The Canada We Want in 2020 Towards a strategic policy roadmap for the federal government NOVEMBER 2011 INCREASING INNOVATION AND PRODUCTIVITY

DESPERATELY SEEKING A MORE INNOVATIVE CANADA Kevin G. Lynch 2 AN INNOVATION AGENDA FOR THE PUBLIC SECTOR Lawson Hunter and Peter Nicholson 11 CANADA’S PRODUCTIVITY AND INNOVATION FAILURES: QUESTIONING THE CONVENTIONAL WISDOM Jim Stanford 21

RISING TO MEET THE ASIA CHALLENGE

RISING TO MEET THE ASIA CHALLENGE AND OPPORTUNITY Dominic Barton 33 A LEAP-FROG STRATEGY FOR RELATIONS WITH ASIA Yuen Pau Woo 42 THE BIG CHALLENGE: ADJUSTING TO THE ASIA CENTURY Rana Sarkar 49

SQUARING THE CARBON CIRCLE

LOSING THE 2020 BATTLE: WINNING THE 2050 WAR Lorraine Mitchelmore 60 C ANADA’S CARBON CHALLENGE: REDUCING EMISSIONS WHILE MAINTAINING OUR QUALITY OF LIFE Ian Mallory 70 BUILDING A LOW-CARBON, HIGH-OCTANE CANADIAN ECONOMY Stewart Elgie and Alex Wood 79

REDUCING INCOME DISPARITIES AND POLARIZATION

WHY CANADIANS SHOULD CARE ABOUT INCOME INEQUALITY Mark Cameron 89 INCOME REDISTRIBUTION IN CANADA Andrew Sharpe 95 INEQUALITY IS NOT INEVITABLE Sherri Torjman and Ken Battle 102

SECURING OUR HEALTH SYSTEM FOR THE FUTURE

LESSONS FROM 2004, PERSPECTIVES FOR 2014 Philippe Couillard 112 FOUR FEDERAL INITIATIVES TO IMPROVE AFFORDABILITY, PRODUCTIVITY AND ACCOUNTABILITY Francesca Grosso and Michael Decter 119 PAYING FOR THE HEALTHCARE WE WANT Mark Stabile 125 PREFACE MAKING STRATEGIC CHOICES GOVERNING IS ABOUT making choices. challenges the country faces, and mobilizing Sometimes the choices governments make consensus for action. In other words, we are strategic, the product of hard thinking believe that the federal government can be a to address major hurdles which coalesce at force for significant and positive change. a particular point in time. It is our belief that This does not mean big government. It Canada is at such a point in time today and it means intelligent, innovative, analytical and is for this reason that we have produced this strategic government. It could conceivably collection of papers to kick-start a discussion result in smaller government, focused on a about the role of the federal government in few big and important areas of policy that Canada. really matter to the country’s future. A serious public policy strategy for the country means doing less of some things, FIVE CHALLENGES FOR 2020 while focusing decisively and aggressively Today, Canada faces challenges and oppor- on a few important things. This requires in- tunities that are quite unprecedented in depth analysis of the really big challenges and our recent history, although they may seem opportunities facing the country. It requires rather opaque to most Canadians. Our abil- governments to be straight with Canadians ity to overcome these challenges – and seize about the risks and rewards that lie ahead, so the opportunities – will determine the future that citizens will buy into a clear direction set trajectory of Canada’s economy and society by government. over the next generation. Our standard of The orientation of this volume – indeed living and quality of life could well hang in the basic orientation of Canada 2020: the balance. This is why we need federal Canada’s Progressive Centre – is that the leadership. federal government has a vitally important Canada 2020 contends that there are five role to play in developing and implement- fundamental, inter-related challenges con- ing strategic policies, focusing governments fronting the country which require strategic and other institutions in society on the big political leadership and policy action from the federal government. 1 Increasing innovation and productivity successive federal governments have Productivity growth and innovation are made incremental attempts to broaden the sine qua non for economic prosper- and deepen Canada’s trade, investment ity. Canada’s lack of productivity growth and economic relationships with Asian has been a worrying feature of the econ- economies. Despite such efforts, Canada omy for decades. Since 1984, relative is not really on the map in China and productivity in Canada’s business sector India today, in stark contrast to many of has fallen from more than 90% of the U.S. our major competitors. level to 76% in 2007. There are no signs It is time for the federal government of things improving: quite the opposite to take a much bolder, more creative in fact. and aggressive approach to help deep- Since the 1990s, the federal govern- en Canadian ties with Asia and enable ment has been taking steps to try to Canadian businesses to take advantage reverse this trend, primarily by investing of unprecedented market opportuni- in university-based research and devel- ties in the region. We must leverage our opment and by cutting personal income unique strengths and advantages and and corporate taxes, the standard policy become an indispensible part of the new remedies for dealing with flagging pro- Asian century. ductivity performance. Yet Canada’s pro- ductivity growth has actually become 3 Squaring the carbon circle Canada has worse over the past decade. among the highest per capita levels of It is therefore time for a much more greenhouse gas (GHG) emissions in the aggressive, focused and creative federal world (although our total contribution to policy response to Canada’s productivity global GHG emissions is low as a result of growth and innovation challenge. Without the relatively small size of the Canadian this, we risk falling further behind and los- economy). High Canadian emissions are ing the revenues that enable us to sustain due in part to our unique geography and our standard of living. harsh climate, but also to a weak culture of conservation and inadequate policy 2 Rising to meet the Asia challenge The and regulatory regimes. global centre of economic power is Modest measures to reduce emis- inexorably shifting from the West to the sions have been implemented over the East. This trend has been underway for past decade. But these initiatives have twenty years, but it is now reaching a cre- been neither significant nor strategic; as scendo, partly as a result of the fiscal and a result they have had little to no effect economic problems plaguing Europe on Canada’s overall GHG emissions. and the United States. There is no better Canada is also fast becoming one of evidence of this shift in economic and the world’s leading fossil fuel producers financial power than the recent efforts by and exporters. It has even been suggest- the European Union to persuade China ed that Canada is “an energy superpow- to help prop up the teetering European er”, or at least can realistically aspire financial system. to that goal. With that title are likely to Canada has been on a slow boat to come increased emissions, at least in the China – indeed to Asia, more generally – absence of meaningful measures to com- for many years, notwithstanding the fact bat these. that we have some significant advan- As a G8 country, an original signatory tages over other countries in this region to the Kyoto Protocol on climate change, of the world. Over the past fifteen years, and one of the world’s largest per capita carbon emitters, Canada has a moral Income polarization has not, up until responsibility to make progress on limit- now, been a big issue on the federal agen- ing GHG emissions (if for no other rea- da. Various reforms to federal income son than to set an example for the big security programs and the tax-transfer emitting countries). We are also at seri- system have been put in place over the ous risk of missing opportunities in the past twenty years, but these have not low-carbon economy of the future and been aimed at dealing with income polar- of becoming increasingly marginalized ization. It is time for the federal govern- economically if we fail to act. It is there- ment to analyze and consider the longer fore time for a serious, strategic effort, term effects of income polarization, and led by the federal government, to square to consider strategic policy reforms to Canada’s carbon circle and put in place head off a looming problem. policies that will significantly decrease our GHG emissions. 5 Securing our health system for the future Universal, high-quality healthcare has 4 Reducing income disparities and polar- been a defining feature of Canada and ization Income inequality has been a Canadian citizenship for 40 years. It is the creeping problem in Canada and other public service Canadians value most. Yet advanced economies for many years now. the general consensus among experts is The bottom two quintiles of the income that if we stick with the current funding/ scale have seen their market incomes administrative models and tax structure, decline, in real terms, since the early Medicare as we know it is not financially 1980s (though transfers have resulted sustainable. in some degree of after tax and transfer Healthcare costs have been rising sig- growth). At the same time, the top nificantly as a fraction of our national 1% of economic families have accu- income and as a share of government mulated an ever-increasing share of budgets (especially provincial budgets) Canada’s wealth. for a generation now. The basic causes Income inequality, a feature of all of healthcare inflation are well-known: market economies, is now giving way to expensive new technologies, procedures income polarization. While this phenom- and drugs that permit us to live longer, enon is still more acute in the US than in coupled with an aging society. Canada, some recent studies suggest the While healthcare delivery is a pro- gap between rich and poor – and between vincial responsibility, healthcare financ- the superrich and the middle class – is ing – paying for the system – has been now growing faster in Canada than in a dual responsibility, shared by fed- the US. eral and provincial governments, since Income polarization can have serious- the beginning of Medicare. In 2004, in ly perverse effects on the economy and on response to rising costs and pressures society. At an extreme, it can undermine on provincial treasuries, the federal gov- social cohesion, unravelling the fabric of a ernment announced a major increase in country. The Occupy Wall Street protests, federal fiscal transfers to the provinces and their analogue in other countries, for healthcare. With some $41 billion in including Canada, are one early sign of transfers for health over ten years, the the social discontent that can arise from 2004 Health Accord was billed “a fix for a income polarization and a growing per- generation”. Unfortunately, it has proven ception that the economy is not working to be little more than a stop-gap for a for most people. decade. As we approach the end of the Health governments and politicians lack the ideas Accord in three years’ time, innovative, to address these issues. Perhaps it is because strategic policy approaches on health- of scepticism that the federal government care financing are urgently required. can really make a difference. Perhaps we We also need the federal government to have reached the limits of innovative public provide leadership on the organizational policy and governance. Or perhaps we are and accountability issues that underpin just avoiding the issues – in a collective state our health system in Canada. of denial – in the hopes that they will resolve themselves in an acceptable way through The scope of federal government activity incremental policy action. clearly extends well beyond these five issues. Whatever the cause, it is time for Canada But our belief is that informed, strategic to break out of this mindset. Many elements decision-making in these areas will go a long of Canadian society – the business com- way towards securing the Canada We Want in munity, NGOs, governments at all levels, 2020. educational institutions, and Canadian Our choice to address all the issues citizens generally – must work to address the together has two implications. First, we will, challenges. No single entity has the solution. as we move on, have an opportunity to exam- A collective effort is required. ine the links between areas (for example, the Our goal is to kick-start a strategic policy effect carbon policy will have on our trad- conversation throughout the country about ing relations or the links between income The Canada We Want in (or by) 2020. Such a inequality and productivity). Second, the conversation has not been evident to date in broad scope of issues will give us a chance to Parliament, in general elections, in political reflect more critically on the role of the state, party platforms, or in the media – indeed in and the effectiveness of policy in general in any of the places you would usually expect addressing the key issues of our time. to see it. The time for that conversation is now. Perhaps it will lead to a consensus KICK-STARTING THE CONVERSATION among political, business, academic and This volume contains 15 papers, three in other leaders in Canadian society that the each of the five areas identified above. We federal government needs to chart a strategic have brought together a group of authors, all direction for the country to secure Canada’s experts in their respective areas, and asked prosperity and the quality of life Canadians them to approach the issues from a strategic have come to expect. We present this volume policy standpoint. as a starting point. For this is what has been missing. The areas have all received attention in the past, but often not in a truly strategic way. Perhaps this lack of policy strategy and priority attention is due to the fact the tipping point has not yet been reached in any given area (although it is looming large in some, notably healthcare financing). Perhaps it is because INTRODUCTION TO OUR PROJECT THIS VOLUME MARKS the culmination of In Phase 2 of the project we will stimulate Phase 1 of our project: The Canada We Want further conversations in each of our five in 2020. chosen areas. We will host a series of panel The overall aim of the project is to launch discussions and web-based exchanges that a debate about the role of the federal govern- draw on the papers in this volume. These ment in Canada. This publication is intended discussions will tease out areas of agreement to act as a focus for discussion and a core and disagreement and begin to focus on around which we can bring in ideas from implementation challenges. We expect to a wider range of people. It is, in this sense, conclude this phase by mid 2012. a starting point. Phase 3 will see us narrowing back down Canada 2020 has called on fifteen authors and reaching conclusions. Drawing on the to share their wide-ranging views in the materials from the previous phases, Canada five areas. Sometimes they agree on policy 2020 will produce a final, consolidated prescriptions, sometimes they disagree. But publication towards the end of 2012. This what all authors have in common is a belief document will summarize our conclusions in in the value of discussing the options and each of the five areas. It will take into account thinking strategically about the issues that recent changes and lay out proposed future Canada faces. strategies. THE CANADA WE WANT IN 2020

