CANADA IN A KNOWLEDGE BASED GLOBAL ECONOMY: Eight Steps to Sustainable Prosperity

           The economic agenda for Canada in an era where Brazilian companies are buying Canadian mining assets, where Kazakhstan is promoting itself as the new Canada, where Finnish pulp and paper companies in Latin America are exporting into the Canadian marketplace, where China and India are becoming sources of knowledge-based innovation is very different from the strategy of previous eras.   Debates about foreign investment, regional subsidies, free trade seem like the residue of a bygone era.    But there has not emerged a political strategy for preparing Canada for an era of global growth.  We have played with ideas like globalization, looking at the behaviour of capital markets, or export opportunities in suddenly significant markets,  but beneath all that has been discussed, we remain a resource-producing economy cross-subsidizing many other activities, with a few competitive players like RIM ,  OpenText and Ballard emerging from the competitive races.

            The federal government has long been searching for a strategy.    It protests that there is an innovation agenda and that we are constantly adapting to the new conditions of global competition.   But that is not the reality.   An innovation strategy and an approach to the rise of China, India, and Dubai require a rethinking of the kind of economy we want to build in Canada over the next decade.   These are the areas where national public policy is essential for competitiveness.  While practitioners of public policy frequently forget that informed market decision-making and entrepreneurial activity are the keys to economic growth,  sound government policy can facilitate the former and attract the latter.      We live in a world where the Dubai stock exchange can go from an obscure regional entity into a major driver of the global economy in five years.   The responsibility of competent public policy makers is to ensure that Canadian entrepreneurs and investors have access to global trends, global markets and global investment opportunities or risk becoming a farm team economy.    That is what governments can do to enhance Canadian competitiveness. 

            Before this vision can be credible with the Canadian electorate,    the federal government has to   consolidate the lessons of the 1990s:  first it has to prove that it knows how to do no harm.  Deficits and other symptoms of a poorly-managed economy are even more dangerous in a world of global competition where access to capital defines competitive advantage for new entrepreneurs.  The skepticism about federal public policies on the economy are that regionalism will trump competitiveness as a criterion for decision-making,  that "innovation strategies" will become strategies for subsidizing companies ill-equipped to create globally competitive companies, and that public monies will go to institutions ill-equipped to develop market opportunities (government research labs and universities).     The federal government needs to show that it understands the sources of wealth-generation in the Canadian economy.     If Liberals want to replace a Prime Minister and a leadership team from Calgary at a time when Calgary is driving much of Canada's global economic presence, it has to be even more committed to the practice of market-disciplined economic growth than the government it wants to replace.    A first step for doing this is to show that the federal government and its agencies are potential partners in investing the Alberta resource profits in global expansion.    The federal government can either pursue a growth-oriented strategy which facilitates Alberta institutions becoming like Norsk Hydro to the benefit of all Canadians, or a strategy based on regional rivalries which will ensure that Canada will continue to underperform internationally.     To succeed, Canadians need more than sound fiscal management; they need a growth strategy.    But there can be no growth strategy without convincing Canadians that this is a very different Liberal Party, one which wants to be more entrepreneurial and market-driven than its predecessor Conservative government, one which understands the new roles of public policy in a global economy.

            The federal government's role is to assist in preparing Canadians for the best jobs in the new global economy.   Perhaps this means that we become self-consciously a Switzerland, a Norway or a Finland.  At the minimum, we need to build on aspects of the way other small economies - some resource-rich, others not - have carved out a role for longterm sustainable prosperity.    Like Switzerland and Holland, we need financial institutions that are capable of transforming investment into value-added activities in the growth regions of the planet.   Like Norway, we need to be able to show how resource riches can be transformed into longterm equity investing.   Like Finland, we need to be able to create Nokia-type companies which are able to provide magnets of excellence for the next generation of Finnish management and deal a small economy into major economic transformations, like those going on in China and India.  Like Finland , we need to aspire to be ranked first in the Transparency International list of non-corrupt economies, a key to attracting growth-oriented longterm investment in the future.

