Economists urge end to era of laissez-faire

Government intervention in the economy is back in vogue and Canada risks being left behind unless it figures out where it can best make a difference, two former federal government economists argue in a new paper.

Picking winners has long been frowned on in most of the developed world – at least, officially.

But the great recession, stalled economic growth and high unemployment has made governments much more open about showering money and resources on favoured industries, Dan Ciuriak and John Curtis argue in a paper being released Tuesday by the Montreal-based Institute for Research on Public Policy.

"The gloves are off," acknowledged Mr. Ciuriak, former deputy chief economist at the department of Foreign Affairs and International Trade (DFAIT).

And often, much more effectively than Canada, he said.

"We have industrial policies, but we don't have a strategy and we're hesitant to talk about that. What we are trying to do is break the taboo. Everyone is doing it, so it's okay to talk about it."

The "inconvenient truth" is that governments have long targeted regions and industries, and that approach can succeed when used appropriately, the authors said in the report, The Resurgence of Industrial Policy and What it Means for Canada.

Countries that fought hard to support key industries often now dominate them, he said, citing examples such as Canada and Brazil in regional aircraft, the U.S., Japan and Korea in semiconductors and the U.S. and Europe in wide-body civil aircraft.

But Mr. Ciuriak said there are limits to meddling in the economy. The key is to identify the risk-reward profiles of various sectors to determine if they're appropriate targets – generally those with high entry costs, significant risks, substantial need for research dollars and potential for large economic spinoffs.

"Government should not be involved in dictating how many tomatoes farmers should grow," he said.

"But there are a whole range of areas where private capital will not go. Those are the ones where government has to zero in on."

Mr. Ciuriak pointed out that Europe, the United States, Japan and China have all identified key "next-generation industries" they intend to support, including advanced manufacturing and green technology.

Canada actively supports a few clusters, "but not with a lot of money or enthusiasm," he said.

The reports cites a few recent examples, including Ottawa's move to expedite environmental reviews of resource projects, reform procurement rules to promote Canadian defence suppliers and renew funding for the Federal Economic Development Agency for Southern Ontario.

The authors suggest that governments in Canada need to exploit areas of natural advantage.

"Canadian governments must tailor sector-specific interventions that play to our unique strengths and circumstances, such as our small domestic market, vast geography and competition from the United States," argue Mr. Ciuriak and Mr. Curtis, former chief economist at DFAIT.

Very little research has been done in Canada on how to craft effective industrial policy because the assumption has been that it is a bad thing.

"We haven't had a serious policy discussion of what works in the Canadian context," Mr. Ciuriak said.

The conventional wisdom that has generally prevailed since the 1970s is that industrial support should be applied broadly and be neutral between industries.