WHAT YOU CAN DO

Our aim is to draw as many viewpoints as possible into this project.

There are several ways you can get involved:

// Attend our series of panel discussions in 2012

// Check our website: download documents, watch interviews and webcasts and make comments

// Contact us directly to arrange joint presentations or discussions

Details are on our project site at: www.canada2020.ca

Diana Carney Project Coordinator [email protected] INCREASING INNOVATION AND PRODUCTIVITY CANADA’S INNOVATION AND productivity renewal to meet current demands (including performance − both of which are central to extending access to new, high-growth mar- economic growth, competitiveness and our kets, a key concern in the Asia section of this standard of living − have been stagnant for publication) but also innovation in materials years. This is particularly problematic in light and standards. Innovation within the policy of Canada’s low levels of labour-force growth function of the federal government should, and the competitive challenges from emerging according to the authors, take the form of a economies. move towards standards-based regulation. Contributors to this section approach the This would bring greater clarity, give market problem from quite different perspectives, forces more play and provide a framework and propose sometimes conflicting solu- through which to question the efficacy of tions. Lawson Hunter and Peter Nicholson entire regulatory regimes. focus on the public sector itself, calling for governments to take urgent steps to put their houses in order on the innovation side. This Canada’s innovation is important in and of itself. But increased public sector innovation also has demonstra- and productivity performance tion and knock-on effects for the rest of the economy. The authors highlight four critical has been stagnant for years areas in which there are particular opportu- nities – and needs – for increased innovation, Kevin Lynch’s paper, by contrast, places with federal government leadership: health- responsibility for innovation squarely on the care services; kindergarten to grade 12 edu- shoulders of the corporate sector. Governments cation; public infrastructure; and regulation. have a role to play, but they can only go so far. In healthcare, the authors highlight the Indeed, Lynch’s view is that many of the piec- need for better cross-country dissemina- es are already in place from the government tion of locally-relevant best practices (a side due to substantial investment in univer- call echoed in the healthcare section of this sity research capacity and innovation-specific report, albeit with a different proposed solu- organizations, such as the Canada Foundation tion). In education they are looking for radical for Innovation, in the 1990s. Nonetheless, new approaches that will hold the attention Lynch, like Hunter and Nicholson, does not and nurture the talents of the “digital natives” think governments should rest on their laurels. of today. In infrastructure they call for He exhorts the federal government to devote THE CANADA WE WANT IN 2020

more effort to this area, especially to ensuring improvements in Canada. This is the overall that technology, once developed, actually gets thesis of Stanford’s paper. He presents data commercialized. that show that Canada’s productivity began to dive just at the point at which we moved into full “liberalization mode”. And the further we The vision is of a federal have moved down this path, the worse our productivity performance has become. government that would Stanford’s solution to this problem is to take a leaf out of the book of the states in East actively strive to ensure Asia that have adopted a far more interven- tionist approach to industrial development. particular outcomes He terms this “sectoral development policy” (rejecting the “industrial policy” label which Federal efforts should be informed by conjures images of old-style support to old existing resources and proposals, such as the style industries). 2008 Competition Policy Review Panel report. Sectoral development policy should, in To add to this, we now have the Expert Panel Stanford’s view, be a highly strategic and dis- Report on Federal Support to Research and ciplined effort that draws on every available Development (October 2011) which – like tool to support chosen sectors. The vision is Lynch’s paper – stresses the importance of of a federal government that would actively ensuring that innovative firms have adequate strive to ensure particular outcomes, instead access to risk capital. Another step that Lynch of relying on the vagaries of trade agree- proposes is to transfer some federal research ments, open regulations on foreign invest- and development support out of tax credits ment, and market allocations more broadly, (which appear to be having a limited effect) to secure this country’s future. and into more direct measures, while mak- Canada’s trade volumes are shifting away ing better use of government procurement to from the U.S. and towards Asia (though at reinforce corporate innovation. nothing like the pace that the authors in the In making this last point, Lynch nods in subsequent section of this volume would like the direction proposed by Jim Stanford: that to see); perhaps it is time that our policies is, away from simply creating an enabling moved in a similar direction, away from the environment and towards much more US model and towards a more interventionist deliberate measures to secure productivity Asian-style solution? DESPERATELY SEEKING A MORE INNOVATIVE CANADA KEVIN G. LYNCH

