Consumer Trends Report - Chapter 1: Key Macro-Economic Trends

Chapter 1–Key Macro-Economic Trends

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Identifying the broader economic context in which Canadians buy goods and services, and how that context has changed over the past two decades, is a natural starting point for understanding the circumstances of today's consumers. In macro-economic terms, consumers depend on economy-wide outputs (the goods and services produced by, or imported into, the economy) and their own income, to engage in consumption: outputs provide products for consumers to buy, and income gives consumers power to buy them. The general performance of the economy, therefore, has important implications for consumers because a vibrant economy requires the production of a wide range of competitively priced goods and services as well as plentiful, stable and well-paying jobs.

Limitations of GDP

GDP is a measure of the monetary value of market transactions within an economy (United Nations 1993; note that this is just one method of calculating GDP ). However, GDP is not an attempt to measure all activities within an economy to which a value can be assigned; nor is it a measure of a nation's well-being. For example:

GDP only includes market activities (i.e. goods and services with monetary value placed on them). Therefore, many sources of valuable activities, such as volunteer work or unpaid housework, are not included in GDP . Furthermore, a number of factors that increase the well-being of a nation (peace and security, the elimination of violence and injustice, and equality of opportunity) are not considered in GDP (Okun 1971).

GDP does not account for externalities. For example, the production of a good may cause environmental damage. When this product is sold, its selling price is included in GDP , while the cost associated with the environmental damage is not.

GDP includes market transactions related to events that reduce Canadians' well-being. For example, rebuilding homes lost during the 2003 forest fires in British Columbia will increase the value of Canada's GDP . Of course, the fire, itself, did not increase the well-being of those who lost their homes.

1.1 A High Growth Economy

Canada's economy has performed well over the last two decades. Real gross domestic product ( GDP ) has been strong since 1980, growing every year except 1982 and 1991, and reaching highs of more than 5 percent in 1984, 1999 and 2000.7

Since 1980, the economy has moved through two business cycles, with two recessions –one in the early 1980s and the other in the early 1990s. The most significant distinction between these two economic slowdowns is that, during the latter, growth in consumer spending did not actually fall. Easy access to consumer credit allowed Canadians to continue spending and, as a result, the “current expansion in consumer spending is the most leveraged in the post-war era” (Tal 2002, 14). (The implications of this continued growth in spending, largely supported by debt, are discussed in Part 2 of this report.)

A healthy labour market and high incomes for some

While displaying some signs of weakness in mid-2003, Canada's labour market has been strong in recent years, and has continued to play a key role in boosting average real incomes for consumers since the late 1990s (Department of Finance Canada 2002).8 For example, 1 419 500 net full-time jobs were created in Canada in the last half of the 1990s, compared to only 125 300 in the first five years of that decade. Furthermore, with the exception of 2001, more than 300 000 net full-time jobs were created each year in Canada between 1997 and 2002. This strong job performance is reflected in income statistics: Statistics Canada national accounts data reveal that personal disposable income per capita has been moving strongly upward since 1996 (see Figure 1.1).

Figure 1.1

Real Personal Disposable Income Per Capita, 1980 Q1 to 2003 Q2

Note: Personal disposable income converted to real dollars using the chain price index for personal expenditures on goods and services.

Source: Office of Consumer Affairs calculations based on Statistics Canada data (CANSIM, series v498186 and v1997738).

The relationship between productivity and consumers

Building a fair, efficient and competitive marketplace is expected to bring broad economic benefits in the form of higher productivity. Productivity, in turn,

is roughly speaking a measure of how effectively the resources of an economy are translated into the production of goods and services. Over long periods of time, productivity is the single most important determinant of a nation's living standard or its level of real income (Harris 1999, 3).

Productivity gains raise the standard of living when they are either passed on to workers via higher wage increases or to consumers via greater declines (or lower increases) in prices9 An illustration of this relationship is that a “faster rate of productivity growth in the goods sector relative to the service sector is an important contributor to the greater rise in services prices” (Gagnon et al. 2003, 7). There are, however, other ways in which productivity growth can enhance consumer well-being, where:

too often advocates of a productivity agenda highlight only its importance for our material standard of living, giving such an agenda an unnecessarily narrow political appeal. The additional wealth created by productivity growth can be taken in different forms: private consumption, enhanced social programs, lower taxes, more leisure time, or some combination of all four of these. In effect, productivity growth provides more opportunity for society
(Sharpe 2004, 24).

And yet, while the strength of the labour market has boosted average real incomes, this performance masks some important variations within the Canadian population. For example, microdata reveal that the strong recovery in real after-tax income during the late 1990s was led by high-income earners. In 2001, real average after-tax income for families in the highest income quintile exceeded that for 198910 by 16.8 percent. Families in the lowest and second lowest quintiles only made corresponding gains of 2.3 percent and 2.4 percent, respectively. In essence, high-income families enjoyed substantial benefits from economic growth, while other groups –including lone-parent families and recent immigrants, who tend to find themselves at the low end of the income scale –did not fare so well. (These trends are explored in more detail in Part 2 of this report.)

The marketplace adapts to a financially diverse group of consumers

The changes in disposable income described above have had repercussions on the marketplace. In the area of housing, for example, there is a general trend among high-income earners to acquire large homes with considerable amenities, such as improved storage areas, double garages and two or more bathrooms.11 And more Canadians own their homes than in the past: the Canada Mortgage and Housing Corporation ( CMHC ) reports that between 1996 and 2001, a number of factors have contributed to a significant rise –from an historical perspective –in home ownership rates in Canada, including low mortgage rates, strong employment growth and higher consumer disposable incomes.12

At the other end of the income scale, the situation is markedly different. Approximately 6 percent of Canadian households faced overcrowded housing conditions in 2000, that is, the number of bedrooms in the home was insufficient for the size and make-up of the household ( CMHC 2003, 11). As well, the 1996 Census revealed that 1.8 million Canadian households had problems obtaining affordable housing. CMHC data suggest that renters experienced similar difficulties between 1996 and 2001 as a result of low vacancy rates in many rental markets ( CMHC 2003, 18). Data to date show neither significant growth in the provision of affordable rental units nor a decrease in overcrowding. The trends toward buying very large homes and increased home ownership described above clearly do not reflect the reality of the housing market for many low-income consumers. At this end of the income scale, the marketplace has not caught up with some consumers' needs.

