In February, Ottawa will almost certainly reveal long-awaited cuts across government departments. It will also likely introduce changes to research and development tax credits, in an effort to promote innovation and increase productivity.
The federal government should be leading by example: The innovation agenda must encompass the public policy function itself. The exercise of this has stagnated over the past 25 years, at least relative to the remarkably innovative decades after the Second World War. New thinking is badly needed.
A good place to start would be with the federal government’s regulatory function, that is the legal obligations imposed by the government on the private sector. Despite significant deregulation in the late 1980s and early ’90s, Canada still has a significant regulatory burden. A 2006 OECD study estimated that if Canada were to have adopted, in each sector, the least restrictive regulations among the countries surveyed, our average annual productivity growth over the period 1985-2003 would have been 0.75% higher.
Supply management in the agricultural area provides a good example of regulation that curtails productivity growth and innovation. Another example comes from the communications industry, where foreign-ownership restrictions deter innovation by preventing Canadian firms from reaching international scale.
Now would be an ideal time to get serious about regulatory innovation. There has not been a fundamental review of the government’s administrative law and regulatory policy for decades. The upcoming budget and the associated departmental budget review bring into sharp relief the need for change. In particular, we should move from ad hoc reviews to a system where the ongoing regulatory oversight function ensures that government operations remain efficient and appropriate over time. This would provide a meaningful legacy for the future operation of the federal regulatory function.
The current system of periodic departmental reviews is both disruptive and expensive. It is a direct result of our more or less unconstrained discretionary model of intervention in business and society: Regulations are imposed under statutes that delegate to the executive branch a broad authority to determine what is in the public interest. This leads to “regulatory creep:” Regulators regulate; they are not inclined to deregulate or minimize regulation. And regulations tend to beget more regulations as the web of regulations becomes more entangled.
An effective alternative would be a “standards-based” approach to all federal regulatory functions (whether economic or social). Under such a system, those who are devising regulations would have an objective benchmark by which to assess their actions (as opposed to a notional reference to the public interest). Innovative, standards-based regulation should therefore result in far clearer limitations, as well as better accountability and responsibility on the part of regulators.
One means of implementing a standards-based approach would be to apply the legal test developed by the Supreme Court of Canada in R. vs. Oakes (the “Oakes test”). This case sets out five conditions that must be met before governments are justified in encroaching on fundamental rights and freedoms under the Charter of Rights. The conditions can easily be adapted to the regulatory context. They would require any regulation to have a clear and pressing objective; be proportionate and clearly connected to the objective; interfere to the minimum extent necessary to achieve the objective and meet a cost-benefit test.
Appropriate provisions for accountability and challenge — an effective legal review mechanism — would have to be put in place. In principle, this might be handled by the courts. However, the courts in Canada have adopted an extreme curial deference when reviewing the activities of specialized regulatory agencies. Affected parties have had no meaningful recourse to independent adjudicators to challenge the regulatory functions of government. This must be addressed.
One option would be to create a separate, universal review process, combining legal fairness with input from non-legal or sectoral experts. The existing Competition Tribunal may fit this description. This body would have the added advantage of understanding the importance of enhancing competition and minimizing regulations that unnecessarily restrict competition.
It is time for the federal government to step forward to reset the regulatory agenda. An aggressive, forward-looking approach would have a meaningful impact on business-sector productivity. It would limit market distortions to the minimum extent necessary to achieve regulatory objectives and, by vigorously promoting competition, would spur business in Canada to be more innovative and thus more productive. The forthcoming federal budget challenges us to take a more long-term perspective.
Lawson Hunter is head of the competition/antitrust group at law firm Stikeman Elliott and a contributor to Canada 2020’s paper, The Canada We Want in 2020: Towards a strategic policy roadmap for the federal government.
