Tyler Cowen is an economics professor at the George Mason University and one of the most widely respected public intellectuals in the United States. In a recent interview, Mr. Cowen made a prediction about the Canadian economy that gets more disturbing the longer I consider it.
"[Technology] has been evolving in a pretty clustered way; I don't mean simple software support, which is more like dentistry, but big, grand projects – the next Google, the next Facebook, Uber. We see those come out of quite a small number of places … I think any location, not just Canada, has to ask itself, 'are we going to be one of those clusters or not?' And the correct answer may be 'no'… I guess at this point that seems likely – that Canada will not be a huge, innovative part of the knowledge economy."
Bank of America Merrill Lynch economist Emanuella Enenajor provided statistical evidence to support the professor's skepticism, noting Canada's distinct lack of investing in research and development: "The U.S. economy is ramping up R&D spending as a share of GDP, sowing the seeds for productivity growth and real income gains in the future, [while] Canada's R&D spending as a share of GDP is falling. The implications: the risk of a continued loss of competitiveness. Unless productivity-boosting investment accelerates, Canada's global competitiveness will continue to decline."
This is an even bigger problem for the country's future than it looks at first blush. The China-driven commodity boom that has enriched Canadians over the past decade is now, in all likelihood, drawing to a close, leaving excess capacity throughout the energy and metals complex. The domestic auto sector, once the centrepiece in a thriving manufacturing sector, is no longer economically viable without hundreds of millions in annual taxpayer subsidies. And even with the subsidies, global investment in auto manufacturing is moving to Mexico.
Canada has lost much of its competitiveness in the auto space relative to both Mexico and the right to work states south of the border, but retains one of the most educated work forces in the world. The question is what we're going to do with the comparative advantage of this knowledge base.
Professor Cowen suggests that the technology sector is not the answer but if he's correct, it's certainly not because Canada isn't developing talent. In a recent New York Times report, an interview with Sam Altman, Stanford University alumni and CEO of Silicon Valley venture capital behemoth Y Combinator, produced the following exchange, I asked [Altman] him if any one school stood out in terms of students and graduates whose ideas took off. "Yes," he responded, and I was sure of the name I'd hear next: Stanford….
But this is what he said: "The University of Waterloo." It was the source of eight proud ventures that Y Combinator had helped along.
To state the obvious, Canada needs a plan – one that looks forward and doesn't attempt to quixotically turn the clock back to the 1990s when a weak loonie, universal health care, and U.S. economic growth focused in northeastern states made central Canada a global manufacturing hub.
In an increasingly globalized economy, any strategy involving competition with low-wage manufacturers in emerging markets is likely destined for failure.
Long-term prosperity will result from leveraging Canada's education advantage to provide goods and services that other countries can't make, in knowledge industries such as technology, biotechnology, engineering, aerospace, or media. It won't come cheap – R&D spending would have to climb precipitously – and it won't be without transition costs in terms of jobs.
But it does need to happen – Canada's place in the global economy will eventually be at stake.