The Land of the Neverendum - How Quebec lost its way, by Peter Scowen
In 1960, Montreal was Canada’s most vibrant city. Once the seat of the Canadian Parliament, it was the country’s first metropolis and its economic engine during the fur-trade boom of the 18th and 19th centuries. The wealthy industrial barons who built the railway that would connect the east coast to the west lived and worked there. Most of the country’s oldest and most storied companies were headquartered in the downtown neighbourhood that sits elegantly between Mount Royaland the St. Lawrence River.
The 1950s in particular had been a period of rapid growth and new development, and the good years just kept coming. In the summer of1967, Montreal hosted a world’s fair that drew more than 50-millionvisitors. Nine years later, the city would host the Summer Olympics - the only Canadian city to ever do so.
Fifty years later, Montreal is a shadow of its former self. Its economic growth stalled in the late 1970s and has never recovered. Today it ranks a distant second to Toronto in population and economic power.
So what happened? The answer is complicated, but a key contributor to Montreal’s stagnation has been the politics of separation.
Even as Montreal was shining as an international metropolis in the 60s and 70s, there was a powerful under-current of political and social change that most visitors would not have noticed. One who did catch a glimpse of it, though, was Queen Elizabeth II, who opened the OlympicGames in 1976 but was urged not to do so by René Lévesque, the leader of Quebec’s fast-rising separatist party, the Parti Québécois. There were many French-speaking Quebeckers who did not want their proud moment to be presided over by the person they portrayed as the living symbol of British imperialism. Only the insistence of the prime minister of Canada, Pierre Elliott Trudeau, assured her participation at the opening ceremonies.
Lévesque’s election as premier just months after the closing ceremonies was a shock to Quebec and Canada.The arrival of the Parti Québécois came on the heels of a decade of violence in Montreal that culminated with the kidnapping and murder of a Quebec cabinet minister at the hands of a radical separatist group in 1970, and the declaration of martial law. The group in question, the Front de Libération du Québec, planted more than 200 bombs in Montreal during the 1960s, many of which went off before the bomb squad could defuse them.
The Parti Québécois’s election in 1976 crystallized some French-Quebeckers’ feelings of grievance and shattered the confidence of the rest of the country. The threat of Quebec independence suddenly became concrete when the new government announced that a referendum on separation would take place May 20, 1980.
That first referendum was defeated roundly. Sixty per cent of Quebeckers voted against separation. But that didn’t bring an end to the independence movement. “Until the next time,” Lévesque famously said in his concession speech. “The next time” came in 1995, and the No side won again. But this time it was by the narrowest of margins – 50.58 per cent vs. 49.42 per cent. Canada came within a few thousand votes of breaking up.
In between referenda, Quebec has cycled back and forth between the Parti Québécois and the federalist Quebec Liberal Party. For decades, each party served two terms before being turfed by voters as the popularity of independence waxed and waned, often in relation to economic conditions. Only recently have the federalist Liberals been able to win a third term in a row.
Today the PQ, the official opposition in Quebec, hopes to one day bring about a third referendum. Completing the trinity is the party’s Holy Grail, but it is also the bane of the majority of Quebeckers – French, English-speaking and other - who are fatigued by the constant battles, and tired of watching other provinces grow more quickly at their expense. The constant threat of one more referendum has been dubbed the “neverendum”.
The question for this piece, and for a country such as Scotland - which, like Quebec, has not seen the spirits of the independence movement dampened by the failed results of one referendum - is: to what degree has the constant threat of separation, combined with repeated referenda, harmed the economy?
Quebec, Canada’s second largest province by population, has not grown as rapidly in the past 50 years as its English-speaking homologue, Ontario. The two provinces started from a similar footing in 1960s. They had similar populations and many of the same resources. Both had a major city that was a major economic engine, though Montreal was the most vital city in Canada while Toronto was a provincial capital famous for its remarkable dullness.
However, Ontario’s population doubled between the censuses of 1961 and 2011, rising from 6.24 million to 12.85 million. Quebec over the same period increased from 5.26 million to 7.9 million, a growth rate only half of that of Ontario’s.
Montreal’s population has stagnated, sitting in 2011 at 1.6 million – a relatively small increase from 1.2 million in 1961. Over the same period, Toronto has grown by more than a million people to 2.8 million, with more than six million in the Greater Toronto Area. It is now the fifth largest city in North America, while Montreal sits at number thirteen.