Food is another area affected by substantial changes in consumers' financial situations. Statistics Canada reports that Canadians spent a higher proportion of their food dollars on meals outside the home (primarily in restaurants) in the 1990s than they did in the 1980s.13 This trend reflects gains in disposable income (resulting from the strong economic expansion of the mid- to late 1990s), and an increase in one-person households and time-constrained households. Not surprisingly, high-income earners led the growth in restaurant spending.14

Low-income earners are in a different position: Statistics Canada's 1998-99 National Population Health Survey reported that more than 10  percent of Canadians (an estimated 3 million people) were living in food-insecure households.15 In addition, the Institute for Research on Public Policy reports that food banks, which emerged in the 1980s in Canada, are growing quickly. Some 1800 new food banks opened between 1997 and 2002 (McIntyre 2003, 47). These developments suggest that, far from boosting restaurant and grocery store business, many low-income Canadians rely on charity for part of their food budget, or sometimes do without, as they are unable to fully participate in the market-based food retail sector.

Another important sector that has undergone significant changes as a result of more polarized consumer incomes is financial services. This is a complex story. Many high-income consumers, especially those with funds available for investment, have benefited from the explosion in investment options since the liberalization of the rules governing the financial services sector. Mutual funds have proliferated and pension funds have grown, and a wide variety of companies now offer investment advice and products. It is interesting to note, however, that consumers do not operate without risk in these markets: many investors find information about sophisticated financial products to be complex and difficult to access and assess.

Canadians with modest financial resources have seen their choices expand in some ways. For instance, the alternative consumer credit market (e.g. payday loans) has grown significantly in Canada,16 offering these consumers an alternative to mainstream financial institutions.17 But, while such loans may be convenient, they come at a much higher cost than traditional financial products –with recent evidence suggesting annualized percentage rates ranging from 390 to 650 percent (Ramsay 2000). Access to and ability to assess complex financial information are challenges for many consumers in the alternative credit market, as they are for high-income investors. So, while the financial marketplace has developed new products for a wide range of income groups, all consumers face largely similar challenges, in the form of increased risk and information complexity.

Increased spending on services

The TD Bank Financial Group reports that “the structure of Canada's economy has undergone a meaningful change over the past few decades, as the service sector gains increasing clout, while the goods sector shrinks in relative importance” (Burleton and Alexander 2001, 1). This conclusion is supported by Statistics Canada national accounts data, which reveal that the nominal share of consumer spending on services increased from 45 percent in 1980 to 53 percent in 2002 (see Figure 1.2).

Figure 1.2

Services as a Percentage of Total Consumption, 1980–2002

Source: Statistics Canada, CANSIM, table 380-0017; series v646942 and v646938.

A more detailed study confirms that while the average price of services grew slightly faster than that of goods from 1986 to 1996, the increasing importance of services is not attributable to inflation, but to sustained growth in the quantity of services bought:

Over the past decade household preferences, on average, shifted away from goods commodities in favour of more services. While the [real] average per-household consumption of goods dropped by 13.9 percent in the period, [real] spending on services rose by 7.8 percent (Little and Béland 1999, 3).

This increasing presence of services in the economy has brought significant benefits to consumers. For instance, day-care centres have facilitated women's access to the labour market and thus, their earning potential. Internet services, as reviewed in Section 2.3, have empowered consumers in their interactions with the marketplace. Car lease arrangements have facilitated access to private transportation.

The growing importance of services in the economy, however, also raises unique consumer issues. Consumers may have more difficulty making wise spending decisions in a market dominated by services. One example is asymmetric information: the seller has complete information about the product, but the consumer's information is incomplete. A service cannot be examined in advance, nor can it generally be returned if unsatisfactory (see, for example, McGregor 1992).

Another challenge that is particularly acute for consumers in the services market is the use of contracts. There is evidence that many consumers have trouble when confronted with service contracts: half of Canadians strongly agree that contracts are often too long for an average person to be able to fully read them, and 65 percent disagree that contracts generally use plain, easily understood language.18 Quebec's Office de la protection du consommateur reports that given the difficulty in assessing the quality of services, the latter account for a significant share of the consumer complaints received by the organization (Office de la protection du consommateur 2000). (More detail on many of these issues is presented in Part 2 of this report.)

Research opportunities

Various business sectors have responded in different ways to the growing polarization of consumers' incomes. For example, recent analysis of the “fringe” financial sector (payday loans, rent-to-own stores, cheque-cashing services, pawn shops, etc.) suggests several subjects for further research, including the growing scale of fringe players and the consumers who use these services, the actual cost of providing fringe financial services and the ease of access to traditional financial services, the relationship between social policy and the demand for fringe banking services, and the effect of fringe financial outlets on communities and neighbourhoods, including research on where these establishments choose to operate (Buckland and Martin 2003, xii).

Rigorous analysis of responses to income polarization in other business sectors also would be a valuable contribution for both firms and policy makers, particularly with respect to the various risks and choices facing consumers.

The growing importance of services in the consumer marketplace also merits greater attention from researchers. Services (e.g. auto repairs, home improvements) consistently rate among the top subjects of consumer complaints. Close examination of such complaints could suggest other services needing analysis, and useful solutions for consumers, businesses and policy makers.

1.2 Canada's Low Inflation Economy

Inflation is the increase, over time, in the average price of goods and services. The inflation rates in Canada and the United States are key influences on interest rates in Canada, which have direct implications for consumers. First, interest rates determine the cost to consumers of borrowing funds. Second, they determine the costs to producers of borrowing, costs that are passed on to consumers in the prices of goods and services.

