Not two years ago, income inequality was a pretty obscure topic. Not so today.
Earlier this year the World Economic Forum identified income inequality as a top global risk and in late 2011 President Obama called growing inequality “the defining issue of our time”.
In March, polling by Ekos found that 57% of Canadians felt that they would be worse off in 25 years’ time than they are today. In April, a Broadbent Institute poll found that three quarters of Canadians felt that the growing income gap in our country was a significant problem, a finding that was confirmed by a Forum poll for the National Post in May. Perhaps it should not have come as a surprise, then, that at the end of April, Liberal Finance critic, Scott Brison succeeded in securing cross-party support in the Canadian Parliament for his motion to form a committee to review income inequality in Canada.
Fast forward to June and the theme continues…..with the economists in the vanguard. The Presidential address at the annual Canadian Economics Association Conference was about trends in top income shares (and why these might matter) and just last week Nobel Prize winning economist, Joe Stiglitz published his latest book, The Price of Inequality: How Today’s Divided Society Endangers our Future.
The debate is over, we all fall in with the President: this is a serious issue that policy-makers ignore at their own peril.
The difficulty lies in knowing what to do about the problem. Addressing inequality is not the same as addressing poverty, something that we have done with varying success for many decades now. It is likely to take action at all levels of the income spectrum (dampening growth at the top, shoring up the middle and actively transferring at the bottom). It also requires a whole new dimension of thought when designing health policy, education and training policy, labour policy, youth policy and policy on corporate governance.
It is action in these areas that will help create a world in which equality of opportunity becomes more meaningful and growth becomes more inclusive. Without such changes, the already substantial degree of public alienation from the institutions of state is only likely to grow, possibly with highly disruptive consequences.
Let us hope, then, that when our Parliament’s Standing Committee on Finance reports in one year from now, it has some firm and inspiring recommendations on how best to improve the equality of opportunity and prosperity for all Canadians. In the meantime, we at Canada 2020 will also be working away on the topic. So, if you have any views, please do share them with us. Left unattended, this is a problem that will certainly not go away.
Category: Opinion
Searching for a new progressive narrative
In the last few years, commentators have remarked upon the narrative of Canada developed by the Harper Conservatives, emphasizing patriotism that supports the military, Tim Horton’s and the North. More recently we have heard calls for a new progressive narrative as an alternative to this Harper version.
What could form part of this narrative, and how could it gain a broader appeal with Canadians?
Much of the current conservative narrative concerns “freedom”, especially the freedom of markets that contrasts with the control that progressives supposedly want to exercise on Canadians through taxation and government programs. The truth is, though, that government services have in many instances increased the freedoms enjoyed by Canadians. Unemployment insurance allows them to feed their families when they are out of work, public education enables people fully to exercise their talents, safety regulations mean that people can work longer and be more productive, minimum wage laws have increased the purchasing power of the poor and socialized medicine allows Canadians to spend more of their money on items of their choosing. Canada’s social safety net has freed many Canadians to pursue their goals and exercise their talents.
A new progressive narrative must, though, make it clear that government action is not the only solution. Private action and enterprise are just as worthwhile. Indeed, society functions best through a combination of individual effort and collective action. Private donations and government programmes complement each other in helping the poor, while governments and markets compensate for one another’s weaknesses. The approach should be more nuanced than the “market-first” consensus of the current narrative.
There are real questions about the way in which the Harper Conservatives have managed the economy. A progressive narrative could point to the fact that the government did not foresee the recession in 2008, that the Conservatives have run up large deficits and that it was the Opposition that forced the Government to develop its Economic Action Plan to stimulate the economy. In addition, it is noteworthy that the regulations that prevented Canadian banks from suffering the same fate as their American counterparts were put in place not by Harper, but by previous governments.
A new progressive narrative could, therefore, challenge many of the stereotypes of progressive ideas and the people who advocate them, while also pointing out the weaknesses of many current conservative ideas and policies. In doing so, however, it should avoid blanket condemnations and insults, whether of conservatives, private business or any other group of people.
