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It’s been 30 years since Ottawa disbanded the body that helped it set a clear economic agenda. It needs a new one to help Canada adapt to a competitive high-tech world

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Jim Balsillie is chair of the Council of Canadian Innovators and founder of the Centre for International Governance Innovation and the Centre for Digital Rights.

In a thoughtful essay published last summer, the writer Lauren Dobson-Hughes made a compelling argument that recent crises – including COVID-19 and Canada’s retreat from Afghanistan – have not only exposed the country’s deeply dysfunctional institutions, but also revealed our bureaucracy’s profound limitations on performing even its most basic duties, such as implementing a payroll system for public sector employees, updating privacy legislation or designing a shipbuilding program.

“We are ill-equipped, floundering, and as the Brits would say, not fit for purpose,” she wrote. “We built our systems, structures and cultures for a different time. They are now failing us, and fast.”

The same can be said for institutions and structures responsible for designing Canada’s contemporary economic strategies. Politicians of all stripes worship at the altar of innovation, with visits to Silicon Valley and photo ops with entrepreneurs, but the devotion is a facade. Public-sector departmental structures and policy-makers are proving incapable of dealing with the opportunities and challenges afforded by the Information Age.

If the past two decades of various economic growth councils, blue-ribbon commissions, and “non-innovation innovation” strategies have proven anything, it is that inside Ottawa there is a dearth of expertise on the issues that accompany our transition to a knowledge-based and data-driven economy.

As the new Parliament restarts its work this week, our elected officials have the chance to take public-institution-building seriously, positioning Canada to capture wealth in a global, innovation-driven economy.

This step begins with rebuilding the Economic Council, an institution the government disbanded in 1992. This new, restructured council would provide the federal government with the research required to establish a long-term policy agenda designed to advance our country’s competitiveness.

The pandemic has proven that governments have extraordinary capacities for marshalling resources and effecting change. That same energy can and should be used to kick-start an intellectual renaissance inside our civil service.

As a country, we are falling behind. All signs point to our failure to design strategies that would allow us to prosper in a new, knowledge-based economy. The Organization for Economic Co-operation and Development (OECD) has dire projections for the Canadian economy, while the average salary is dropping, weakening an already endangered middle class.

But we still have a chance to create an innovative, more competitive Canada.

Operators at Air Canada use a new cathode-ray display system in 1973. Through the 20th century, Canada and its largest trading partner, the United States, grew far apart in the scale and ambition of their technology sectors.Tibor Kolley/The Globe and Mail

Digital transformation has reshaped the world

Forty years ago, the traditional production-based economy began transitioning to a knowledge-based economy and, more recently, to a data-driven economy. A world previously based on open, shared science, and on liberalizing trade through tariff reductions and a patent system designed to reward genuine inventions, has transitioned into a world of closed science, closed markets and monopolization of knowledge and information.

This shift didn’t just signal detachment from physical production. It foundationally changed the structure and behavioural characteristics of companies that pared down capital equipment and workers, yet still operated at global scale, pulling in massive profits and paying little in taxes. Those companies turned to aggressively generating intellectual property (IP) assets (such as patents, copyrights, trademarks and contracts) and, in the past decade, to using data assets to control markets and capture superior economic rents, often with increasing marginal returns.

This transformation has reshaped the global competitive landscape, but was no secret in the international policy community. In advanced countries, policy-makers adopted new strategies and marketplace frameworks that rewarded owners of IP. One of the key global battlegrounds became technical standard setting, the critical frontier where IP rights owners fight for dominance of value chains, wherein a company makes money from IP embedded in products, rather than from the labour embedded in their production.

In recognition of the growing importance of IP, Canada’s largest trading partner, the United States, passed the Bayh-Dole Act in 1980, a sweeping legislation that addresses the ownership of inventions that arise from publicly funded research. The 1980s were marked by a series of measures intended to expand American IP ownership and to enable U.S. firms to capture international economic rents. These measures included establishing the annual Special 301 Report aimed at creating protections abroad for U.S.-owned IP.

