Comprehensive Wealth in Canada

Canadians are Concerned About the Future — and Rightly So

Canadians enjoy levels of well-being that are the envy of much of the world. But is that well-being sustainable? Will our children and grandchildren do just as well as us?

Most Canadians think not.

In a 2018 Environics poll, nearly half (48 per cent) of Canadians reported being basically pessimistic about the direction of the world. In another 2018 poll, the U.S.-based Pew Research Center found that 67 per cent of Canadians said they believed their children would be financially worse off than them.

Short-term indicators like gross domestic product (GDP) are insufficient for measuring sustainability. This is a fact noted by G7 leaders in the communiqué from their 2018 summit in Charlevoix, Quebec. The heads of state of the world’s leading economies said that countries must begin to compile measures that focus on long-term prosperity and well-being.

GDP measures income today. But what matters in the long run is wealth, the foundation of income in the future. More specifically, a country’s produced, natural, human, financial and social capital determine its prospects for the future.

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1. Slow Growth in Canada's Overall Comprehensive Wealth (Especially Compared with Other Leading Countries)

The value of Canada’s comprehensive wealth portfolio grew from $647,000 per capita in 1980 to $701,000 in 2015, an annual average growth rate of 0.23 per cent (Figure 1). In contrast, GDP grew at an annual average rate of 1.31 per cent over the same period. In other words, GDP grew more than five times faster than the wealth foundation on which it rests.

Viewed through the lens of comprehensive wealth, then, Canada’s development has been far less impressive than GDP alone suggests.

Moreover, according to the UN, Canada’s comprehensive wealth performance has been the worst among G7 countries in recent decades.

Canada is fortunate to be wealthy compared with its peers. In a 2018 global study on comprehensive wealth (based on methods broadly consistent with those here), the UN ranked Canada first among G7 nations in terms of the level of comprehensive wealth per capita. Its position at the top of this list was due largely to its reserves of natural capital, an advantage that puts the country in a position of clear strength vis-à-vis its peers. Canada had nearly four times more natural capital than the next closest of its G7 peers (the United States) in 2014.

At the same time—and consistent with the findings of this study—the UN ranked Canada last among G7 members in terms of the growth in comprehensive wealth. By the UN’s estimates, Canada’s comprehensive wealth actually fell between 1990 and 2014 (by 0.25 per cent annually on average), whereas that of every other G7 nation grew substantially (Table 1).

Clearly, other countries are doing better than Canada at ensuring the growth of their comprehensive wealth portfolios—and they’re catching up to Canada’s level as a result. In 1990, the average comprehensive wealth in other G7 countries was 53 per cent of Canada’s; by 2014, this share had climbed to 74 per cent. At current rates of growth, the UN’s findings suggest Canada will lose its first-place position to Japan in 2024 and will fall to fifth place in less than a generation (2039).

In addition to these main areas of concern, we find other areas of weakness in the country’s comprehensive wealth portfolio.

• Canada’s largest and most important asset—its human capital—did not grow at all from 1980 to 2015. In fact, the average Canadian held just slightly less human capital in 2015 ($496,000) than in 1980 ($498,000). This raises questions about how well equipped the workforce is to deal with the challenges faced by the economy: low productivity growth, the need for innovation and economic diversification and U.S. protectionism, to name a few.

• Canada’s market natural assets (minerals, fossil fuels, timber, agricultural land and built-up land), traditionally a backbone of the country’s wealth, declined by 17 per cent from 1980 to 2015 as a result of depletion of many of Canada’s natural resources.

• The value of Canada’s oil and gas assets fell by 83 per cent in 2015 on the heels of the drop in oil prices. While oil prices are notoriously volatile (and have since regained some of their losses), current trends in global energy markets suggest oil prices are likely to trend downward in the long term, raising the risk of stranding some of Canada’soil sands assets, which (as noted) represent 25 per cent of business-sector produced assets.

• Canada’s key ecosystems—forests, wetlands, grasslands and lakes/rivers—declined in physical extent (though modestly in comparison to their size) and became increasingly impacted by human development.

In a positive trend, Canada’s financial capital grew rapidly, especially in recent years. For likely the first time in history, Canadian ownership of foreign financial assets outstripped foreign ownership of Canadian assets in 2015. These gains were, however based on unusually favourable market trends—especially unprecedented growth in the U.S. stock market and the declining value of the Canadian dollar—rather than on actual investments.

As for Canada’s social capital, it appeared to hold steady over the period. Diversity in social networks and trust in institutions showed steady increases, while voter turnout in federal elections generally declined (rebounding somewhat in the two most recent elections). Other social capital indicators showed little change in either direction over the period.