The Honourable INTRODUCTION They have relatively stable financial systems Kevin G. Lynch, P.C. We are entering a new global normal. Things and fiscal positions yet inflationary pres- is Vice Chair of the BMO will not be as they were. sures and income inequality challenges Financial Group. He was The international economic geography is threaten. They must also secure the natural appointed the 20th Clerk of shifting to Asia and other dynamic emerging resources to satisfy their increasingly the Privy Council, Secretary to economies. The demographics of aging are affluent citizens and feed their economies. the Cabinet and Head of the creating a global talent hunt. The digital In such a world, the drivers of success are Public Service of Canada in universe is transforming what markets mean a global perspective, the capacity to realize 2006, a position he held until and how social interaction and communica- economies of scale that transcend traditional 2009. Prior to that he served tion take place. There has been a dramatic markets, and the ability to sustain produc- as both Deputy Minister of decline of trust in leadership – whether tivity growth, typically through innovation. Industry and Deputy Minister political, corporate, regulatory or moral – Competitive firms are increasingly defined of Finance, as well as Executive due to the cumulative impact of financial, by their ability to shape market tastes and Director at the International environmental, corporate governance and create innovative products that disrupt Monetary Fund. He was made regulatory crises. What is emerging is a new markets. a Member of the Queen’s Privy multi-polar world: economic power is being How is Canada placed in this new global Council for Canada in 2009. dramatically redistributed; political, military normal? With our myriad advantages, our and intellectual power will follow. biggest risk may be complacency. It is time There are large risks associated with to acknowledge, in both our public policy this new global normal. Countries such and private sector strategy, that the status as the US seem politically unable to deal quo is no longer viable. We need to build on with their fiscal problems. Europe seems our many strengths, not rest on them. And unwilling to confront its policy incon- we need to tackle our weaknesses, two of the sistencies, and China and other Asian most pressing and pervasive of which are countries are reluctant to address their our under-performance in productivity and consumption-saving-export imbalances. innovation.

2 WHAT IS INNOVATION and how to fine-tune its products, processes AND WHY DOES IT MATTER? and markets according to what competi- Innovation is our ability to create new tors are doing and how consumer tastes are products and services, to produce existing shifting. This is where innovation enters products in different ways, or to develop the picture. new markets. It lies at the heart of modern competitiveness. It drives growth. It improves productivity. It raises our living standards. Innovation is the essence It gives consumers new choices, as users of the BlackBerry, GPS, the iPod, the iPad, of how a dynamically successful digital photography, ATMs and on-line shopping will attest. It is also incredibly firm “stays ahead of the important to an economy. As The Economist observed, “America gets more than half its competitive curve” economic growth from industries that barely existed a decade ago – such is the power of As this typical Canadian firm goes about innovation.”1 its planning, the world around it is not static, Overall, innovation increases the value it is constantly evolving. Consumer tastes are of the output produced by a worker – a changing. Technology is changing. Markets firm’s productivity. This improves the firm’s are changing. Competitors are shifting. The competitiveness and increases what it can firm has to make decisions about how to cope pay its workers and earn as its profits. It is with this dynamic environment amidst much the answer to the often-posed question of uncertainty. How well it does depends upon how a higher-wage economy like Canada how focussed and disciplined it is in seek- can compete with emerging countries with ing continual innovation and productivity low costs of production. But it also has a enhancement. Innovation is the essence of public purpose: it is an essential ingredient how a dynamically successful firm “stays for raising living standards and ensuring ahead of the competitive curve”. the economic growth we need to meet our Corporate innovation does not happen priorities as a nation. As Paul Krugman, in the abstract; there are four distinct areas the Nobel Prize winner, wrote recently of possible innovation in firms: in the New York Times: “Productivity isn’t everything, but in the long-run, it is almost // Product Innovation this is the techno- everything.” logical and planning capacity of a firm Consider what innovation and productivity to introduce new products and services mean at the level of an individual firm. A ahead of competitors, to anticipate typical business thinks about the products it consumer wants and needs, or even to has to sell, the potential customers that will create them. New products typically carry buy them, and whether it can make a profit higher profit margins and encounter and grow by selling them. Once it decides less cost competition than established on its products and markets, it has to decide products. Product innovation can be the on how to organize efficiently. It has to hire, result of research and development, or train and compensate workers, and decide the result of integrating existing leading what kind of human resource management technologies in a new way that better policies it needs. It has to choose the best meets consumer demands. It requires possible production and distribution a sophisticated understanding of both processes. Then it has to consider whether consumers and technology. 1 February 18, 1999.

3 THE CANADA WE WANT IN 2020 INCREASING INNOVATION AND PRODUCTIVITY

// Market Innovation this is the capacity of a In a market-driven economy, innovation firm to alter its market, geographically or essentially has to happen at the corporate virtually (e.g. using the internet to extend level, through one or more of these four reach) or by creating new products, for channels. Public educational and research which there was no previous market. policies are vital to nurture it, as are an adequately risk-taking venture capital // Process Innovation this is the capacity system and an effective financial system. But to change how goods and services innovation itself is largely a corporate are produced and delivered to reduce responsibility. cost, improve efficiency and increase convenience for customers. Developing HOW IS CANADA DOING? global supply chains and identifying risk- Innovation is vital to our future, yet we sharing partners in manufacturing are are simply not doing well enough. The prime examples of process innovation. private sector in Canada has not kept pace Internet shopping and online banking with many other countries when it comes are two service sector examples. Another to investing in innovation. In the past this possibility is value-based or “frugal problem was essentially counter-balanced by innovation” (for which India is increasingly a low Canadian dollar. This is no longer the well-known) whereby firms engineer case. If unaddressed, our poor private sector backwards to achieve the best product innovation and productivity performance for a fixed price point. will increasingly constrain our options for the future. The choice for Canadians – and all // Organizational Innovation this is the of us have a stake in the outcome – is whether strategic capacity to convert creativity, our innovation approach merely needs some market and customer knowledge and model restyling or whether it requires a more technology into marketable innova- complete model makeover. tions. It requires active disruption of The usual starting point for analysis the status quo and the natural tendency of innovation is investments in research towards incremental improvements. and development (R&D), by both the public Innovative corporations have business sector and the private sector. structures that accommodate dedicated innovation teams, working separately to Public sector innovation policy develop new products and processes, In the public sector, a compelling public but still hard-wired into the corpora- narrative about the risks to the nation tion. Management creates “innovation from a perceived brain drain, together with supportive” structures that fight the clear evidence that our university research tyranny of short-termism. capacity had deteriorated led, in the 1990s, to a fundamental policy rethink. There was a refocusing on global excellence in higher education to be achieved through a more The choice for Canadians is strategic approach to research prioritiza- tion, greater competition among research whether our innovation approach institutions and far more investment by the government. The imperative of commercial- needs some restyling or whether ization of research was recognized and strong links between publicly-funded research and it requires a complete makeover the private sector were promoted.