After the Bayh-Dole Act, trade agreements became the main policy tool for establishing marketplace frameworks that suited IP owners. Consequently, the U.S. introduced IP protections in the original Canada-U.S. Free Trade Agreement in 1989 and then rolled out more in the North American Free Trade Agreement in 1994, and then the Trade-Related Aspects of Intellectual Property Rights Agreement that formed part of the World Trade Organization Agreement in 1995. Today, the overwhelming majority of the text in the recently ratified Canada-U.S.-Mexico “free trade deal” is about structured marketplace frameworks that extend and entrench the IP and data rights of American companies – so much so that the words “free trade” do not even appear anywhere in the agreement.

With this new strategy, the U.S. was able to overcome the industrial challenges of the 1980s and adapt a tech-driven economy into a knowledge-based one in the 1990s, securing pole position in the race to dominate the data-driven economy of the 21st century.

Today, U.S.-based companies own half of the world’s most valuable IP and control vast amounts of digital data, evidenced by the US$10-trillion combined market value of Apple, Amazon, Facebook, Microsoft and Google parent company Alphabet, with tangible assets comprising only 4 per cent of their assets.

These lessons were not lost on others: Advanced countries such as South Korea, Germany, Singapore, Israel, Sweden, Taiwan and Japan formulated equally sophisticated strategies attuned to their domestic realities and followed the U.S. example. By 2016, industrialized countries’ receipts of international IP payments were more than 100 times higher (US$323-billion) than those going to low-and middle-income countries (US$3-billion).

But no country has made as concerted and comprehensive an effort to raise the level of its game as China. The country engaged in a whole-of-society effort to gain traction by bringing IP education to its schools; training legions of IP professionals; establishing specialized IP courts to promote sophisticated litigation capabilities; strategically populating standards-setting bodies; establishing a NASDAQ-like equity board to encourage the development of a sophisticated venture capital sector; and building expansive and increasingly powerful IP holdings for offensive and defensive purposes.

In the last five years, China has filed half of all global patents and started dominating standards-setting bodies. It recently published the “Guidelines for Building a Powerful Country with IP rights 2021-2035,″ a report that lays out in startling detail the sophistication of Chinese policy-makers in using national IP assets as a “core element of international competitiveness.”

These strategies have pushed China and its companies to massive valuations, competitiveness and even dominance in critically strategic sectors such as clean tech and 5G and 6G. Alibaba and Tencent are currently valued at approximately US$1.3-trillion, with total tangible value sitting at less than 3 per cent.

China now rivals the United States in the combined number of Fortune 500 companies and “unicorn” startups valued at more than one billion dollars – a more relevant statistic of emerging economic strength in the contemporary economy than gross domestic product. It is hardly surprising that control of IP and data is the main bone of contention in the current trade and technology war between China and the U.S.

Visitors to last fall’s Aspara Conference in Hangzhou, Zhejiang province, look at a new processor from T-Head, a unit of e-commerce firm Alibaba. To make China a self-reliant technology power, the Communist Party is pushing Alibaba to take on the expensive business of designing its own processor chips.Chinatopix via AP

Canada is still navigating with outdated maps

While these developments constituted a paradigm shift for policy-makers around the world, Ottawa was unconvinced.

Rather than investing in public sector institutional capacity to keep up with changes in the global economy, the Canadian government became dependent on a rotting practice of outsourcing its own work to costly, controversial and unaccountable consultants and in the process giving birth to the so-called “shadow public service.”

As public bodies transfer more and more responsibility to management consultancies, the processes for delivering their core functions become less transparent. These self-eroding practices are particularly troubling because the role of government is expanding owing to the nature of the contemporary, post-COVID economy, which requires an unprecedented amount of horizontal integration in policy development, analytical depth, and rapid response by policy-makers.

In the mistaken belief that the knowledge economy functions like the production-based economy and that the government could manage it without updating in-house expertise, our policy-makers disassembled the country’s analytical and research infrastructure, including disbanding the Economic Council in 1992, even as the IP intensive economy was spreading beyond its initial foothold in the United States. The effects of this most unfortunate miscalculation continue today.

