The Liberal Third Option: A Study of Policy Development A Thesis Submitted to the Faculty of Graduate Studies and Research in Partial Fuliiment of the Requirements for the Degree of Master of Arts in Political Science University of Regina by Guy Marsden Regina, Saskatchewan September, 1997 Copyright 1997: G. W. Marsden 395 Wellington Street 395, rue Wellington Ottawa ON KI A ON4 Ottawa ON KIA ON4 Canada Canada Your hie Votre rdtérence Our ME Notre référence The author has granted a non- L'auteur a accordé une licence non exclusive licence allowing the exclusive permettant à la National Library of Canada to Bibliothèque nationale du Canada de reproduce, loan, distibute or sell reproduire, prêter, distribuer ou copies of this thesis in microform, vendre des copies de cette thèse sous paper or electronic formats. la forme de microfiche/nlm, de reproduction sur papier ou sur format électronique. The author retains ownership of the L'auteur conserve la propriété du copyright in this thesis. Neither the droit d'auteur qui protège cette thèse. thesis nor substanîial extracts fiom it Ni la thèse ni des extraits substantiels may be printed or otherwise de celle-ci ne doivent être imprimés reproduced without the author's ou autrement reproduits sans son permission. autorisation. This study presents an analysis of the nationalist econornic policies enacted by the federal Liberal government during the 1970s and early 1980s. The Canada Development Corporation(CDC), the Foreign Investment Review Agency(FIRA), Petro- Canada(PetroCan) and the National Energy Prograrn(NEP), coliectively referred to as "The Third Option," aimed to reduce Canada's dependency on the United States. This thesis examines the origins, objectives and operations of each of these pofjcies and assesses the reaction of the Canadian capitalist class to these initiatives. Despite the strong opposition by foreign-controlled capital and the majority of domestic capital to most of these nationalist economic policies, the Liberal government under the leadership of Prime Minister Pierre Trudeau persisted in their implementation. The study argues that a number of domestic and extemal factors conspired to pressure the historicdy continentalkt Liberal Party and the anti-nationalist Trudeau into pursuing a more independent econornic course. This thesis shows that the CDC, FIRA, Petrocan and the NEP contributed to a significant reduction in foreign control of the Canadian economy during the period 1970- 84, particularly in the oil and gas sector. Still, the dependent nature of Canada's truncated industrial structure was not Gndamentally altered. Furthemore, Canada's trade dependency on the United States increased substantially and was deepened with the eventual negotiation of the Canada-U.S. Free Trade Agreement under the Progressive Conservatives. Nonetheless, the Liberals were able to effectively diffuse,the pressure for more radical initiatives such as nationalization by pursuing the relatively moderate nationalist agenda of the Third Option. I would like to thank my thesis committee members Joseph K. Roberts, Lorne Brown and Phillip Hansen for their assistance and editing of the dr& forms of this thesis. 1 would like to extend special thanks to principal advisor Dr. Roberts who over the past five years displayed exceptional patience and understanding to a graduate student who found it far too easy to be distracted by what seemed to be more pressing issues at the tirne. The financial assistance 1 received from the Faculty of Graduate Studies and Research at the University of Regina in the fom of a scholarship, fellowship and teaching assistantships was very much appreciated. 1 could not have completed this thesis without this invaluable assistance. 1 would aiso like to express my appreciation to the many university library workers who assisted me in finding the proper goverment documents, loading the microfilm machine, and fixing photocopier jarns. The dedication of university support workers should be commended given the many years of chronic govemment undefinding. 1 would like to thank my feUow students fiom the Political Science Department and other disciplines for the camaraderie and sometimes heated political discussions that helped shape my thinking on a number of issues. I have many fond mernories of my time spent at the University of Regina. Finally, 1 would like to express rny deepest gratitude to my fiancé Carla Beck for her patience and support over the 1st few years. More than anyone, she probably heard the phrase "1 have to work on my thesis" one too many times. 