Canadians have rarely had more reason to be optimistic. Forecasters say we have one of the world's healthiest economies, projected to grow faster in 1998 than every major industrialized country, including Britain, Germany, Japan and the United States. For once the traditionally depressed Atlantic region is sharing in the bounty: Newfoundland is producing oil; Prince Edward Island is enjoying a record number of tourists; Nova Scotia and New Brunswick are tapping into huge natural gas reserves. In this sea of prosperity only British Columbia stands out as an island of economic gloom.

The contrast is so alarming that last month B.C. Liberal leader Gordon Campbell described B.C. as a "have-not" province. That label is usually reserved for provinces that receive equalization payments from the federal government, of which there are currently seven: Saskatchewan, Manitoba, Quebec and the four Atlantic provinces. They will receive a total of $8.5 billion in extra money in 1998-99 because their "fiscal capacity"—the ability to raise tax revenues to spend on provincial programs—falls below the national standard of $5,370 per person.

Using Ottawa's standards, Mr. Campbell is technically wrong; B.C. has a fiscal capacity of nearly $6,000 per resident, second only to Alberta. But if the provincial economy continues to perform as poorly as it has in recent years, British Columbians can expect many more comparisons to their poorer cousins on the other coast.

Use any yardstick and the picture looks grim. B.C. was the only province to shed jobs between January 1997 and January 1998. It has the highest unemployment rate west of Quebec. The Canadian Imperial Bank of Commerce forecasts the province will barely avert a recession this year, and the economy will grow by just 1%—dead last in Canada. If the population increases by 1.5% as expected, the net result will be that B.C.'s per-capita wealth will shrink in 1998 for the fifth time in the six years. "If we weren't growing from a population perspective, I think we would be in a recession," says John Winter, president of the B.C. Chamber of Commerce. "That's the scarier proposition for me."

Downsizing in the forest sector will take in operations large and small, from MacMillan Bloedel Ltd., which laid off 1,300 B.C. workers in January, to a Weldwood of Canada Ltd. plywood mill in Quesnel, which recently cut 80 jobs. The economic pinch will be felt in urban centres as well as logging towns. Manpower Temporary Services, the world's largest international staffing company, says Vancouver will be the worst large city in Canada for job seekers this year. Moreover, Manpower says Vancouver is the only large city where employers expect to give more pink slips than add workers this year. Not surprisingly, business and consumer confidence in B.C. is the worst in Canada.

The sorry state of the B.C. economy is the result of several factors. The most important may be the perception that after six years of NDP rule, B.C. is the worst possible place to run a business. But the most immediate reason is the economic crisis in Southeast Asia. Several countries watched helplessly as their currencies lost most of their value, making imports prohibitively expensive. One was South Korea, B.C.'s third-largest international export market, after the U.S. and Japan. The province's resource industries felt the effects instantly. South Korean purchases of coal, which had averaged more than $20 million a month since the end of 1995, dropped to $11 million in December. Manufacturers of B.C. lumber, paper and pulp suffered equally dramatic declines.

Most important to B.C. is the effect of the crisis on Japan, which for much of the 1990s had been pouring money into Southeast Asia. With the value of their investments now greatly diminished, some Japanese firms have been forced into bankruptcy.

Few Japanese want to make major purchases in such an uncertain climate, so housing starts dropped dramatically in 1997. That curtailed demand for B.C.'s most important export to Asia, softwood lumber. According to BC Stats, Japanese purchases of B.C. lumber declined to $118 million last December, the lowest figure in any month since 1992, and 60% less than the $292 million in sales a year earlier. Lower prices caused by weak demand have compounded the problem; the export price of 1,000 board-feet of two-by-fours fell to $288 in December from around $400 a year earlier.

But as serious as the Asia's problems are, they are only the most recent setback for B.C.'s economy. Jim Cutt, a professor of public administration at the University of Victoria, notes that B.C.'s main trading partner is still the U.S., whose economy has expanded for seven consecutive years. "We ought to be doing very well," says Prof. Cutt. The bulk of B.C.'s economic woes, he maintains, can be blamed on its poor investment climate, which in turn can be directly traced to the NDP, "the most incompetent and destructive government in British Columbia history."