As well, Quebec’s GDP growth rate has been consistently below that of Ontario, according to Statistics Canada. The government’s current forecast for 2016 puts Quebec’s growth at 1.4 per cent, compared to 2.5 per cent for Ontario. And Quebec has higher unemployment and is more dependent than Ontario on government spending to maintain its economy.
The reasons for this are complex, but no serious analysis would overlook the role of Quebec’s dominant political debate of the past half-century.
On a macro-economic level, the ups and downs of Quebec’s economy have followed those of Canada and the United States. When growth rises or stalls in the U.S. and Canada as a whole, the same thing happens in Quebec. However, the peaks of growth are lower, so over the economic cycle Quebec has been falling further behind.
The question then is, to what extent Quebec’s neverendum has exacerbated the downturns and slowed the upturns? And what direct, visible effect has the threat of separation had on the activities of companies and investors in the province? In other words, what micro-economic impact has there been?
The answers are clear. The threat of independence, and the promise of more referenda, contributed directly to the departure of head offices from Montreal, before and after the first referendum; the departure of entire company departments even if the head office stayed put; a direct loss of jobs; a reduction in foreign investment in the period just before the second referendum; and higher bond rates for Quebec debt when there is a threat of a new separatist government or another referendum.
Furthermore, while the province’s GDP has moved up and down on pace with other provinces and the country as a whole, it has done so partly thanks to government spending on infrastructure, and to an expansion of the size of government. In 2013, government spending in Quebec made up 47 per cent of the province’s GDP, compared to 38 per cent in Ontario and a Canadian provincial average of 39 per cent, according to the HEC Montréal Centre for Productivity and Prosperity.
As a direct consequence, Quebec has the highest marginal personal income tax rate in Canada, the highest gross debt and the highest gross debt-to-GDP ratio, which stood at 55.1 per cent on March 1, 2015, according to the Quebec finance ministry.
Overall, Montreal’s annual growth rate of 1.5 per cent over the past 10 years has been the lowest of Canada’s biggest cities.
Research done by l’Institut du Québec - a research group operated jointly by the Conference Board of Canada and Montreal’s leading business school, École des hautes études economiques - concluded in 2013 that, if Montreal’s metropolitan region had grown at the average rate of economic growth in Canada over the last 25 years, per capita income would be $3,450 higher today.
The Economic Consequences of the Neverendum
The non-political factors that contributed to Quebec and Montreal’s fall from the top of the economic heap in Canada are straightforward.
Toronto and its region began to overcome the geographic disadvantages it had and exploit its opportunities.
While Montreal was the economic motor of Canada during the fur-trade era and into the first part of the 20th century, by 1950 Toronto was already asserting itself. The opening of the St. Lawrence Seaway in 1959 gave Ontario - which sits up-river on the Great Lakes - access to new markets and ended its reliance on Montreal to handle its marine export business.
The growth of passenger airlines and the construction of major autoroutes also reduced Toronto’s isolation in central Canada. With easier access to Toronto, companies that would have at one time considered Montreal to be the natural choice began to set up shop there, thanks to its stolid Protestant character, reliable infrastructure and conservative banking culture. As well, with the discovery of vast quantities of oil in Alberta, there was a westward-shift in Canada’s economy under way.
But perhaps Toronto's most important advantage was its access to a vast and growing population in an area surrounding it called the Golden Horseshoe. Densely populated and heavily industrialized, it is home today to nine million Canadians. It also has tens of millions of American customers close by in the most heavily populated parts of the United States (New York State, Michigan, Pennsylvania and Ohio). Toronto is one of the most globalized cities in North America, serving as a hub for two countries and multiple states and provinces.
Montreal by contrast is a large city in a relative population desert (it borders Vermont, New Hampshire and Maine, three relatively sparsely populated US states), and it competes with eastern powerhouses such as New York and Boston for regional dominance. Toronto’s rise to prominence in Canada was perhaps inevitable, and Montreal’s relative decline in status an out-growth of that phenomenon.
But that ignores the hard facts of what occurred in Montreal and Quebec in the wake of the rise of the independence movement. It was my own father who first began to record these consequences in an organized fashion.
