For the past 250 years, Canada’s deep and mutually beneficial economic links with its superpower neighbour to the south have stood as a cornerstone of our growth and prosperity. While the US will continue to be a major economic partner and critical ally for Canada, its hegemonic days are likely over. The size of the Chinese economy alone is expected to rival that of the US by 2020 – 2030. That gives Canada only a decade or two to accomplish a major re-orientation of its economy.
The economic links between Canada and the US are broad as well as deep. There is a deep web of ‘connective tissue’ that binds the two countries, not just economically, but also socially, culturally, and politically. Asia, on the other hand, feels geographically and culturally distant. Links are sparse and Canadian businesses lag their rivals in terms of Asian penetration: only half of the 20 largest Canadian companies have operations in Asia – 100% of the top 20 American companies do.
Canada has a significant mountain to climb. Recent McKinsey research found that not only did many Chinese consumers not know where Canada was, but that the only reference they had for the country was that it was the “place to go for clean air”.
The re-orientation of Canada’s economy towards Asia is unlikely to happen organically – and certainly not at the speed required. The kind of strategic thinking, action and coordination required to achieve this will be a challenge in Canada’s decentralized system of governance. But previous challenges have brought Canada’s government, business and civil society communities together to act jointly to address major issues. We must do it again. For without such strategic action, Canada’s future prosperity and political power and relevance are at risk.
A first step is for the Prime Minister to appoint a Minister for Asia and establish an Asia Advisory Council made up of 15-20 influential Asia-based politicians and business people. The Minister for Asia would be a key contact point for Canadian businesses, civil society and Asian governments.
Second, we should seek to build on our strong base of human ties with Asia. Increasing the number of Asian students studying in Canada has benefits beyond the pure economics; it also extends personal links that will bear fruit into the future. At the same time we should increase Asian content in our own education system.
Governments in Asia are very strategic about supporting their own companies. We should take a leaf out of their book, identifying and actively supporting strategic sectors. There are many good candidates, including infrastructure, agri-food, aerospace and financial services.
Canada has some of the most admired infrastructure in the world and China has a huge infrastructure need: by 2025 more than 220 Chinese cities will have over 1 million inhabitants. Our financial system came through the 2008 crisis in stronger shape than those of other developed economies and our regulatory system and banks are globally recognized for effective governance and risk management. Aerospace presents another opportunity. China and other Asian countries are keen to develop aerospace industries. Bombardier is the third largest civil aircraft manufacturer in the world and we also have many successful suppliers to the industry.
Growing Asian interest in both consuming and owning Canadian resources is inevitable. This presents opportunities and risks for Canada. Overseas investment could help bring down the cost of development, expand and modernize our resource infrastructure and create more jobs for Canadians. To take full advantage of this opportunity Canada must proactively invest in its resource infrastructure. We cannot build an energy link to Asia, nor become an energy superpower, unless pipelines to the West Coast are built and the necessary export facilities and shipping lanes authorized.
At the same time, it is imperative that Canada has in place an effective long-term plan for managing its own resources. Our current policy on foreign ownership is unclear to many. We must also ensure that we are not simply spending the wealth of future generations. The Government of Canada should consider working with resource rich provinces to establish an investment fund, like Norway’s, to ensure that future generations of Canadians benefit as much as Canadians of today.
The world is re-balancing towards Asia; Canada must re-balance with it. This will not happen without strong federal government leadership. Canada’s own Asia century must start now.
Dominic Barton is global managing director at McKinsey and Company.
Month: March 2012
Proposals for helping the environment without hurting the economy
As the world struggles to restrict carbon emissions into the atmosphere, Canada stands out. Although many countries emit larger absolute amounts of carbon, we are, among developed countries, the second-largest per capita emitter of greenhouse gases, (after Australia).
We need to recognize this status, and show leadership on carbon. If we fail to do so, our economy will attract negative attention and possibly even sanctions on our exports. Anyone who does not take this risk seriously should consider the current difficulties of the Keystone XL Pipeline in the U.S. and proposals in the EU to label oilsands products as “dirty” fuel.
Should our oilsands exports be limited, an industry that supports our national prosperity will be suppressed: whether Canada wants to do the “right thing” for the global climate, we must do the “smart thing” and manage carbon in our own self interest.
Canada agreed to extremely challenging goals for carbon reduction in the Kyoto Protocol in 1997 (to six per cent below our 1990 levels by 2012) and the Copenhagen Accord in 2009 (to 17 per cent below our 2005 levels by 2020). But we have never had a clear plan of how to get there. It should be no surprise, then, that we are not currently on track to arrive.
