separatism in quebec

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Separatism in Quebec By Oleg Nekrassovski

In his speech in Quebec City on February 13th

, 1991, Prime Minister Brian Mulroney

(Office of the Prime Minister, 1991) clearly suggested that without an in-depth cost-benefit

analysis or market study, no business person would put the future of his/her company on the

bargaining table. Consequently, the bargain over the future of a country must deserve, at least, an

equally serious economic analysis. Hence, the Prime Minister stressed that Quebecers must look

carefully at the facts before making a decision to separate; as such a decision necessarily

involves their and their children’s economic well-being (Office of the Prime Minister, 1991).

Also, according to the Citizens’ Forum (1991, p. 119), Canadians are incredibly ignorant of the

economic costs of Quebec independence. In the hope of remedying these problems, the present

paper will look at the economic consequences of Quebec separation and will strive to

demonstrate that the economic arguments advanced in support of the separation of Quebec from

the rest of Canada, are not compelling.

According to the views that the PQ held about 20 years ago, Quebec has to be a sovereign

nation state in order to fully participate in the global economy. This, the PQ asserted, is because

the rules of international trade favour nation-states, and all international trade organizations are

composed exclusively from countries (Fidler, 1991, p. 35).

Within a year of its inception, the Bloc Québécois argued that Canadian federalism is

unacceptable to Quebec. In particular, the Bloc cited constant federal deficit and public debt; a

federal economic policy unsuitable for Quebec ; inadequate federal job training; poor federal

funding for research and development; a swollen and costly federal public service; and a growing

regional and social inequality (Fidler, 1991, p. 47). Hence, in order to overcome these federal

shortcomings, the Quebec government must be allowed to take on a role of a national state. This,

according to the Bloc, will only become possible when Quebec becomes fully sovereign (Fidler,

1991, p. 47).

Also, according to the Bloc, Quebec, in virtue of being a province of Canada and subject

to interference from the federal government, is unable to coordinate its major social and

economic policies (Fidler, 1991, p. 49). Moreover, the Bloc asserts that promotional, and

research and development tools are heavily concentrated at the federal level, but do not get fairly

distributed among the provinces; with Quebec in particular not getting the share it deserves.

Also, Quebec gets proportionately less than Ontario in federal transfer payments, while high

interest rates and an overvalued dollar, created by the Bank of Canada, are damaging to the

Quebec’s economy (Fidler, 1991, p. 49).

According to a comment in a 1990 study by one of Merrill Lynch’s analysts, a separate

Quebec would be just as viable economically. After all, Quebec’s GDP for 1988 was U.S. $120

billion, which exceeds that of Denmark [$101 billion] and Austria [$117 billion], and is only

slightly below that of Belgium [$138 billion] (Grady, 1991, p. 31). Moreover, since monolingual

Anglophones form only 6.7% of Quebec’s population, there is little reason to believe that if


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Quebec separates, there could be an economically damaging exodus of English speakers. And

besides, many dissatisfied English speakers have already left Quebec during the tumultuous

1970s (Grady, 1991, p. 31).

Political and fiscal decentralization, and hence separatism, are economically

advantageous when individual mobility is costless and, in different localities, differentiated

bundles of public goods can be efficiently provided (Alesina, Perotti, and Spolaore, 1995, p.

753). On the other hand, there are at least four arguments which point to the economic benefits

of large jurisdictions (and hence show that separatism is economically unsound): (1) economies

of scale in the production of public goods and their ensuing benefits, are more likely to occur in

large jurisdictions; (2) problems of tax competition are frequently caused by externalities which

are more likely to be internalized by a large jurisdiction; (3) regional economic shocks are

considerably smaller under large redistributive systems that encompass several regions; (4) little

redistribution of wealth can occur in fragmented jurisdictions, even if taxpayers are concerned

about the welfare of others (Alesina, Perotti, and Spolaore, 1995, p. 752).