Reed Scowen, 84, was elected to the Quebec legislature in 1978 as a member of the federalist Liberal Party. As a former businessman trained at Harvard University and the London School of Economics, he was quickly assigned the role of opposition finance critic. Tall, red-haired and clinical of mind, he was, in the imaginations of his nationalist foes, the epitome of the ‘English oppressor’.
In his role, he picked away in fluent French at the PQ government’s unsupported arguments about the economic benefits of independence, and made them confront one particularly unpleasant truth: that companies began moving their head offices, departments and factories out of Montreal at an accelerated rate after the PQ’s election in 1976.
Between 1979 and and 1983, Scowen released three reports on this flight of capital. In order to make the data as watertight as possible, only companies whose spokespeople confirmed the departure of a department or a head office were included. There were a number of other companies that didn’t want to be involved in the politics of the debate on separation, even though there were news reports about them leaving the province.
They were left off the log of departed companies.
The Liberal Party also limited itself to companies that moved ten or more employees. The final number is therefore generally thought to be conservative.
In the end, between 1977 and 1982 — with the first referendum in 1980 the Liberals reported the departure of 71 head offices from Montreal, mostly to the benefit of Toronto and its region. In some cases it was just the head office that moved, while factories, warehouses and various departments were left behind. In other cases the head office left with some of its departments and factories. And in some cases the entire company quit the province.
As well, another 28 other companies moved one or more departments out of the province. The companies reported a total of 14,141 jobs lost in Quebec.
After centuries of growth, suddenly Montreal was bleeding businesses.
Among those who uprooted their head offices were the Bank of Montreal, the Royal Bank of Canada (which continues to list Montreal as its head-office address but only symbolically), the Canadian Chamber of Commerce, Dominion Bridge, Du Pont of Canada, Electrolux, Hostess Food Products, Macdonald Tobacco (by then owned by the American company R.J. Reynolds), Monsanto Canada, Northern Telecom, Prudential Insurance, Redpath Industries, Simmons, Sun Life and Westmount Life Insurance Co.
Companies had left Quebec before 1976, but they were always replaced by new ones moving in. That give-and-take stopped dead after the PQ election and during the period of the first referendum. From 1977-82, the Liberals could only find one company that moved any of its operations from another region of Canada to Quebec. That was Electrolux, which after moving out its head office and taking 100 jobs to Toronto, returned 10 of those jobs to Montreal.
In the end, more than 700 companies left Quebec in whole or in part from 1976 to 1985, according to Michel Kelly-Gagnon, the president of l’Institut économique de Montréal.
It wasn’t just companies leaving. During the same period, Quebec underwent a dramatic out-migration. According to the census data of 1976 and 1981, 140,000 English-speaking people, many of them well-educated and experienced in business, left Quebec in those five years alone. The province’s share of the Canadian population dropped from 27 per cent to 25 per cent (it currently sits at 23 per cent). Another 100,000 English-speaking people left the province after 1981.
Quebec’s share of manufacturing investment in Canada plunged from 23 per cent to 18 during the same five-year period (’76-’81), according to Statistics Canada, and its share of new jobs from 20 per cent to 16, when compared to the previous six years.
The chief reason for leaving the province cited by company spokespeople was uncertainty surrounding Quebec’s political future. English-speaking Canada was a far better bet when considering where to locate, or relocate, because you could still have access to the Quebec market without any of the risks wrought by political turmoil.
The decline in the number of head offices continued long after the first referendum. In 1990, five years before the second referendum, 96 of Canada’s top 500 companies measured by gross revenue were located in Montreal. By 2011, the number had dropped to 75, according to the Fraser Institute, a Canadian policy think tank.
This loss of jobs and businesses in Quebec during the period of the first referendum had a direct effect on the province’s fiscal health. The PQ government set about borrowing and spending money at a rapid pace, partly to compensate for the loss of business. In the four years of the government’s first mandate (1977-81), it tripled the deficit from $847 million to $2.3 billion (all figures Canadian dollars). The province’s debt went from $5 billion in 1976-77 to $10.3 billion in 1980-81, according to Quebec government figures.
This trend has never reversed itself in Quebec. Rare has been the year Quebec hasn’t run an operating deficit. In March 2015, its net debt was $186 billion, with $121 billion attributable to deficit spending.