Low inflation and low interest rates for consumers

Compared to the 1980s –the early 1980s in particular –consumers have experienced substantially lower inflation and interest rates in the last 10 years. In the early 1980s, the rate of inflation exceeded 10 percent, and then hovered around 4 percent from 1984 until the end of the decade. Since 1992, the inflation rate has generally stayed below 3 percent. Sustained low inflation is important to consumers because it has a substantial impact on prices. With an annual inflation rate of 5 percent a year, average prices double in slightly more than 14.4 years. Reducing that rate to 3 percent means that it takes 24 years for prices to double (Government of Canada 2002).

Low inflation and interest rates can benefit consumers by keeping prices predictable and steady. This is particularly beneficial for people on fixed incomes, since low inflation protects their purchasing power. For example, those depending on defined-benefit registered pension plans gain from consistent low inflation because most of these plans are not indexed to the inflation rate.19

Low real interest rates have dramatically reduced the costs associated with many types of consumer borrowing (for example, mortgages and personal lines of credit). The impact on consumers of current monetary policies that strive to limit inflation is well reflected in Statistics Canada national accounts data. For example, the debt-to-income ratio in Canada rose sharply since 1985, from 60.3 percent in the first quarter of 1985 to 103.2 percent in the last quarter of 2003 (see Figure 1.3). In addition, the saving rate declined over this period, from 14.1 percent to 1.3 percent –an historical low. Low interest rates have also changed consumer behaviour in financial markets, by decreasing the attractiveness of holding money in traditionally safe savings options, such as bank accounts or government-issued savings bonds. As a result, some Canadians are seeking higher rates of return from their other investments, such as mutual funds. (These significant changes in Canadians' financial positions, and their related implications, are explored more fully in Part 2 of this report.)

Figure 1.3

Debt-to-Income Ratio and Saving Rate, 1980 Q1–2003 Q4

Source: Statistics Canada, CANSIM, series v498187 and calculations by the Micro-Economic Policy Analysis Branch, Industry Canada.

Research opportunities

Since Canadians are carrying more debt than ever before, further research could explore how vulnerable consumers would be to a sudden rise in interest rates. In particular, research could focus on the potential impact of higher rates on both the residential mortgage and short-term consumer credit markets, and on retirement incomes.

1.3 Regulatory Reform of Monopolies and Oligopolies

Since the 1980s, there has been considerable regulatory reform of monopolistic or quasi-monopolistic providers of residential electricity and natural gas, telecommunications and other services (the airline industry, for example). Greater choice in suppliers and lower costs are potential benefits of these changes for consumers, but these benefits also entail significant new challenges for consumers. A recent consumer study of the electricity market in the U.S., where regulatory reform is more advanced than in Canada, notes that, in general, a functional market can deliver more benefits to consumers than a regulator, but “a dysfunctional market can impose infinitely more harm on consumers than regulators on their worst day” (Cooper 2001, 15).

More choices for consumers

Canadian consumers have been given more choice in many markets opened to greater competition. The Canadian Radio-television and Telecommunications Commission ( CRTC ) notes that “residential consumers now have a range of alternatives to the incumbent telephone companies available to them for long-distance calling, Internet access, and mobile telephony” ( CRTC 2002, 95). This is supported by industry data, which reveal that the incumbent companies' share of the telecommunications industry's total revenue fell from 83.4 percent in 1998 to 78.5 percent in 2001 ( CRTC 2002, 14). The Public Interest Advocacy Centre ( PIAC ) notes that “from a retail perspective, [greater marketplace competition] clearly offers consumers a wide range of pricing options that would not otherwise be available …” (Lawson 2003, 21).

More challenges for consumers

Increased choices force consumers to deal with more –and more complex –information, since they must now make decisions that will affect their welfare and finances, in markets in which their experience is limited. Consumers can now comparison shop among a number of telephone, television signal, and, in some provinces, gas or electricity suppliers. And, consumers are heavily exposed to marketing and promotional activities as new entrants vie for business. However, even a little experience helps: in the case of long-distance telephone services, a 1999 survey by PIAC suggests that most consumers are comfortable participating in a competitive environment, with 79 percent of respondents reporting that they compared prices, and almost half (47 percent) reporting that they had switched long-distance providers at least once (Barrados 1999). In contrast, in the natural gas market an estimated 56 percent of consumers did not feel sufficiently well informed to make decisions about switching natural gas providers
(Barrados 1999, 2, Appendix).20

One potential explanation for the substantially higher degree of consumer comfort in the competitive long-distance market, as opposed to the competitive natural gas market, may be consumers' greater familiarity with the former. In 1999, at the time of the PIAC survey, competitive natural gas markets were relatively new.21 Consumers have had choice for long-distance telephone service suppliers since 1994.22

But even the mature competitive telecommunications market is not without consumer information challenges. While consumers now benefit from many choices of a long-distance service provider, comparing competing offers is much more challenging than it was a few years ago. Network access charges, minimum monthly charges, time-of-day restrictions and time limits on minutes used are common parts of many long-distance service plans today. For example, a package offered by one of the major incumbent companies in October 2003 included a minimum monthly charge of $4.95 (which includes the first 60 minutes of long-distance calls), a $2.95 network access charge and a limit of 800 long-distance minutes (customers are charged for additional minutes). This pricing structure is highly complex compared to either “plain old telephone service,” with consumers simply paying a flat service fee, plus per call long-distance charges, or the earliest competitive long-distance service packages, which relied, for example, on a straightforward monthly minimum charge plus a price cap for unlimited calling. Bundling home telephone service with cellular and Internet services is making the telecommunications options available even more complex.

