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Economy Lab

Canada's recovery: Good governance or just luck? Add to ...

It is by now a commonplace to remark that Canada’s recession was much less severe than was the United States and in many other rich countries. On the other hand, it is also true that there were other rich countries that were even less affected that Canada: Australia, for example, sailed through the crisis almost without incident. What are the lessons to be learned from these comparisons? Were we luckier or better-governed?

More related to this story



Part of the answer must surely be luck: Australia had the good fortune to be much more closely linked to the booming economies in Asia, and Canada had the good fortune of having an almost indestructible banking sector. This financial system’s roots are generations-deep, so neither the current government nor its predecessor can claim credit.



So Canada was relatively fortunate in that it was faced with a more manageable problem than some other countries. When the crisis hit, the Bank of Canada was able to expand its balance sheet in order to keep financial markets functioning so that the Canadian economy could take advantage of the improvement in our terms of trade. In hindsight, the recovery was more or less assured once commodity prices began to recover in early 2009.



What of the role of the federal government? The proper way to evaluate policy is to consider the counterfactual: what would have happened if the federal government had behaved differently? I can think of many ways that the government could have made things much worse -- the spending cuts that were its initial reaction were certainly ill-conceived. But since that austerity program was abandoned, it’s hard to point to a serious error that significantly deepened and/or prolonged the recession.



So the Conservatives cannot claim all the credit for those cross-country differences: Canada was luckier than the United States and the other G7 countries. The best it can say is that it didn’t make any serious mistakes that made the recession significantly worse.



It may not sound like much, but it’s more than some other governments can say.



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