Month: February 2012
The free-market hasn’t delivered on productivity
In the initial postwar decades, Canada’s economy experienced a historic leap forward, qualitatively and quantitatively. Strong business investment, rapid industrialization, and massive spending on public infrastructure propelled growth and productivity. We went from being poor cousins to our American neighbours, to virtual equals: productivity in the business sector rose from 70 per cent of U.S. levels in 1946, to 90 per cent four decades later. And as Canada built a stronger social safety net and more equal income distribution, the quality of life for most Canadians surpassed U.S. levels.
In the 1980s, Canadian policy-makers became concerned with how to maintain that momentum. The famous Macdonald Commission, influenced heavily by market-oriented economic analysis, made two core recommendations in this regard. Canada’s social welfare programs should be rationalized to reinforce labour market discipline. And we should pursue comprehensive free trade with the U.S., to expose our firms to the full force of competition and eliminate our remaining 10-per-cent productivity disadvantage. The proposals were fiercely debated, but in the end implemented. The Macdonald Commission’s 1985 report heralded a new era of economic rationalism; it might be less “compassionate” than previous policy frameworks, but would surely deliver the productivity goods via the invisible hand of a freed market.
The graph that accompanies this article starkly illustrates the ironic results. No sooner had the Macdonald Commission helped spur a historic turn in Canadian policy, than Canada’s relative productivity began to fade. The more social programs were curtailed, the more we faced global competition, the more sectors were deregulated, and the deeper taxes were cut, the worse Canada’s productivity performance became. Today we’re right back where we started: poor cousins again, with business sector productivity equal to only 70 per cent of U.S. levels, and still sinking.
In terms of innovation, our performance has been even worse: lagging far behind the U.S. and most of the industrialized world. As we focus on extracting and exporting ever-more unprocessed minerals, our capacity to develop innovative products, services, and processes for the world has withered away. The current tribulations of Research In Motion (like Nortel before it) reflect much larger problems: The failure to develop a successful national innovation system, the failure to nurture Canadian-based global champions, the failure to penetrate global markets with anything other than what happens to be buried beneath our feet.
Market-oriented economists struggle to identify remaining residual “barriers” or “frictions” that must explain the failure of their whole policy approach to unleash promised efficiency. But what if the starting assumption of the “rationalist” model — namely, that the unconstrained operation of private markets is the most efficient, innovative way to organize economic activity — is not justified? What if, in fact, markets work more productively and creatively when they are guided, supported, and constrained, rather than simply being unleashed? What if the best approach is to challenge and direct business to more productive and innovative outcomes, rather than coddling and privileging it?
Indeed, the experience of most successful industrializing countries in recent decades suggests a very different idea of how innovation, productivity, and export-led growth actually occur. From Korea to Finland, China to the Netherlands, Brazil to Germany, countries which actively direct and manage growth seem to perform better in productivity, innovation, and global trade. These countries have fostered investment and innovation with focused sector strategies; deliberately favourable capital market, exchange rate, and trade policies; and sophisticated efforts to manage income distribution so that productivity growth visibly translates into higher living standards (unlike Canada where there is no longer any visible link between productivity growth and personal incomes). Intellectual support for the effectiveness of those approaches is provided by recent new thinking in development economics, highlighting the central role of a proactive “developmental state” in attaining qualitative and quantitative economic progress, rather then reifying market forces.
How do you nurture desirable innovation-intensive industries, and national-champion firms to deliver those innovations to the global stage? Using every policy lever in the tool kit: favourable access to capital and technology; close alignment with public training and technology programs; leveraging public procurement to give strategic firms a head start in their home market; actively promoting domestic interests through trade policy (rather than continuing to believe like Boy Scouts that simply “following the rules” will ensure domestic success). That’s how other exporters, even small countries, built and expanded their foothold in high-value global markets.
It’s about time Canada learned some of those lessons. That will require a willingness to break out of the market-oriented straitjacket which has overwhelmingly shaped policy discourse in Canada since the Macdonald Commission. Yet it is under that framework that Canada went from champ to chump, in terms of productivity, innovation, and global trade. Alternative ideas will seem new, even offbeat. Yet they offer considerably more promise than continuing to scrape the bottom of the free-market barrel.