Measuring whether Quebec’s overall economic growth has lagged because of its never-ending independence movement is a more complicated question. Part of the difficulty is that government statistical agencies only began collecting complete GDP and investment data in 1981. Estimates of Quebec and Canada’s GDP prior to then are largely derived from economic modelling. So this is not a precise science.
Nonetheless, Caisse Desjardins, a large credit-union and insurance company based in Quebec, published a telling analysis in 2014 of Quebec’s GDP growth from 1950 to 2010. It demonstrates a clear pattern in the province.
In the 1950s, 60s, and 70s, Quebec saw rapid growth. The province’s annual GDP growth rate was regularly above 10 per cent, and in a few years it approached the 14 per-cent mark. There were recessions in 1957-58, in 1974 and again in 1979 that pushed growth into negative numbers. But for the most part Quebec was a boom province.
Caisse Desjardins’ analysis gives reasons for the boom from 1950 to 1979, and for the recoveries after the three brief recessions. It says the boom came thanks to investment in natural resources and the building of road and railway infrastructure, growth in consumer spending, and the expansion of tertiary sectors such as finance, healthcare, public administration, and education. The construction of the 1967 world’s fair and the 1976 Olympics sites also spurred growth.
From 1980 onward, a different dynamic sets in. GDP growth rates never hit nine per cent and are generally under six per cent. Recessions in Quebec last longer and go deeper than in the rest of Canada. And the recoveries become less dependent on new private investment and far more reliant on government spending.
According to Caisse Desjardins, a recovery recorded in the second quarter of 1983 came thanks to a reduction in interest rates, massive provincial government investment in home-building, government support for struggling businesses and government job-creation programs.
A recovery that lasted from Q3 1989 to Q1 1990 is credited to the growth of Quebec’s public sector, an investment in Quebec roads, millions spent by the government on supporting business consolidations, and massive investment from Hydro Québec, the provincially owned hydroelectric power utility.
In a recovery in Q2 1992, Quebec again goes to work building roaeinvesting in government (health care, education and cultural affairs) and giving tax breaks to companies. And Hydro-Québec ramps up its capital projects.
The same things happen in recoveries in 2001 and 2009. The Quebec government spends and spends, on tax breaks, on investments, on infrastructure and on bigger government. There is no mention by Caisse Desjardins of private investment as a cause of the recoveries after 1980.
This helps explains why, in 2013, government spending in Quebec made up half of the province’s GDP, compared to 38 per cent in Ontario. And why Quebec’s debt is higher than any other province, and why it has the highest debt-to-GDP ratio in Canada. Quebec cannot seem to count on private investment to spur its growth.
From 1997 to 2002 alone, the government invested $2-billion in privat companies to encourage them to set up shop in the province. Several high-profile projects funded by the Société générale de financement, the crown corporation that invested taxpayers’ money in those years, collapsed shortly after they started production because they weren’t competitive.
It doesn’t help that Quebec is located right beside Ontario, whose lower income tax rates, and the fact that it is the epitome of political continuity, makes it more attractive to business investment.
Karin Hollenz, a German doctoral candidate, in 2000 wrote a thesis, “Historic Roots and Socio-economic Consequences of the Separatist Movement in Quebec.” Her conclusion showed decline in non-residential investment just before the 1995 referendum.
The hard numbers are telling. “Business investment in Quebec was 12 per cent lower in 1995 than in 1994. In Ontario and Canada it decreased by 5.2 per cent and 7.3 per cent, respectively,” Hollenz wrote. She attributed the difference to political instability.
According to one economist writing in the Montreal Gazette in 1998 and quoted by Hollenz, “over the 1994 to 1997 period ... real business investment, the most dynamic force in any economy, and the most vulnerable to uncertainty, crawled along at 1.7 per cent per year in Quebec, while in Ontario it raced ahead at a 10.3-per-cent pace, more than six times faster.”
There were other impacts of uncertainty. In March of 2014, during a Quebec general election campaign that saw the separatist Parti Québécois leading in the polls, a peculiar thing happened, according to Michel Kelly-Gagnon of l’Institut économique de Montréal.
“During Quebec’s provincial election this past spring, when it looked like the separatist Parti Québécois had a good chance of forming a majority government and calling a third referendum on independence, the province’s 10-year bond yields rose to 17 basis points above those in the neighbouring province of Ontario, from a gap of just 10 basis points a few weeks before,” Kelly-Gagnon wrote in a blog post.
