Economics: What price human values?

Ottawa - Canada is the Group of Seven economy we rarely think about. The country hits the news when Quebec goes through another bout of separatism. The rest of the world looks to it for leadership when troops are needed for another United Nations mission. And people who follow economic performance will know that Canada ranks at the top of the UN human development league, the measure devised to measure not just for wealth in terms of Gross Domestic Product per head, but to allow for social factors such as the levels of education and quality of health care.

Yet a brief visit this week, talking with business people and government officials, makes it clear that this enviable nation is wrestling with exactly the same economic problems as everybody else and is facing the need to reform its much admired welfare state.

The economic story is familiar but has a couple of interesting twists. Like the UK, Canada has managed four years of decent growth. The deep recession of the early 1990s was pretty much synchronised with the British one. As in the UK, growth slowed sharply at the end of last year and early this year. It is probably now picking up, but more slowly than in the UK.

Unsurprisingly, the fiscal deficit soared: the provinces' and federal deficits totalled over 5 per cent last year, and are about 4.5 per cent this. Next year the forecast deficit is that magic 3 per cent, suggesting that the Maastricht target has influence on this side of the Atlantic too.

By looking at other economic indicators, some more surprising facts emerge. Unemployment is stuck at 10 per cent and creeping up. So Canada had continental European, rather than United States or even UK levels of unemployment. The country is creating jobs but these are outstripped by the number of people entering the labour force.

There is a sharp geographical divide, not North-South as in the UK, but East-West. Ontario and the provinces to its west are gaining jobs; Quebec and the Atlantic provinces are losing them. A confidential report on the Canadian econ-omy by the International Monetary Fund, leaked earlier this week, praised Canada for sticking at cutting its deficits. But it argued that the country needed reforms, such as tightening eligibility for unemployment insurance, to try to encourage a more flexible labour market.

For the visitor, the most striking feature is the exchange rate: Canada must be the cheapest developed country in the world. With the Canadian dollar worth 74 US cents and 44 pence sterling, prices seem suicidally low: little more than half those in Britain. Yet this week the investment bank Wood Gundy published a paper suggesting that a rise in the Canadian dollar even to 80 US cents would plunge the country back into current account deficit.

This leads to the uncomfortable thought that the country is only managing to compete with the US - which has higher productivity and more flexible labour markets - because it has such a low exchange rate.

Where most people would look to Canada for lessons, though, is not how to run an economy, but how to run a humane and decent welfare state. The country shares many social problems with the US, including one which is causing great concern here - child poverty.Canada, despite its social safety net, appears to have a level of child poverty second only to the US in the developed world. And it is rising.

So clearly the social security system needs to be refashioned. The responsibility for this falls on the newest and youngest member of the Liberal government's cabinet, the Minister for Human Resource Development, a former management consultant called Pierre Pettigrew, whom I met on Friday.

It is telling that Canada should have a minister for human resources. The actual function is running the social security system. But names matter. Helping develop human capital is surely the most important thing any government can seek to achieve but very few explicitly set out to do it. The point of the name is that the job ought to be about actively helping people help themselves, rather than passively handing out taxpayers' money. The job is complicated by the split of responsibility between the Federal government in Ottawa and the provinces, and all the associated tensions.

On social policy, a rough demarcation is that Ottawa is responsible for redistribution through the tax system - both between rich and poor states and between rich and poor people - and the provinces are respon-sible for programmes to improve employment and opportunities. The social security system cannot, believes Mr Pettigrew, be split on 10 different province-based systems because people need to be able to move about the country without encountering "unreasonable barriers to social services". But some things are clearly better organised at province level.

One shift which may have relevance for the rest of the world is the effort to move from passive support for the unemployed to active measures to get them back to work. Measures include: enabling part-time workers to qualify for unemployment insurance, so that people are not discouraged from working part-time; subsidies for low-wage jobs, so that people at work are not penalised by losing social benefits; and help for people who wish to become self-employed.

Will these measures work? It is too early to say. All deals have to be negotiated with the individual provinces. What is clear, though, is that the government feels it is doing something special: applying a human face to capitalism. Mr Pettigrew calls it a "un douceur de vivre", a gentleness of life.

And that is what is most interesting about Canada. Like all other developed countries it has had to cut its deficit, which has meant a squeeze on the public sector. The aim now (cynics say this is because the Liberal government will soon be facing elections) is to feed back a little more money into social services in the most effective way. The aim would be pretty much that of a Blair government in Britain, only the stakes may be higher. If Canadian governments cannot persuade voters to continue to accept a high level of redistribution, it is not just a government that falls; the unity of the country may go too, for the glue that holds it together is partly based on transfers of wealth.

All round the world there are efforts to refashion the welfare state - in Mr Pettigrew's words "to make it survive" into the next century. The changes to the Canadian model are a key example of this. If they really do work they will carry lessons for all governments that want to generate gentleness in the tough capitalist world. And if they don't? Well, there will be a harsh message for Canadians, and for the rest of us too.