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Economy

Canada’s economy needs more employee ownership

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It’s time to add retiring entrepreneurs to the list of economic existential threats posed by Canada’s aging population.

A new report from the Canadian Federation of Independent Business (CFIB) found that 76 per cent of Canadian owners of small- and medium-sized enterprises (SMES) — companies with between one and 499 employees — plan to exit their businesses during the next decade. Some 56 per cent of SME owners aimed to get out within the next five years. About three-quarters of these soon-to-be former business people are looking to retire completely.

The CFIB white paper confirms similar findings in a 2017 study by the Business Development Bank of Canada (BDC) and in Statistic Canada’s annual surveys of SMEs: the ranks of Canada’s seasoned business owners are about to be substantially thinned.

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The implications for the Canadian economy are massive. SMEs accounted for 98.1 per cent of all Canadian businesses with employees in 2021. They employed about 10.3 million people, equivalent to 63.8 per cent of Canada’s total labour force.

SMEs are critically concentrated in the sectors we need to call on to build our way out of our housing supply deficits, to boost Canada’s anaemic productivity, and to support our balance of payments with the rest of the world. Construction accounted for the largest share (16.3 per cent) of SMEs in a single industry, followed by professional, scientific, and technical services (14.6 per cent). SMEs have also been leading our international trade recovery since 2020’s shutdowns.

Based on Statistics Canada data, CFIB estimates that baby boomer retirements will trigger transfers of over $2 trillion in SME assets to younger generations of business owners. That’s  equivalent to 75 per cent of Canada’s annual economic output.

This wave of change adds risks to Canada’s already wobbly long-term outlook. The OECD expects Canada to notch up the worst growth and productivity performance amongst its 38 industrialized-country members over the next few decades.

Retiring business owners are set to follow the lead of retiring workers. While the pandemic induced the Great Resignation in the United States, Canada has seen the Great Retirement: in addition to folks over the age of 65 calling it a day, a record number of Canadians aged 55 to 64 have retired. Widespread labour shortages that weren’t expected to bite for five to 10 years are putting a damper on economic growth. Rising immigration numbers can compensate only partially for these deficits.

We need to encourage older Canadians to stay in the labour force. One key move would see the federal government follow through on earlier attempts to raise the bar for Old Age Security eligibility to age 67. But the politics around this are challenging to say the least.

We also have to ensure that the SMEs that employ so many Canadians transition smoothly through their owners’ retirements. Yet, the CFIB found that only one in 10 of these business owners have formal succession plans. About half of SME owners surveyed said that finding a suitable buyer was their biggest barrier to a steady hand-off of their businesses.

Many other countries face the same SME succession challenge and they offer lessons on how Canada could address it.

The U.S. and U.K. now have years of experience with the use of employee ownership trusts (EOTs) to help exiting SME owners realize the full value of their companies while handing the reins to trusted employee stewards. Typically, these trusts secure a loan to buy the company on behalf of employees; this debt is then serviced out of the enterprise’s annual profits.

Over 45 years, U.S. trusts have allowed 14 million American workers to amass US$1.6 trillion in business assets. Similarly, since the 2014 introduction of U.K. EOTs, over 700 British businesses have been sold into these structures.

Compared with other enterprises, British and American employee-owned firms tend to be more resilient to shocks, more durable instruments of regional development, better sources of pay and more effective generators of employee wealth. This success is widely recognized. Even Pope John Paul II endorsed employee ownership back in 1981.

Employee ownership puts capital and labour on a more equal footing by transforming stakeholders into shareholders. The CFIB noted that just over half of Canadian SME owners would be more likely to sell their businesses to their employees if EOTs were available here.

In research with Toronto’s Social Capital Partners, I projected along with Jon Shell that between 500 and 750 SMEs could be sold to their employees in the eight years following the creation of a Canadian EOT structure with accompanying incentives similar to those in other countries. That could create somewhere between $4 billion and $9 billion in wealth for about 50,000 to 114,000 Canadian workers — with further gains in later years.

The federal government expressed an interest in EOTs in its April 2021 budget. Ottawa then committed in its April 2022 budget to create a Canadian EOT structure under the Income Tax Act, but the fall economic statement in November 2022 was silent on the matter.

In the coming months, we need the federal government to bring forward legislation to allow for Canadian EOTs. The scale of our approaching tide of SME successions and our enduring growth challenges augur for urgent action.

Brett House is professor of professional practice in economics at Columbia Business School and a fellow with the Public Policy Forum, the Munk School, and Massey College. He tweets at @BrettEHouse.

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How will a shrinking population affect the global economy? – Al Jazeera English

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Falling fertility rates could bring about a transformational demographic shift over the next 25 years.

It has been described as a demographic catastrophe.

The Lancet medical journal warns that a majority of countries do not have a high enough fertility rate to sustain their population size by the end of the century.

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The rate of the decline is uneven, with some developing nations seeing a baby boom.

The shift could have far-reaching social and economic impacts.

