The Economic Costs of Quebec's Separation Will Be Steep: Response

Abstract

It is a pleasure to comment on the article by my friend and esteemed colleague, Pierre-Paul Proulx. His article is a very informative one for a U.S. audience, for it provides a good representation of the arguments being put forward by economists in Quebec who favor the sovereignty option. Professor Proulx argues that both in the short and long term, a sovereign Quebec would be better off economically because, first, misguided policies pursued in Ottawa for many years have worked against the economic interests of Quebec and, second, Quebec City would be able to tailor-make its domestic and international policies so as to effect maximum benefit to the 7.3 million residents of the newly created nation-state. In addition, Professor Proulx repeats the oft-stated argument that growing international interdependence provides a favorable setting for subunits of current nation-states to seek more political autonomy while, at the same time, taking advantage of regional free trade or common market arrangements. Consequently, Scotland, Corsica, the Basque region of Spain, Northern Italy, and Quebec are in a better position than ever before to assume control of the political levers of power, while continuing to participate fully in such regional economic groupings as the European Union or the North American Free Trade Area (NAFTA). As I mention in my own article, there is some validity to both arguments. Quebec's share of Canada's exports, inward foreign direct investment, and foreign tourists is well below its percentage of Canada's population and gross domestic product. Moreover, Quebec's growing north-south economic linkages with the United States would certainly help to cushion any losses in east-west commercial linkages with the rest of Canada in the post-sovereignty era. On the other hand, the Quebec government's own fiscal and economic policies have left much to be desired, and Premier Bouchard has openly admitted that the province's fiscal and economic house need to be put in order before another referendum is scheduled. Quebec ranks as the second most indebted non-central government in the world and its annual deficits continue to exceed three billion dollars (C) per year. The public bureaucracy is already bloated; even so, the PQ government has pledged to absorb tens of thousands of federal employees who now live in or have ties to Quebec after independence. Quite frankly, the Quebec government is very ill prepared, in the short term, to assume the responsibilities of sovereignty. In my article I estimated that Quebec City would accept 21 percent of the federal government's debt, minus assets. Professor Proulx believes that figure is too high, whereas most observers in the rest of Canada consider my calculation to be too low. However, even if 10 billion dollars (C) is subtracted from the equation, Quebec will still be saddled with over 180 billion dollars (C) in total governmental debt and huge annual interest payments on this debt. Moreover, over 50 percent of this debt would be owed to investors outside Quebec, and the government might face the additional challenge of lower bond ratings and a devalued currency. In addition, economic growth has been stagnant in the period since the 1995 Referendum. For the twelve-month period ending in August, 1996, Quebec created only 3,000 new jobs, compared with 26,000 in British Columbia, 33,000 in Alberta, and 150,000 in Ontario. The provincial unemployment rate also stood at 11.8 percent, more than two percentage points higher than Canada's overall 9.4 percent jobless rate. The Montreal region, which is the engine of the provincial economy and accounts for 43 percent of Quebec's population and 53 percent of its manufacturing production, continues to be in the economic doldrums. Its unemployment rate stood at 12.4 percent in August 1996, and five of the eight cities in Canada with the highest rates of joblessness were located within the province of Quebec. …