In the early 1990s, the Reform Party was often ridiculed for its policies, the implication being that its supporters were somehow un-Canadian. Many Western Canadians were offended by this: the attacks reaffirmed their support for the Reform Party as it became the Canadian Alliance and now the modern Conservative Party. At the same time, the stereotype developed that many progressives were hostile and insulting to anyone who disagreed with their agenda.
A new progressive narrative can not only debunk the negative stereotypes about progressives and counter the narrative of the Harper Conservatives, it can also help build a more positive dialogue in our country. Canadians frequently defy political stereotypes: Conservative voters show compassion for the poor and care for the environment, while Liberal, NDP and Green voters put in long hours of hard work and show entrepreneurial spirit. Indeed, many entrepreneurs have run as Liberal or NDP candidates over the years.
A new political narrative that recognizes this and helps to bring us together as a country, rather than worsening the tensions that currently exist, would provide an extremely valuable service to Canada and to all Canadians.
Jared Milne is a policy researcher and analyst from Alberta with a strong interest in Canadian history, Canadian politics and Canadian public policy.
Canada must adjust to the Asian century
Over the coming decades, Asia will become the global centre of aspiration, innovation and technology. Canada’s long-term prosperity and security will increasingly depend on its ability to understand and seize economic opportunities in the region – particularly in the twin giants of China and India – as well as in countries such as Vietnam and Indonesia.
What’s more, Asia’s influence is spreading globally. New, non-Western webs of power are emerging, exemplified by the growing Brazil-China relationship, meaning that Canada’s success in other regional markets will depend on how much we matter in Asia.
Despite – or, perhaps, because of – their manifest success, Asian countries are at the forefront of the biggest collective action challenges of our time. These range from critical shortages of water, energy and food, to a need to fill education, health care and infrastructure gaps and to address climate and other environmental concerns. Outsiders who offer practical, targeted assistance to Asian countries to overcome these problems will be well-placed to reap the economic and political benefits.
To succeed in this environment, Canada needs to be visible, useful and creative. Competition for Asia’s attention is intense and Canada has fallen behind. Our reputation as a gateway to natural resources may open the door to Asia, but we need to be resourceful and identify additional roles to keep that door open – be it in education, health care, environmental stewardship or elsewhere.
We must also recognize that Canada’s businesses, academic institutions, non-governmental organizations, provincial governments and citizens are already active in Asia and are important faces for Canada. These new diplomats need to be empowered to work on Canada’s behalf.
What does this mean in practice?
To start, the federal government should double-down on its bilateral and regional engagement. Any strategy for Asia must be led, and seen to be led, from the top – especially in countries such as China, South Korea and Singapore, where the state plays a major role in the economy.
There has been rapid progress in the past year. Stephen Harper’s high-profile visit to China yielded many new initiatives, among them a joint study to examine potential for a trade agreement. Negotiations are moving swiftly to conclude a Comprehensive Economic Partnership Agreement with India by 2013, and Canada is lobbying hard for member status in the nine-country Trans-Pacific Partnership. The challenge will be to sustain our attention and follow-through. We must not allow our fiscal woes to distract us from this.
Secondly, Ottawa should identify and deploy smart investments to develop Canada’s brand image. Among these should be a Canada Brand Equity Foundation, in partnership with the provinces and private sector, to manage and measure perceptions of Canada in key hubs, cities and regions in Asia. For example, expanding the CBC’s presence in Asia with content targeted at local markets would be a low-cost way to enhance Canada’s “mind-share” in Asia.
Canada’s brand could also be enhanced by associating with iconic, highly visible projects in Asian countries. For example, Ottawa should push to achieve partner-country status for the Delhi-Mumbai Industrial Corridor, Asia’s largest building project (Japan is already there). It’s also time to revisit the argument to build a Sovereign Wealth Fund by pooling our resource rents. Such a fund would enable us to invest at scale in Asia and put us at the top table of global capital partners for Asia’s leading companies and governments.
Third, the federal government needs to find better ways to source and co-ordinate leadership from below. This could include a “wiki events” calendar that would share itineraries and allow groups to “self-organize” events and partner in real time.
Competitions and contests are another tool to engage this sector. For example, for a small sum, we could offer a “Canadian X-Prize” and motivate smart crowds to work on Canada’s behalf. This would involve picking a country and specific problem in Asia (for example, rural electrification in a given Indian region) and offering a prize in conjunction with Canadian universities and leading Canadian companies.