Without relevant research and sound advice for the new economy, Canadian policy-makers have spent the past three decades confusing innovation with invention, a science-and-technology strategy with an innovation strategy, IP generation with IP protection, free trade agreements with asset protection agreements, privatization with digitization, and supply chains with value chains. Repeated initiatives aimed at promoting economic growth either had no strategy for generating and commercializing IP (the currency of innovation), or were designed to transfer decades worth of taxpayer-funded IP to foreign firms.

Several observations underscore just how out-of-step Canada has been: Between 2000 and 2016, even as the global share of the capital stock composed of intangible assets dramatically rose, the share of intangible assets in Canada’s economy declined, as documented in a recent report from Statistics Canada.

Despite a highly educated population and public investments in R&D, Canada has consistently been a large net importer of intellectual property, or what economists call the “innovation trade” balance. Instead of exporting high-margin IP, including value-added goods such as machinery and equipment for sectors from agriculture to health care, Canada’s trade is still dominated by traditional lower margin natural resources and agricultural goods. Our trade relationship with South Korea sets in sharp relief the composition of our economy: Canada sells low-margin beef and buys their high margin, IP intensive technology. Forty years after the advent of a knowledge-based economy, Canada’s deficit on IP payments and receipts is widening at an alarming rate, a position we share with developing economies. This deficit would be significantly larger if the value of net flows of data were included.

Since 1976, Canada’s productivity performance has been the worst of all OECD countries, resulting in real wages remaining essentially stagnant since then. “For most of the past 40 years Canada has been in a ‘bad equilibrium,’ wherein real wages have essentially stopped growing” states a recent research paper by Public Policy Forum fellow Don Wright. “Government policy, consciously or unconsciously, has sustained the resulting low-wage-low-productivity model of competitiveness, hence keeping Canada in the bad equilibrium.”

Our middle class bears the brunt of these policies. According to a recent IMF report, Canada’s prepandemic GDP per capita in 2019 was 3 per cent lower than in 2010; over the same period the U.S., which has aligned its economic policy strategies with contemporary economic realities, experienced a 35-per-cent increase. The World Bank’s 2020 report says Canada is losing ground in terms of GDP per capita, directly affecting purchasing power of the average Canadian, with the current average salary of US$43,242 down from the peak US$52,635 in 2013. The gap between Canadian and U.S. performance would be much wider if the changing wealth effects from privately owned assets were included in these measurements.

The implications for Canada are stark. The OECD recently projected that Canada’s economy will be “the worst performing advanced economy over 2020-2030 and the three decades after.” As economist Dan Ciuriak notes, as IP and data claim a growing share of global income and wealth, without a strategy to improve our “poor terms of trade,” Canada faces a shrinking share of that income and wealth. Under the current bargain we have struck with the rest of the world, Canadians are contributing to the development of intangible assets but not sharing in the ownership or exploitation of those assets.

But the gaps in our government’s capacity to understand the contemporary economy are much wider. It is commonly said that data is now the most important economic asset. It’s also true that data is everywhere except in our national economic accounts and our industry statistics. This means that Canadian policy-makers had no idea what the value proposition was in major data-intensive procurement projects they enthusiastically launched such as the now defunct Sidewalk Toronto project.

Nor did they know the cost of signing on to the data provisions in the recently ratified CUSMA agreement or the Progressive Agreement for Trans-Pacific Partnerships. Indeed, at the February, 2020, meeting of the Industry, Science and Technology Committee, Canada’s lead trade negotiators confirmed that the government has no study to show the benefits and costs of the IP and data provisions of CUSMA, even though they account for well over 90 per cent of the economic effects of the agreement.