As far as interregional transfer payments are concerned, a political separation would, in

principle, only be beneficial to a region which is “subsidizing” the rest of the system. Quebec, on

the other hand, has been a net subsidized region from 1973 (and as of 1981 has remained as

such) (Polese, 1981, p. 15). And since political separation is incompatible with interregional

transfer payments, a politically sovereign Quebec would lose this income (Polese, 1981, p. 15).

Hence, if Quebec happens to be a net subsidized region at a time when it decides and manages to

separate, it will suffer a considerable economic loss.

In a report, regarding Quebec’s potential for independence, submitted in 1991 by Jean

Chrétien; Chrétien shows the downside of Quebec’s separation. He points out that Quebec

exports 53% of all of its exports to other parts of Canada, compared to 35% for Ontario; and asks

whether Quebec’s independence will preserve, if preserve at all, this trading relationship so

beneficial to Quebec’s economy (Fidler, 1991, p. 78). Chrétien also points out that Quebecers

support the NAFTA a lot more than any other Canadian nationals because they view it as being

highly important to their economic wellbeing. He then goes on to argue that an independent

Quebec may have considerable problems retaining all such beneficial treaties, as all economic

partners of Canada will likely want to examine an independent Quebec on its own terms before

re-establishing their economic relationships with it by agreeing to sign analogous treaties (Fidler,

1991, p. 78).

This uncertainty regarding the continuation of Quebec’s membership in the NAFTA in

the case of secession was stated by then federal finance minister Paul Martin, during the

campaign leading up to the 1995 sovereignty referendum in Quebec, to put 90% of Quebec’s

exports and hence almost one million jobs, at risk (Young, 2000, p. 314).

Also, according to Chrétien’s 1991 report, if Quebec separates, the public debt would

have to be divided between Quebec and the rest of Canada. To make it fair, Quebec would have

to take on, a per capita share of the federal debt, as of 1991, which when added to its own

provincial debt, as of 1991, will make Quebecers, on a per capita basis, some of the most highly


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indebted people in the industrial world (Fidler, 1991, p. 75). Finally, Chrétien points out that the

federal government, in fact, invested into Quebec more, on a per capita basis, than into the rest of

Canada. So he asks how the federal government will be compensated by Quebec, in the case of

separation, for all these investments (Fidler, 1991, p. 75).

In the view of most economic experts at the time of 1995 sovereignty referendum in

Quebec, even though a sovereign Quebec may not be worse off economically on its own, the

period of transition to sovereignty may very well have serious economic repercussions (Young,

2000, p. 324). In fact, transition to sovereignty could very likely involve a serious recession

which would damage both Quebec and the rest of Canada. In particular, in the view of most

experts, a vote in favour of secession would create great uncertainty among all investors, which

would lead to reduced flow of trade, reduced tax revenues, growth in deficits, emigration of

talent, and so on (Young, 2000, p. 324).

Also, not long before the sovereignty referendum in Quebec took place, Daniel Johnson,

the leader of the Quebec Liberal Party at the time, stated that a victory for the separatists, at the

referendum, will raise interest rates on various goods, adversely affect the mortgage rates, and

the value of the Canadian dollar. And if Quebec decides to produce its own currency, the value

of Quebec dollar would be 63 Canadian cents (Young, 2000, p. 327).

Also, not long before the referendum, the provincial premiers had their annual meeting, at

which they indicated that a sovereign Quebec should not expect to remain a party to

interprovincial trade agreements. The federalists also pointed out, at that time, that equalization

payments along with other transfers, currency, labour mobility, milk quotas, along with the

deployment of armed forces and associated jobs, were all under federal control. However, due to

their campaign strategy, the federalists avoided stating what exactly will happen to all these

variables in the case of sovereigntist victory (Young, 2000, p. 327).