1 would like to dedicate this thesis to my mother Merle Marsden who passed away in 1993 der a valiant battle with lung cancer. Too often she spent many hours typing university essays that 1 had lefi to the last minute to complete. Her faith in me and enthusiastic encouragement of my university studies were very much appreciated. Abstract Acknowledgements Table of Contents List of Tables Chapter 1 - Introduction 1.1 Background to the Study 1.2 Furpose of Study 1.3 Methodology 1 -4 Outline of Study Chapter 2 - The Rise of Economic Nationalism 2.1 The Liberal Party in Canada 2.2 The Economic Context 2.3 The Political Context 2.4 NDP and the Wde 2.5 Cornmittee for an Independent Canada 2.6 The Decline of U. S Hegemony Chapter 3 - The Canada Development Corporation 3.1 Origins and Objectives of the CDC 3 -2 Reaction to the CDC 3.3 The CDC in Operation 3.4 Conclusion Chapter 4 - The Foreign Investment Review Agency 4.1 Origins and Objectives of FIRA 4.2 Reaction to FIRA 4.3 FIRA in Operation 4.4 Conclusion Chapter 5 - Petro-Canada 5.1 Origins and Objectives of Petro-Canada 5.2 Reaction to Petro-Canada 5.3 Petro-Canada in Operation 5.4 Conclusion iii 6.1 Origüxs and Objectives of the NEP 6.2 Reaction to the NEP 6.3 Impact of the NEP 6.4 Conclusion Chapter 7 - Results of the Third Option 7.1 Effectiveness of the Third Option 7.2 An Aborted Industrial Strategy 7.3 The Unraveling of the Third Option Chapter 8 - Conclusion Bibliography Table 1 - Levels of Control of Capital Employed in Non-Financial Industries - 1992 24 Table 2 - Number of Takeovers Involving a Foreign-owned or Controlied Acquitting Company 25 Table 3 - Popular Opinion on Foreign Investment 34 Table 4 - CDC Board of Directors 50 Table 5 - Status of Applications, 1974-1985 70 Table 6 - Cl&s and Disallowance Rates, Acquisitions, 1974-85 by Industry Sedor 72 Table 7 - CIaims and Disallowance Rates, New Businesses, 1976-85 by Industry Sector 73 Table 8 - Cla- and Disailowance Rates, Acquisitions, 1974-85 by Country of Apparent Control 74 Table 9 - Clairns and Disallowance Rates, New Businesses, 1974-85 by Country of Apparent Control 75 Table 10 - Exploration Expenditures by Major Oil Companies, 1976-8 1 9 1 Table I I - Major Oil Company Performance: Net Income, 1976-8 1 92 Table 12 - Petro-Canada's Capital Expenditures, 1976-8 1 93 Tabie 13 - Petro-Canada - Assets and Acquisitions 94 Table 14 - Canadian Attitudes Towards Energy Policy, 1980-83 124 Table 15 - The Largest Oil and Gas Producing Companies, Dec. 198 1 126 Table 16 - Major Corporate Acquisitions 127 Table 17 - Foreign Assets in Canada 13 6 Table 18 - Foreign Manufacturing Assets in Canada 137 Table 20 - International Investment Position with the United States, 1965-85 Table 21 - Direct Investment Abroad by Country Table 22 - Merchandise Exports - Major Trading Areas Table 23 - Merchandise Imports - Major Trading Areas Table 24 - Distribution of Canada's Domestic Exports, 1970-84 Table 25 - Distribution of Canada's Merchandise Imports, 1970-84 Table 26 - Current Account Surnmary, 1968-84 Table 27 - Total Expenditures on R&D as a Percent of GDP by Country, 1971-85 No seif-respecting nation can or should accept the proposition that it shouId always be economicafly dependent upon any other nation. Let us recognize once and for al1 that the only basis for a sound and healthy relationship between Our two proud peoples is to find a pattern of economic interaction which is beneficial to both Our countries and which respects Canada's right to chart its own econornic course.' - Richard Nixon, April 14, 1972 1.1 Background to the Study No other advanced industrial society has experienced the high levels of foreign control as has Canada. The consequences of the branch-plant economy have been well documented and include: technological dependency, the blocking of exports, excessive reliance on resources, an underdeveloped industrial structure, balance of payments problems, adverse employment effects, loss of taxation revenue through intra-fhn pricing, loss of sovereim and an exacerbation of regionalism.2 Kari Levitt argued in 1970 that foreign control of the economy transformed Canada into "the world's richest underdeveloped country. "3 Indeed, foreign ownership has been at the centre of a long-running debate conceming the location of Canada within the world capitalist economy. Within left academic circles, the dependency school of thought, including Levitt, exerted a dominant influence during the late 1960's and 1970's. This school emphasized the chronic levels of foreign (primarily American) ownership, Canada's truncated industrial structure, and the overdevelopment of the financid component of the indigenous capitalist class at the expense of the industrial component. Latin American dependency theory was implicitly, though sometimes explicitly, appropriated in order to determine Canada's place in the world hierarchy, which according to this view was one of satellite in the Amencan empire.4 The dependency perspective was given political expression in the form of the lefi-nationalist Waffie faction of the New Democratic Party? 1 UWiLL Ub L11G 11uu- 17r v~ aiiuriibi YWI OFYUCI VU WU.^. .--..-.------ - -- challenge the dominant dependency anaiysis. The finance capital school argued that the Canadian capitalist class was mature and that Canada was an irnperialist power in its own Rght.