To make matters worse, when the government turns to external expertise, it receives advice grounded in 19th- and 20th-century thinking about the economy. In 2017, the Federal Government appointed the “Advisory Council on Economic Growth” and asked it to provide “concrete policy actions to help create the conditions for strong and sustained long-term economic growth.” The Council said all the right things – for 40 years ago. Its report was completely silent on the imperative for Canada to generate strategic IP portfolios and data assets and to develop co-ordinated strategies to leverage these assets to capture the economic rents. Instead, it proposed strengthening IP protections, which would exacerbate Canada’s growing multibillion dollar IP trade deficit.

The Council also proposed a foreign direct investment (FDI) strategy straight out of the last century’s playbooks. Its advice was completely oblivious to the reality that the net benefit to the host economy of inward foreign direct investment depends on the direction of flow of technology and rents that accrue to that country and other local spillover effects. In contrast to the industrial era, when foreign multinationals undertook more R&D in their host countries than in local firms, FDI into the contemporary IP- and data-intensive economy targets and expatriates the high-growth firms that are critical to the future dynamism of local economies.

The failure to recognize the shift has resulted in Canada’s low growth in innovation and also resulted in falling GDP per capita caused by positioning the country to compete globally with low-wage jurisdictions on the salaries of our tech talent. Another contributing factor is our choice to sell low-margin goods.

It is long past time to acknowledge that we don’t have a critical mass of expertise and analytical muscle inside our civil service.

Prime Minister Justin Trudeau meets a factory worker at a campaign stop in Welland, Ont., during last fall's federal election. Earlier that year, Mr. Trudeau gave François-Philippe Champagne the innovation, science and industry portfolio.Carlos Osorio/Reuters

A 21st-century Economic Council for a 21st-century Canada

The COVID-19 crisis has demonstrated just how important it is to have governments that are competent, adaptable and accountable. Given the challenges coming from areas such as public health, climate change, the digital revolution and China’s increasing geopolitical importance, neoliberalism’s “hands off” approach to the economy is untenable. Canada’s government and especially our civil service need dynamic capabilities and capacity. They also need to be able to attract policy experts that understand how these cross cutting factors affect the economy, including through global trade linkages. Natasha Tusikov and Blayne Haggart, leading experts on the knowledge-based economy, recently argued that the Canadian government’s ability to adapt to rapid change through policy formation is not a luxury but a necessity.

To address the governance capacity gap, the new Economic Council should be focused on harnessing applied knowledge. It should be data-driven and work hand-in-glove with Statistics Canada to adapt the way we measure and model the contemporary economy to capture its essential dynamics. It should have a global perspective. In particular, it should understand how innovation is reshaping comparative advantage in our trading partners – and by extension reshaping Canada’s.

The new Economic Council should be capable of integrating horizontally across areas such as demographics, regional economic trends, environment, labour, education, health and most importantly the digital transformation. And it should be interdisciplinary, with the ability to mobilize the range of experts required to authoritatively address any issue area within its remit.

The new Council should draw from expertise that exists in Canadian universities, think tanks and research centres – experts who can assess and evaluate changes in a knowledge-based economy and who understand the mechanics of economic rent capture. It should play a convening role for Canada’s think tanks, signalling areas of research interest and serving to mobilize, leverage and integrate the results of their research for the benefit of our policy-makers. The Council must also consider IP and data’s “dual-use” nature, with its profound effects on security, society and democracy. It should aim to draw on and give feedback to economic research currently performed within government departments. There should be transparency to the processes to avoid “policy laundering.”

The new Economic Council must be independent, with the roles of the Chair and Directors established through Governor in Council appointments. It should have its own budgetary allocation and permanent staff. Its advice, alongside the information and analysis on which it is based, should be open and transparent. This is particularly important given the ever-growing centralization of power held by unelected and unaccountable staff inside the Prime Minister’s Office.

Canada is still without an economic strategy that reflects how the international competitive landscape has been reshaped by the digital transformation. “The difficulty,” economist John Maynard Keynes once said, “lies not so much in generating new ideas as in escaping old ones.” Now more than ever Canada must build a prosperity agenda or else face continued erosion of our standard of living – especially for the middle class.

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