To change this, we will have to implement an ambitious and smart national program of carbon efficiency that will affect the life of every Canadian. Such a program must recognize one technological reality and two political constraints. The technological reality is that fossil fuels will drive our economy for the next 25 years. Renewable energy is highly desirable, but we are a few technological breakthroughs from it becoming a base fuel. Politically we are constrained by the continuing lack of consensus across the country on the causes and perils of climate change, which limits public buy-in. This problem is compounded by the fact that if big emitters such as China, India and Russia are not with the global program, Canada’s reductions will be ineffectual; we run the risk of incurring sacrifices to no significant benefit for anyone.
The solution? We must focus on energy measures that deserve to be implemented for reasons other than carbon, but that simultaneously reduce our carbon footprint:
- Press the pedal on natural gas: Natural gas emits half the CO2 of coal and two-thirds that of oil. It is cheap, abundant, and low in other pollutants. We need to convert as many power plants, industries, cars, trucks, and trains to gas as we can. Yes, development of natural gas brings its own environmental issues; these will need to be managed carefully.
- Invest in energy efficiency: Consumers and producers can do much more. We need to reduce consumption of electricity per unit of GDP by 15 per cent. With recent innovations such as LED lighting and smart distribution grids, this is readily doable – and required investments will more than pay for themselves with reduced power bills. We must also demand that oil and gas producers – especially the oilsands – tighten up the efficiency of their production.
- Expand rapid transit: Canada still needs to get more people out of cars and onto rapid transit. The spinoff is obvious: less congestion and local pollution in our cities.
- Expand small-hydro and biomass: There is very significant potential throughout the country for economic development of small hydro and biomass (biodiesel and waste). The local benefits are clear.
Supplemental measures that are desirable, but justifiable for reasons of carbon reduction only, are:
- Promote carbon capture and se-questration (CCS): There is significant promise in sequestering carbon in underground reservoirs. Federal and some provincial governments are making large catalytic grants to pilot projects. We should double up on them.
- Invest in innovation in renew-ables: We need to advance the day when renewables become a base fuel. More R&D is good, but the acute need is for support in commercialization of technologies. Government can facilitate initial commercial contracts through: “feed-in tariff” arrangements (as in Ontario); its own procurement programs (as in the City of Calgary); or specific project subsidies, such as the federal Wind Power Production Incentive program. There is particular untapped potential in tidal power in Canada.
Absent from the above measures is a carbon tax or a “cap-and-trade” system for emissions. In order to pack the desired punch, a carbon tax will have to be so high as to impair our economic growth. It would also slow the necessary large-scale shift to natural gas. Cap-and-trade works best for bigger point-source emitters, but regulation can address these more effectively.
This is clearly a very ambitious program. We may have withdrawn from Kyoto but there are some encouraging developments domestically. For example, in August 2011, the federal government demonstrated a commitment to a new natural-gas standard in devising regulations for coal-fired power plants. Moving beyond this will require well-directed regulation, funding and uncommon co-operation between all levels of government and the private sector. But the potential prize is a Canada that tops both the economy and environment league tables. We can get there if we try: now is the time to start.
Ian Mallory is president of Pickworth Investments LP, Calgary.
Why is the timing never right for action on climate?
Ten years ago, a very senior federal deputy minister told me that implementing Canada’s Kyoto Protocol target to reduce our greenhouse gas emissions to six per cent below 1990 levels by 2012 would force an adjustment on the Canadian economy greater than that of the Free Trade Agreement (FTA) with the United States. (The FTA, which was ultimately of great economic benefit to Canada, had a significantly disruptive effect on the Canadian economy, especially the manufacturing sector, in the short term.)
This bureaucrat’s comment on Kyoto, made five years after Canada signed the Protocol and the year it was ratified by Parliament, reflected the dominant view within the government at that time. Even with the relatively strong Canadian economy that then prevailed, and with a decade in which to implement Kyoto, conventional wisdom in Ottawa held that Canada’s target was a bridge too far. And this was the opinion within the Chrétien government, which signed Kyoto and remained rhetorically committed to it. As a result, nothing meaningful was done to reduce Canada’s GhG emissions at the federal level during the Chrétien years.
And while the short-lived minority government of Paul Martin claimed adherence to Kyoto’s goals, and proposed “Project Green” under then environment minister Stéphane Dion to help Canada reduce its emissions, it too failed to seriously come to grips with the problem. Neither the Chrétien nor the Martin governments had the stomach, even during periods of strong economic growth and when protecting the environment ranked historically high in public opinion, to move forward with the most effective and efficient tools for reducing carbon emissions – a carbon tax and/ or a “cap and trade” regulatory regime. During the Liberal era, the prevailing orthodoxy of fear over the alleged dire political and economic costs of reducing GhGs had an iron grip on the Ottawa mind, even when the political economy conditions for a strong federal push to curb emissions seemed at their most accommodating.
