Kevin Lynch oneNS Oct 2 2014

GLOBALIZATION, TECHNOLOGY AND DEMOGRAPHICS ARE RESHAPING THE GLOBAL GROWTH EQUATIONKevin G. Lynch

Vice-Chair BMO Financial Group,and

Former Clerk of the Privy Council and Secretary to Cabinet, Government of Canada

“One Nova Scotia” RoundtableHalifax, Nova Scotia

October 2, 2014

1One Nova Scotia Roundtable, Halifax, Oct 2, 2014

Observation 1: The context facing Canada and Nova Scotia is changing

The core question facing us in Nova Scotia is: how well and how quickly are we adapting to this change?

The demographic imperative - we’re aging,

with profound impacts

Globalization 2.0 -the hyper-

connected world

Global financial crisis - with endless

consequences

Technology revolution - changing

everything

The competitiveness paradigm shift - need an innovation engine

Observation 1: The context facing Canada and Nova Scotia is changing. The reality today is a world that is changing, profoundly. Structural trends are reshaping economies, societies, politics, expectations, and are redefining the “drivers of success”, for everyone. Change is the new constant.

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Observation 2: The new global economic reality is a “two-speed world”

2-speed World: By the Numbers

2012 2013 2014 2015Avg growth

2012-15

Emerging Economies 5.1 4.7 4.6 5.2 4.9

Emerging Asia 6.7 6.6 6.4 6.7 6.6

China 7.7 7.7 7.4 7.1 7.5

Advanced Economies 1.4 1.3 1.8 2.4 1.7

US 2.8 1.9 1.7 3.0 2.4

EU -0.7 -0.4 1.1 1.5 0.4

Canada 1.7 2.0 2.2 2.4 2.1

Source: IMF World Economic Outlook Update, July 2014

2-Speed World: The Visual

1-2%growth

6-7%growth

5%growth

Observation 2: The new global economic reality is a “two‐speed world” ‐‐‐ with advanced economies in the slow lane and emerging markets leading global growth. With 90% of Canada’s trade with “slow growth economies”, this creates a trade and investment diversification imperative towards emerging markets for Canadian business.

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Observation 3: Trade diversification drives growth

RankTop Canadian

Export Markets, 2013

% of all 2013 Exports of Goods and Services

Size of Economy (2013 USD Billion, GDP)

4-year Average Growth: 2013-2016

1 United States 75.9% 16,800 2.7%

2 China 4.3% 9,181 7.4%

3 United Kingdom 3.0% 2,536 2.4%

4 Japan 2.3% 4,902 1.1%

5 Mexico 1.1% 1,259 2.8%

6 Hong Kong 1.0% 274 3.6%

7 Netherlands 0.8% 800 0.8%

8 South Korea 0.7% 1,222 3.5%

9 Germany 0.7% 3,636 1.3%

10 France 0.7% 2,737 1.1%

11 India 0.6% 1,871 5.7%

12 Belgium 0.5% 507 1.0%

13 Brazil 0.5% 2,243 2.4%

14 Norway 0.4% 511 1.6%

15 Italy 0.4% 2,072 0.3%

Sources: IMF World Economic Outlook, Oct 2013, Stats Canada

Observation 3: Trade diversification drives growth ‐‐‐ but Canada’s current export markets do not align well with the distribution of current global economic activity, and align even less well with where future export demands will originate. Canada’s exports are greatly underweighted in Asian economies, and emerging markets in general.

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Observation 4: Lack of trade diversification has costs

Export Values comparing actual Canadian activity weighting with China and Emerging Market Economies to what it

would be with US weighting

Exports to Emerging Market Economies

% Share of total exports

Note: Bank of Canada foreign activity measures calculated based on 2012 share of Canada and US exports to China and select EMEs. The numbers displayed represent the gap between 2013Q2 exports and the level of exports implied by the recalculated foreign activity measures.Values expressed in 2007 chained dollars.Sources, IMF, Statistics Canada, Bank of Canada calculations. Las Observance 2013Q2

Canada UK Germany US Japan Australia0

10

20

30

40

50

Source: IMF Last observation: 2012

%

Observation 4: Lack of trade diversification has costs ‐‐‐ Canada’s trade exposure to emerging markets is smaller proportionally than other G7 countries. If Canada had the same proportion of exposure to emerging markets as the US, the demand for Canadian exports would be $60 billion higher, and that is a lot of lost growth, incomes, and jobs.

