Viewpoint: Quebec

The economics of separatism

Canada's new prime minister, Joe Clark, has little support among French Canadians, perhaps increasing the possibility that Quebec will separate from Canada (with the western provinces likely to follow). My own favorite strategy is to decentralize national government and then privatize local government, so I am naturally sympathetic to Quebec's complaints against increasing federal intrusion. It is likewise reasonable for Quebec to doubt the wisdom of federal policies that have converted the Canadian dollar into a soft currency and pushed both inflation and unemployment toward double digits. But there nonetheless seem to be elements of insularity and scapegoating in the separatist movement that need to be rooted out.

Considerable attention has been lavished on the language problem in Quebec and on the supposedly related flight of people, business, and wealth. What is often missing from popular discussions of the issue, however, is an analysis of the economic aspects of separatist complaints and the probable economic consequences if the Quebec separatists actually achieved their objectives.

A survey undertaken for the Toronto Star a couple of years ago showed that most Quebec citizens felt that they had not received their share of the province's wealth because of confederation and English-speaking control of Quebec business. The Star concluded that "the issue of separation has economics at its roots."

One measure of the economic basis of separatism is per capita personal income, which is 11 percent higher in Ontario than in Quebec. Another measure is the proportion of households earning more than $15,000—which in 1974 was 38 percent in Ontario, 27 percent in Quebec. Moreover, the higher-income positions within Quebec itself tend to be held by the English-speaking minority (13 percent of Quebec's population).

The high representation of English-speaking businessmen is presumably related to the fact that foreign investment accounted for at least 40 percent ownership of 97 percent of Canadian manufacturing assets in 1973 and to the fact that 86 percent of foreign long-term investment in Canada was from the United States and Britain. Such massive foreign investment was doubtless essential to the rapid economic expansion throughout Canada, including Montreal; but its highly visible link with a minority language in Quebec could be expected to provoke some resentment.

A central link between separatism and French-Canadian feelings that they are the victims of cultural discrimination is the issue of whether Quebec is a net gainer or loser from the flow of federal taxes and spending. A survey of the relevant evidence by the C.D. Howe Research Institute of Montreal found no evidence that federal payments or benefits received by Quebec in the 1960s exceeded the amount the Quebec taxpayers paid to the federal government. More recent studies, however, according to the Howe study, do "indicate a definite trend for Quebec to derive increasing benefits from federal budgets—a trend that has accelerated since the 1973 oil crisis and the substantial federal subsidies that arose from it."

The federal subsidy for Quebec's oil imports, largely financed by a tax on oil exports, is now being phased out along with oil price controls. So the "increasing benefits" that Quebec briefly derived from that program will soon be gone. There are, however, more benefits from confederation than regional redistribution of federal funds, which is clearly a zero-sum game.

Discussions of the economic viability of a separate Quebec typically skip lightly over the real issues. In Canada without Quebec, John D. Harbron merely points out that Quebec covers a lot of land and is "an important source of natural resources and energy." But Quebec's standard of living cannot be maintained through land and raw materials alone. Mining, forestry, and electric power together accounted for only 11.6 percent of the value added by goods-producing industries in Quebec in 1974; manufacturing and construction accounted for 83.8 percent.

Far from being a "source of energy," an independent Quebec would be among the most energy-dependent nations on the globe, producing virtually no oil, gas, coal, or uranium. Quebec's hydroelectric power supplies only 18 percent of the province's energy consumption and is estimated to supply only 25 percent by 1985 (after the $16 billion James Bay Project is completed). Quebec industry, which once had unique access to cheap imported oil under federal law, also uses significantly more energy relative to value added than does the rest of Canada.

Quebec, like any developed economy, must attract and retain capital and skilled labor. Minerals in the ground are not enough to ensure prosperity. The province's heavy dependence on foreign capital means that Quebec simply cannot afford the luxury of harsh restrictions on foreign investment. Threats of nationalization are likewise apt to provoke capital flight.

Individual incentives are also important. Quebec had been losing productive people long before the new regime came into power. From 1966 to 1971, Ontario had a net immigration of 369,164, while Quebec lost 41,808 people from migration. In recent years, Ontario's population has grown more than twice as fast as Quebec's.

A major explanation for Quebec's relative failure to attract and hold workers is that Quebec has the highest rate of personal taxation in Canada, more than twice as high as in Ontario (and 26 percent higher for all types of taxes). Quebec has the only progressive income tax in Canada that is not adjusted for inflation, so that the effect of inflation in pushing people into higher brackets creates an increasingly strong incentive to live and work in other provinces. The highest tax rate is 68.9 percent in Quebec, 61.9 percent in Ontario. Quebec also has the highest minimum wage rate ($3.15 an hour) in North America, making its low-wage industries less competitive and aggravating the province's chronic high unemployment (7.4 percent from 1970 to 1976, compared with 6.1 percent in Ontario). If the predictable consequences of such regional disincentives are instead blamed on Ottawa or cultural discrimination, constructive corrective measures may not be taken.

A central question regarding the economic viability of an independent Quebec concerns its customs, trade, and monetary ties to Canada. The separatist slogan of "sovereign association" is not particularly illuminating, since any form of association (such as confederation) obviously requires some surrender of sovereignty. The separatists sometimes claim that separation would allow them to tailor monetary and trade policy to provincial needs, while at other times they suggest that the province's economic ties to Canada would remain virtually unchanged.

Some 40 percent of Quebec's production is sold elsewhere, mostly to the rest of Canada. So the question how to combine political separation with economic union is crucial to provincial living standards.

Rodrique Tremblay, Quebec's minister of industry and commerce, has suggested a Quebec-United States common market (which would violate the US policy of non-discriminatory trade relations), much larger US imports of aluminum and other Quebec products that are also made in the States, plus substantial US aid and support of a Quebec dollar. The evident implausibility of such a scenario is compounded by Quebec's new law requiring the use of the French language in business. It is not the rest of Canada that makes the use of English necessary; it is the United States. English is the universal language of business—as essential to world commerce as the US dollar. Quebec's language requirement is the equivalent of an import tax on English-speaking managerial and professional skills.

Quebec has a genuine problem with higher unemployment and lower incomes than in Ontario, although provincial tax and minimum wage policies must bear a large share of the responsibility. Moreover, the province's powerful economic ties to the rest of the continent necessarily preclude an insular policy toward trade, outside investment, and the international language of business. Failure to recognize this interdependence is perhaps a greater threat to Quebec's economic health than is separatism itself.