4 This renewal went well beyond dollars Academies makes a compelling case that and cents. Independent institutions, princi- Canada has a real business innovation prob- pally the Canada Foundation for Innovation, lem.2 This can be appreciated by looking at were created at arm’s length from govern- the international comparisons in Figure 1. In ment to build strategic research excellence. 2008, Canada ranked 15th among all OECD The Canada Research Chairs were created, countries in terms of business R&D expendi- two thousand of them, geared to attracting tures as a % of GDP. and retaining world-class researchers to our universities. Major new funding was provided for the Granting Councils and an Commercialization still lags indirect costs-of-research support program. Dynamic new engines of research such as the significantly, resulting in fewer Canada Global Excellence Chairs, Centres of Excellence and Genome Canada were new firms and jobs and less new established. New excellence-based graduate scholarships (the Vanier Scholarships and wealth than should be the case the Canada Graduate Scholarships) were introduced. Major tax changes were imple- Canadian business spending on R&D was mented to put charitable giving to Canadian only 1% of GDP. This is well below the OECD universities and research hospitals on a par average of 1.6% of GDP, roughly half of what with the US. the US spends and almost as low as a third of In not much more than a decade, there has what the leaders, Sweden, Finland and Korea, been remarkable progress in rebuilding the spend. Moreover, Canada’s R&D spending higher education research infrastructure in is highly concentrated in a few sectors. The Canada. University research investments as a service sector accounts for 70% of Canadian proportion of GDP are now higher in Canada GDP. It spends only 0.6% of its sectoral GDP than in all other G7 countries, including the on R&D. The natural resource, utilities and US. This is a tremendous achievement and construction sectors together represent over the fruits of these efforts can now be seen in 16% of Canadian GDP and spend barely the quality and quantity of research coming 0.3% of sectoral GDP on R&D. out of our university labs. It is not just R&D expenditures that are However, more remains to be done. low. The 2011 Report of the Federal Science, Spending is not the only measure of univer- Technology and Innovation Council presents sity research success. Commercialization data that show aggregate Canadian business still lags significantly, resulting in fewer new productivity levels to be more than 25% lower firms and jobs and less new wealth than than those of the US (Figure 2), with rates in should be the case. Interactions between some sectors being less than half those in the our research-intensive institutions and US (though there are some “star performers” the private sector are still too limited such as the construction industry). Canadian and achieving global excellence in education business invests only about 75% as much 2 Council of Canadian and research requires continuous effort. as US business in leading-edge machinery Academies (2009) and equipment and a shockingly low 47.9% Innovation and Business Private sector innovation performance as much as American firms in information Strategy: Why Canada University research is on a decided upswing; and communications technologies (ICT). Falls Short. (http://www. private-sector innovation is another matter. In short, there is a real and present innova- scienceadvice.ca/en/ A recent report by the Council of Canadian tion and productivity problem in Canadian assessments/completed/ business. innovation.aspx)

5 THE CANADA WE WANT IN 2020 INCREASING INNOVATION AND PRODUCTIVITY

Business sector R&D expenditures as a percentage of GDP (BERD ratio)

15th

2.7 % 2.7 % 2.5 % 2.2 % 1.9 % 1.8 % 1.8 % 1.7 % 1.5 % 1.4 % 1.3 % 1.3 % 1.2 % 1.2 % 1.1 % 1.0 % 1.0 % 0.9 % 0.9 % Japan Korea France Ireland Iceland Austria Canada Finland Norway Sweden Belgium Germany Denmark Australia Netherlands Luxembourg United States United Kingdom Czech REepublic

SOURCE: OECD (2010) Main Science and Technology Indicators, Volume 20.

Figure 1

HOW DO WE TACKLE about what it will take to maintain our com- OUR INNOVATION DEFICIT? petitiveness, growth and standard of living. Given the magnitude of our problem, a “busi- Productivity and innovation should not be ness-as-usual” approach to innovation will feared but tackled: they are not about work- not be enough. Tweaking existing programs ing more for less; quite the opposite, they are and incentives will not turn things around. essential for raising our living standards. We need instead a broad public discussion The federal government is not the main driver of private sector productivity and innovation in Canada. That is the responsibil- Productivity and innovation ity of business itself. It does, however, have a clear role to play both in framing the required lie at the intersection between public discussion and in ensuring that busi- ness in Canada is underpinned by effective public policy and private economic measures and an enabling policy sector behaviour environment.

6 Canada–US labour productivity and selected capital intensities (US = 100) LABOUR MACHINERY & PRODUCTIVITY EQUIPMENT* ICT SECTOR (2007) (2000-07 avg.) (2000-07 avg.) AGRICULTURE, FORESTRY, 86.4 70.5 79.1 FISHING AND HUNTING MINING 88.0 80.0 31.2 Mining except oil and gas 47.3 57.0 35.1 Oil and gas extraction 81.6 100.5 25.6 UTILITIES 62.7 51.0 73.6

CONSTRUCTION 192.5 79.2 14.7

MANUFACTURING 73.2 91.1 36.6

SERVICES SECTOR Wholesale trade 90.0 29.9 45.6 Retail trade 75.6 70.4 72.1 Transportation and warehousing 108.1 86.8 19.7 Information and cultural industries 46.6 82.8 98.5 Finance, insurance, real estate and leasing 72.1 105.4 72.2 Professional, scientific and technical service 38.6 45.7 42.3 Administrative and waste management 107.6 39.9 49.9 Education, healthcare and social assistance 95.9 34.2 17.8 Arts, entertainment and recreation 39.0 39.3 128.7 Accommodation and food services 72.2 28.3 47.1

AVERAGE FOR ALL SECTORS AND INDUSTRIES 72.1 74.5 47.9

* includes information and communications technology (ICT) SOURCE: Science, Technology and Innovation Council (2010) State of the Nation 2010 Report.

Figure 2

Leadership is needed The leaders of both need to be involved in It will take leadership – in government, crafting an effective national response. business, universities and labour – to focus Below are eight concrete steps the fed- attention on the new global normal and how eral government should take to substantially a mature economy such as our own should improve our innovation and productivity respond to this. Simply put, productivity and performance. Those in which it plays a lead innovation lie at the intersection between role are presented first, followed by those in public policy and private sector behaviour. which its role is more supportive.

7 THE CANADA WE WANT IN 2020 INCREASING INNOVATION AND PRODUCTIVITY

GOVERNMENT TO LEAD in innovation and productivity. These 1 Competition matters to corporate benchmarks would be made available behaviour. Governments – both federal to the public, and both markets and and provincial – need to change regula- boards of directors would be encour- tion to increase market competition in aged to take these into account in Canada, particularly in more protected evaluating corporate performance. sectors where productivity and inno- Market discipline should drive more vation gaps are largest. As Tom Jenkins corporate management focus on recently argued: “The motivation innovation. to be productive and to innovate is a pri- mal one related to competition… If you 3 Trade agreements with dynamic want to have better productivity in our emerging economies help reinforce economy we cannot “suggest” to our a global mindset and orientation executives that it would be a good idea. amongst Canadian business, and also Instead, we must “force” their firms to contribute to increased competition. change and become more productive by We need to complement NAFTA by increasing the competitive intensity.”3 A negotiating new economic arrange- starting point would be for the govern- ments with a range of countries, includ- ment to revisit the competition policy ing: Brazil, a country of 200 million proposals of the Canadian Competition people that will soon be the sixth Policy Review (2008). largest economy in the world; China, the second largest global economy; India, the dynamic emerging economy We have one of the with which we share much, but not trade and investment; and with South most generous research and Korea and Japan. We need to be more strategic, more focussed and to proceed development tax credits with a greater sense of urgency.