            Canada's competitive advantages are enormous.  As a resource-producing economy, we have the potential to be as wealthy as Norway in planning our longterm role.   We have strengths in key sectors like environmental engineering, alternative energy, power utility management, healthcare administration and other categories which venture capitalists view as the most important bets for the next decade.    We also have institutional investors like CDP and OTPP which are capable of expertise in global investing which is competitive with financial institutions in Holland or Switzerland.   We lack strengths in marketing driven companies, with the exception of some companies like Tim Horton's.   Our deficiencies are issues about which we have long fretted and done little:  our capital markets lack the investment banking skills to assist Canadian companies in growing through global expansion.    Our marketing skills as a nation are weak, reflecting the engineering competences of a resource economy.  Our incentive structures both cultural and in terms of financial incentives dissuades entrepreneurs from creating new businesses in Canada.

            Eight proposals:

            1.   Canada should be the most economically literate and scientifically literate society on the planet.    That should be a goal of public policy and political communications.   The link between competitiveness and scientific/economic literacy is key to 21st Century prosperity.  The first thing governments can do is to increase the level of economic and scientific literacy in their society.    Political speeches talk constantly about investing in education and everyone applauds.    But we don't know what that means.    If it means subsidizing more "research" projects on esoteric areas, that probably isn't a good investment.     Nor is a market-distorting investment that follows the last "trend" like more investment in biotech.   Education means at least three quite different sets of objectives: (a) skills broadly diffused through the society ; (b) commercialized projects  like the breakthrough energy-saving light bulb;  (c) this enormous social capital in a society that comes from being scientifically and economically literate.    
Competitiveness goes hand-in-glove with scientific and economic literacy.     Public policy can promote scientific and economic literacy, which means that the tradeoffs that are made in diffusing new technologies and the billions of market decisions made every day will contribute to a greater prosperity rather than counterproductive choices and unintended consequences.    For years, I have proposed that students read John Allen Paulos' Innumeracy and Peter Huber's Galileo's Revenge to show the importance of mathematical, economic, and scientific illiteracy for public policy decisions if these decisions are to enhance productivity and competitiveness.
If Canada set as a goal to be the most scientifically literate economy in the world, the most economically literate economy in the world and the country ranked first in the Transparency International index on honesty and reliability in capital markets, there is little doubt that Canada with its natural endowments would maximize its competitiveness.   
However, there is evidence that we don't perform well on these indices.    In part, this is a result of an educational system which hasn't placed enough emphasis on economic and scientific literacy in the past.   The market corrects and motivated teenagers these days are inclined toward the kind of commercial and scientific skills which lead to productive decision-making.    Political leadership in the 21st Century has to be ahead of these trends.   A society which understands economic tradeoffs and scientific evidence will be more prosperous than a society which doesn't.    Political leadership has to not only promote educational policies which do this, because we need creative generalists as well.   But in terms of social decisions, informed markets are a prerequisite to competitiveness.    If government cannot educate that there is a connection between competitive resource industries and our capacity to invest in next-generation research, then public policies in Canada will, at best, fail, or at worst, be counterproductive.
  
              2.   The development of an economic skills-set for commercializing technology is critical to the generation of wealth and the new prosperity.   This is a challenge that is not met by new money.   It is met by new skills in the Canadian venture capital community and the creation of organizational cultures in Canadian universities that promote commercialization.    There are extraordinary opportunities open to Canadian universities, science centres and innovative sources to a strategy of commercializing innovation.  A strategy for identifying 50 areas in which scientific work could be aggregated into a model for creating new products in areas like environmental bioremediation, biopesticides could reap enormous commercial benefits.    But the current commercialization model focuses on research and then puts obstacles in the way of commercialization by putting more of an emphasis on cheap capital than on management skills.    Public policy could help by creating alliances with sophisticated venture capital globally and removing the kind of easy capital which adds limited value.  The success of a commercialization strategy depends on being able to attract the best entrepreneurial talent to Canada (or keep it in Canada ) and links it to significant commercial opportunities.