Jim Stanford is an economist with the Canadian Auto Workers, Canada’s largest private-sector trade union.
Canada lags badly in innovation and productivity
At the recent Davos World Economic Forum gathering, the Harvard Business School trumpeted a multi-year project on U.S. competitiveness, itself defined in a novel way as “the extent to which firms operating in the U.S. are able to compete successfully in the global economy while supporting high and rising living standards for Americans.” Their resolution is both beguilingly simple in concept and devilishly complex in practice: competitiveness with rising wages and improving living standards hinges on continually increasing productivity. And, for high-income economies, a prime driver of productivity growth over the long run is innovation.
What is innovation and why does it matter? Innovation is our ability to create new products and services, or produce existing products in different ways, or develop new markets. It lies at the heart of modern competitiveness. It drives growth and improves productivity. It raises our living standards and gives consumers new choices. It is the answer to the question of how a high-wage economy like Canada can compete with emerging countries with lower wage costs.
Consider innovation at the level of an individual Canadian firm. The world around it is constantly evolving. Consumer tastes are fluid. Technology is morphing. Markets are changing. Competitors are shifting. In this dynamic environment, innovation is how a firm “stays ahead of the competitive curve.” But such corporate innovation does not happen in the abstract or by chance; it is achieved through structured and distinct channels of innovation within successful firms for product innovation, market innovation, process innovation and organizational innovation.
So, with innovation so vital to our future, how is Canada doing? Not well. While basic research in our universities is reasonably strong, Canadian business spending on R&D is only one per cent of GDP, half of what U.S. corporations spend and one-third of what the leaders Sweden, Finland and Korea invest annually. Canada has slipped to 20th place among OECD countries for business spending on research and development. And it shows: the productivity level of the Canadian business sector is only 72 per cent that of U.S. businesses.
How do we tackle our innovation deficit? By being less complacent: We have a strong dollar and weak productivity; strong public research capacity in our universities and weak commercialization of it; deep trade links with a slow growing U.S. and weak linkages with the dynamic emerging economies. And, by being more collaborative: innovation in a market-driven economy has to happen in individual companies, with governments providing a supportive framework and universities creating talented graduates and world-class research that supports business innovation.
To achieve these objectives, we need to act and learn, not debate and delay. Five reasonable candidates for early action include: competition, financing, talent, research excellence and leadership.
Competition matters to corporate behaviour. Governments, both federal and provincial, should increase market competition in Canada, particularly in protected sectors where productivity and innovation gaps are largest. Governments can also encourage information-driven competition by supporting public productivity and innovation benchmarks for the main sectors of the economy measured against the world’s best.
And new trade agreements with dynamic emerging economies would help reinforce a global mindset and orientation and increase competition.
Financing is crucial, both for innovative startups and established firms looking to invest more in innovation. The venture capital industry in Canada is simply not functioning the way it should. We seriously lag other countries as diverse as the U.S., Israel, Singapore and the U.K. The federal government could consider establishing a review panel to plot a new blueprint for venture capital in Canada.
Government support for business innovation is predominantly delivered through the tax system, with one of the most generous research and development tax credits in the world. Unfortunately, judging by corporate R&D levels, this mechanism is not working as intended. Some of these innovation tax expenditures should be redirected to more direct support for innovation, in line with best practices in other knowledgeintensive economies.
Talent matters in a knowledge-based economy. It is essential for our education systems to be geared to the needs of a global, knowledge-based economy. Business leaders of tomorrow need to be experts in global marketing, to understand the core technologies for their sectors and to be comfortable in risk assessment of innovation. Research in our universities is the backbone of an effective innovation system. We need to continue to fund this public good. But we also need to insist on accountability for global excellence and better commercialization.
