Front Matter

Front Matter

Vladimir Klyuev, Martin Mühleisen, and Tamim Bayoumi
Published Date:
October 2007
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    ©2007 International Monetary Fund

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    Typesetting: Julio R. Prego

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    Northern star : Canada’s path to economic prosperity / edited by Tamim Bayoumi, Vladimir Klyuev, and Martin Mühleisen. — Washington, D.C. : International Monetary Fund, 2007.

    • p. cm.—(Occasional paper ; 258)

    Includes bibliographical references.

    ISBN 978-1-58906-614-4

    1. Canada — Economic conditions — 1991–2. Canada — Economic policy. 3. Fiscal policy — Canada. 4. Monetary policy — Canada. I. Bayoumi, Tamim A. II. Klyuev, Vladimir. III. Mühleisen, Martin. IV. International Monetary Fund. V. Series: Occasional paper (International Monetary Fund) ; no. 258

    HC115.N678 2007

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    The following conventions are used in this publication:

    • In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.

    • An en dash (−) between years or months (for example, 2005–06 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2005/06) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2006).

    • “Billion” means a thousand million; “trillion” means a thousand billion.

    • “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

    As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.


    Two decades ago, Canada was running current account deficits and its fiscal situation looked dismal. While inflation had come down from double digits, it remained in the 4–5 percent range, the unemployment rate was above 8 percent, and GDP growth was erratic. Gloom permeated assessments of Canada’s economic prospects.

    Facing up to the challenges, Canadian authorities undertook an impressive set of reforms to set the economy on the right course. Tax reform, tight expenditure control, as well as an explicit fiscal framework that focused on reduction and, subsequently, elimination of the deficit have turned the fiscal situation around. Pension reform has put the Canada and Quebec Pension Plans on a sustainable track. An inflation targeting (IT) framework, which Canada was the second in the world to introduce, has anchored inflation expectations and made monetary policy more predictable. The Canada-U.S. Free Trade Agreement, followed by the North American Free Trade Agreement (NAFTA), opened the economy to more foreign competition. This was accompanied by an agreement on internal trade and other measures to make the economy more flexible.

    As a result, the economic situation now looks dramatically different. The stop-and-go cycle is a thing of the past. Inflation has averaged 2 percent since December 1995, when that number was adopted as the target in the IT agreement. The unemployment rate is at a 33-year low, and real GDP growth has been among the fastest in industrial countries during the last 10 years. The federal budget has recorded nine surpluses in a row, and general government debt is trending down. The current account has been in surplus since 1999. The new framework has dramatically improved macroeconomic stability, with variation in GDP growth, inflation, and interest rates much lower than previously. While the performance of many industrial countries has improved, Canada’s improvement has been particularly dramatic.

    This improvement has occurred despite a series of major shocks, including the emerging market financial crises of the 1990s; the collapse of the dot-com bubble later in the decade; the September 11, 2001, terrorist attacks on the United States; outbreaks of SARS (severe acute respiratory syndrome) and mad cow disease (bovine spongiform encephalopathy, or BSE); growing competition from the rising Asian economies, particularly China; and wide fluctuations in commodity prices. The Canadian economy has exhibited remarkable resilience in the face of these challenges. In particular, the economy has adjusted extremely well to the recent run-up in energy prices and the exchange rate, which has put differential pressures on regions and sectors, boosting the resource-rich western provinces and squeezing manufacturers in central Canada.

    Despite the successful record, challenges inevitably remain. Population aging and the rising cost of medical services are putting pressure on government finances, and reining in health care costs remains an important challenge, which is by no means unique to Canada. While safe and sound, Canada’s financial sector may lack dynamism—possibly reflecting a regime that effectively precludes takeovers from home or abroad. Marginal tax rates on investment are among the highest in the world, which may help explain why the rise in productivity has been less striking than for real GDP.

    The IMF enjoys a close working relationship with the Canadian authorities and has been highly supportive of Canada’s strong institutional framework and continuing structural reforms, just as the Canadians have provided the IMF with much useful insight on its own future direction. This volume collects analyses of various aspects of the Canadian economy undertaken by IMF staff members in recent years. Strikingly, despite its economic size, Canada features many characteristics of a “small open economy”—it is relatively open; its trade is highly concentrated with the United States, making it susceptible to economic fluctuations in its southern neighbor; and it is subject to the vicissitudes of global economic conditions by virture of its large commodity exports. Canada’s success in facing challenges common to many other IMF member countries can thus provide valuable lessons to a wide range of academics and policymakers.

    This paper has benefited from the comments of colleagues in the Western Hemisphere Department (WHD) and in other departments of the IMF. In particular, the editors appreciate the contributions of Charles Collins and Christopher Towe. The editors are also grateful for the assistance of Alfred Go, RoseMarie Elizabeth Fonseca, Eneshi Irene Kapijimpanga, and Volodymyr Tulin in the WHD department. Linda Griffin Kean of the External Relations Department edited the manuscript and coordinated the production of the publication. The views expressed in this paper are those of the IMF staff and do not necessarily reflect the views of national authorities or IMF Executive Directors.





    Bureau of Labor Statistics (U.S.)


    bovine spongiform encephalopathy (mad cow disease)


    Canadian Association of Petroleum Producers


    cubic feet of natural gas per barrel of oil


    consumer price index


    Canada Pension Plan


    CPP Investment Board


    distance to default


    Employment Insurance


    Energy and Utilities Board (Alberta)


    finance, insurance, and real estate


    gross domestic product


    Global Economic Model (IMF)


    Global Fiscal Model (IMF)


    Guaranteed Income Supplement


    generalized method of moments


    gross product originating (by industry)


    Goods and Services Tax




    information and communication technology


    industrial organization


    large banking group


    million barrels a day


    Monetary Conditions Index


    Manufacturers’ Sales Tax


    North American Free Trade Agreement


    North American Industry Classification System


    National Energy Board


    Old-Age Security


    Organization for Economic Cooperation and Development


    ordinary least squares


    Organization of the Petroleum Exporting Countries


    Office of the Superintendent of Financial Institutions


    public expenditure management


    real effective exchange rate


    Report on the Observance of Standards and Codes (IMF and World Bank)


    Registered Pension Plan


    Registered Retirement Savings Plan


    severe acute respiratory syndrome


    Stability and Growth Pact (EU)


    Standard Industrial Classification


    small and medium-size enterprise


    Spousal Allowance


    total factor productivity


    tax-prepaid savings plan


    vector autoregression


    World Economic Outlook


    West Texas Intermediate


    yearly basic exemption


    yearly maximum pensionable earnings

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