stations—climate change is the great battle of the present and future, one that neither Ontario nor any other jurisdiction is doing enough to fight.

All these challenges beckon. But if the past and present is any guide, Ontario will rise to them, and soon regain its swagger. And not a moment too soon.