As one would expect, consumers have benefited from better prices as a result of new competition in markets formerly served by regulated monopolies. For example, Statistics Canada data for 1992 to 2002 reveal that price increases for telephone services over this period were generally less than the overall rate of inflation (see Figure 1.4). However, “telephone services” include many variables (basic local service, installation and repair, telephone equipment charges, long-distance charges), and this masks some important trends in prices.

Figure 1.4

Telephone Services * and All-Items Price Indices 1992–2002

* Telephone services include basic local service, installation and repair, telephone equipment and long-distance charges.

Source: Statistics Canada, CANSIM, table 3260002.

Competition has certainly lowered long-distance service prices, and consumers who make frequent use of this service are unquestionably better off today than they were with the monopoly telephone system.23 However, CRTC analysis shows that actual savings ultimately depend on two factors: a consumer's location and the pattern of telephone service use. Rates for basic local service increased significantly with rate rebalancing, and many new charges were introduced for services previously provided for free, such as directory assistance, 911 and Message Relay Service (mandatory monthly charges) and wireline maintenance insurance (Lawson 2003, 21). In addition, the CRTC reports that between 1995 and 2000 price increases for basic local telephone service were, in some provinces, dramatically higher for rural customers than for those in urban areas.24 So, while the typical customer pays lower telephone bills in the competitive telecommunications market, this is not the case for all groups of consumers.25

Changes in the structure of Canadian electricity and natural gas markets are more recent, so it is too early to compare their intended and real effects on prices.

Research opportunities

Canada is still in a relatively early stage in the reform of regulated industries and the introduction of competition in utility markets, especially in comparison with the United States. Nevertheless, good data on the impact of these reforms on consumers will likely be necessary to guide regulators and policy makers as reforms continue. Recent experience indicates that, apart from information on such traditional issues as impacts on prices and the entry of viable new competitors, information on service quality and innovation, affordability and the ability of consumers to understand and navigate these new markets and access redress will likely be required.

1.4 A More Open Domestic Marketplace

Over the past two decades, liberalized trade rules, improved cross-border transportation services and new information and communications technology have facilitated an increase in the exchange of goods, services, labour and capital. Trade in goods and services has the potential to offer a number of benefits to consumers, from lower prices to greater choice.26 It also has raised consumer advocacy and protection issues.

Trade negotiations expand

Canada has participated in a number of international trade discussions through the General Agreement on Tariffs and Trade and its successor, the World Trade Organization ( WTO ). While trade negotiations began with goods, the Uruguay Round, the 1989 Canada-U.S. Free Trade Agreement and the 1994 North American Free Trade Agreement ( NAFTA ) all included services, as does the current Doha Development Agenda, which also covers WTO rules on competition policy and intellectual property policy. In an increasingly open marketplace based on services, the level of protection given to the interests of Canadian consumers hinges on the rules established by these agreements. As well, the attention now devoted to international frameworks formerly considered to be mainly of domestic concern, such as those on competition and intellectual property, could have a long-term impact on Canadian consumers.

NAFTA , in particular, has had a significant effect on investment trends in Canada and on the movement of people. For example, between 1994 and 1998, the United States contributed all of the increase in the share of assets of Canadian enterprises held by foreign firms (Taylor 2001). As reported in Chapter 2, this movement of capital has the potential to bring direct benefits to Canadian consumers; for example, by increasing the presence of foreign retailers, firms that have been responsible for introducing some of the most innovative retail formats into Canada.

Between 1987 and 2001, exports as a percentage of GDP grew from 27 to 43 percent (Statistics Canada 2003a). Even when excluding the import content of exports,27 the value-added contribution of exports increased during the 1990s, reaching 29 percent in 1999 compared to 19 percent in 1990 and a previous high of 22 percent in 1986 (Cross 2002). This, in turn, has influenced Canada's labour market, having a direct impact on job creation. According to the Department of Foreign Affairs and International Trade ( DFAIT ), 167 100 new jobs were created in Canada in 2001, linked in part to trade and foreign investment. Furthermore, it has been estimated that one in every four jobs in Canada is linked to its export success in global markets ( DFAIT 2002, 1).

Of even more direct impact on consumers, have been changes in imports of “other consumer goods.”28 These soared by 207 percent in nominal terms between 1989 and 2002, compared to growth of only about 15 percent in Canada's population and of 64 percent (nominal) in the consumption of goods.29 In other words, Canada consumed more goods per capita in 2002 than in 1989, and that growing consumption appears to be increasingly made up of imports rather than Canadian-made goods (see Figure 1.5).

In certain sectors, imports now dominate the Canadian marketplace. For example, the import penetration ratio30 in footwear increased from 51 percent in 1989 to 70 percent in 1995 (Charron 1997), and in the pharmaceutical industry from 18 percent in 1983 to 76 percent in 2000 (Lexchin 2001).

Figure 1.5

Merchandise Imports versus Consumption, 1989–2002

Source: DFAIT , Fourth Annual Report on Canada's State of Trade, 2003, and Statistics Canada, CANSIM, table 380-0017; series v646939-v646941.

Values-based consumerism and globalization

The growth of international trade in goods has, in part, also spurred the emergence of values-based consumerism. Many consumers now want to know not only what they are buying, but also how it was made. Concerns about environmental protection, health risks, the nutritional content of food, animal welfare and exploitative labour practices have led to a growing market demand for products, many imported from the Third World, that are produced according to certain values-based standards. Examples include “fair trade” coffee, wood and paper products from sustainable forests, organic food, and clothing and footwear manufactured in “fair wage” factories.