            3.   A small economy like Canada runs into problems in maintaining the skills-upgrades for talent in the key 25-40 career period.    There are many ways that skills can be enhanced:  universities targeted to lifelong education that are connected to global best practices,  programmes designed to ensure that Canadians have sabbaticals which provide access to practitioners in health-care administration or police administration or simply management skills.   This will not happen by accident.   Ensuring the skills-sets of 25-40 year olds are the best in the world:  In order to remain competitive young Canadians have to leave the country to be able to sustain skills at a level commensurate to their competition in Europe and the United States.    A programme of encouraging Canadians to remain in Canada with a commercialization fund available to hundreds of potential young talent would do more to create jobs than any single initiative that can be coordinated by public policy makers.

4. in a global economy, successful governments, whether municipal (city of Vancouver), regional (Catalonia), or national brings to its local entrepreneurs and wealth creators the possibility of global networks.   The Canadian Government developed Team Canada missions as an instrument that was appropriate to an export-and -investment-oriented growth strategy; in the new global economy strategic alliances are critical to the success of national economies.   The Canada-Dubai or Waterloo-Bangalore alliances will be the test of success in the next generation.  A role government can play is in leading globalization.   A map of Canada with links around the world, generating the kind of productive deal networks that are accessible is a radical change of foreign economic policy.   What we need is not trade missions, but linkages with growth-creators and value-investors around the world.   Our Business Schools could do this if removed from a narrower academic framework of operation.

5.   The tax system is a statement of our economic values.  It must ensure that government rewards and supports high-value adding entrepreneurs.       The most important issues are to ensure that the incentive systems exist to reward entrepreneurial risk-taking which will create value-enhancing jobs and opportunities for growth.   It may be too late and too disruptive to move toward a higher consumption tax (20% GST) and a radical cut in capital gains and personal income tax (the Irish model).     But the philosophy underlying the role of the tax system has to reflect the goals we set as a society for our economic performance.   It is ultimately an incentive system as well as a device for generating public revenues.

6.  Our balkanized capital market has always contributed to underperformance.   This has been somewhat  compensated for by innovative behaviour from large institutional investors,  but the creation of a capital market which is national, capable of innovative financing, and the most honest and well-regulated in a post-Sarbox world is a key part of the new national prosperity initiative.   Canadians have been held back for years by the "balkanized" capital markets.  Some healthy initiatives have come about because of the skills of our institutional investors, the new role accorded CPP, the skill-set of CDP, OTPP.     With the rise of the Alberta economy, the need to ensure that Albertan investment in growth is at the centre of national decision-making is more imperative than ever.  This means more government-government partnerships in economic growth.  As the CPP, CDP and Alberta Treasury start to harmonize their activities around an investment agenda, the governments of Alberta, Quebec and Canada have to start harmonizing their strategies around the theme of accessing global opportunities and creating the preconditions for sustainable prosperity.  The structure of our capital markets remains a significant public policy priority.   The fact that there is no national securities regulator has always impeded Canada's role as a destination for entrepreneurial capital.  The federal government's inclination to discourage provincial agencies from pan-Canadian investment strategies has done collateral damage to the building of competitive sectors.   The structure of our banking system reflects our own ambivalence about how strongly we promote global competitiveness.  A regulated sector emphasizes competitive practices in consumer banking.  As a result, our financial institutions lack the capacity to be global competitors and Canadian businesses lack access to expertise in global investment and investment banking activities.    A strategy for the financial services sector which openly promotes Canadian competitiveness would significantly enhance the prospects of the Canadian economy.