Finally, an overarching part of Canada’s Asia (and global) strategy should be serial experimentation. Not all the ideas outlined here will work, but we need to experiment to see what gains traction. We should follow the lead of the smartest companies that rely on “fast failure” to find their way in a fast-changing world.
Canada is behind in Asia, but we’re catching up. We should build on current efforts by using new, cost-effective tools of diplomacy to show Asia that Canada is an indispensible partner.
There is no cure for Dutch Disease
Thomas Mulcair, leader of the federal New Democratic Party, says Canada has Dutch Disease. Ontario Premier Dalton McGuinty has implied similarly.
Canadians over 50 are forgiven if they run out and hire an arborist for confusing this ailment with Dutch Elm disease that wiped out so many trees in Canada two generations ago. The economic illness to which Mulcair refers is in fact much more serious than a gardening problem.
Dutch Disease occurs when one part of the economy — in Canada’s case, the oil extraction segment — becomes ridiculously popular on world markets. Cash flows in as foreigners buy up the resource, pumping up the exchange rate. This in turn makes it much harder for other parts of the country’s economy to sell goods and services abroad, as the higher currency makes their products more expensive in world markets.
The term was coined after the Netherlands discovered natural gas, which coincided with an appreciation of the guilder and a decline in the Dutch manufacturing sector. These three phenomena were linked by some analysts, leading The Economist magazine in the late 1970s to label the whole mess “Dutch disease.” The logic was that the natural gas find had increased demand for the guilder such that the exchange rate appreciated significantly, thereby damaging the competitiveness of the export-oriented manufacturing sector.
Mulcair believes Central Canada’s manufacturing sector — which has shed hundreds of thousands of jobs in the past number of years — is suffering the same fate today that the Netherlands faced decades ago. A Canadian dollar equal to the greenback, according to this analysis, is the by-product of the boom in the oilsands and high international demand for this commodity, which is allegedly killing the manufacturing sector’s export competitiveness.
But even if we agree with Mulcair’s analysis — and some economists do — there is almost nothing realistic that governments can do about it, which makes raising this economic bogeyman rather pointless and unnecessarily divisive.
Essentially, there are four ways to cure Dutch Disease.
The first — and most draconian — is to adopt a fixed exchange rate at a level to enhance export competitiveness, say 75 cents to the U.S. dollar. At such a value, Canadian goods-makers could keep selling abroad even in the face of a resource boom.
That policy, however, also throws out any ability of the Bank of Canada to control interest rates. In a fixed-exchange rate world, the sole goal of the central bank’s monetary policy would be to keep the loonie at 75 cents. There is little chance that any Canadian government would give up national economic sovereignty to fix an exchange rate. Moreover, Washington would never accept a Canadian dollar peg that was flagrantly designed to improve Canada’s manufacturing competitiveness at the expense of American companies. We would face all kinds of trade retaliation from the Americans were Canada to go down this road.
The second way to combat Dutch disease is to establish a large sovereign fund that would hold oil revenues offshore, bringing them into Canada gradually to “sterilize” them, which in theory should ease upward pressure on the loonie. Even abstracting from the highly divisive regional politics of creating an offshore fund designed to help Central Canada’s manufacturing industry at the expense of Western Canada’s resource industry, it is hard to see how such an instrument could even work technically in today’s world of massive, hyper-fast financial flows.
A third strategy for alleviating Dutch disease is the development of an activist industrial policy aimed at improving manufacturing productivity. A national industrial policy, however, would take such a long time to have a measurable effect on a manufacturing sector suffering Dutch Disease that the patient would probably be dead before the disease was cured. Worse still, if “industrial policy” turned out to be just a euphemism for protectionist measures, like tariffs or non-tariff barriers, the program would provoke so much trade retaliation that any beneficial effect on the economy would be totally nullified.
The final way to fight off Dutch disease is to impose much higher taxes or royalties on the extraction of the oil, coupled with severe restrictions on foreign ownership of Canadian resource companies and assets, thereby reducing the sector’s value, which would cause the dollar to depreciate. It is a strategy otherwise known as “making Canada poorer,” and would have all of the political appeal that slogan implies.