Most importantly, leadership is needed, in government, business, universities and labour if we are to improve Canadian living standards and competitiveness. Productivity and innovation lie at the intersection between public policy and private sector behaviour.
Prime Minister Stephen Harper’s speech at Davos signalled a willingness to “undertake major transformations to position Canada for growth over the next generation.” As part of this, we should be desperately seeking a more innovative Canada.
The Honourable Kevin G. Lynch is vice-chair of the BMO Financial Group. From 2006 to 2009 he was clerk of the Privy Council.
Skilled trades deficit colliding with energy boom
For many years we have been told Canada faces an acute “skills mismatch,” where the economy has lots of great jobs for the highly qualified – notably engineers, information technology professionals, and science PhDs – without enough of these people to meet the demand.
But a second skills shortage has crept into the economy that promises to dwarf the professionals deficit. This less-talked-about shortage is being driven by two forces on a collision course: unprecedented demographic change and an equally unprecedented boom in one large, growing and labour-intensive sector of the economy.
This is the skilled trades deficit – an acute shortage of electricians, welders, pipefitters, plumbers and carpenters. Exacerbating the problem is the corresponding economic boom in the energy infrastructure sector, with a projected investment over the next 20 years that is breathtaking.
The collision of these forces of declining labour supply and booming energy construction demand requires governments – federal and provincial – to develop a pan-Canadian strategy to meet the challenge and seize the economic opportunity.
Growth in the labour force is slowing as baby boomers retire. Forty years ago, the labour force grew at about 4 per cent a year, on average. A decade from now, growth will fall to almost zero.
This trend is particularly acute in the skilled trades. Between 2011-19, according to the Construction Sector Council, 208,000 skilled tradespeople will retire – with only 111,000 new recruits entering the trades. If you think you have trouble finding an electrician today, wait five years.
This trend is running headlong into two distinct forces on the demand side of the ledger. First is the boom in the oil sands, which depends intensely on skilled trades. Second, and less well known, is a requirement over the next 20 years to refurbish Canada’s aging system for electricity generation and distribution, which has been allowed to atrophy over the past two decades.
The Canadian Energy Research Institute estimates that about 800,000 incremental jobs, many of which are skilled trades, will need to be filled in the oil sands alone over the next 20 years; and that capital investment in the oil sands will exceed $250-billion over that time frame.
Add to this the Conference Board’s estimate that the electricity sector will invest nearly $300-billion over the same period to maintain existing assets and meet market growth, and you have the largest construction boom since the postwar period.
As a result of these two competing forces – unprecedented labour force contraction running up against equally unprecedented demand for skilled trades – the next seven years alone will see the economy coming up short by about 156,000 skilled tradespeople.
On one hand, this is a good-news story. Long-term career prospects in the skilled trades look very promising. But we have nowhere near the number of people in the pipeline today to meet this demand, nor do we have the public policy framework to significantly increase the skilled-labour pool. And as each year passes, we have fewer skilled people to pass along the expertise, making the replacement work force challenge that much greater.
Immigration is an important short-term fix, but it alone cannot solve the longer-term problem. Nor should immigration of skilled tradespeople be seen as the long-term solution for a country with an unemployment rate of nearly 8 per cent, and much higher for some population segments, notably native people and other underrepresented groups.
This historic construction boom represents a unique, once-in-several-generations, opportunity that Canadians should seize upon. Labour market policy is an area of shared jurisdiction. Ottawa has some levers, such as immigration and financing for training; the provinces have others, such as education policy, training programs and credential recognition; and internal labour mobility is shared between the two levels of government.
All these levers need to be pulled in a co-ordinated fashion to ensure that the Canadian economy and Canadian workers reap the full benefit. Canada needs a national work force strategy.
Building a Strategic Design Capacity for Co-Design
This paper serves as the final report on the Australian Government’s Co-Design Community Engagement Prototype, a project that involved the federal government, the State of Victoria, 9 communities in Victoria, community service providers and residents, in 9 separate dialogue processes aimed at aligning services.
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