in the world. Unfortunately this 4 In Canada, government support for business innovation is predominately mechanism is not working delivered through the tax system. Indeed, we have one of the most as intended generous research and development tax credits in the world. Unfortunately, 2 Information matters to corporate judging by corporate R&D levels, this behaviour. By creating a national mechanism is not working as intended. Productivity and Innovation Council Consideration should therefore be the federal government could intro- given to redirecting some of these duce more ‘information-driven innovation tax expenditures to direct competition’ into Canadian business support for innovation (which is more decision-making. Such a Council the norm, amongst OECD countries, should produce global productiv- including the US). 3 Jenkins, T. (2011) “A simple ity and innovation benchmarks for solution to Canada’s key sectors. It should research what innovation problem”. Policy firms in each sector in the top five Options. 32 (8), 12-21. competitor countries are doing to excel

8 This could be channelled through a to catalyze renewal in this area, the revamped and expanded IRAP (Industrial federal government should consider Research Assistance Program) that has establishing a Venture Capital Industry a greater focus on helping small- and Review Panel. medium-sized enterprises adopt lead- ing edge technologies and best manage- 2 Education clearly matters in a knowl- ment practices. Other possibilities include edge-based economy. It is essential for creating a Canadian equivalent of DARPA our education systems to be geared (the US Defense Advanced Research to the needs of a globally-oriented, Projects Agency, one the most successful US knowledge-based economy. Graduates government agencies) and providing more need to emerge with multiple language direct support for developing new, common skills and with meaningful knowledge purpose technologies in key sectors. of other countries, their cultures and Opportunities for such technology markets. Managers and business development exist in many areas, including: graduates need to be experts in global agriculture, to meet the emerging demands marketing, to understand the core of new middle class consumers in Asia; the technologies for their sectors and to oil sands, for water and soil remediation; be comfortable in risk assessment of medicine and medical devices; information product innovation. If they are not, technology; and renewable energy. In they will be overtaken in the global addition, the Government of Canada could search for talent and will not be able be much more aggressive as a purchaser of to lead Canadian businesses to the innovative goods and services, reducing the innovative future that we need. One way risk faced by innovative Canadian companies to achieve this is to design incentives and helping them build market share. to increase the interactions between research universities and businesses. GOVERNMENT PLAYS A SUPPORTING ROLE 3 Research excellence in our universities is 1 Financing is crucial, both for innovative the backbone of an effective innovation start-ups and established firms looking system. We need to continue to fund this to invest more in innovation and pro- public good, building on the innovative ductivity. The venture capital industry re-investments of the last decade. But in Canada is simply not functioning in we also need to insist on accountability the way it should. We seriously lag other from the institutions to ensure that they countries as diverse as the US, Israel, are focussed on global excellence in their Singapore and the UK in this key sup- research. And, we have to become better porting element for increased innova- at commercializing the fruits of this tion. As a new Business Development research. This will help create a virtuous Bank of Canada (BDC) study clearly circle of research leading to innovative stated: “Although the venture capital ideas, new products, more competitive industry is only one element of the firms, jobs and growth, and ultimately innovation ecosystem, examples from the capacity continually to re-invest. An 4 BDC (2011) Venture countries such as the US and Israel examination of the role of intellectual Capital Industry Review. show the potential impact this industry property (IP) rights and whether certain Ottawa: BDC. (http://www. can have in creating technology IP regimes provide better incentives to bdc.ca/EN/Documents/ champions. Unfortunately, Canada is commercialization would be timely. other/VC_Industry_ ‘punching below its weight’.”4 As a way Review_EN.pdf)

9 THE CANADA WE WANT IN 2020 INCREASING INNOVATION AND PRODUCTIVITY

4 Public-private partnerships can be an CONCLUSION effective way of diffusing research and Canada is blessed with much, and yet there is supporting innovation. More leading much we need to do. First and foremost, we edge technology demonstration projects, must avoid complacency. focussed in sectors where Canada has Today, we have a strong dollar and weak inherent comparative advantages, are productivity. We have strong public research one route (carbon capture and storage capacity in our universities, and weak private pilot projects in Saskatchewan and sector innovation and commercialization. Alberta would be one example). We have deep trade links with the US, and Another way for the government to weak linkages with the dynamic emerg- promote innovation would be to support ing economies. Canada is in an excellent the establishment of more cooperative position to prosper, provided we tackle our technology development centres, weaknesses, with productivity and inno- which would bring together university vation being front and centre. We should researchers and private sector busi- be desperately seeking a more innovative nesses and give all partners the right to Canada well before 2020. use and customise common intellectual property.

10 AN INNOVATION AGENDA FOR THE PUBLIC SECTOR LAWSON HUNTER AND PETER NICHOLSON

Innovation is the principal driver of pro- THE CASE FOR Lawson Hunter is head ductivity growth and economic prosperity. PUBLIC SECTOR INNOVATION of the Competition/Antitrust Contemporary discussion focuses almost Governments need to do much more to Group at law firm Stikeman exclusively on innovation by businesses promote innovation in their own domains Elliott, where he has had a and on what governments can do to support for the following reasons. long career as a regulatory and this. While this emphasis is appropriate up government relations counsel. to a point, it ignores the elephant in the 1 The government sector of Canada’s Formerly Canada’s senior room: the public sector itself, the activities economy currently accounts directly civil servant in charge of of which contribute more than a quarter for about 26% of GDP (up from 23% competition policy and of Canada’s GDP and whose regulatory pre-downturn, due to a significant tem- enforcement, Mr. Hunter policies profoundly affect the behaviour of porary increase in capital spending), played a key role in drafting the private sector. comprising $367 billion in expen- the federal Competition Act. The thesis of this paper is that government ditures on goods and services and From 2003 – 2008, he served can make a greater contribution to Canada’s $72 billion in capital spending.1 as executive vice-president innovation performance by putting its own The public sector is thus a very big and chief corporate officer house in order, than by focusing almost “business” in its own right – far larger in of Bell Canada and BCE Inc., exclusively on the acknowledged innovation terms of both employment and output where he was responsible short-comings of businesses. To illustrate the than the entire manufacturing sector. for overseeing regulatory, possibilities, we cite some major challenges Canada’s economic performance is governmental relations and and opportunities in four broad domains: therefore heavily and directly influ- corporate affairs. healthcare services, K-12 education, public enced by the productive efficiency of infrastructure and regulatory policy. The pro- the public sector. The more efficiently posals are necessarily high-level but they dem- the public sector does its job, the better onstrate the relevance of the thesis and help the value for the taxpayer. prompt a new focus for innovation policy on [It should be noted that there is a 1 Estimates in current the public sector itself, where opportunities structural tendency for the cost of public dollars based on Q2 2011 for creativity abound and where the power of services to grow faster than overall GDP at annual rates governments to effect change is greatest. GDP. This is because public services (Statistics Canada).

