What the U.S. can learn from Canada at the G20

FORTUNE -- Toronto's downtown core has already been locked down at a cost of nearly $1 billion for this weekend's G8 and G20 summits, tightly scripted events that give face time to power brokers such as President Obama and Russian president Dmitry Medvedev. But while the streets resemble a northern version of Gitmo, the mood away from the chain link fences and security barriers has perhaps never been more ebullient.

For good reason. The Canadian economy grew an astounding 6.1% annualized rate in the first quarter, compared with 4.9% in the fourth quarter of 2009. That pace of growth is the strongest in more than a decade and twice the 3% growth reported by the U.S. in the first quarter.

While the U.S. economy has stabilized, its prospects for a strong recovery remain in doubt. The Obama administration continues to propose stimulus efforts to spur job growth, but so far the unemployment rate remains stubbornly high. Even worse, many economists are now predicting another dip in the housing market and more trouble ahead for the banking sector.

With so much uncertainty in the air in the U.S., President Obama would be smart take a long moment during his Toronto visit to learn some lessons from the Canadian way of growing an economy.

It starts by relying on the private sector for job growth instead of government help, as Obama has so far futilely offered. In Canada, the unemployment rate is 8% and falling, compared to 9.7% in the U.S.

The Federal Reserve said on Wednesday it planned to leave interest rates unchanged "for an extended period." The Bank of Canada, meanwhile, became the first among G7 central banks since the start of the crisis to raise its benchmark interest rate, reversing a two-year trend. Earlier this month, it brought its overnight target rate to 0.5% from a record-low 0.25%.

While Canada's growth is strong now, it is unlikely to sustain GDP growth of 6% or more for the remaining quarters of 2010, which would likely trigger an inflationary spiral. Economists predict GDP growth of 3.5% for the year, as consumer spending and housing sales settle into a more comfortable range.

Still, Canada is expected to lead the G7 in economic growth for at least the next two years. How did our northern neighbor become the economic star of the exclusive G7 club of developed nations, which includes Britain, France and Japan?

1) A lack of bankers gone wild: A key reason is that its banks sailed through the worst downturn since The Great Depression without getting knocked to the ground by subprime mortgages. These banks remain as solid and well-capitalized as ever. And despite a reputation for bleeding retail customers and small businesses dry with service charges and fees, they continue to underpin Canada's economy.

2) Innovative manufacturers: Exporters used to have a historic cost advantage. That's no longer true: the Canadian dollar trades at near parity with the greenback and demand from the U.S. has dramatically pared back. Instead of asking for protection: "Manufacturers have been forced to look for new customers and do business differently," says Jayson Myers, president of Canadian Manufacturers & Exporters, the country's largest trade and industry association. Companies that have survived the global downturn are investing in new product design and engineering for new customers in Mexico, China and India.

3) Fiscally restrained government: Finally, Canada is on an economic tear because Ottawa has managed to get its fiscal house in order over the last 15 years, with the federal deficit now at a mere 3.5% of GDP. This compares to 11.3% in the U.S. and 10.4% in Britain.

Canada's Prime Minister Stephen Harper is sure to extol the virtues of fiscal restraint to his G8 and G20 partners this weekend, in light of the fact it has cost national governments more than $7 trillion to dig the global economy out of crisis. The resulting mountain of sovereign debt has pushed a number of countries, including Greece and Spain, to the brink of default.

But this message is likely to get a mixed reaction. President Obama has argued that deficit cutting should be saved for later, fearing that premature tightening could plunge the U.S. and the global economy into a double-dip recession. On the other hand, British Prime Minister David Cameron this week introduced an emergency budget that contains some of the harshest cuts since World War II.

Harper will have bragging rights when it comes to his country's robust economic recovery. But considering the security bill for the three-day G8 and G20 summits in Toronto and nearby Huntsville will cost more than $1 billion, he could have a harder than anticipated time selling his austerity message.

Security for recent G20 summits in Pittsburgh and London cost $12.4 and $10.9 million, respectively.