The overall trends in the country’s comprehensive wealth portfolio are summarized in Table 2. As a result of these trends, we believe Canada’s comprehensive wealth portfolio—and Canadians’ long-term well-being—could suffer additional losses from relatively small changes in economic, environmental or social conditions. The most likely of these—rising interest rates and a cooling of the housing market—began to play out at the end of 2017 with consequences yet to be determined.

While Canadians clearly feel intuitively their long-term well-being is under threat, they do not have the information they need to confirm their concern. This is because comprehensive wealth is not measured in Canada today. Some pieces of the portrait are available from Statistics Canada, but a complete, regular and clear assessment is missing.

In contrast, Canadians are fed a regular and rich diet of short-term statistics like GDP—monthly, quarterly and annually—and the media devote a lot of time and space to reporting them.

We believe Canada—and all countries—must begin measuring comprehensive wealth to balance the short-term view of development offered by GDP. With comprehensive wealth to use as another lens on progress, Canadians would know with confidence whether their well-being was on a sustainable path—and they would be able to hold their leaders accountable. Just as importantly, decision-makers would have a new tool to guide decision making, ensuring impacts on long-term well-being were considered alongside traditional short-term concerns like GDP growth. Today, the decision-making scales are tipped in favour of the short term. We believe it is time they be balanced.

Comprehensive wealth measures—if they were regularly available in Canada—would focus decision-maker’s attention on issues that we believe receive less attention than they deserve. Most obviously, they would draw attention to the impact of policies and projects on the assets that make up the comprehensive wealth portfolio. This alone is a significant strength. Wealth, in spite of its importance in assessing sustainability, receives far less attention today than GDP and other short-term measures.

By focusing on assets, which are long-lived, comprehensive wealth measures would draw attention to the long-term impacts of policies and projects. These can often be overshadowed by short-term benefits. Jobs, for example, can be both short- and long-term and the impacts of each are quite different. Creation of short-term, relatively low-wage jobs in construction, for example, is not as advantageous in the long run as creation of permanent jobs in, say, advanced manufacturing.

Similarly, investments in capital-intensive projects, may have large and positive impacts on GDP in the short term but can lock economic development into a specific path for many years to come. This may be fine if the long-term prospects for that path look good but less so if the investments are in a mature industry facing disruption from rapidly emerging technologies.

Another benefit of comprehensive wealth is the coherent framework it offers for assessing the diverse issues that can be associated with policies and projects. Issues ranging from job creation to natural resource revenues, ecosystem health, investment flows, debt and social development can all be assessed by considering their impacts on the various elements of the comprehensive wealth portfolio.

The basic decision-making criterion of the comprehensive wealth framework is that the value of the assets that make up the portfolio (and, therefore, the size of the portfolio itself) must be stable or increasing in per capita terms for development to be sustainable. Applied in the context of decision making, this means a policy or project should be evaluated based on its projected effect on the value of the comprehensive wealth portfolio. Projects/policies that maintain or increase per capita comprehensive wealth should be considered desirable and those that do not should be considered undesirable.

Beyond the effect on asset value, applying the comprehensive wealth lens leads to a focus on two other dimensions of assets: their diversity and their distribution.

Asset diversity is important for the resilience of wealth and well-being. Just as financial advisors counsel individuals to diversify their stock and bond holdings as a hedge against collapse in one part of their portfolios, nations also require asset diversification. Concentration of assets in one category of capital can lead to fragility and risks to sustainability.

Distribution of assets matters for reasons beyond diversity. Whereas diversification is the classic hedge against having“all your eggs in one basket,” concern about the distribution of wealth has more to do with ensuring fairness in economic and social opportunities across groups or regions.

Of course, simply publishing estimates of comprehensive wealth would do nothing to assure the sustainability of Canadians’ well-being. The measures would have to be used to guide decision making, just as GDP and other indicators are used today. With comprehensive wealth measures in place, decision-makers would have a more balanced perspective on progress. No longer would short-term income growth be the default focus of attention. It would be complemented by an equally important focus on the asset base underlying Canadians’ well-being.

Fortunately, Canada is better positioned than any other nation to show leadership on the measurement of comprehensive wealth. Statistics Canada—already a world-class organization—measures more of the components of comprehensive wealth than any other statistical agency. Its measures of produced and financial capital are excellent as they stand. It has sound—if not fully complete—measures of natural capital that could be readily augmented.Its experimental measures of human capital could also be readily turned into official measures. Many elements of social capital are captured in its various household surveys and these could be brought together into more cohesive statistics.

We believe the federal government should fund Statistics Canada to carry out the needed changes to its programs and begin regular reporting on comprehensive wealth, just as it has long done with GDP. Doing so would require a relatively modest investment on the government’s part but would pay major dividends for the nation.

It would help Canadians better understand their future prospects. It would better equip leaders to make balanced decisions. And, not least, it would put Canada in the position of leading on the G7’s call to go beyond GDP and measure what matters in the long term for prosperity and well-being.