The spread fell back to five basis points in July, a few months after the PQ was roundly defeated in the election by the federalist Liberal Party.
The polls were wrong, but the heavily indebted province’s economy had still taken a hit.
Conclusion – lessons for Scotland and the UK
Quebec and Scotland are different in important ways, but they have a very similar problem - a portion of their populations has been persuaded of the case for separating themselves from the larger country. Both have pro-independence parties that have had remarkable electoral success but which have lost referenda on separation. Both independence parties hope to hold another. Both vow that independence can be achieved quickly, without cost to voters, and without acrimony.
Welcome to the Neverendum.
Scotland risks a protracted stay in this frustrating limbo. With the Scottish Nationalist Party in control of Holyrood the independence agenda could remain at the forefront of Scottish politics for a generation.
It is likely that members of Holyrood from all parties will try to expand the jurisdiction of their legislature, and thus their own influence, and that grievances and hurt feelings could be stoked up on any political friction with the rest of the UK.
Scottish voters will swing back and forth between separatist and unionist parties, depending on the changing political landscape. The cycling between pro-independence party and union party that has defined Quebec elections since 1976 could well become a fact of life, and, has also happened in Quebec, will exact a toll on the economy.
In this scenario investors will not know from election to election where Scotland stands on the issue of independence. Some investors may be indifferent. But many of them will choose to invest south of the Border, or in another European country altogether, because they will be more confident that they will not face the upheaval that Quebec companies faced after 1976, and yet they will still enjoy access to the Scottish market. Those that do invest in Scotland may demand a higher return on their investment, in the form of lower corporate taxes, higher prices or other benefits that end up being paid for by taxpayers or consumers.
This is the main lesson of Quebec’s neverendum for Scotland and indeed the whole of the UK. But there is another lesson, this one for the pro-UK side. In the 1995 Quebec referendum, federalists made the mistake of focusing their arguments against independence on economic issues. The pro-union side spoke about globalized economies and the benefits of being big. They forgot about the cultural side of life, and failed to make the case for a Quebec that could enjoy its unique identity as both French and Canadian. Suddenly, the polls showed that the Yes side was going to win. Only a last-minute show of affection and need by English-speaking Canada prevented disaster. And even then, the pro-Canada side only won by a few thousand votes.
Nationalism cannot effectively be countered solely with arguments about a reduction in GDP, an increase in bond rates or a potential loss of investment. National identity is an emotional issue, and for some the economic costs resulting from separation would simply be a price worth paying. Anyone desiring to keep Scotland in UK needs to take this argument on by showing how Scots culture and national identity is best preserved and enhanced by staying with the rest of Britain rather than by breaking away from it.
But that said, what is so frustrating for federalists in Canada, and most likely for their counterparts in Scotland, has been the unwillingness of the leaders of the independence movement to address the real costs of separation - not to mention the economic harm produced by an endless flirtation with breaking up a well-established, peaceful, wealthy nation. It is dishonest to promise that something as disruptive as independence can be delivered with no cost. It is worse to pretend that it can be achieved without personal loss for the many who are opposed to it. Quebec today is a culturally vibrant but economically stagnant province.
Montreal, even in its decay, is a gorgeous city. The French language dominates almost completely. Old inequities that saw an English minority dominate a French majority have been corrected. Quebec’s independence movement has been given a fair hearing and rejected twice, but there is a stubborn vestige from another time that continues to push for separation at all costs, and one more referendum.
And so the uncertainty and its consequences continue. Let’s hope that at least some good can come from this if others learn the lessons of the neverendum.
Peter Scowen is a member of the editorial board of The Globe and Mail in Toronto.
Appendix – The Scots in Montreal
It is somewhat ironic that, as some Scots bid to separate from England, the “England” that some Quebeckers want out of their lives is actually Scotland. The fact that most of the Montreal’s largest businesses in the 19th and 20th centuries were owed by Scottish immigrants and their descendants, and that Montreal’s English-language character is far more Scottish than English, is lost on most French-speaking Quebeckers. English, Scottish, Irish, Welsh - we were all les maudits Anglais, all considered to be equals in the oppression of the French working class.