North American integration is now the most relevant trade phenomenon for Canada. Canada-U.S. trade in 1989 was worth 83 percent of the value of interprovincial trade; by 1996 the relative value of U.S. trade reached 142 percent of the value of interprovincial trade (Industry Canada 1999). Considering merchandise imports generally, the share originating from the United States has been in the 69-77 percent range since 1989 ( DFAIT 2003, Table 1C). It may be, however, that the presence of other countries is specifically greater in the consumer marketplace, as the U.S. share of imports of “other consumer goods” into Canada was lower, at 48 percent, in 2003.31

Consumer choices transformed by trade

Imports benefit consumers by providing a wider array of products in the marketplace. This conclusion is supported by public opinion research that suggests that Canadian consumers see greater trade as having led to greater choice.32 Canadians' overall assessment of trade agreements appears divided, however. When asked to think of Canada's participation in trade agreements and to choose between two statements regarding the impact of trade, respondents in another survey were about equally divided: 46 percent said that consumers benefited from an increasing diversity and availability of goods and 45 percent said consumers now face a more complex marketplace, in which it is more difficult to compare competing products and services.33 Although interpretation of public opinion data is constrained by the fact that the data only measure perceived benefits or costs, Canadians' views of trade suggest that its effect is not the same for all consumers, since those with higher income and a university degree are more likely to perceive benefits.34

Increasing international trade does not appear to have had a negative effect on Canadian consumers' protection after they make a purchase. For many products, the retailer provides a guarantee for goods imported or the manufacturer has warranty service in Canada.35 Likewise, the refund and exchange policies are those of the retailer, regardless of the origin of the product. Nevertheless, some information can be more difficult for consumers to assess when the manufacturer's operations are not located in Canada. For example, consumers of imported products are at a disadvantage when assessing information concerning quality standards or the environmental and working conditions in which the goods were produced, or the manufacturer's reputation with respect to customer satisfaction. Labelling practices may also present some difficulties; in 2000, 54 percent of all allergy-related recalls coordinated by the Canadian Food Inspection Agency resulted from imported foods and, in an assessment of labelling and allergen controls in the import sector, the Agency concluded that, for the majority of importers, the procedures for ensuring label accuracy were considered inadequate (Canadian Food Inspection Agency 2000).

Since the first rounds of trade negotiations, tariffs have been reduced or eliminated in many sectors. The focus in today's trade negotiations has therefore shifted, with “increasing scrutiny of domestic policies as potential non-tariff barriers in various trade fora” (Hadfield, Howse and Trebilcock 1996, 21). Consequently, today's focus on non-tariff barriers is likely to increasingly involve the consumer protection framework. At the December 2002 Canada-European Union summit, for example, it was recognized that a free-trade agreement would not be developed in the short term, with officials saying that “some non-tariff barriers include difficulties over recognizing professional qualifications or differing consumer protection rules” (Canadian High Commission in London 2003, 3).

This trend is also likely to present a number of challenges to public interest advocates, such as consumer organizations. For one, given the complexity of analyzing these agreements, a recent Canadian study has suggested that the voluntary sector “will need to increase its level of knowledge and sophistication with regard to international treaties and agreements, especially those dealing with the flows of goods and services” (Public Policy Forum and the Queen's School of Public Policy 2003, 16). For consumer organizations, however, resource constraints limit their ability to develop detailed knowledge areas and impose challenges in allocating time between a number of local, national and international consumer issues. Another challenge noted by the Canadian study was the difficulty for domestic voluntary sector organizations such as consumer groups to lobby and interact with unelected international bodies, whose trade policy increasingly affects the rules governing domestic provision of goods and services (Public Policy Forum and the Queen's School of Public Policy 2003).

Research opportunities

The interaction of trade and consumers is a potential area for researchers to address data gaps and explore analytical methodologies and emerging consumer issues. Much of the readily available information about imports is difficult to analyze from a consumer perspective. As a result, there is not much information available on the relationship between merchandise imports and the scope and nature of choice for Canadian consumers, or on the impact of imports on prices.36

Measurement and analysis are, however, likely to be all the more complex today. The tariff reductions agreed to in earlier rounds of trade negotiations were easy to report, but the long-term effects of a wider choice of quality and price combinations of imports are harder to isolate and quantify. Over time, many factors besides trade have come into play simultaneously and influenced outcomes in consumer markets, including changes in consumer preferences, the emergence of new and diverse local competitors, technological developments and shifts in the cost structure underlying production.

As for the harmonization initiatives of various trade agreements (e.g. safety standards and regulatory requirements), while questions have been raised with respect to their impacts on consumer protection, further, more detailed and longer-term analysis is required on such a complex issue. Most analysis of trade liberalization focuses on the ability of suppliers to access markets, with very little analysis done on the impact on consumers of new suppliers entering domestic markets and the implications for domestic regulation. In-depth case studies in various sectors may be required to better understand how NAFTA and other agreements have influenced business behaviour and government policy making, and, in turn, the consumer protection offered
to Canadians.

Any analysis, however, will be constrained by the difficulty of ensuring –whether by collecting hard data or conducting public opinion surveys –that the effects of trade can be isolated from the many other factors that compose the complex dynamics of the marketplace.

1.5 A Marketplace Transformed by Technology

The intensified pace and broad scope of technological innovation have raised a number of economy-wide issues for consumers. On the one hand, technology has increased consumer choice, both in the form of entirely new products and by increasing the reliability and lowering the cost of certain existing products. But the challenge of keeping up with new technological applications and product information affects the ability of consumers to navigate today's marketplace. Furthermore, the scope of technological change raises issues with respect to the traditional consumer protection framework.

While technological development has always played a role in the economy, consider the pace of change today. Over the past decades technological change has been fuelled by the awesome power of automated computation. Innovation in this field has been described by Moore's law, which states that the power of a microchip doubles about every 18 months. This has proven to be true since 1965 (The Economist 2003). The sustained rate of growth in the power to treat intangible data is all the more impressive when compared with “physical” sectors, such as passenger and freight transport. There have been no major technological advances in transportation “since the introduction of commercial jet planes, high-speed train networks and containers in the late 1960s” (Rodrigue et al. 2004).