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Observation 5: Asia is a market for Canada’s natural resources, and much more

Sources: OECD, The Emerging Middle Class in Developing Countries , http://www.oecd.org/dev/44457738.pdf; McKinsey. Global Insight, February 2009; MGI China Model, February 2009; MGI

Numbers (millions) and Share (percent) of the Global Middle Class

2009 2020North America 338 18% 333 10%

Europe 664 36% 703 22%

Central and South America

181 10% 251 8%

Asia Pacific 525 28% 1740 54%

Sub-Saharan Africa

32 2% 57 2%

Middle East and North Africa

105 6% 165 5%

World 1845 100% 3249 100%

Private Domestic Consumption2020 (Forecast)

CAGR2007-2020(%)

2.2

1.5

6.3

1.9

2.3

3.8

1.2

1.5

8.3

1.3

Observation 5: Asia is a market for Canada’s natural resources, and much more. There are 800‐900 million middle class consumers in Asia today, and their number will double by 2020. Private domestic consumption in China is just 36% of GDP today, compared to 72% in the US, will surpass all countries except the US and Japan by 2020 ‐‐‐ and this is a largely untapped export market for Canadian firms.

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Observation 6: There are many untapped export opportunities in Asia for Nova Scotia firms

Consumers - $22 T consumption in emerging markets in 2025 and almost 2B middle class consumers -wanting better foodstuffs, better housing, better financial services, better education, etc.

Natural Resources - A 30% increase in global energy demand, of which China and India alone will account for 60% by 2035.

Infrastructure - $27 T expected infrastructure spend in emerging Asia, creating opportunities in engineering services, consulting, financing , specialty services, as well as basic materials.

Agriculture and Food - Middle class wants variety in agriculture and foodstuff as well as increased food safety.

Tourism - approximately 80 million outbound Chinese travelers in 2012, growing to over 110 million in 2015 - fastest growing segment in the world.

Education - 1 B Asian youth to educate in any given year, and Canada/Nova Scotia have high quality, reasonably priced product offerings.

Health Care - Spending expected to triple across Asia by 2020 but public systems are rudimentary-to-mediocre, and private systems are mixed.

Observation 6: There are many untapped export opportunities in Asia for Nova Scotia firms. Energy can be a beach‐head to a broader trade relationship with Asia. But we need to build a “brand” ‐‐‐ presently the only Canadian brand in Asia is Canada itself, and it is positive but opaque. Seven specific opportunities in Asia to which the strengths of Canada and Nova Scotia are well‐aligned include:

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Observation 7: Consider the energy opportunities, and risks

CANADA’S ENERGY SECURITY CONUNDRUM

US Hydrocarbon Supply

US Hydrocarbon Demand

+100% reliance on US market for gas, oil and electricity exports

+Increasing Canadian

unconventional supply capacity: oil sands + shale gas

=Declining Canadian security of

energy demand

CANADA’S ENERGY SECURITY CONUNDRUM

US Hydrocarbon Supply

US Hydrocarbon Demand

+100% reliance on US market for gas, oil and electricity exports

+Increasing Canadian

unconventional supply capacity: oil sands + shale gas

=Declining Canadian security of

energy demand

Global energy demand:

• >33% growth by 2035• <5% growth in OECD• China demand > U.S.

Global energy supply:

• Shale oil, oil sands • Shale gas • Renewables

Energytechnology:

• Fracking, oil sands• Renewables• Water remediation; CO2

Globalrisk/uncertainty:

• Geopolitical: Iraq, Syria, Nigeria, Russia, South China Sea

Global energy equation:

• Shifts in security of global demand/supply

• U.S. energy self-sufficiency

• Global gas market?