What is today Quebec was handed over to the British from France in the Treaty of Paris of 1763. The treaty was the outcome of the Seven Years War, which the British won when they took Quebec City, with the help of the 78th Fraser Highlanders, in 1759. The French of Quebec still view that episode in their history as “la conquete” - the conquest. The country they had colonized and the culture they had begun to create there were stolen from them by “les anglais.”
As a consequence of the British conquest, many of the wealthier, more educated French-speaking people in Quebec returned to France. They left behind the poorer classes: coureurs de bois, farmers, clerics.
Abandoned by their former masters and caretakers, those left behind retreated into the arms of the Roman Catholic church, which preached to them about the evils of material desire and capitalism, and impressed upon them the need to raise large families in order to maintain a majority, population-wise. The departure of the French upper classes left the door open for a grou of rugged men of Calvinistic bent to roar into the colony and dominate the business classes of Montreal and Quebec City. Some were the victims of the Highland Clearances, some were poor and looking for a better life, and some came for the opportunity and adventure.
We’re talking about Scots. They came, they saw and they reconquered. Hardy and bon vivant, they were immune to the depredations of the Canadian winter and unaffected by their English counterparts’ tiresome obsession with class. They immediately went to work with the French coureurs de bois and the natives, and within 20 years had taken over a significant part of the lucrative fur trade in the western part of what was to become Canada.
Chief among them was Simon McTavish, a highlander from Stratherrick. With his partners, a majority of them Scottish but also a few English and French, they formed the North West Company and started to cut into the business of the older and larger Hudson’s Bay Company, which was controlled from London. They were eventually forced into a merger with their erstwhile competitors when the battle for commercial advantage devolved into violence and the British government stepped in. They become one company in 1821 under the leadership of another Scot, George Simpson.
The Scots of the 18th century, fresh from their union with the English, quickly became the dominant English-speaking culture in Montreal. In 1785, they founded the Beaver Club, a dining club for the fur traders who wintered in the city and wanted to share their stories of adventure and travel in the North West. They were the fur barons of Montreal, wealthy, full of joie de vivre and noted for their hospitality. They built
Presbyterian churches in Old Montreal and soon numbered in the thousands. In general, the Scots of Montreal were the upper and middle classes, along with the English, and controlled the city’s commercial life.
The educated French in the city stuck to the professions, such as lawyer or notary, or joined the church. The uneducated French and the Irish, along with a relatively small proportion of Scots, were the working poor.
As Montreal grew, the Scottish barons moved out of the narrow confines of the original city along the St. Lawrence River and up onto the expansive plateau at the foot of Mount Royal. There they began to build massive homes with names like Ravenscrag and Cragruie. The wealthiest and most powerful people in Canada congregated there. Their new neighbourhood was so opulent that it would eventually become known as the Golden Square Mile.
The Scots kept coming. They established more businesses, usually in association with English, French and American partners, but always in the lead role. Most noteworthy was the Bank of Montreal in 1817, led by John Richardson, born in Banffshire. By 1900 the bank was Canada’s largest and had assets equal to anything in New York City (today it goes by the name BMO).
Others of note were John Redpath of Berwickshire. Redpath, whose working-class roots led him to distrust the English aristocracy, is credited with helping to industrialize Montreal in the 19th century.
Starting in construction, he built or was involved in the construction of major Montreal landmarks, such as the Lachine Canal and Notre-Dame Basilica in Old Montreal. His family sugar company was a major Montreal employer, and he used his great wealth to finance numerous other businesses. He also fought successfully to reduce tariffs that favoured British-based companies over those in Canada.
The Scots, being consummate merchants, built numerous department stores whose names lasted into my lifetime, such as Morgan’s, Simpson’s and the tartan-branded Ogilvy’s. A first-generation Scot founded the Montreal Evening Star, one of the great newspapers of the city until it folded during a labour dispute in 1979. William Dow founded a famous brewery that competed with the English-born Molson family, whose brewery was the first in North America. William Macdonald, who was born in Canada of Scottish parents who had fled the Jacobite Rebellion, founded the famous Montreal tobacco company.
Doctors trained in Edinburgh were among the leading physicians of their day and helped found Montreal General Hospital in 1821. Two Scottish industrialists donated the land and money to build the Royal Victoria Hospital. The Douglas Institute, originally a home for the insane, was named after James Douglas, a Scottish-born physician who first made his name in Quebec City.