New technology is also being adopted much faster than in the past. As shown in Figure 1.6, the number of years before a major new technology reaches 50 percent of households has become consistently fewer. Over the past two decades, the electronics sector has stood out in terms of the speed at which new technologies are transformed into consumer products. Less than 10 years after the Internet was commercially launched in 1993, 62 percent of households in Canada reported having at least one regular Internet user (Statistics Canada 2002). In 2003, almost half (48 percent) of Canadians reported having at least one digital video disk ( DVD ) player in their household. This compares to only 1 percent five years earlier and “in comparison, CD players and PCs took about 12 years to reach the same level of penetration in Canada” (Solutions Research Group Consultants Inc. 2003, 1).

Figure 1.6

Number of Years It Took for Major Technologies  to Reach 50 Percent of American Homes

Source: Reproduced from Adam D. Thierer, How Free Computers are Filling the Digital Divide, Backgrounder No. 1361, The Heritage Foundation, April 20, 2000.

How times have changed!

The following are examples of new products and services that have been introduced in the consumer marketplace since the late 1970s (based on Wall Street Journal 1998).

  • Walkman
  • Cellular phone
  • Compact disk/digital video disk
  • Laptop computer
  • Game Boy
  • MP3 player
  • Personal computer
  • Direct satellite television
  • Internet access

New products and even new industries

The rapid growth in computer power has quickly created many new electronic products ( DVD players and cell phones, for example) and services (electronic banking). And technological advances have broadened consumer choice in other areas, such as eye care, with the introduction in the mid-1980s of disposable contact lenses and laser eye surgery.

Entirely new industries have developed based on new technology, such as biotechnology. While the biotechnology industry is still considered to be in its infancy (the longest average use of biotechnology being less than 11 years; Traoré 2003, 11), the potential benefits to Canadians are significant. This is especially true in health care, in which “medicines, vaccines and other health-related devices and products will help reduce or eradicate many diseases and improve life expectancy” (Traoré 2003, 22).

Building materials and technological improvements: An example of benefits and challenges

Technological changes in the building materials industry are ongoing and have had varying effects on products, including improving durability and energy efficiency, and making them more cost-effective and easier to install ( CMHC 2000). This has benefited some consumers by giving them more choice of superior, higher cost building materials, while making owning a home more affordable for others by also making cheaper alternatives available. However, it can also amplify an information challenge, given the lack of consumer awareness of price-quality-reliability trade-offs in building products. “Building product companies believe that many builders are substituting lower quality products in an effort to reduce costs” ( CMHC 2000, 3), with some owners unaware of the quality variations.

Greater range in quality and prices

In addition to creating new products, technological development has had a significant impact on quality and price levels. For example, the development and production of a new motor vehicle model, which once took four to six years, is now accomplished in closer to two years (O'Neill 1998) with major cost savings to manufacturers. These shorter product development times have put upward pressure on product content and overall quality,37 as “no vehicle can expect to stay on the market for long without being replicated or outdone in terms of quality” (O'Neill 1998, 9). Technological developments in computers, particularly, have been beneficial to consumers, with both significant performance improvements and price cuts. Data comparing eight generations of semiconductors (from the 4 kilobyte to the 64 megabyte chip) reveal that the average price per unit of memory declined sharply as the power of chips improved (see Figure 1.7).

Figure 1.7

Average Annual Price per Megabyte of Dynamic Random Access Memory, 1974–1998

Source: Nadejda M. Victor and Jesse H. Ausubel, 2002, DRAMs as Model Organisms for Study of Technological Evolution, Technological Forecasting and Social Change, 69(3): 243-262.

Electronic waste: The environmental impact of fast-changing technologies

According to studies commissioned by Environment Canada, more than 140 000 tonnes of computer equipment, phones, televisions, stereos and small home appliances accumulate in Canadian landfills every year, the weight of which represents “enough uncrushed waste to fill up the Toronto Skydome every 15 years” (Environment Canada 2003). Of greater concern than managing the volume of this waste is the fact that most electronic equipment contains toxic substances such as lead, cadmium and mercury. A number of technological changes are accelerating the disposal of electronic products, such as the expectation that the turnover rate of Canadians' purchases of computers will fall to only two years (May 2001), and “the millions of television sets that will be discarded once the digital TV revolution kicks in” (Canadian Press Newswire 2000). Canada's consumer electronics and information technology industries are working with governments and stakeholders towards the development of sustainable solutions for Canada's electronic waste problem (Canada NewsWire 2003).

The problem of rapid product obsolescence

With rapid technological change and ever faster product development, relatively new product innovations, formats and versions are quickly rendered obsolete. Once a new type of product is established in the market, another often soon comes along. In 1983, for example, 20 years after the first cassette player/recorder was introduced, tapes were outselling vinyl. A year before, however, the first compact disk ( CD ) system had been announced, and CD s in turn surpassed cassette sales in only 10 years (by 1992) (DeBarros 2001). Knowing when to buy products using a new technology or even whether to buy them is thus an issue that characterizes the modern consumer marketplace. Many consumers struggle to understand these changes, since technologies are sometimes designed by and for daring early adopters. For example, on the topic of the computer industry and of the diffusion of innovation throughout society, it has been noted that “early adopters find the product adequate, so all the industry needs to do is coax the reluctant masses to buy in and accept the responsibility for learning to live with expensive, inadequate solutions” (Mueller 2000). Public opinion poll results suggest that 62 percent of consumers are, in fact, concerned about not understanding the usefulness and value of new products.38

When personal computer sales growth declined for the first time in 2001, “upgrade fatigue” was pinpointed as one of the reasons (Los Angeles Times 2001). The pain of upgrades is especially associated with the personal computer market, because it is now almost entirely a replacement market (i.e. computer owners replacing old machines, as opposed to first-time buyers). In other cases, the pain has been felt by the early adopters of new product versions that were subsequently found to be inadequate by users and had to be replaced. For example, the first phone-enabled version of a popular handheld e-mail device, required early adopters to use cumbersome headphones and wires to make and receive a phone call. Within months, a new series that had a built-in speaker and microphone was released (Manes 2003). Also, consumers of an emerging technology who have purchased from one supplier can be left confused when announcements from another company raise the issue of competing standards. Perhaps the most notable example of this was the Beta versus VHS format war over videocassettes. Another recent example has to do with new DVD storage and recording formats (The Globe and Mail 2002).39 In summary, a consumer behaviour study involving eight such technology problems concluded that the new-obsolete problem is indeed consumers' most widely experienced challenge (Mick and Fournier 1998).