Enter Stéphane Dion, Liberal Opposition leader from 2006-’08, a climate change theologian who became a Kyoto High Priest when he chaired the 2005 UN Climate Change Summit in Montreal, which extended the Kyoto Protocol and sought to deepen GhG reductions among its signatories. As Liberal leader, Dion, sensing the political winds on the environment generally and climate change specifically were blowing in his favour, ran an entire general election campaign in 2008 on the moral imperative for Canada to cut its GhG emissions, and on the thesis that this could be done in an economically beneficial way that was of no fiscal cost to the taxpayer (in other words, the free lunch version of cutting emissions).
At the heart of Dion’s plan was a carbon tax – known as the Green Shift. It was a very complicated yet ultimately mild tax that was designed that way for fear of the alleged severe political repercussions of asking Canadians to make any sacrifice whatsoever on their carbon consumption.
This bureaucrat’s comment on Kyoto, made five years after Canada signed the Protocol and the year it was ratified by Parliament, reflected the dominant view within the government at that time. Even with the relatively strong Canadian economy that then prevailed, and with a decade in which to implement Kyoto, conventional wisdom in Ottawa held that Canada’s target was a bridge too far. And this was the opinion within the Chrétien government, which signed Kyoto and remained rhetorically committed to it. As a result, nothing meaningful was done to reduce Canada’s GhG emissions at the federal level during the Chrétien years.
And while the short-lived minority government of Paul Martin claimed adherence to Kyoto’s goals, and proposed “Project Green” under then environment minister Stéphane Dion to help Canada reduce its emissions, it too failed to seriously come to grips with the problem. Neither the Chrétien nor the Martin governments had the stomach, even during periods of strong economic growth and when protecting the environment ranked historically high in public opinion, to move forward with the most effective and efficient tools for reducing carbon emissions – a carbon tax and/ or a “cap and trade” regulatory regime. During the Liberal era, the prevailing orthodoxy of fear over the alleged dire political and economic costs of reducing GhGs had an iron grip on the Ottawa mind, even when the political economy conditions for a strong federal push to curb emissions seemed at their most accommodating.
Enter Stéphane Dion, Liberal Opposition leader from 2006-’08, a climate change theologian who became a Kyoto High Priest when he chaired the 2005 UN Climate Change Summit in Montreal, which extended the Kyoto Protocol and sought to deepen GhG reductions among its signatories. As Liberal leader, Dion, sensing the political winds on the environment generally and climate change specifically were blowing in his favour, ran an entire general election campaign in 2008 on the moral imperative for Canada to cut its GhG emissions, and on the thesis that this could be done in an economically beneficial way that was of no fiscal cost to the taxpayer (in other words, the free lunch version of cutting emissions).
At the heart of Dion’s plan was a carbon tax – known as the Green Shift. It was a very complicated yet ultimately mild tax that was designed that way for fear of the alleged severe political repercussions of asking Canadians to make any sacrifice whatsoever on their carbon consumption.
Dion’s Liberals were defeated in that election, proof enough for many that federal climate change policy can’t sell in Canada.
For their part, the Harper Conservatives have done a shift of their own on GhG emissions policy. One-time climate change deniers, the Harper Conservatives were always hostile to Kyoto, and have recently pulled Canada out of this international agreement entirely. Yet in the 2008 election the Conservatives did propose a “cap and trade” system to reduce emissions. They subsequently abandoned that idea in favour of some targeted industrial regulations that have yet to be implemented after six years in office.
This potted history of Ottawa’s record on climate change policy suggests that for well over a decade the dominant view within the federal government is that there is very little it can or should do to reduce Canada’s GhG emissions. It suggests any attempt to do very much on climate policy will cause damage to the economy that is too significant to accept. It implies that the timing for federal action on climate change policy is never right in Canada – neither when the economy is booming nor when it is slumping; neither when the politics of the environment are in the ascendancy or in retreat; not when governments are strong majorities or when they are weak minorities.
The federal government’s 15-year record on tackling Canada’s greenhouse gas emissions is profoundly depressing. By some measures, we have the second-highest per capita emissions in the world. You would think that embarrassing statistic alone would be enough to get the feds moving.
For their part, the Harper Conservatives have done a shift of their own on GhG emissions policy. One-time climate change deniers, the Harper Conservatives were always hostile to Kyoto, and have recently pulled Canada out of this international agreement entirely. Yet in the 2008 election the Conservatives did propose a “cap and trade” system to reduce emissions. They subsequently abandoned that idea in favour of some targeted industrial regulations that have yet to be implemented after six years in office.