7.   The federal government has to support those areas in which there is a global competitive advantage.    Investing in growth sectors where we have global competitive advantage like environmental industries is the key to sustainable prosperity.   Canadians need to create companies which have global market leadership.  In traditional economic activities, we have to assess all our decisions against a backdrop of growth dynamics in the global economy.   If the Canadian sector is non-competitive, it ceases to be a priority and the economic policy becomes a skills-enhancement policy to match the needs of a globalizing economy.     Managing globalization means that a smaller percentage of the population will be involved in directly wealth-producing activities.  As we move toward a Swiss/Norwegian model, this will work as long as we reinforce the strengths of our resource sector and ensure that investments in skills-enhancement are managed with fiscal discipline.    Public policy should not direct growth strategies, but nor should it create obstacles.  The vision of a Canada where we create the equivalent of Nokia in micro turbines or the equivalent of Bausch in biopesticides is one which builds on the intellectual capital of Canada and creates a distinct competitive advantage in international economic competition.
This applied to the public sector as well. There is nothing wrong with a larger public sector, if that public sector activity is efficient and oriented toward productive activities.  A Canadian police force, capable of ensuring domestic security in Haiti or Kosovo is worth investing in because it develops specialized public sector competences.  A Canadian democratic civil society building project, capable of ensuring well-regulated and well-investigated stock markets in Cairo or Addis Ababa is worth investing in.    A public sector which is intrusive and meddling is something which Canadians have chosen to reject at every opportunity.   Moving forward requires that we recognize the difference between backing competitive activities and creating meddlesome entanglements.

8.   A well-regulated internet is a cornerstone of competitive advantage.  Few countries are better positioned than Canada to do this.      The rise of spam and privacy-intruding internet activities may clog the new information economy.     The internet requires (a) privacy be protected so financial transactions can take place over the web; (b) the internet be policed so that the home (where the internet is most powerful) is protected from unwanted intrusions and the citizen can assure that all that is received in the home is indeed invited;  (c) that privacy is controlled by the receiver.   The balancing of internet use and privacy issues will ensure a competitive advantage to jurisdictions which have invested in a competitive advantage of regulation of the internet.  As a political issue, this has more traction than ever as parents are concerned with web-use, business are concerned with the seaweed of spam and the potential of the web for a variety of innovative activities are called into doubt in this new phase of the evolution of the wired economy.

But above all the new Canadian formula is one which constantly mobilizes resources for the challenges of the 21st Century.      There have to be world-class capacities in Canadian companies and skills development.  All decisions have to be made against a backdrop of what our economy will look like in twenty years.   Do we want a 20% GST and a slash in capital gains taxes and corporate taxes?   What would that make the Canadian economy look like?  Is that kind of Irish model importable? 

The most important items on the next Minister of Finance's desk will be how Canadian capital markets develop the unique competences and efficiencies required to deal Canadian companies into growth in the Dubai to Singapore world,   the Bangalore to Shenzhen world of new value creation, the Helsinki to Cambridge world of technological innovation.    Canadians have long been casual about mobilizing their global resources, networks of Canadian educated Chinese decision-makers, for example.   While Silicon Valley maintains networks through ongoing activities and an extremely active alumnus network, Canadians lack the mechanisms to do this.   What is a government for, if not to ensure that UBC-educated MBAs and McGill-educated engineers who work together in Shanghai also have an ongoing relationship with Canada?    The 20something generation is already doing this by instinct and initiative.    By the time their ideas are the dominant ideas, they will already have made decisions about being part of the global economy that will limit their involvement in Canadian agendas.     Over and over, it is worth repeating, that people will make rational sacrifices of income to participate in the building of Canada.   No one should trade off their own career needs for development and access to world-class practices in order to stay in Canada.    By simply being aware of this challenge, Canadian business and finance can recruit the best in the world to Canada, given our competitive advantages.    The role of the federal government is to say that in the new globally competitive knowledge economy, nothing other than best practices and world standards will be tolerated.    The vision of a well-regulated internet economy, a well-regulated, national innovative capital market and the most scientifically and economically literate society on the planet is attainable.