Enormous population growth since the industrial revolution has put enormous pressure on the planet’s limited resources.

So, how does the drop in births affect the economy?

And regulators in the United States and the European Union crack down on tech monopolies.

The gender gap in tech narrows.

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John Ivison: Canada's economy desperately needs shock treatment after this Liberal government – National Post

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Lack of business investment is the main culprit. Canadians are digging holes with shovels while our competitors are buying excavators

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It speaks to the seriousness of the situation that the Bank of Canada is not so much taking the gloves off as slipping lead into them.

Senior deputy governor, Carolyn Rogers, came as close to wading into the political arena as any senior deputy governor of the central bank probably should in her speech in Halifax this week.

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But she was right to sound the alarm about a subject — Canada’s waning productivity — on which the federal government’s performance has been lacklustre at best.

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Productivity has fallen in six consecutive quarters and is now on a par with where it was seven years ago.

Lack of business investment is the main culprit.

In essence, Canadians are digging holes with shovels while many of our competitors are buying excavators.

“You’ve seen those signs that say, ‘in emergency, break glass.’ Well, it’s time to break the glass,” Rogers said.

She was explicit that government policy is partly to blame, pointing out that businesses need more certainty to invest with confidence. Government incentives and regulatory approaches that change year to year do not inspire confidence, she said.

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The government’s most recent contribution to the competitiveness file — Bill C-56, which made a number of competition-related changes — is a case in point. It was aimed at cracking down on “abusive practices” in the grocery industry that no one, including the bank in its own study, has been able to substantiate. Rather than encouraging investment, it added a political actor — the minister of industry — to the market review process. The Business Council of Canada called the move “capricious,” which was Rogers’s point.

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While blatant price-fixing is rare, the lack of investment is a product of the paucity of competition in many sectors, where Canadian companies protected from foreign competition are sitting on fat profit margins and don’t feel compelled to invest to make their operations more efficient. “Competition can make the whole economy more productive,” said Rogers.

The Conservatives now look set to make this an election issue. Ontario MP Ryan Williams has just released a slick 13-minute video that makes clear his party intends to act in this area.

Using the Monopoly board game as a prop, Williams, the party’s critic for pan-Canadian trade and competition, claims that in every sector, monopolies and oligopolies reign supreme, resulting in lower investment, lower productivity, higher prices, worse service, lower wages and more wealth inequality.

(As an aside, it was a marked improvement on last year’s “Justinflation” rap video.)

Williams said that Canadians pay among the highest cell phone prices in the world and that Rogers, Telus and Bell are the priciest carriers, bar none. The claim has some foundation: in a recent Cable.co.uk global league table that compared the average price of one gigabyte, Canada was ranked 216th of 237 countries at US$5.37 (noticeably, the U.S. was ranked even more expensive at US$6).

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Williams noted that two airlines control 80 per cent of the market, even though Air Canada was ranked dead last of all North American airlines for timeliness.

He pointed out that six banks control 87 per cent of Canada’s mortgage market, while five grocery stores — Sobeys, Metro, Loblaw, Walmart and Costco — command a similar dominance of the grocery market.

“Competition is dying in Canada,” Williams said. “The federal government has made things worse by over-regulating airlines, banks and telecoms to actually protect monopolies and keep new players out.”

So far, so good.

The Conservatives will “bring back home a capitalist economy” — a market that does not protect monopolies and creates more competition, in the form of Canadian companies that will provide new supply and better prices.

That sounds great. But at the same time, the Conservative formula for fixing things appears to involve more government intervention, not less.

Williams pointed out the Conservatives opposed RBC buying HSBC’s Canadian operations, WestJet buying Sunwing and Rogers buying Shaw. The party would oppose monopolies from buying up the competition, he said.

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The real solution is to let the market do its work to bring prices down. But that is a more complicated process than Williams lets on.

Back in 2007, when Research in Motion was Canada’s most valuable company, the Harper government appointed a panel of experts, led by former Nortel chair Lynton “Red” Wilson, to address concerns that the corporate sector was being “hollowed out” by foreign takeovers, following the sale of giants Alcan, Dofasco and Inco.

The “Compete to Win” report that came out in June 2008 found that the number of foreign-owned firms had remained relatively unchanged, but recommended 65 changes to make Canada more competitive.

The Harper government acted on the least-contentious suggestions: lowering corporate taxes, harmonizing sales taxes with a number of provinces and making immigration more responsive to labour markets.

But it did not end up liberalizing the banking, broadcasting, aviation or telecom markets, as the report suggested (ironically, it was a Liberal transport minister, Marc Garneau, who raised foreign ownership levels of air carriers to 49 per cent from 25 per cent in 2018).

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The point is, Canada has a competition problem but solving it requires taking on vested interests. Conservative Leader Pierre Poilievre has indicated he is willing to do that, calling corporate lobbyists “utterly useless” and saying he will focus on Canadian workers, not corporate interests.