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Observation 7: Consider the energy opportunities, and risks ‐‐‐ we need to diversify our energy export markets away from one single energy buyer, and the “rewards” to doing so are huge ‐‐‐ LNG exports would raise gas prices; oil exports would reduce oil price “discounts” in US markets and absorb volume increases. And consider the energy risks if we do not diversify ‐‐‐ Canada’s “energy security conundrum.”


Observation 8: Consider the food and agriculture opportunities, what we’re capable of and what we’re missing

100% =

ROW

China

Dairy

383

Beef

260

Poultry

173

Pork

400

Sources: McKinsey. USDA, NBS, Food and agriculture organization of the United Nations (FAOSTAT)

China’s share of consumption%, 100% = $B Total

Agricultural Resources

Ranking

Lentils 1st

Linseed 1st

Mustard Seed 1st

Dry Peas 1st

Forest 2nd

Barley 2nd

Canola 2nd

Blueberries 2nd

Cranberries 2nd

Mixed Grain 2nd

Wheat 8th

Canada’s global production rankings for agricultural resources

50

15 10 6

Observation 8: Consider the food and agriculture opportunities ‐‐‐ Asian, particularly Chinese, growing demand for better quality, higher nutritional foodstuffs. China is now the world’s largest market for meat (at $300 Billion) and there is substantial room for it to grow further, as well as expand poultry, dairy products and seafood. But, Canada is not yet a major player.

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Observation 9: Consider the education opportunities, with Australia the best example of what is possible

SOURCE: McKinsey “International Education: A Key Driver of Canada’s Future Prosperity,” Advisory Panel on Canada’s International Education Strategy, August 2012; Government of Quebec

International student market share (est.)

Percent

InternationalstudentsNumber

UnitedKingdom

UnitedStates

Canada

Australia

10

18

5

13

428,000

723,000

240,000

557,000

Observation 9: Consider the education opportunities. There is a great scope to grow education as a major export to Asia…the fact that Australia, which is smaller than Canada, has a share of the international student market that is 2½ times Canada’s shows both today’s deficit and tomorrow’s potential for Canada to grow education as a major export to Asia. Australia is the exemplar, and our competitor.

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Observation 10: Consider the value added tourism opportunities, and what it will take to capture them

Mongolia 0.3

Canada

0.3

0.3Germany0.40.4

Indonesia 0.6UK

1.1

Cambodia

Thailand

Australia

Singapore

1.5

1.2

1.0

USA

Russia

0.70.8

Vietnam

1.4

France

1.6

1.7

Taiwan

Japan

Malaysia

China international travelers by destination Millions, 2011

1.8

2.4South Korea

SOURCE: McKinsey. CEIC, China tourism yearbook, Euromonitor (2011) Ctrip survey 2/2013; China Tourism Academy “China outbound travel satisfaction survey”

Singapore 79.5

Germany 80.0

South Africa 80.2

Brazil 80.3

Agentina 81.0

France 82.3

New Zealand

82.5Spain

82.6

Italy 82.7

Canada 84.5

Chinese tourist satisfaction rate

Observation 10: Consider the value added tourism opportunities ‐‐‐ the fastest growing global tourism segment is Chinese travelers‐‐‐but, despite having received “approved destination status” for Chinese tour operators, we rank 14th in attracting high spending Chinese tourists. There is great potential to capture a much higher share of Chinese travelers, provided we customize the product, the marketing and the branding.

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Observation 11: How well positioned are Canada and Nova Scotia for success in today’s global economy?

In today’s hyper-competitive world, the question for Nova Scotians is: is being “pretty good”, good enough?

