Canada doesn’t just have a prosperity problem. We also have a problem in how the debate over prosperity is being framed.
Usually, the issue is cast in terms of productivity, innovation or intellectual property. Those are at once key concerns, and at the same time, so abstract as to be divorced from most Canadians’ everyday life. Too often, “we need productivity to increase” ends up sounding a lot like “work harder for less.”
In truth, the question is one that should concern all Canadians: Will we have a high-wage economy with rising standards of living, or will we continue to sink into a low-wage economy whose innovations largely benefit other countries?
The federal Liberals seem to have at least started to recognize the problem, with Finance Minister Chrystia Freeland flagging the dangerously low productivity growth forecast for Canada in last April’s budget. The Organization for Economic Co-operation and Development ranks this country last in potential economic growth over the next 40 years.
If that OECD forecast becomes reality, the Canada of 2060 will be a relatively poorer country, falling further and further behind other advanced economies into second-tier status.
To date, the Liberals’ preferred approach to solving the prosperity problem is an ever-bigger role for government in crafting a top-down industrial strategy, focused on public sector growth funds.
Last year’s budget had two new major entries: the Canada Growth Fund, a $15-billion effort aimed at spurring private sector investment; and an innovation and investment agency whose purpose is to accelerate the research, development and commercialization of new technologies.
However, as the Report on Business series, Per Capita, has ably catalogued, earlier efforts at industrial strategy have fared poorly. The supposed supercluster strategy to build up new advanced industrial centres devolved instead into barely disguised regional development grants.
Ottawa’s program to boost Canada’s artificial-intelligence research ended up primarily benefiting foreign-owned companies. Three-quarters of the patents that emerged from experts funded through the program are owned by foreign entities; just 7.8 per cent are owned by Canadian firms.
Those failures point to the need for a back-to-basics rethink of industrial strategy, starting with the obvious step of laying out what Ottawa is hoping to accomplish and where public dollars should be focused.
Instead, we have the omnidirectional money machine of the still-on-the-runway Canada Growth Fund, whose writ seemingly extends through the entire economy. The government, not to mention taxpayers, would be far better served with efforts focused on a few key sectors with as few acronymic agencies as possible.
Such reforms would help to ensure that Ottawa doesn’t waste further billions of dollars, though they might not necessarily do much to solve Canada’s prosperity problem.
Suppose, for a moment, that a federal industrial fund is not in fact able to correctly divine which technologies will be key in future and where Canada will have some sort of comparative advantage. That points to the more fundamental problem with the Liberals’ approach to boosting prosperity: it depends far too much on a neo-dirigiste approach (and perhaps not all that neo) that has far too much faith in the technocratic powers of government.
A broader, and more effective, agenda would start with a push to rebalance the risks and rewards for innovation. At the moment, the risks of failing to invest and innovate are blunted by barriers to international competition. Ownership restrictions, non-tariff barriers and other anti-competitive regulations shield companies from the costs of their own indolence. Any serious plan to boost investment and productivity has to include dismantling that shield.
At the same time, Ottawa needs to make the payoff from investing more attractive. Reversing the drift to higher corporate tax rates should be part of that effort, as should accelerated depreciation for capital investments. The overall goal of reform should be to reduce, or at least to delay, draining capital pools through taxation.
Fundamentally, that would require patience for such structural reforms to take hold, the belief that the private sector can innovate without government hand-holding – and the courage to argue aggressive measures are needed to head off a decades-long decline into a low-wage economy.