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The provincial legislature at Queen's Park in Toronto. Don Drummond’s report on Ontario’s economy got most of its attention for its warning of a $30-billion deficit. (Deborah Baic/Deborah Baic/The Globe and Mail)
The provincial legislature at Queen's Park in Toronto. Don Drummond’s report on Ontario’s economy got most of its attention for its warning of a $30-billion deficit. (Deborah Baic/Deborah Baic/The Globe and Mail)

What's wrong with Ontario - and how to make it right Add to ...

It got most of its attention for its warning of a $30-billion deficit, and its 362 cost-cutting recommendations to help avoid that fate.

But the scariest number in Don Drummond’s landmark report to the government of Ontario is a much smaller one: two, as in 2 per cent.

That’s the level of annual economic growth that Mr. Drummond, a former economist at Toronto-Dominion Bank, thinks the country’s largest province will have in the years to come. And while long-term projections are notoriously unreliable, that pessimism is grounded in the reality of a manufacturing-reliant province that coasted by on built-in advantages – a low dollar, low energy prices, a reliable U.S. market in close proximity – that have now evaporated.

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For all that there is to fear in Mr. Drummond’s projection, and for all the consternation that his doom-and-gloom projection is causing, there is also cause for hope. Something is happening in the boardrooms of the private sector and the backrooms of government: The grim outlook is kicking off an overdue debate about how to reinvent a province that is still the economic heart of Canada.

For a government based in Toronto, which has been largely sheltered from the storm, it has been too easy to tinker around the edge of economic policy, to flirt with pet causes and hope for the best. Premier Dalton McGuinty has tried to pull a few levers – investing heavily in education; ushering in a more business-friendly tax regime; heavily subsidizing what he thinks is an emerging green-energy industry, along with older sectors like auto production.

But even his own officials concede that it doesn’t add up to a comprehensive strategy. And the province is handicapped by something else. Its corporate leaders have maintained an aversion to risk that one provincial Liberal lightly ascribed to Ontario’s Scottish Presbyterian roots.

That caution famously insulated Toronto’s financial sector from the worst of the 2008 global meltdown. But it has also led to a well-documented lack of innovation, fewer startups and fewer entrepreneurs, with little sign that the government’s efforts to create a more favourable corporate tax regime are sparking the investment it expected.

Now, the jolt from Mr. Drummond – coupled with a flurry of other bad news, and the bitter symbolism of a recent closing in London, Ont., of a locomotive factory owned by Caterpillar Inc. – has challenged the assumptions that both business and government leaders have relied on. And most notable among those is the idea that the province that has long enjoyed the benefits of a diverse economy can continue to be all things to all people, which has driven the government’s willingness to prop up flagging industries with various forms of subsidies.

“What are we good at and how do we grow it?” asks Janet Ecker, a former provincial finance minister who now heads the Toronto Financial Services Alliance.

It’s a sentiment that was frequently echoed in interviews with economists, executives, public policy experts and government officials. For a province as big as Ontario, developing a more specialized economy isn’t as easy as picking one or two industries and going with it.

Financial services tends to be flagged as the area with the most room for growth, not least because of the opportunities afforded by the resource boom in Alberta and other provinces. (As CIBC vice-president and former federal minister Jim Prentice puts it, “These are pan-Canadian opportunities we should be taking advantage of – not simply regional projects.”) But while that should help Toronto to continue to be an engine of growth, it won’t do much to create needed jobs in the north or in the southwest.

For that reason, the idea of “clusters” – a buzzword a couple of years ago that was eventually dismissed as faddish – is creeping back into vocabularies both inside and outside government.

Kitchener-Waterloo, the province’s gold standard on that front, won’t be easy to replicate; there are only so many tech capitals to go around. But the more optimistic members of both the public and private sectors suggest that, with time, other capitals could emerge as well – building the industries where the province has already shown some potential.

Despite the province’s mixed experience with green energy, the distance it’s already gone down that path could help a city such as Windsor emerge as a clean-tech hub. Northern cities, such as Thunder Bay or Sudbury, could become national leaders in the resource sector, particularly if the province gets serious about developing the so-called mineral “Ring of Fire.” A Hamilton or a London could build around health sciences – a growth industry if ever there was one.

The organic way that Kitchener-Waterloo has grown around the University of Waterloo and Research In Motion Ltd. helps explain why most everyone agrees that quick fixes will prove quixotic. But even the longer-term ones will prove beyond Ontario’s reach if it’s not able to get beyond custodianship and stewardship, and start looking toward innovation and entrepreneurialism; to growth rather than preservation.

There are ways for business, government and the broader public sector to work together on those fronts – from venture capital, to a greater use of diasporas to connect with emerging markets such as China and India, to greater specialization among universities (of the sort that was so pivotal to Kitchener-Waterloo’s success). But it will require leadership – a willingness to confront the economic disease that is driving Mr. Drummond’s calls for cost cutting, rather than just treat the symptoms.

One component of Mr. Drummond’s report that caught Mr. McGuinty’s eye, according to a source, was the chapter that calls for government to “rethink and reset its business support programs.”

Among the recommendations is to start from scratch on the $3.6-billion it provides businesses in direct subsidies and tax expenditures, scrapping the ones that don’t show results.

It would be a bold sign of a willingness to do things differently. But what the new way of doing them would be is a conversation that’s only just starting.