With technology playing an increasingly vital role in our daily lives, it is not surprising that the ability to understand it is now getting considerable attention. The U.S. National Academy of Engineering emphasized the pitfalls of the low level of technological awareness in society in general:

Although the United States is increasingly defined by and dependent on technology and is adopting new technologies at a breathtaking pace, its citizens are not equipped to make well-considered decisions or to think critically about technology. … Americans use technology with a minimal comprehension of how or why it works or the implications of its use or even where it comes from. … We fill shopping carts with highly processed foods but are largely ignorant of their content, or how they are developed, grown, packaged, or delivered. … Americans are poorly equipped to recognize, let alone ponder or address, the challenges technology poses or the problems it could solve. And the mismatch is growing. Although our use of technology is increasing apace, there is no sign of a corresponding improvement in our ability to deal with issues relating to technology (National Academy of Engineering 2002, Executive Summary, 1-2).

Abilities and skills related to technology have clearly become essential for consumers. Today's youth are expected to demonstrate greater technological literacy than were previous generations, and should be better equipped as tomorrow's consumers. It appears, however, that even today's youth are challenged in their use of technology, as suggested by a provincial assessment of students in grades 5, 8 and 11 in Saskatchewan. It showed that students of all ages fell below expectations in their understanding and use of new technologies (see Figure 1.8).

Figure 1.8

Percentage of Students Attaining Highest Levels (3, 4 and 5)  in Technological Literacy

* Standards and expectations were set by a group of stakeholders, including parents, students, teachers, directors, curriculum writers and businesspeople.

Source: Provincial Learning Assessment in Technological Literacy, Saskatchewan Education, 1999.

Challenges to the traditional consumer protection framework

Keeping consumer protection legislation and regulations up to date is increasingly challenging in the face of widespread and rapid technological change. For example, since “the threat and promise of networked digital technology is that every individual with access to a computer will be able to perform the 21st century equivalent of printing, publishing and vending” (Litman 1997), digital issues are among those identified as outstanding concerns to be dealt with in future phases of copyright revisions (Industry Canada and Department of Canadian Heritage 2001). In the case of biotechnology, consumer protection has had to deal with “the rapid pace of technological innovation and the shortening of the gap between discovery and application which puts pressure … on the regulatory apparatus …” (Naimark 2000). The number of new biotechnology products and processes marketed tripled between 1997 and 1999 (Traoré 2003), and the rapidity of these changes has challenged the quantification of risks to human health and the environment. Regulators thus face difficult risk analyses, which may cause significant delay in access to new products, but must be done in light of the potential risks of quick market introduction.

Finally, with much of the technological change having occurred in information and communications technology, the particular dynamics of network effects40 are increasingly important. Regarding electronic commerce:

In the area of data networks, it is essential that policy makers protect consumers against monopolistic and anti-competitive practices. Increasing returns and network effects lead to problems when dominant firms use market power to exclude rivals or limit the ability of rivals to develop products that are interoperable. Practices of bundling products, technological tying of products, or other techniques can reduce competition and lead to high prices, reduced consumer choice or lower quality (Trans Atlantic Consumer Dialogue 1999, 1).

It should be noted that some analysts take a different view (see VanDuzer and Paquet 1999).

Research opportunities

There are no indications that the pace of technological advancement will slow significantly in the near future. Therefore, the consequences of the rate at which products are disposed of or rendered obsolete by new versions must be better understood. Considerations include assessing the costs to consumers against the value offered by new product versions, as well as environmental impacts. Furthermore, while some work has been undertaken,41 it may be useful to get a broader overview of consumers' technological literacy skills to help identify the benefits and costs to them of adopting a particular technology. Finally, consumer perspectives (e.g. an understanding of how consumers actually use a new technology, how well they understand it, how they integrate it with their other activities) will continue to be needed for regulation in key sectors to remain effective.

Footnotes

7 Growth in GDP was 4.97 percent in 1998. Source: Statistics Canada, CANSIM, series v3860085. Back to text

8 The Economic and Fiscal Update (Department of Finance Canada 2002) also notes a positive contribution to personal disposable income from strong productivity growth and substantial tax cuts by both federal and provincial governments. Back to text

9 A Statistics Canada study over the period 1961-99 concluded that “productivity gains [are primarily] reflected in lower relative output prices for consumers, not higher relative wage increases for workers.” See Statistics Canada 2001. Back to text

10 The year with the highest after-tax income before the recession of the early 1990s. Back to text

11 For example, homes built from 1996 to 2000 were about 25 percent larger than those dating from 1961 to 1977. Source: CMHC 2003, 11. Back to text

12 For example, home ownership rates increased from 63.6 percent to 65.8 percent between 1996 and 2001, the largest increase in the last 30 years. Source: Ibid. Back to text

13 For example, the food services share of overall consumer spending on food rose from 32.7 percent in 1989 to 34.6 percent in 1998. Source: Little and Bennett 1999, 21. Back to text

14 For example, while one of every four Canadians lives in a household in the highest income quintile, these individuals account for more than one of every three consumer dollars spent in restaurants. Source: Little and Bennett 1999, 25. Back to text

15 A food-insecure household is defined as one in which, at least once during the previous 12 months, family members were worried that there would not be enough to eat, did not eat the variety or quality of food that they wanted, or did not have enough to eat. Excluding the first group (those who worried but did not compromise the quantity or quality of food they ate), 8 percent of Canadians reported being food-insecure. Back to text