Rankings Global Competitive-ness Index (WEF)

Innovation Capacity (WEF)

ProductivityGDP per employed worker, current prices, USD (OECD)

Soundness of Financial Systems (WEF)

Net Debt to GDP, 2013(IMF)(lowest to highest)

Tertiary Education, % of Population (OECD)

K-12 Pisa Results: Math (OECD)

Number of Universities in Top 100 (Times Higher Education)

Ranking of Cities – EIU Global Liveability(# of cities in top 10; ties settled based on rankings)

Institutional Strength and Resilience, OECD Countries (World Bank)

Norway

Finland

Sweden

Estonia

Denmark

12th

18th

Canada

New Zealand

South Africa

Hong Kong

Singapore

1st

58th

United States

United Kingdom

Germany

Australia

Canada

5th

1st

Switzerland

Singapore

Finland

Germany

United States

14th

5th

#1

#2

#3

#4

#5

Canada

UnitedStates

Canada

Japan

United States

New Zealand

Finland

1st

3rd

China (Shanghai)

Singapore

Hong Kong

Taipei

Korea

13th

36th

Australia

Canada

Austria

Finland

New Zealand

2nd

n/a

Switzerland

Finland

Germany

Israel

United States

27th

5th

Luxembourg

Norway

US

Ireland

Belgium

17th

3rd

Finland

New Zealand

Sweden

Switzerland

Norway

9th

17th

Observation 11: How well positioned are Canada and Nova Scotia for success? High wage, high income, lower scale economies cannot compete on standard products produced with common technologies at low input costs ‐‐‐ they have to be innovation intensive. While innovation‐driven competitiveness is complex, the core drivers include: innovation, quality of human capital, entrepreneurship and frameworks. And, while Canada does reasonably well at present (and noting that Nova Scotia ranks lower in all categories), the question is: is being “pretty good”, good enough in today’s hyper‐competitive world?

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GLOBAL 54UAE 79China 79Singapore 73Indonesia 72India 69Malaysia 65Canada 60Netherlands 60Mexico 59Hong Kong 59Australia 58Brazil 57Germany 57Argentina 53U.K. 52Sweden 51S. Korea 51S. Africa 50U.S. 49France 46Japan 44Italy 43Turkey 41Spain 39Ireland 39Russia 37Poland 35

Global Trust Index, 2014

50%

51%

51%

55%

59%

59%

60%

63%

64%

65%

65%

66%

70%

75%

79%

Financial services

Media

Banks

Chemicals

Energy

Pharmaceuticals

Consumer healthcompanies

Telecommunications

Brewing and spirits

Consumer packagedgoods

Entertainment

Food and beverage

Automotive

Consumerelectronics

Technology

Global Trust in Sectors, 2014

Observation 12: Trust matters for leading change

Observation 12: Trust matters for leading change. The Edelman Global Trust Barometer shows a decline in the public’s trust in many countries and many sectors over the last decade. And this matters when introducing new products, new policies, new innovations and new markets. Canada has more trust in business and government than the global norm, and all other G‐7 countries, and technology is the new sectoral gold standard for trust.

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Trust Index is an average of a country’s trust in the four institutions of government, business, media and NGOs. 20‐country global total (does not include Argentina, Hong Kong, Malaysia, Singapore, South Africa, Turkey, UAE).

Source: 2014 Edelman Trust Barometer Global Energy Industry Results


Observation 13: Culture and attitudes matter to success for Nova Scotia in this profoundly changing world

• We need to avoid “short term-ism” --- it is hard to build for our long term future with a quarterly mindset. A focused, long term Strategic Plan, with clear implementation milestones and accountabilities, is a good place to start.

• We need to avoid “status quo-ism” --- it cannot be a strategy for long term success in a profoundly changing world. Re-orienting the economy towards more innovation-intensive firms, particularly start ups, is key.

• We need to avoid “parochial-ism” --- everyone needs clear “going global” strategies today. Job #1 for Canada and Nova Scotia is focussed, export market diversification.

• We need to avoid “risk aversion” in policy and operations. Consider a number of immediate innovations: reverse trade missions; foreign student strategy; incubator(s); pervasive co-op; and Chinese tourism as possible places.

Observation 12: Culture and attitudes matter to success for Nova Scotia in this profoundly changing world. To realize our full potential in Nova Scotia, we need to better embrace entrepreneurship and innovation, be less risk averse, be more ambitious about seizing new global trade opportunities, and, be clearer about our collective interests as well as our private goals. Complacency is a risk best avoided.

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Kevin Lynch oneNS Oct 2 2014

Presentations & Public Speaking

Transcript of Kevin Lynch oneNS Oct 2 2014