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SECTORS OF STRENGTH

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Financial services

Canada’s financial services sector is a world leader whose reputation was burnished by the sector’s strong performance during the global financial crisis of 2008. But there is still plenty of room to boost its contribution to Ontario’s GDP.

“There is the ability to continue to promote that, and promote the importing of jobs from around the world to Ontario,” said Jim Leech, head of the Ontario Teachers’ Pension Plan.

The opportunity to do so is rising as banks and insurers in Europe and the U.S. retreat, making employees and business available. “There are companies out there that are looking at moving operations, they are not happy in London and New York and other locations,” said Janet Ecker, former Ontario finance minister and president of the Toronto Financial Services Alliance.

Don Drummond, as co-chair of the Toronto Financial Services Working Group, signed off on a report in 2009 that set a goal of making Toronto one of the two leading financial clusters in North America, and one of the top 10 global hubs for the sector. (Roughly one-third of Canada’s financial services employees are concentrated in the Toronto area.)

The report, by Boston Consulting Group, identified opportunities to create 25,000 to 40,000 new jobs and add $4.5-billion to annual GDP within five years. Those included establishing Canada as a leading centre for mining, metals and energy financing – an area that already accounts for about 7,000 jobs including investment bankers, analysts, trader and lenders – and for retirement financing.

One of the next steps to support the financial services industry is identifying what infrastructure and other supports it could use, Ms. Ecker said. “For example, Porter Airlines is wonderful infrastructure support for the financial services cluster in downtown Toronto, because you’re an hour or an hour and a half to all of the other major American financial cities, including New York and Chicago,” Ms. Ecker said. “All of that feeds into developing and maintaining a cluster.”

Technology

Technology is one of North America’s most lucrative sectors, and for the past decade Research In Motion’s international appeal helped brand Ontario as a major tech hub. The BlackBerry maker’s magnificent growth helped foster a vibrant tech community in the Kitchener-Waterloo area, about an hour northwest of Toronto, and the University of Waterloo became known for churning out highly-sought-after computer science grads.

That ecosystem is now at risk as RIM restructures. For years, tech grads had reason to stay in Ontario, but if the community withers, more could flock to Silicon Valley.

To support the sector, the provincial government helped fund innovation hubs such as the MaRS Discovery District in Toronto. The idea: Put computer programmers, genetic researchers and business minds under one roof and they’ll create magic.

The problem now is that there are plenty of smart technology ideas to run with – they just don’t have the private sector capital to get them off the ground. Innovative ideas have little value if they can’t be commercialized and marketed.

A similar situation has played out in the clean-tech sector, which Premier Dalton McGuinty made one of his key priorities. The government subsidized clean energy to lure green businesses to the province, but there hasn’t been much action other than Samsung’s big wind energy deal.

“It's my belief that government has done a lot of things that they needed to do to set the table,” said John Armstrong, a long-time management consultant and managing partner at Capco. He is also a member of Ontario’s task force for competitiveness, productivity and economic growth. “I lay a lot of it at the feet of businesses to step up.”

Health care

Health care is not usually top of mind when Ontarians think about strong business sectors, but a number of influential thinkers say it could be one of our best opportunities.

From health care itself to medical devices, technology, nursing homes and drugs, there are vast markets to be tapped into. Canada’s pension plans have begun to show an appetite for investments in this sector, which promises to be high-growth as the baby boomers’ medical needs grow.

When Mr. Drummond was still chief economist at Toronto-Dominion Bank, he wrote a report that identified the health system as an increasingly important economic driver.

But, it’s politically sticky: “The key to building a health care cluster will be to throw the door open more widely to private sector involvement.”

Many of the elements required to create a world-class health care cluster already exist, including a competitive tax environment and investments in research and commercialization, but a concerted strategy is needed to pull all the pieces together, Mr. Drummond wrote in that 2010 report.

Ilse Treurnicht, the CEO of MaRS Discovery District, said the health care sector is growing. But she called on Ontario to adopt more of this province’s own health care innovations so that Canadian companies can garner the evidence that they need to make their innovations successful. “Right now they can’t penetrate our own system, they can only come back once they’ve sold elsewhere,” she said.

Resources

Ontario’s once thriving mining community has lost some of its lustre. Not only have Western Canada’s vast oil sands and gas deposits stolen the spotlight, but foreign giants such as Vale and Xstrata swooped in in 2006 and bought out Ontario mining stalwarts such as Inco and Falconbridge. In the years since, mining has felt more like a part of Ontario’s past than a focal point of its future.

Yet just one province to the east, the provincial government is embarking on an audacious project to double down on mining and resources. Rather than shun its expansive north, Quebec is emphasizing it, hashing out an ambitious 25-year project dubbed “Plan Nord.” Quebec is betting its future on developing mining, energy and forestry resources located far north of its major cities.

Ontario could adopt a similar scheme. Its other viable sectors – technology, financial services and health care – are all based in the south, and the sizable population that still lives near places such as Sudbury and Timmins have little else but resources to rely on.

Plus, there remain resources to develop. For those who believe that Ontario’s northern mining deposits are tapped, look no further than a company like Detour Gold, which is developing a gold mine north of Timmins. The firm already has a market value of $2.7-billion and it easily raised $270-million a few weeks back because investors believe in its potential.

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