Candid about Canada and the U.S. - for the future.

• Author: Walker, Michael A.
• Position: Viewpoint

Anyone interested in investing in Canada, or in doing business there, probably has two concerns: the state of the Canadian economy and the referendum furor surrounding the rewriting of our country's constitution, particularly its effect on Quebec's relationship with the other provinces. I'd like to put you at ease on both counts.

First, you may have been reading about efforts in Canada to rewrite our constitution and the possible secession of Quebec. I don't think you have to be concerned, at least in the next seven to 10 years, that we're going to have a breakup of Canada. Instead, we're going through another chapter in the 125-year saga of Canada's trying to deal with its linguistic duality and its peculiar attitude towards the rights of individuals and the rights and powers of the state.

But what are the financial implications of all this referendum activity? As a financial manager, how should you regard Canada as a place in which to invest and do business?

Well, I think all of the exchange-rate and interest-rate repercussions have already happened. After all, financial markets can vote any time. They didn't have to wait to take into account the uncertainties associated with the referendum dispute. As a consequence, they've adjusted.

Interest rates immediately reflect any change of assessment of risk and, of course, Canadian interest rates had to spike upward--to make sure foreign investors would continue to lend us the very large amounts of money we need to finance our government debt and corporations. The short-term interest-rate differential shot up to 4 percent but has subsequently subsided. That upward spike and subsequent decline was the extent of the financial impact of the referendum.

From now on, with the referendum discussion behind us, the interest-rate structure will continue to subside, and the value of the Canadian currency should firm as we go forward.

BULLISH ON CANADA

Despite the difficulties we see in all of the Northeast of the United States and in Canada, I'm very optimistic about the prospects for the Canadian economy. Why? Above all, because the tax burden falling on Canadian families has stabilized. One of the major problems with our North American economies, and in fact with world economies, is the very large tax burdens that people are bearing. But in Canada for the last three or four years the tax burden has been stabilizing. People are more aware of and more politically sensitive to the undesirability of further increasing the tax burden. And the...