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3 Many of the biggest challenges and opportunities facing Canada today lie squarely within the domain of the public sector. They include: // delivery, in a fiscally-sustainable way, of high-quality, universal healthcare to an aging population; // discovery and implementation Incentives and cultures of effective methods to educate new generations of “digital natives”; in public service organizations // investment in a new generation of public infrastructure that incorporates are too often hostile the information and communications technology (ICT) revolution, addresses to innovation the challenge of environmental sustainability, and provides more are not subject to the cost-constraining efficient access to growth markets discipline of competition and they beyond North America; and are more labour-intensive than the // design of smarter regulation that Dr. Peter Nicholson was average for the rest of the economy. identifies, and regularly re-calibrates, the inaugural Chief Executive They therefore benefit less from the the balance between what markets Officer of the Council of progressive reduction in capital costs can be trusted to sort out, and what Canadian Academies from due to technological innovation. they cannot. 2006 – 2009. Prior to this he Productivity-increasing innovation is was the Deputy Chief of Staff the only way to mitigate this tendency These challenges call for radically for Policy in the Office of the without reducing the level/quality of innovative approaches. Prime Minister of Canada and, the services.] between 2002 – 2003, Special 4 A more innovative public sector will be Advisor to the Secretary General 2 Innovation – defined in simplest terms a better enabler of business innovation of the OECD. From 1995 – 2002 as new or better ways of doing valued and productivity. Innovative competi- he was Chief Strategy Officer things 2 – within the public sector is the tion policy, in particular, is needed to of BCE Inc. He holds a BSc. and means by which the quality, accessi- spur businesses to be more innovative MSc. in physics from Dalhousie bility, and cost-effectiveness of public themselves. University and a PhD in goods and services are improved to operations research from meet people’s evolving needs and This is not to say that governments’ Stanford University. expectations. Innovation can be efforts to support innovation by businesses Dr. Nicholson is a Member “internally generated” but it often (for example R&D subsidies and tax breaks, of the Order of Canada. results from adopting and adapting incentives for venture capital, programs appropriate innovations that originate to promote collaboration with university 2 Simply coming up with a elsewhere. Unfortunately, incentives researchers) are not important – but their bright new idea or invention and cultures in public service organisa- effects are indirect. We are arguing that much is not sufficient to qualify as tions are too often hostile to innovation greater attention needs to be paid to direct innovation. The new ideas and discourage the experimentation actions that the public sector in general, and must eventually “work” – i.e. and calculated risk-taking required to the federal government in particular, can result in improvements in achieve it. take to improve overall Canadian innovation the efficiency, effectiveness and productivity. or quality of outcomes.

12 WHY HAS PUBLIC SECTOR INNOVATION BEEN OVERLOOKED? The current emphasis on A cynic might argue that governments simply wish to evade responsibility and keep the focus accountability in the public sector on the private sector as the source of Canada’s weak innovation/productivity performance. further discourages innovation And productivity growth – that is, the annual percentage change in output per hour worked prices.3 When computing their contribution – has, indeed, been very weak. Between 1984 to GDP, statistical agencies, essentially by and 2009, productivity in the business sector default, define the output value of most pub- grew at an average of only 1.1% per annum, or lic services as equal to the monetary value half the rate in the US. Between 2005 and 2009 of the wages, capital and other purchased it did not grow at all. inputs that go into their production. With Cynical interpretations aside, there are output thus defined as equal to input, total more fundamental reasons why the innova- productivity – which is the ratio of output to tion/productivity agenda has not resonated input – is always equal to one. Thus measured inside the public sector. (multifactor) productivity does not grow. Foremost, perhaps, is a philosophical (or There is an old adage that “what gets ideological) view that the public sector is measured gets done”. Without available simply not about productivity or the kind of measures of productivity improvement, innovation that is directed toward improv- it is much harder to design incentives ing efficiency. While this is patently untrue, to stimulate the kind of innovation that the priorities and incentives in most public yields productivity growth. Considerable sector entities do not, in practice, promote effort is nevertheless underway in some innovation. Most public sector entities have countries – for example the UK, Scandinavia highly risk-averse cultures and disincentives and Australia – to develop appropriate and to match. This is due in part to the dispropor- operationally practical measures of output tionate emphasis that the media and political and productivity for several types of public opposition place on “failures”, coupled with services (notably health, education and public resignation in the face of services that municipal services). The 2008 UK government are merely “good enough”. White Paper, Innovation Nation, stated that: More rationally, risk aversion is due to the “The Government is uniquely placed to high stakes involved given the sheer scale of drive innovation in public services, through many public sector activities: failure can have allocating resources and structuring incen- a major social or economic impact. The gross tives. Major forces such as attitudes to risk, imbalance between risks and rewards thus budgeting, audit, performance measurement inhibits the managed risk-taking on which and recruitment must be aligned to support innovation depends. The current emphasis innovation”. Governments in Canada should on accountability in the public sector has be playing a greater role in this innovative only exacerbated this tendency and further movement. 3 Commercial crown discourages innovation. corporations are a partial There is also a more technical factor at OPPORTUNITIES FOR exception. User fees have play. A fundamental difference between the PUBLIC SECTOR INNOVATION some of the characteristics business and public sectors is that most Below we highlight four key areas that would of prices but they are public goods and services are provided free benefit enormously from greater public generally not determined at the point of consumption. There are no sector innovation. While these involve all via competitive market competitive markets to gauge their value via jurisdictions, and often the provinces or processes.

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municipalities are most directly responsible, embraced by the multitude of stakeholders we highlight the specific role of the federal in Canada’s various healthcare systems. government. One especially puzzling feature of our present system illustrates the difficulty we have in doing this (and the clear need for The challenge is to channel an innovative approach). In spite of readily available evidence and best practice guide- the mounting global torrent lines, treatment approaches for virtually every medical condition vary widely even of data and experience within small geographic regions (e.g. among neighbouring hospitals in a city). Several in healthcare innovation into factors contribute to this paradox: physicians are heavily influenced by the treatments locally-relevant best practices in vogue when they were first trained; the supply of treatment facilities (e.g. beds, diag- nostic services) affects treatment choice as do 1. Healthcare services implicit financial incentives (e.g. physician- In 2009 Canadians spent $175 billion on owned services); busy doctors may simply be healthcare, an amount equivalent to 11.4% unaware of current best practice or there may of GDP. Despite some modest efforts to bend not be a solid consensus as to what is “best”; the cost curve, healthcare spending – driven and of course patient variability militates by technology, demographics and public against a formulaic, textbook approach. expectations – continues to outpace by some To address this problem the federal margin the growth of both the economy and government could establish a system loosely government revenue. Overall it increased by modelled on the “Ag. Reps” employed to 90% between 2000 and 2009 and it now con- disseminate science-based best practices to sumes, on average, about a third of provin- family farms in the early 20th century. With cial budgets. The situation is insidious: the the support of the provinces, a cadre of phy- current fiscal trajectory is unsustainable in sicians (“Med. Reps”) could disseminate the long run but the “crisis” is unfolding only detailed, location-specific and individualized gradually. The urgency of day-to-day pres- data on treatment practices, outcomes and sures trumps the major behavioural changes costs. (These data are already being collected required. in most cases.) Small teams would go from There is no silver bullet to solve this hospital to hospital, and from service to complex problem. Canada should, though, service, meeting face-to-face with doctors, be advantaged in healthcare innovation due administrators and other health profes- to our public insurance model and the fact sionals to discuss variances between their that we have a multiplicity of jurisdictions in particular practices/results and those of which to innovate and experiment. What is comparable facilities and to talk about needed is innovation on many fronts, some accepted best practice. technical, many behavioural and systemic. Although such comparative informa- Fortunately, we do not need to reinvent the tion can readily and confidentially be made wheel. We can benefit from the experiments available on-line, this is no substitute for of others. The challenge is to channel the at least some face-to-face dialogue with mounting global torrent of data and experi- well-informed peers (the Med. Reps), in ence in healthcare innovation into locally- the presence of one’s colleagues. Over time, relevant best practices that will actually be such evidence-based discussions should