Canada may or may not have Dutch Disease. The disease itself might not even exist — many Dutch economists don’t believe the Netherlands actually ever had it. But, if we have caught this insidious virus, Canadians need to understand that it is kind of like a bad cold. There is no reasonable cure; you just have to let nature run its course.
We can save money and improve health care
Ontario needs to find $2 billion in annual health care savings.
Provincial premiers and health care stakeholders had been gearing up for a noisy battle with the Conservative government around renewal of the 2004 Health Accord.
Confounding expectations, in December 2011, Finance Minister Jim Flaherty announced a unilateral renewal of federal health funding. The “deal” provides six per cent annually for the next five years, and after that no less than three per cent per year. This unanticipated federal generosity leaves the provinces with the ability to manage federal health care dollars as they choose.
It also deprives them of the federal government as a convenient scapegoat.
It places full responsibility on the provinces for shaping the future of health care delivery within the universalist and public principles of the Canada Health Act.
The Ontario government is committed to holding spending growth in health care to 2.1 per cent per year, down dramatically from a historic, eight-year growth rate of 7.4 per cent. To meet its target, Ontario will need to find $2 billion of annual savings. The recent Ontario Health Action Plan highlights aggressive bargaining with doctors and health care unions as well as lowered drug costs as key cost-saving strategies. However, even if real zeros can be achieved in these areas, such strategies will yield only about half the required savings.
What other cost-cutting measures might the provinces consider that could improve patient care?
Fewer health organizations
Ontario’s Drummond Commission questioned whether the 2,500 separate governance bodies in the Ontario health care system actually result in effective governance. His answer: probably not.
More importantly, we should ask whether more governance means better health care.
Individual governance bodies are largely concerned with the quality of the care in their own institutions. Transitions of care are not governed by anyone; no single organization is responsible for the patient journey across many health care settings. The one per cent of patients with multiple conditions who account for 49 per cent of total health care costs, are under-managed. Many simply fall between the cracks.
Reform is therefore required not only for cost-saving reasons, but also to improve quality of care.
Get rid of processes that are unnecessary orredundant
In Saskatchewan, Premier Brad Wall is implementing the Toyota Corporation “lean” philosophy as a way of removing unnecessary and inefficient processes from health care delivery. Significant savings are being achieved.
At the same time, Ontario patients being discharged from hospitals may undergo as many as three home-care assessments, all before a single home-care visit takes place (one by the hospital to determine if home care is needed; one by the Community Care Access Centre to determine the appropriate kind and number of visits; and another by the actual home-care provider).
We are spending a disproportionate number of public dollars in the management and assessment of need rather than on the care itself. The government should cut out duplication, streamline administrative layers and put the money into front-line care and home-care visits.
Reduce unnecessary readmissions to hospitals
Unplanned readmissions to hospitals are significant and, according to various studies, often avoidable. Shortened hospital stays mean that patients may be discharged quicker but sicker. In Ontario, the readmission rate is around 15 per cent. This is high. Many different problems can emerge for patients post-discharge. However, a study conducted by the University of Toronto found discharged patients were about 28 per cent less likely to be readmitted to hospital within seven to 30 days if they had a home-care visit within one day of discharge. That statistic alone merits action.
Use health care professionals more effectively
In Ontario we operate on the assumption that each medical emergency call means an ambulance dispatch to the ER. In Nova Scotia, calls are triaged and dispatched by paramedics through one centralized system. A medical communications officer determines the right service for each patient, whether it is ground or air ambulance or an extended care paramedic (ECP). ECPs have advanced training in geriatric care and can treat elderly patients for things such as stitches, replacing catheters, etc. in their place of residence. One year into the program, more than 70 per cent of callers avoided a trip to the ER.
Move services out of hospitals
Today, about 80 per cent of all hospital surgery is conducted as day surgery on an outpatient basis. This represents a vast cost improvement for the hospitals. However, we are still conducting surgeries in the most expensive setting — one constructed to house infrastructures required for complex care and in which labour costs and staffing levels are very high. There are more than 700 Independent Health Facilities licensed in Ontario. Some of these facilities could provide uncomplicated procedures with higher efficiency and volumes.