“My daily obsession will be about what is good for the working-class people in this country,” he said in Vancouver earlier this month.

Even opening up sectors to foreign competition is no guarantee that investors will come. There are no foreign ownership restrictions in the grocery market (in addition to the five supermarkets listed above, there is Amazon-owned Whole Foods). When the Competition Bureau concluded last year that there was a “modest but meaningful” increase in food prices, it recommended Ottawa encourage a foreign-owned player to enter the Canadian market. It was a recommendation adopted by Industry Minister Francois-Philippe Champagne, to no avail thus far.

But it is clear from the Bank’s warning that the Canadian economy requires some shock treatment.

Robert Scrivener, the chairman of Bell and Northern Telecom in the 1970s, called Canada a nation of overprotected underachievers. That is even more true now than it was back then.

It’s time to break the glass.

jivison@criffel.ca

Get even more deep-dive National Post political coverage and analysis in your inbox with the Political Hack newsletter, where Ottawa bureau chief Stuart Thomson and political analyst Tasha Kheiriddin get at what’s really going on behind the scenes on Parliament Hill every Wednesday and Friday, exclusively for subscribers. Sign up here.

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Beijing At A Loss On What To Do About Its Economic Challenges? – Forbes

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China’s annual “Two Sessions” conference has for decades revealed the party agenda to the faithful. This year’s meeting offered them little, a startling development given China’s huge economic and financial challenges – a property crisis, export shortfalls, demographic decline, a loss of confidence among consumers and private business owners, and growing hostility in foreign capitals. More than ever, China needs Beijing to act, to point the way to future action. The failure to address this need at the Two Sessions suggests that China’s leadership has run out of ideas.

Most telling was the absence of the traditional press conference. Every Two Sessions meeting has included a space for China’s leadership to interact with both domestic and foreign media. The senior men in government were not always forthcoming at these exchanges, but their evasive answers at least pointed out publicly what matters they considered touchy or awkward. When this year’s press conference was cancelled, one can only conclude that the good and the great in the Forbidden City worry about being embarrassed.

The authorities did announce a real growth target for 2024. They set it at “around 5 percent.” In one respect, this information can only be described as bland. It was expected and is very close to last year’s pace. In another respect, however, it confesses failure of a sort. It is, after all, barely over half the real growth rate China averaged up until 2019. And with all the problems, it is not clear that China can even make that rate. Last year the economy had a tailwind from pandemic recovery. None of that is in play in 2024. Meanwhile, the authorities never explained how they intended to achieve the growth.

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Infrastructure spending was mentioned, one trillion yuan ($132.9 billion) worth of it. Infrastructure is China’s default form of economic stimulus. But little was said about how China would finance such spending. Local governments, the usual source of infrastructure financing, face huge debt overhangs, some so severe that they cannot even meet the public service needs of their populations. True, Beijing said it was ready to take the unusual step of issuing central government debt to finance the spending. But even that raises questions. The government already faces record high budget deficits. The emphasis on “ultra-long bonds” may hint at how difficult financial matters have become. Long maturities will delay the need to repay the debt and show that Beijing does not expect an immediate return from its spending.

Little was said about the property crisis with all its adverse economic and financial ramifications. Despite the need for bold action on this front, all Beijing has mustered so far are the “white lists” in which local governments compile a list of failing real estate projects for financing that the state-owned banks would review before advancing the funds. The amounts discussed so far, however, are tiny compared with the need, barely over 5 percent of Evergrande’s initial failure two and half years ago. Some weeks back, talk emerged about a plan for the government to take over some 30 percent of the housing market. Although such an action would have brought China other severe problems, it would have been big enough to disguise the property crisis. Nothing as bold or substantive as that got a hearing at the Two Sessions.

On China’s deflation problem, the authorities did indicate a target of 3 percent inflation for the year but said nothing about how they planned to achieve it. To be sure, deflation is more a symptom than a cause of the country’s challenges, which in part lie with inadequate demand for consumption and capital spending by private business, but neither did China’s leadership say much about these problems either. The only concrete suggestion was a promise by the People’s Bank of China (PBOC) to cut interest rates more than the bank already has. Given the lack of an economic response to past rate cuts, this promise hardly seems an adequate answer. In any case, as soon as the conference ended, the PBOC at its own meeting decided against another interest rate cut.

Talk did center on new growth engines for the economy, what the conference referred to as “new productive sources.” There was little new here. Renewable energy, advanced technology, and electric vehicles led the list. Like so much else offered at the Two Sessions, the talk was all aspirational. No one suggested how China planned to promote these areas beyond what is already being done. Given the sorry state of China’s economy, that is not enough.

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If the Two Sessions is supposed to announce a guide to China’s future, this year’s meeting missed its mission, especially in the face of China’s many economic and financial problems. Perhaps more complete and substantive guidance will emerge at next month’s politburo meeting, but given how the Two Sessions went, that seems unlikely. China’s leadership seems to have run out of ideas.

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