14 lead to much greater efficiency, a tighter (“just in case” one might need it), to storage variance around best practices and a more in external memory and online search (that nuanced and circumstantial interpretation can be accessed “just in time”). Information of such practices. Systems of compensation technology creates, finally, a realistic option and other incentives could also be adapted of individually-paced, student-centric learn- to reflect best practice, further affecting ing. The genie cannot be put back in the behavioural change. bottle. Radically new approaches to mass The federal government is best placed education are needed. to lead this initiative in view of the broad national benefit. It is also the agent that is best able to draw on data and expertise from How do we inculcate the across the country and to disseminate the lessons learned most widely. The federal critical faculties appropriate for government should provide the majority of funding, with some cost-sharing from an information-besotted culture? provinces as they decide to opt in. But which approaches are likely to work, 2. K-12 education and what do we mean by “work” in this Unless it is crowded out by health spending, context? There are theories, and plenty of the cost of K-12 education in Canada – passionate advocates on all sides, but the $51 billion in 2009, or a little less than 10% inconvenient truth is that we simply don’t of total provincial and federal government know. So the field of education cries out program spending, is fiscally manageable, for realistic experimentation and open- thanks in part to moderating demographic mindedness. Nowhere is there a greater pressure. The overwhelming issue is there- need, and more exciting opportunity, for fore not financial, but finding the best way public sector innovation. to educate successive generations of digital Some of this has been happening from the natives. How do we hold their attention? ground up, thanks to the commitment and How do we inculcate the critical faculties ingenuity of individuals and small groups appropriate for an information-besotted of teachers. But the inertia and inherent culture? How do we equip them to exploit the conservatism of the education establishment mind-amplifying potential of information will not yield to isolated grassroots innovation. technology? Top-down, determined leadership is needed The stakes are monumental. The base to discover and eventually to implement a of skills and cultural preparation that we new education paradigm. While we cannot instil today – in schools, at home and in the move too quickly, because we do not yet community – will substantially shape know what is appropriate, we must not con- Canada’s stock of human capital, and thus tinue to plod along with traditional models. our capacity for innovation and responsible We require a sense of urgency. citizenship, for the next four to five decades. A major commitment to focused and The traditional teacher-centric, lock-step practical research is called for. All govern- classroom paradigm is no longer appropriate. ments in Canada have roles to play but the Technology puts virtually all codified human federal government, in collaboration with the knowledge a few mouse clicks away (at least provinces, is best positioned to lead a national in principle). This fundamentally transforms research strategy toward a new education the nature of fact-based knowledge acqui- paradigm appropriate for the digital age. This sition: from storage in one’s own memory might begin with the creation of a “Canada

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Foundation for Innovation and Research in years of heaviest infrastructure invest- Education” (C-FIRE), analogous in concept ment (1962 – 1973). Professor James Brox (but not necessarily in modus operandi) to of the University of Waterloo has mod- the Canada Foundation for Innovation. elled the impact of public infrastructure on manufacturing productivity and come to broadly similar conclusions. Investments in public The message of these findings is: (i) that investments in public infrastructure need to infrastructure need to be given be given greater priority in the innovation/ productivity agendas of governments in greater priority in the Canada, and (ii) that the hiatus in investment since the 1970s has left an infrastructure defi- innovation/productivity agendas cit that needs to be addressed systematically. (While the recent economic stimulus mea- of governments in Canada sures were a good start, their main objective was to “make work” and they were designed As in the case of healthcare, Canada is to be temporary). well-placed to be a global leader in education A new, long-term infrastructure invest- innovation by virtue of our multiple jurisdic- ment strategy must encompass the municipal, tions (which create opportunities for realistic provincial and federal governments.5 It experimentation); our cultural and linguis- should be undertaken with the promotion tic diversity; and our ICT-savvy population. of productivity growth as a principal objec- The great benefit of being in the vanguard of tive. Thus it should focus on issues such as education innovation would be: (i) a head- how to facilitate the movement of Canadian start in building, from a Canadian perspective, products to new high-growth markets. And the appropriate skills for the future, and (ii) a it should be innovative. For example, we proving ground to help Canadian developers should strive to develop and use new high- of new education products (such as the white performance construction materials and 4 Brox, J. (2008) “smart” boards produced by Calgary-based methods (building codes must become more “Infrastructure Smart Technologies). innovation-tolerant), to incorporate ICTs to Investment: The create “smarter” infrastructure and to be Foundation of Canadian 3. Public infrastructure more energy-efficient. Competitiveness”. IRPP In 2007, the per capita stock of public In almost every case there will be oppor- Policy Matters. Vol. 9, no.2. infrastructure in Canada was about 23% tunities for public–private partnerships, the below the peak achieved in 1980.4 Apart optimal structuring of which will also require 5 Approximately 55% from the general public inconvenience and innovative approaches. Such partnerships not (by value) of public potential safety risks this entails, inadequate only facilitate business sector productivity infrastructure in Canada investment in public infrastructure has very but also build the capability of Canadian is within municipal significant economic consequences. companies to compete in the burgeoning jurisdiction, 45% is In 2009, Wulong Gu and Ryan Macdonald global market for infrastructure planning, under the provinces, of Statistics Canada analysed the impact engineering and construction. and only about 5% is on business productivity of government federally owned. The investment in infrastructure. They concluded 4. Regulation federal contribution to that over the period 1962 – 2006, this accounted, The examples thus far have focussed on infrastructure investment on average, for 9% of labour productivity the public sector as the delivery agent. But is now largely through growth in the business sector, and that the the innovation agenda must also encompass shared-cost transfers. contribution was much greater in the early the public policy function itself. The exercise

16 of this has stagnated over the past 25 years, on regulating, rather than deregulating. at least relative to the remarkably innovative Second, regulation begets regulation. This decades after World War II. New thinking – is particularly true for attempts to restrain including a fundamental reappraisal of our market behaviour, such as supply manage- approach to regulation – is badly needed. ment in the agricultural sector. Competition [As a starting point, we should dust off the inevitably keeps breaking out in unregulated recommendations in the September 2004 areas, begetting new regulations to fill the report of the External Advisory Committee gaps. There is rarely any fundamental reas- on Smart Regulation and give much greater sessment as to whether the entire regulatory priority to the findings of the Competition scheme remains appropriate for the purpose Policy Review Panel (the Wilson panel) for which it was first enacted. that reported more than three years ago in Forward-looking, innovative regulatory June 2008.] policy should seek to identify the many valid Despite some deregulation in the last public policy purposes served by regulation 25 years – principally in the areas of trans- and establish whether there are alternatives portation, energy and, to some extent, that achieve the same regulatory objec- telecommunications – Canada still has a tives with a lesser impact on innovation and significant regulatory burden. Much of this productivity. Such policy should be based on is federally mandated. A 2006 multi-country three pillars: OECD study estimated that if Canada were to have adopted, in each sector of the economy, the least restrictive regulations among the Forward-looking, innovative countries surveyed, the nation’s average annual productivity growth would have regulatory policy should seek been 0.75% higher every year over the period 1985–2003.6 Even allowing for uncertainties to identify the many valid in these econometric estimates, this is an extremely large effect that demonstrates the public policy purposes served very substantial impact that regulation can have on productivity. by regulation Supply management in the agricultural area provides a good example of regulation Standards-based regulation that inhibits productivity and innovation. Most regulations are imposed under stat- By inhibiting the ability to exploit economies utes that delegate to the executive branch of scale and scope, supply management the authority to determine what is in the results in higher prices for consumers and public interest. In effect, they create an adversely affects the ability of food proces- unconstrained discretionary model of inter- sors to compete with imported product. vention. Our belief is that that discretion Another example of negative fallout from should be limited. All regulation, whether regulation comes from foreign ownership economic or social, should instead be subject 6 Conway, P., de Rosa, D., restrictions that deter innovation by prevent- to a rigorous, standards-based test to ensure Nicoletti, G. & Steiner, ing Canadian firms from reaching interna- that it is efficient and minimally intrusive in F. (2006) “Regulation, tional scale. The airline industry in Canada achieving its objectives. Competition and is a case in point. One way to do this would be to rely on Productivity Convergence”. In facing up to this problem, a number the test developed by the Supreme Court OECD Economics Dept. of immediate issues arise. First, regulators in R vs. Oakes (the “Oakes test”). This sets Working Paper No. 509. regulate: regulatory bodies are focused out five conditions that must be met before Paris: OECD.