According to Young (1999, p. 62), during the short period preceding the 1995

sovereignty referendum in Quebec, it was widely expected that a vote in favour of separation

would cause a sharp decline in the stock market. In one systematic retrospective study of this

feared event, that used implied volatility indexes, it was found that right after a sovereigntist

victory, the TSE index would have seen an immediate decline of 7-10%. Also, according to the

same study, a pro-separatist majority vote would not have caused significant differences in the

volatility of stock prices from province to province. In other words, a pro-separatist vote would

have devalued the shares of companies fairly equally, regardless of the province in which a

firm’s head office was located (Young, 1999, p. 62-63).

A survey of Canadian money managers was also conducted prior to the 1995 referendum.

It revealed that an overwhelming majority of these professionals expected that in the case of

separatist victory, there will be a downgrading of Quebec securities and there will be a widening,

by 100 to 150 basis points, of interest rate spreads between Canadian government and Quebec

bonds. The Canadian money managers also expected a downgrading of Ontario bonds and a

widening, by another 100 to 150 basis points, of interest rate spreads between Canadian and

American government securities (Young, 1999, p. 63). Moreover, if foreign investors thought


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that Ottawa might have no choice but to assume the whole national debt, or anticipated a long

period of uncertainty, then the downgrading of federal government bonds would certainly occur,

possibly to such an extent that it would be illegal for many investors to hold them. What’s worse,

the financial uncertainty following a separatist victory, could be great enough to make Canadian

government and corporate bonds go from downgraded to unrated, because the risk of holding

such bonds might be declared by the rating agencies as being impossible to evaluate (Young,

1999, p. 63).

In the event of Quebec’s separation, Quebec’s dairy industry will likely sustain a heavy

blow. In Canada, legislation achieves much higher prices for Canadian dairy products, than on

the world market, by setting production quotas and limiting imports. The dairy producers in

Quebec hold 48% of Canadian production quotas, and are entitled to sell a third of their produce

in other provinces (McCallum and Green, 1991, p. 28). Now, if Quebec separates, the rest of

Canada will most likely give Quebec’s quotas to its own dairy producers. This will nearly double

the supply of milk in the rest of Canada and completely eliminate the demand for Quebec’s dairy

products. So the Quebec’s dairy industry will lose a third of its market (McCallum and Green,

1991, p. 28). Alternatively, Quebec’s dairy producers might be able to sell their products to the

rest of Canada at, much lower, U. S. prices. Consequently, Quebec’s dairy producers will earn,

collectively, $150-250 million less per year, than they did in the days when Quebec was part of

Canada (McCallum and Green, 1991, p. 29).

Thus, as this paper has demonstrated, Quebec will suffer great losses in many economic

spheres, if it ever decides and manages to separate. Consequently, the economic arguments

advanced in support of the separation of Quebec from the rest of Canada, are not compelling.


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References

Alesina, A., Perotti, R., & Spolaore, E. (1995) Together or separately? Issues on the costs and

benefits of political and fiscal unions. European Economic Review, 39, pp. 751-758.

Canada, Office of the Prime Minister. (1991) Notes for an address by Prime Minister Brian

Mulroney, Chamber of Commerce, Quebec City, Quebec.

Citizens’ Forum on Canada’s Future. (1991) Report to the people and government of Canada.

Ottawa.

Fidler, R. (1991) Canada, Adieu? Quebec debates its future. Halifax: The Institute for Research

on Public Policy.

Grady, P. (1991) The economic consequences of Quebec sovereignty. Vancouver: The Fraser

Institute.

McCallum, J., & Green, C. (1991) Parting as friends: the economic consequences for Quebec.

Toronto: C. D. Howe Institute.

Polese, M. (1981) Economic integration, national policies and the rationality of regional

separatism. Journal of Regional Science, 4(1), pp. 1-19.

Young, R. (1999) The struggle for Quebec: from referendum to referendum? Montreal: McGill-

Queen’s University Press.

Young, R. (2000) Quebec 1995: The rhetoric of the referendum. In: Galeotti, G., Salmon, P., and

Wintrobe, R. eds. Competition and Structure: the political economy of collective decisions:

essays in honor of Albert Breton. Cambridge: Cambridge University Press, pp. 309-336.

separatism in quebec

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