It is also well known that volumes lead to better outcomes — practice does make perfect. At the Kensington Eye Clinic, for example, the volume of cataract surgery has led to economies as well as greater access.
Innovative change can curb health care cost growth while improving outcomes and patient safety. The challenge is to make innovation work for patients and for taxpayers.
Whither the health debate?
The current federal health accord expires in 2014. Most expected that, by now, we would be entering a period of protracted wrangling over what would replace it. Instead we face something of a void.
In December 2011 the federal finance minister unexpectedly – and unilaterally – announced a surprisingly generous new offer to the provinces: continued 6% annual increases in federal transfers for three years after the current health accord ends, after which transfers will be pegged at the rate of nominal GDP growth with a guaranteed base of 3% a year.
This money comes with no strings attached. The federal government seems to have abandoned the semblance of a policy role in healthcare, beyond its fiduciary responsibilities to aboriginal health (enshrined in the Constitution), its responsibility for military healthcare, its funding of health research, and its role in drug approvals.
What does this mean for us, the consumers – and ultimate financers – of healthcare in Canada?
The healthcare authors in our book, The Canada We Want in 2020, writing before the December 2011 announcement, all agreed that the there was an important leadership role for the federal government in healthcare. In particular, they suggested that an active federal government, acting in a sensitive and collaborative mode, could help address many of the core challenges that our system faces. These include:
- addressing the disparity in care across provinces/communities (developing, en route a meaningful set of common indicators);
- stimulating a process of modernization so that our healthcare system better addresses current needs (such as chronic rather than acute care and addressing the high cost of outpatient drugs/the need for a national pharmacare programme);
- ensuring better and more consistent evaluation of which procedures should be funded (evidence-based not media-driven decision-making);
- institutionalizing a culture of innovation in healthcare;
- placing a clear focus on healthcare outcomes, within a systems approach, rather than concentrating on inputs and procedures;
- helping to forge a societal consensus on paying for healthcare and providing leadership on diversified revenue sources.
This pro-federal leadership viewpoint is also espoused in a March 2012 Senate report entitled, Time for Transformative Change: A Review of the 2004 Health Accord. This largely unpublicized report notes: “…..there is a need for federal leadership in promoting healthcare reform across jurisdictions.” (p. 83).
Apparently, the federal government disagrees. All these deep and difficult challenges will now be left to the provinces. It has therefore provided a swift answer to the question posed in our volume by Philippe Couillard, physician and former Quebec Minister of Health: Does [the federal government] want 2014 to be a low-profile rubber stamping event or does it wasn’t renewal of our health system to be part of its legacy?
For if renewal does take place – and that is a big if – it must be the provinces that take the lead (and thus the glory). Whether they will be capable, or willing, to do this remains to be seen. The challenge is all the greater since many of the problems of healthcare, such as inter-provincial disparities, may actually be exacerbated by the new federal stance. Under the new arrangements, federal funding will be allocated on a strict per capita basis across the country. (At present it is a mixture of per capita payments and tax points which means that certain provinces, notably Alberta, receive much less per capita than others). The new arrangements could have a negative impact on those provinces with a higher proportion of older – more expensive in healthcare terms – Canadians.
Though Canada’s health system scores well on important indicators (for example, we are above average on life expectancy at birth and at age 65, though dismally below average for the aboriginal population), ours remains one of the most expensive systems in the world. Health spending accounts for 11.4% of GDP, almost 2% above the OECD average.
Sadly, the problem of financing healthcare has not miraculously disappeared with this announcement. Increasing amounts of money still need to be found and if new sources of revenue are not identified (for example, the type of social insurance premium that our author, Mark Stabile talked about in his piece), healthcare financing will continue to squeeze other priorities in both federal and provincial budgets.
Neither have the severe problems around First Nations’ healthcare been resolved. The federal government has recently announced that its National Aboriginal Health Organization will cease to operate by June 30, 2012. It is not year clear what path has been chosen for moving forward in this area.
