Which way Canada?

Over the weekend Canada’s PM remarked, “Canada will not slip back the way so many other developed countries are slipping back.” That’s good to hear. Unfortunately the numbers don’t back him up.

Sure we’re buoyed by a strong resource sector, and a well-capitalized, well-regulated financial sector. However the major elements of future growth and competitiveness, i.e. the foundations of becoming (in the PM’s words) one of the “next generation of economic powers” aren’t going to found in traditional sectors but rather in the next generation of innovative processes and products. And on those measures, we’re not doing as well as one might think.

Here are a couple of examples that I cover in my research.

Using the UNIDO Competitive Industrial Performance (CIP) Index, Canada ranks dead last in growth amongst the top 60 global industrial economies having seen a 11% decline in its CIP score over the 2005-2009 period. UNIDO’s Competitive Industrial Performance (CIP) index is calculated on the basis of the following components: industrial capacity, manufactured export capacity, impact on world manufacturing value add, impact on world manufactures trade, industrialization intensity, and export quality (high-tech intensity). To be fair, other advanced industrial economies haven’t fared well either. The UK dropped nearly 7%, New Zealand -6%, Japan and the United States -4%. And while one might equate the drop in the growing share of resources in the Canadian economy, the relative comparison between Canada and the US – both of whom have enjoyed the benefits of increasing resource dividends (shale gas in the US/oil sands in Canada) – leads one to question whether this isn’t a much deeper issue in Canada.

The 2012 Global Innovation Index adds some data regarding those deeper issues. It’s recently published report (co-authored by INSEAD and WIPO) saw Canada drop out of the top 10, falling to 12th of the global index from 8th the previous year. The GII aggregates 84 different measures related to innovation – including education, research funding, infrastructure, capital and credit access – to come up with its rankings. And while, Canada is still ranked far ahead of high-performing industrial economies such as Germany (15th)  , evidence that we’re doing some things right, one might (and I will) question where the sources of competitiveness and future growth will come from given Canada’s 25th place ranking in human capital and research. In particular, our 49th place ranking in per capita spending on education, 46th place in the percentage of science and engineering students, and 20th place in access to ICTs are glaring weaknesses for an economy like Canada’s.

Moreover, while Canada dropped 4 spots (and the US dropped 3), the similarly-endowed UK moved up 5 spots. It’s evident that policy plays a role here. The UK’s advantage in the ranking may partially be explained due to its significantly higher score on ICT infrastructure (7th to Canada’s 20th place) and slightly higher per capita funding of education (38th to Canada’s 49th). The result is a much more significant role of knowledge-based output in the economy (11th to Canada’s 38th).

And while Canada’s current government has recently sought to address some of these weaknesses with some much needed reforms to research funding in its 2012 Budget, largely as a response to the Jenkins Commission, it comes after several years of neglect of research and the sciences through funding reductions. As I wrote in January 2010, these cuts would prove to be shortsighted in the face of funding increases by our competitors in the US, UK and beyond. Recent numbers might provide some evidence that this is now showing true.

So what are we to do:

  1. Double up on education, we should lead the OECD in per capita investment, not lag behind the average.
  2. Double up on infrastructure, both enabling physical infrastructure and ICT specific infrastructure. As it stands only 8 cents of every tax dollar flows to cities, one of the major reasons cities across Canada face an infrastructure deficit of over $100 billion. Either we flow more money directly through to cities or we channel more dollars through national/regional initiatives to address metropolitan grid lock, ICT access and modern transportation.
  3. And finally, ensure that we remain a competitive market for highly-skilled immigrants. Immigration drives innovation. Every bit of research out there shows the significant dividends we enjoy as a result of the attraction of the brightest from elsewhere. If they want to leave their homes, we should be positioned as the number one destination.

All this costs money. And we’re short of money you say.

That’s true. But if we want to compete in the future we need to start investing in it. Cutting the GST was a ludicrous move panned by every economist in the country. It’s a consumption tax – and with the right exceptions on food/rent it properly targets those who can pay a bit more . We should bring the two points back meaning approximately $12 billion in annual revenue could be allocated to the above. Shoot me for saying we should. I want my kids to be on a level playing field when they’re competing with a global labour force.

And yes, I understand that no one votes for governments who raise taxes. Fine – find me another well thought out solution that doesn’t indiscriminately cut public spending but rather finds real opportunities for readjustment. I’m listening. I’ve worked in the public sector, I’ve seen some waste and inefficiency, but I’ve also seen a lot of people who do really good work that provides significant value.

Ultimately, the current’ governments’ focus on flexibility – be it employee rights/benefits or environmental regulation – doesn’t address the real driver’s of long-term economic growth – skilled and educated people. Supplement a renewed focus on education and skills with a massive push for modern infrastructure and we’ll have a fighting chance.

DH.

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