Indeed, long before "Asian flu" became part of the business lexicon, few entrepreneurs were willing to build anything except housing in B.C. From 1994 to 1996, non-residential business investment—that is, the money spent to start or improve businesses—amounted to 12.9% of the B.C. economy, lower than Ontario and all Western provinces except Manitoba. The figure in Alberta was 20%. Even in dollar terms B.C. is an investment weakling compared to its smaller neighbour. In both 1995 and 1996, Alberta had $6 billion more in new business construction and equipment purchases.

A recent Statistics Canada survey shows the "investment gap" is likely to widen in 1998. Its annual survey of investment intentions found that capital spending in B.C. will likely increase by just 1.3% this year—superior to only Prince Edward Island, which is suffering a dramatic drop after the completion of the Confederation Bridge last year. Despite the Asian meltdown, Pacific Rim countries still have a substantial chunk of the world's wealth and population, so B.C. should be able to attract money more easily than it is, says Peter Hall, associate director of provincial forecasting for the Conference Board of Canada. "In a sense, it's surprising the B.C. economy has not been able to attract its share of the global investment pot," he says. "One would expect to see quite the reverse happening."

The dearth of investors is so acute that the Clark government now celebrates when a company is even thinking about investing in B.C. Last month the premier's office issued a press release to announce that Alcoa, the world's largest aluminum producer, is to study the feasibility of building a new smelter in B.C. Mr. Clark made a similar fuss over an announcement in January by Georgia-based Alumax, and the government even ran television advertisements trumpeting plans for a new smelter in Kitimat to be built by Alcan. The truth is that the Montreal-based aluminum maker is only studying the idea, with a decision expected next year. Meanwhile, it is going ahead with a new smelter in Alma, Que., which will be producing aluminum by the year 2000.

Such pronouncements by Mr. Clark are often ridiculed by critics as meaningless, yet they may serve him well in one respect: they reinforce a perception that prosperity comes only with the help of government. The more the public believes that, the easier it might be for the NDP to justify expensive "investments": $329 million for a majority stake in the Skeena Cellulose pulp mill; about $400 million taken annually from forest companies and spent by Forest Renewal B.C.; $44 million to Canadian Airlines, which the government says is a tax break but which Auditor General George Morfitt says is really a grant.

While Alberta introduced a law two years ago prohibiting new loans or guarantees to business without full debate, B.C. continues to dole out millions in grants and loans. A 1996 paper by the Canadian Taxpayers Federation called for the elimination of $145 million in assistance programs to business—and that was before the NDP launched its much-publicized "Jobs for B.C." strategy, which includes public spending or tax incentives to help favoured sectors of the economy, such as fishing, tourism and the film industry.

The kind of thinking behind such policies—that government help is necessary for success—is usually associated with the "havenot" provinces. In a June 1996 Angus Reid poll, 64% of Quebeckers and 52% of Atlantic Canadians said they wanted a more active government. British Columbians were next at 47%. Yet even in the poorest region of Canada, those attitudes are slowly changing, says Don Cayo, president of the Atlantic Institute for Market Studies (AIMS), a Halifax think-tank that supports eliminating virtually all business subsidies. Mr. Cayo relates the story of the CEO of a major Atlantic corporation who recently donated $7,500 to the institute. "As he gave it to me, he said, 'You know, five years ago we wouldn't have given you anything. Five years ago we didn't think we'd make it in this region without subsidies.'"

In fact, the evidence suggests that government intervention has made the have-not provinces weaker, not stronger. An AIMS study found that in the late 1960s Atlantic Canada's economy was catching up to the rest of Canada. Then came the era of massive federal transfers. Over a 30-year period, $250 billion more was pumped into the region than was paid out by its residents, yet the economy sickened. "If it worked," says Mr. Cayo, "we would all be rich."

The reason the funding did so much harm is that entrepreneurs became more focused on meeting government rules, to qualify for subsidies, than satisfying customers, says Mr. Cayo. "Business has been skewed away from being competitive," he says, noting that Nova Scotia-made products are generally more expensive and of poorer quality than those made in nearby New England. "Governments are not inclined to push people to do it efficiently because, golly, they might need 10 fewer people." The Atlantic experience may hold an ominous lesson for B.C., since Premier Clark has said repeatedly business tax cuts should be tied to job creation targets.

