Canada’s been on easy street for too long

TORONTO—For Canada, it has been too easy for too long. But strong headwinds suggest all this is about to change. However, will we—and especially our business community—be up to the challenge? Or will we simply slide into a mediocre future? For a brighter future, we have to do better. In its most recent analysis of our economy, the International Monetary Fund presents a sobering outlook for the country over the next several years, and issues yet another warning that we have to become much more innovative and creative as a country so that our productivity performance improves. Two numbers in particular stood out from the IMF report. Innovation Minister François-Philippe Champagne tests out an F-35 fighter jet simulator at the CANSEC trade show in Ottawa on June 1, 2023. The Hill Times photograph by Andrew Meade The first showed that there is a significant limit brake on our capacity to grow the economy and support what we value. This is the slowdown in the potential growth rate of the economy—the growth rate that can be sustained without triggering rising inflation and a need for policymakers to slam on the fiscal brakes. Over 2018 and 2019, it averaged 2.4 per cent; for the years 2023 to 2028, it is forecast to average 1.9 per cent a year. The differences may seem small, but with 2.4 per cent growth potential the economy doubles over 29 years; at 1.9 per cent it takes 36 years. Potential growth is determined by growth in the labour force and productivity growth. The second shows that our balance of payments with the rest of the world—our ability to pay our way in the global economy—is also in decline. Our deficit—based in large part on our ability to export—is projected to grow from 1.5 per cent of our GDP this year to 2.4 per cent in 2028. Innovation-led productivity is also a factor here. We are failing to create the goods and services of the future. Canada has long relied on aggressive skills-based immigration policies to support economic growth. “But this is not a recipe for growing per capita income or living standards,” the IMF says. “Boosting productivity growth is crucial for long-run economic prospects.” Productivity growth “must be enhanced and the investment climate made more attractive.” But it also warns the Trudeau government, with its generous subsidies for electric vehicles and batteries, against seeing this as “key to Canada’s green industrial development”, given rapid technological change. A new paper by Peter Nicholson, one of Canada’s leading thinkers on innovation and productivity, outlines why Canada has such a poor record on business innovation, despite the skills and new knowledge breakthroughs by individual Canadians. In the paper, published by the Johnson-Shoyama School of Public policy at the University of Saskatchewan, Nicholson argues that a major reason why Canadian businesses have underinvested in innovation-led productivity is that for many decades they didn’t need to. Canada’s competitive advantage in an integrated North American economy has been based on resource extraction, light processing and branch-plant manufacturing, sectors that do not place high on most standards of innovation. Canadian business found a profitable role in this arrangement. “It is not too much an oversimplification to say that Canada produces resource commodities and a range of fairly standard goods and services in exchange for 'innovation’ in the form of advanced capital goods, technology-intensive manufactured products, sophisticated services and the technology and know-how that come bundled with branch plants,” Nicholson argues, a process that has served Canada reasonably well in the past. This maintained the appearance of healthy per capita growth, in the same league as other advanced economies, by importing and applying innovation and know-how from the United States and other countries and, as well, by relying for more of our economic growth from immigration. Even though Canada’s productivity level fell from 95 per cent of the U.S. level in the mid-1980s to about 70 per cent now, high immigration offset low productivity so that we appeared to be on the right track. But now we face headwinds, and it’s far from clear that Canada can prosper unless its business community, in particular, shifts to a new growth model. These disruptive headwinds are coming from globalization, technology, environmental sustainability and population ageing, Nicholson contends. In the case of globalization, while the U.S. will remain a key market, the main focus of global economic growth will shift to Asia. “Consequently, long-term economic opportunity is shifting from a market (North America) where Canada has enjoyed unique advantages of geography, language and business culture to markets where it has little established position, except as a commodity supplier,” Nicholson explains. Canada is too dependent on the U.S. At the same time “information technology is transforming virtually every aspect of economic and social behaviour, and is the platform on which virtually all other leading technologies depend. Given transformative developments in artificial intelligence and automation, combined with application of information technology throughout the material and life sciences, the world appears to be on the verge of a new industrial revolution.” But Canadian firms have been serious under-investors in the new technologies. Meanwhile, our high dependence on the oil and gas industry—it accounted for 26 per cent of Canada’s merchandise exports in 2022—is seriously threatened by the world’s move to net-zero emissions. “This revenue is at great risk,” Nicholson warns, and it’s far from clear it can be sustained without enormous investments in new technologies. Nor is it clear what new export industries would replace fossil fuels. Likewise, the aging of society means we will face both much tighter labour markets, and, at the same time, technical unemployment due to fast-moving automation with a need for much-improved productivity. “These four megatrends, which are well established and gaining momentum, are of particular significance for,” Nicholson warns. “Together, these trends appear destined to profoundly disrupt Canada’s low-innovation equilibrium.” What to do? More on that next week. But in the meantime, we must pay much greater attention to these serious wake-up calls, from both the IMF and from Nicholson. Yet past advice has been ignored. Will it be once again? Are our political and business leaders in serious need of hearing-aids? David Crane can be reached at crane@interlog.com. The Hill Times