This potted history of Ottawa’s record on climate change policy suggests that for well over a decade the dominant view within the federal government is that there is very little it can or should do to reduce Canada’s GhG emissions. It suggests any attempt to do very much on climate policy will cause damage to the economy that is too significant to accept. It implies that the timing for federal action on climate change policy is never right in Canada – neither when the economy is booming nor when it is slumping; neither when the politics of the environment are in the ascendancy or in retreat; not when governments are strong majorities or when they are weak minorities.
The federal government’s 15-year record on tackling Canada’s greenhouse gas emissions is profoundly depressing. By some measures, we have the second-highest per capita emissions in the world. You would think that embarrassing statistic alone would be enough to get the feds moving.
We need more public sector innovation
The Drummond report on Ontario’s fiscal woes came mixed with a visionary challenge to make Ontario “a province that provides the best public services, delivered in the most efficient manner, in the world . . . We goad our business sector to win new customers globally in the face of stiff competition. Why not apply the same standards to our government?”
Good question. But to meet Drummond’s challenge, the broad public sector in Ontario will have to muster the same sort of commitment to innovation that politicians constantly urge on the business sector. Unfortunately, governments have been strangely silent when it comes to public sector innovation where they alone have both the tools and the responsibility to act. So the blunt message to policy-makers who want to foster a more innovative Ontario and Canada is, first, to get your own house in order.
The public sector is Canada’s biggest industry, accounting for a quarter of GDP. And public policies regarding education, health care and regulation touch every aspect of society and set the context in which the business sector operates. So while innovative businesses are surely important, an innovative public sector is at least equally important.
We need to distinguish two different public sector roles — one as deliverer of public services and the other as policy-maker.
In the delivery role, the challenge is that public services are rarely subject to the discipline of competitive markets, so the incentives to innovate to achieve greater efficiency are less keenly felt. It is also hard to measure the productivity of most government services — they aren’t like “widgets” that can easily be counted. Thus it is difficult to apply many of the management techniques that foster productivity-boosting innovation in sectors like manufacturing.
So we need innovation to develop practical metrics for public sector productivity and to design the right behavioural incentives. Considerable effort is underway in the U.K., Scandinavia and Australia to do just that. Governments in Canada need to be members of this innovation-minded club, learning and sharing best practices.
Unfortunately, none of this is politically sexy. But as the Drummond report put it: “The ultimate challenge in the years ahead will be to find ways to make government work better and preserve as much as possible the programs Ontarians cherish most.” So governments finally need to pay far more than lip-service to innovation in public service delivery since this is the only way to achieve fiscal sustainability without compromising service quality.
This will require an about-face because today the internal incentives in governments are precisely the opposite of what is needed. Rather than reward the calculated risk-taking on which innovation depends, we have instead created a risk-averse public service culture, hobbled by excessive “accountability” regimes that no longer serve the public interest.
The need for greater innovation is just as apparent in government’s policy function. Although the words “innovative government” sound today like an oxymoron, it was not always so. Canada enjoys the legacy of many visionary and innovative public sector initiatives dating from a former era — initiatives like the CBC, the St. Lawrence Seaway, the National Research Council, medicare, the Charter and others like the Auto Pact, often in creative partnership with business.
Could it be that we have we run out of opportunities for innovative public sector leadership on the really big issues? Obviously not. For example:
• We need a fiscally sustainable way to deliver universal public health care to an aging population.
• We need to redesign grade school education to be more relevant to the realities of the information age.
• We need massive, ongoing investment in new generations of public infrastructure as part of any strategy to make Canada more productive, competitive and environmentally responsible.
Consider, for example, medical care where greater adoption of best clinical practices could be induced by creating a cadre of physicians who would meet face-to-face with doctors and administrators — in effect challenging them to explain the existing widespread discrepancies between their practices and “best practices.” Such evidence-based assessment would lead to improved quality and cost-efficiency of health care.
Or consider K-12 education, where we desperately need to discover the best way to teach the new generations of “digital natives”? How can we instill the critical faculties appropriate for an information-besotted culture? What are practical alternatives to the teacher-centric, lock-step classroom tradition? These are huge questions for which no one in the world has reliable answers. So we need an urgent “R&D” program to inform a new education paradigm for the information era. As one concrete initiative, we should create a “Canada Foundation for Innovation and Research in Education” (or C-FIRE), with federal-provincial co-operation, so as to provide the focus and financial support this vital endeavour will require.
These examples set the bar high, but that is because the stakes are so high. And while specific policy ideas can always be debated, the main message is the need to get governments focused on innovation in their own backyards where both the responsibility to act, and the magnitude of the potential payoff, is greatest.
Peter Nicholson was the inaugural president and CEO of the Council of Canadian Academies and was policy director for prime minister Paul Martin.