Aside from a belief in government intervention in the economy, the have-not provinces have something else in common: high taxes. Of the nine English-speaking provinces, the highest provincial income tax rates are in the four Atlantic provinces; they average a rate of 62.5% of basic federal tax. Manitoba and B.C. have the next-highest, at 52% and 51%, respectively. (Quebec has its own income tax system which is not directly comparable.)

And in other ways B.C. has a more punitive tax structure than the have-not provinces. The province has the second- highest income tax rate on corporations and small businesses and the highest surtaxes on high-income earners. The latter is especially destructive because it punishes the very people who would start new businesses, says Prof. Cutt. "You'd have to be either a saint or a lunatic to make a serious investment in British Columbia right now," he remarks. "The tax environment is pathological."

A government does not necessarily have to close school libraries and leave sick people to die in the streets to get taxes down to more reasonable levels, the academic adds. An analysis by Osgoode Hall law professor Patrick Monahan showed that when Ontario's Conservative government cut personal income taxes, its revenues actually increased by $700 million. Major tax increases by the previous NDP government, on the other hand, resulted in less revenue.

Part of the difference can be explained by economic cycles—Ontario was entering a major recession when the Bob Rae New Democrats took office—but the tax cuts have helped create a "virtuous circle" of investment and economic growth, says Michael Walker, executive director of the Fraser Institute. Alberta, the only province with a lower tax burden than Ontario, is growing so fast its government will run a $2.2-billion surplus this year, and expects to pay off its taxpayer-supported debt by March 31, 2000.

In contrast, B.C.'s taxpayer-supported debt has doubled under the NDP to $21.8 billion. The New Democrats' failure to balance the books during the good years of the early 1990s, when B.C. led the country in growth, appears to have put the government in a box. "If Clark and [Finance Minister Joy] MacPhail are facing a financial and economic conundrum, the political challenge they are facing could be life or death for the NDP," political analyst John Twigg writes in a recent newsletter.

On one hand business leaders are calling for $1 billion in tax relief to send positive investment signals, and spending cuts to eliminate the deficit. This month's budget will be crucial, declares business rep Winter. "Something in that budget has got to be a signal that we are cognizant of the problem and we are prepared to deal with it," he says. On the other hand a coalition of 20 public-sector unions is demanding wage increases. But the NDP has little room to move on either front because its fiscal credibility is in ruins since it tabled falsely-balanced budgets in 1995 and 1996.

The shortcomings of NDP economic policy may be obvious, but Prof. Cutt says the opposition B.C. Liberals have failed to articulate how they would change it. Liberal leader Campbell admits that sometimes he is not aggressive enough in "selling the message," but argues that his party has a clear plan. It starts with balanced-budget legislation, including pay cuts for ministers whose departments overspend, and a broad-based income tax cut.

Later, he says, a Liberal government would eliminate the corporate capital tax, which taxes business assets regardless of profits, and reduce the small business tax, which is 50% higher than Alberta's. As for spending cuts, Mr. Campbell is not specific.

The premier has been talking about tax cuts lately too, but Prof. Cutt is sceptical because many of B.C.'s most punitive taxes were brought in from 1991 to 1993 when Mr. Clark was finance minister. "I think they're out of their depth," he says of the government.

With a provincial election at least two years away, and most of Asia still in shock over the region's sudden financial collapse, B.C. seems destined to remain Canada's economic doormat for a while yet. Still, the conference board's Mr. Hall says it is too soon to put B.C. in the same basket as the have-not provinces. One factor in its favour is that it is still a retirement destination for other Canadians, which tends to have a stabilizing effect on the economy. And Southeast Asia will eventually rebound, a recovery that will benefit B.C. more than the rest of the country. "We still estimate that B.C.'s long-term growth potential is one of the highest in the country," he says.

In the meantime, however, Mr. Winter says business owners are anxious to see policy changes from Victoria that will help change B.C.'s business-hating image. He concludes, "We're really hopeful we've been able to get the message through that we cannot wait a whole lot longer."

—Derek DeCloet

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