Maybe, though, the provinces will surprise us. Now that their energies need no longer be wasted on battling the federal government on healthcare, perhaps they will be put to better use innovating, modernizing and refocusing. Time will tell. Polls suggest that most Canadians still want a federal role in health. But, regardless of who is taking the decisions, our contention at Canada 2020 is that the policy issues around healthcare for all Canadians must remain firmly in the spotlight.
Canada must leap ahead in Asia
Canada is back in the game in Asia. With two recent visits by Prime Minister Harper (to China, Thailand, Korea, and Japan) and a path-breaking trip to Myanmar by Foreign Minister John Baird, the government has begun a serious policy tilt towards Asia.
The recent federal budget underscores this leaning towards Asia, with its focus on trade and investment negotiations across the region. Canada is now in various stages of bilateral free trade talks with five Asian countries, and is making the case for entry into the Trans Pacific Partnership (TPP), a grouping of nine Asia Pacific economies.
If the government seems to be in a bit of hurry on Asia, there is good reason. Canada’s market share in Asia is below potential, we have no full trade agreements with Asian countries, and Ottawa has not been invited to regional clubs such as the East Asian Summit.
Entry into the TPP is by no means assured. Ironically, one of the main obstacles is our closest ally and trading partner, as was evident in the remarks by President Obama at the recent Canada-US-Mexico Summit. Obama suggested that Canada’s supply management system for dairy and poultry products could be a deal breaker. This issue was known to be problematic, but it is telling that the US President would draw attention to it rather than to the importance of bilateral economic ties and the proven success of NAFTA. Even though the US has clearly made a policy “pivot” towards Asia, there little indication to date that Washington DC considers Canada as playing a useful supporting role for American objectives in the region.
Canada is playing catch-up in Asia, which explains the frenetic pace that this government has set for itself on trade agreements. In my paper for Canada 2020, I outlined the elements of a “catch-up” strategy on Asia and am pleased to see that many of these ideas are now being implemented. If the current policy tilt to Asia is sustained, there is every reason to believe that we can indeed catch-up.
But there are no prizes for simply entering the race. To recognize that China and India are global powers and that Asia is vital for Canada’s future prosperity is simply to be on the same page as every other major industrialized country.
In addition to a catch-up strategy, Canada needs a leap-frog strategy. The goal should be no less than for Canada to be the most Asia-engaged country in the western world.
Leap-frogging our competitors will require a commitment at the federal and provincial levels, as well as by business and civil society, to make sure that Canadians have the knowledge and skills to be effective in an increasingly Asia-centric world. If future generations of Canadian leaders are to become more Asia-engaged, there will have to be substantially more teaching about Asia and Asian languages in the education system, including at the elementary and high school levels.
In one key area, Canada can already lay claim to be the most Asia-connected country in the industrialized world. In relative terms, human ties between China and Canada are longer and deeper than for any western country, and in Vancouver we have arguably the most Asian city outside of Asia. These are assets in the Canada-Asia relationship that are grossly underutilized; they offer the potential to leverage diplomatic, commercial and civil-society ties with Asian countries that other western countries can only regard with envy.
The federal government’s Asia Pacific Gateway and Corridors Initiative (APGCI), for example, has set the stage for Vancouver to become not simply the preferred entry point for Asian shipments to North America, but the premier hub for government, business, cultural, and research linkages connecting the two sides of the Pacific. A gateway is valuable in part because of what passes through it, but more so because of the value-added activity that happens within and around it. The next phase of the APGCI should therefore focus on the “gateway economy”, which would include activities such as the development of business and professional services for global Asian firms and the attraction of Asian head offices for their North American operations.
In the near-term, the most important game-changer in the Canada-Asia relationship is energy exports. Current debate around oil sands and shale gas development in western Canada, and the construction of the Northern Gateway pipeline to the coast, focuses largely on the impact on Canadians, especially First Nations. The bigger story, however, is that the coming energy glut in North America could lead to the creation of a trans-Pacific energy market. In addition to significant economic benefits for Canada, energy trade across the Pacific could lead to increased energy security in Asia, superior environmental outcomes in the region, a more balanced trade relationship, and stronger diplomatic ties with Asian countries.