16 For example, Money Mart, a leading provider of payday loans, established itself in Canada in 1982, and now claims to serve its clients at 300 locations. Back to text

17 In many instances, these services represent the only option for low-income Canadians. Back to text

18 Question commissioned by the Office of Consumer Affairs in 2001 as part of the Environics Research Group's Focus Canada survey. Back to text

19 Statistics Canada reported that, as of January 1, 2000, of all private and public sector defined-benefit registered pension plans (which accounted for 85 percent of members), only 8.8 percent were fully indexed to inflation, and only 18.8 percent were partially indexed. Alternatively, 67.4 percent of defined-benefit plans, covering 50.6 percent of members, had no automatic adjustment. Source: Statistics Canada 2000, 6 and Table 13, 41. Back to text

20 Note that the results of the Public Interest Advocacy Centre's survey on natural gas were limited to consumers in Alberta and Ontario, the only two provinces that offered residential choice at the time of the survey. Back to text

21 For example, residential choice for natural gas in Alberta only became available for “many” consumers in 1996. See Ministry of Energy, Government of Alberta 2003. Alternatively, while Ontario's natural gas market was opened to competition in the mid-1980s, substantial changes occurred in this industry in 1998 with the passage of the Ontario Energy Board Act. See Ontario Energy Board 2002, 7, 10. Back to text

22 The CRTC notes that true competition in the long-distance market began in 1994, when incumbents were required to modify their networks to allow people to make long-distance calls without having to dial extra digits. By 1998, one year prior to the Public Interest Advocacy Centre survey, the CRTC had determined that the long-distance market was sufficiently competitive and had ceased to regulate long-distance rates charged by the incumbents. Source: CRTC 2001, 5. Back to text

23 For example, the CRTC analyzed the impact of long-distance savings on a typical consumer's total annual phone bill (including basic service) from 1995 to 2000. It found that, depending on the province and region (urban or rural area), the typical consumer saved between $133 and $324 annually. Back to text

24 For example, during this five-year period, rural consumers in Newfoundland faced a 100-percent increase (versus 48 percent for urbanites). Similar differences occurred in Quebec (88 percent versus 39 percent), Ontario (96 percent versus 34 percent), Manitoba (116 percent versus 66 percent) and British Columbia (86 percent versus 46 percent). Rate differences (increases for urban and rural consumers) were broadly similar in the other five provinces. Data were not published for any of the territories. Source: CRTC 2001, 45. Back to text

25 The CRTC defined a typical consumer as “a consumer with one residential line and 125 billed minutes of domestic long-distance (Canada-Canada) per month using blended peak/off-peak pricing information. ... This is approximately equal to the national residential average.” Source: CRTC 2001, 45, Table 5.2. Back to text

26 See Chapter 2 for information about the effects of foreign direct investment in the retail services sector. Back to text

27The value of imported intermediate goods, which is not part of GDP . Back to text

28 “Other consumer goods” does not include all consumer goods. It consists of two general categories: apparel and footwear and “miscellaneous” consumer goods (which includes televisions, radios and phonographs, printed matter, watches, sporting goods and toys, home furnishings, photographic goods and miscellaneous end products). Back to text

29 Based on Statistics Canada national accounts data for consumption (expenditure-based and excluding services). Back to text

30 Proportion of the domestic market supplied by imports. Back to text

31 The statistic, as opposed to general merchandise imports, is presented on a customs basis, since it was not found on a comparable payment basis. See Statistics Canada 2003b, Table 10. Back to text

32 When surveyed about the impact that international trade agreements have had on consumer choice, 67 percent of respondents said consumers have more choice of products. See Millward Brown Goldfarb 2003. Back to text

33 Question commissioned by the Office of Consumer Affairs in 2001 as part of the Environics Research Group's Focus Canada survey. Back to text

34 The statement that they have benefited from increased choice was selected by 58 percent of those with household income greater than $80 000 versus 38 percent of those with less than $20 000, and 53 percent of those with a university degree versus 39 percent of those with less than a high-school education. Back to text

35 Consumers may occasionally have to dial an American number (perhaps not toll-free) for follow-up customer service. Back to text

36 In these cases, public opinion data can be used, even if imperfect, as substitutes. The Office of Consumer Affairs commissioned a question in 2001 on the effect of trade on prices as part of the Environics Research Group's Focus Canada survey. Results indicated that 45 percent believed that trade agreements have caused prices to increase, 19 percent that increased trade caused prices to fall, and 27 percent that trade had no impact on prices. Back to text

37 While only an imperfect indication of product quality, odometer readings at the scrap yard provide some quantitative measure of the trend. See Desrosiers 1999. “In the 1960s the average vehicle in North America lasted only 140,000 to 150,000 kilometres. Today the average vehicle lasts 250,000 to 270,000 kilometres and within five years will last more than 300,000 kilometres. This represents a doubling of the vehicle's useful life over the last 30 years.” Back to text

38 Question commissioned by the Office of Consumer Affairs for the Environics Research Group's Focus Canada survey, 2002. When considering those reporting to be very concerned, results were higher for seniors (34 percent of those aged 60 and older, compared to 18 percent of those ages 18 to 29) and those with less education (33 percent of those with less than a high-school diploma, compared to 17 percent of those with a university degree). Back to text

39“Rivalry among industry titans over next-generation DVD s heated up on Monday when Japan's Toshiba and NEC said they would propose a cheaper type of high-capacity disc incompatible with the Blu-ray format advanced by Sony and others.” Source: The Globe and Mail 2002. Back to text

40Network effects exist when the value of a good or service increases with the number of others who purchase or use a compatible good or service. The classic example of a network system is a telephone exchange, in which the value of joining the network increases with the number of other subscribers who are connected and therefore can be reached on compatible networks. Back to text

41Such as the above-mentioned 1999 Provincial Learning Assessment in Technological Literacy, Saskatchewan Education (see Figure 1.8). Back to text

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