As global economic and political weight continues to shift towards Asia, Canada has to work harder just to be noticed. Our ability to put in place the infrastructure and regulatory framework for energy exports – and to foster cooperation on energy issues more broadly, including on renewables – will be watched closely in Asia.
It is in some ways a major test for Canada-Asia relations: success will mean a significant new platform for trans-Pacific ties in an area that matters hugely to Asia. Failure, on the other hand, will signal that Canada cannot muster the political will to diversify its economy, even where the opportunity and potential is so clearly evident.
This, in turn, raises a scenario that I would rather not contemplate: that we neither catch-up, nor leap-frog, but instead fall further behind in our ties with the most economically dynamic region in the world.
Yuen Pau Woo is President and CEO of the Asia Pacific Foundation of Canada.
Can a Small Change Budget Transform Canada’s Economy?
The federal Budget thus far seems to be known most for eliminating the penny, a small change initiative if there ever was one. Yet the government claims Budget 2012, entitled Jobs, Growth and Long Term Prosperity, will secure Canada’s long-term prosperity, which, according to Mr. Flaherty and the Prime Minister, is anchored in this country’s innovation performance.
This budget, like many others over the past fifteen years, spills a lot of ink on Canada’s well- documented innovation deficit. There is a whole chapter on “supporting entrepreneurs, innovators and world class research”. The government claims that its approach to innovation policy, as outlined in the Budget, will, over time, transform Canada’s economy, making it much more innovative and globally competitive. This, in turn, will secure our prosperity.
Does the substance in Budget 2012 line up with that claim?
For at least fifteen years, successive governments – Liberal and Conservative – have tried to improve the Canadian business sector’s woeful innovation performance, primarily through spending and tax measures of various kinds. These are aimed at stimulating private and public sector research and development, and the commercialization of that research. Spending on R&D is effectively considered, in government circles, to be a rough proxy for innovation. As a result, we have seen a litany of tax and spending measures over the years, and the creation of all kinds of new entities to deliver that agenda. And yet Canada has barely moved the needle at all on innovation and productivity performance.
Budget 2012 devotes a total of $1.1 billion over five years to improving Canada’s innovation performance. To some, that might sound like a lot of money, especially in the context of an austerity-focused government. It isn’t: it is trivial. It amounts to one tenth of one percent of total federal spending. It is a drop in the ocean in a $1.75 trillion economy. It is considerably less innovation-related expenditure than most governments – including previous Conservative governments – have apportioned in recent budgets.
So how can the government seriously claim that Budget 2012 is all about the economy’s long-term prosperity, which it acknowledges is bound up with improving Canada’s innovation performance?
Here’s how.
Budget 2012 basically throws in the towel on the traditional federal approach to improving innovation performance through government spending and tax incentives. The government seems to have concluded that this standard remedy isn’t working after many years of considerable federal effort. The evidence suggests they are right.
The government also seems to have concluded that the most significant thing they can do to improve Canada’s innovation performance is to expose the Canadian business sector to the full forces of global business competition. This is the Harper government’s new innovation agenda for Canada.
Budget 2012 is unique, and quite bold, among recent federal budgets in one respect. It devotes 10 pages to outlining how the government is “expanding trade and opening new markets for Canadian business”. This globalization agenda has been emerging piecemeal over the past 18 months, and is now laid bare for all to see in the Budget. The Harper government is embarking upon the most significant international trade agenda in memory – opening up free trade talks with the EU, India, Japan and the Trans Pacific Partnership (a multi-lateral free trade agreement centered in Asia), and beginning exploratory free trade discussions with Thailand and Mercosur (a customs union involving four large south American countries). In addition, the government recently signed a foreign investment protection agreement with China – which was 18 years in the making – and is now finally taking a serious interest in Chinese trade and investment.
Exposing Canadian business to the full forces of global market competition, and prying open foreign markets for Canadian exports, is also a textbook way to drive innovation performance in the business sector. And it doesn’t cost a penny pinching (and penny eliminating) government any money at all to do so.
That is why Budget 2012—“the small change budget”—could actually do as the government says, and significantly improve Canada’s innovation performance in a way no previous government has been able to. The only remaining question is this: Are Canadian businesses and workers prepared to meet the gale winds of global competition?
A new Asia strategy for Canada
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.