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governments can be justified in encroaching Accountability on fundamental rights and freedoms under Standards-based regulation is effective only if the Charter (the criteria could apply equally complemented by an objective accountability in the regulatory context). regime for governments and regulators. Two 1. The intrusion or limit must have a things are required. First, the Oakes test must pressing and substantial objective. be legally binding on all regulatory agencies. 2. The limit must be proportionate Second, affected parties must be permit- to the objective. ted to challenge an agency’s compliance 3. The limit must be rationally with the test and there must be an effective connected to the objective (i.e. the legal review mechanism. In principle, the government must demonstrate how review function might be handled by the the objective would be advanced). courts were it not for the fact that courts 4. The limit must be minimally impairing in Canada – as contrasted, for example, with (i.e. it must interfere to the minimum the US – have adopted an extreme curial extent with normal activity). deference when reviewing activities of all 5. The positive outcomes of the intrusion specialized regulatory agencies. must outweigh its negative effects. An appropriate alternative review body for federal regulatory initiatives would be the Competition Tribunal. The Tribunal has It is time for a number of advantages: // it comprises judges and non-judges, the federal government to so specialized sectoral expertise can be readily brought in; step forward to reset // its expertise in developing competition policy links well to the objective the regulatory agenda of identifying minimally-intrusive regulatory measures; and // because of its Federal Court members, it would likely act with a high degree of fairness and rigour in the application Applying the Oakes test broadly to all of legal tests and standards. policy and regulations would bring much needed discipline and rigour to the regulatory Periodic reviews process. The increased speed of technological and An example of the approach would other change means that regulatory adjust- be the government’s 2006 policy direc- ment must accelerate. There is no evidence tive to the Canadian Radio-televison and in Canada that it has, perhaps not surprising Telecommunications Commission (CRTC). given the powerful bias towards continued In setting telecommunications regulation, regulation and incremental change. the CRTC was required to: (a) rely on market Regulatory regimes therefore require forces to the maximum extent feasible; (b) objective and regular review to determine adopt regulation that was efficient and pro- whether they remain effective in achieving portionate; (c) interfere with the operation of their intended policy objectives. Reviews competitive market forces to the minimum should allow for the possibility that the extent necessary; and (d) ensure regulation regulatory policy framework may need to did not deter efficient entry or encourage be fundamentally amended or even laid economically inefficient entry. to rest. They should be wide-ranging, covering

18 all manner of regulation, and should be con- A CONCLUDING OBSERVATION ducted by objective third parties to avoid the The objective of this paper has been to build dangers of regulatory capture (a symbiotic the case for a powerful commitment to inno- relationship developing between regulator vation across the public sector in Canada. and regulatee). Because part of the objec- Throughout our nation’s history there have tive is to ensure that regulation does not been epochs of spectacular public sector stand in the way of market forces, it may creativity (for example opening the West, be appropriate to involve the Commissioner binding the country together with crown of Competition (either as an advocate or initiatives in transportation and communi- “friend of the court”, or, possibly, as the cations, creating Canada’s unique model of lead reviewer). the modern welfare state, defining our citi- It is time for the federal government to zenship through the Charter of Rights and step forward to reset the regulatory agenda. Freedoms, and establishing a confident role An aggressive, forward-looking approach, in the North American economy through the as outlined above, would have a meaningful Auto Pact and the FTA, then NAFTA). impact on business sector productivity. It Today, the opportunities and challenges would limit non-market distortion to the are different but, as this paper has sought minimum needed to achieve regulatory to illustrate, no less in need of imagination objectives and, by vigorously promoting and commitment. The public sector needs competition, it would spur businesses in to get its “mojo” back. It needs to harness Canada to be more innovative and thus more the talent and idealism of a new generation. productive. The agenda is there. All that’s needed is leadership.

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SOURCES AND REFERENCES Australian National Audit Office (2009) Public Sector Innovation: A Review of the Literature. (http://www.anao.gov.au/bpg-innovation/lit-index.html)

Brox, J. (2008) Infrastructure Investment: The Foundation of Canadian Competitiveness. IRPP Policy Matters. Vol. 9, no.2.

Conway, P., de Rosa, D., Nicoletti, G. & Steiner, F. (2006) “Regulation, Competition and Productivity Convergence”. OECD Economics Dept. Working Paper No. 509. Paris: OECD.

Council of Canadian Academies (2009) Innovation and Business Strategy: Why Canada Falls Short. (http://www.scienceadvice.ca/en/assessments/completed/innovation.aspx)

Education Week (2011) Technology in Education, 1 September, 2011. (www.edweek.org)

Gawande, A. (2009) “Testing, Testing”. The New Yorker, 14 December, 2009.

Gu, W. & Macdonald, R. (2009) The Impact of Public Infrastructure on Canadian Multifactor Productivity Estimates. Ottawa: Statistics Canada.

National Endowment for Science, Technology and the Arts, UK (2011) Innovation in Public Sector Organisations. (http://www.nesta.org.uk/about_us/assets/features/innovation_in_ public_sector_organisations)

United States Department of Education (2010) Evaluation of Evidence-based Practices in Online Learning: A Meta-analysis and Review of Online Learning Studies. (http://www2. ed.gov/rschstat/eval/tech/evidence-based-practices/finalreport.pdf)

Wennberg, J.E. (2010) Tracking Medicine: A Researcher’s Quest to Understand Healthcare. Oxford: OUP.

20 CANADA’S PRODUCTIVITY AND INNOVATION FAILURES: QUESTIONING THE CONVENTIONAL WISDOM JIM STANFORD

Traditional economists believe that unreg- Until the financial crisis and resulting Jim Stanford is an economist ulated, competitive markets are the best recession of 2008 – 09, of course, the US economy with the Canadian Auto Workers, mechanism for allocating economic resources was often held up as the prototype of a rational Canada’s largest private-sector (capital, labour, etc.) and ensuring that they are and efficient, if unforgiving, market-driven trade union. He received his PhD in used to maximum human benefit. They believe economy. US productivity growth was high, Economics from the New School that these private markets are inherently the standard story went, because Americans for Social Research in New York, efficient and self-adjusting. The best thing have freed markets to work their magic. If and also holds economics degrees for government to do is set stable “ground we want high productivity too, we should do from Cambridge University and rules” for the operation of markets (protecting the same thing. This storyline was never fully the University of Calgary. He property rights, and so on), and then get the consistent with the facts: many other coun- writes an economics column for heck out of the way – letting the forces of self- tries with big government, high taxes, and the Globe and Mail and is a mem- interest and competition take care of the rest. stronger government regulations demonstrate ber of CBC TV’s regular National When it comes to Canada’s long-standing productivity and productivity growth records News economics panel. His book, preoccupation with improving our dismal equal or superior to the US. And the debacle of Economics for Everyone, was record on productivity and innovation, the the financial crisis and subsequent stubborn published in 2008. standard prescription of these traditional recession have obviously reduced the appeal economists is, therefore, clear. To improve of the US approach.1 1 Canada’s claim to fame efficiency, improve markets. Eliminate the Nevertheless, the traditional faith of econ- through that difficult period “distorting” effects of taxes. Eliminate regula- omists in markets ultimately underpins the has been that we avoided bank tions or barriers to full competition (through dominant trend in Canadian policy in recent failures and hence experienced free trade agreements, deregulation of product decades, and explains why Canada’s overall a less painful recession than markets and business conditions, and other society has become more market-sensitive, did the US. It is interesting that efforts to “cut red tape”). Use “tough-love” even market-dominated, during this period. Canada’s stronger banking labour and social policies to strengthen During this time we have also become more regulations and our publicly- personal incentives and produce a more similar to the US. For example, the Conference owned mortgage insurer are disciplined, “flexible” labour market. That will Board of Canada recently reported that income acknowledged to be crucial then unleash the full potential of the private inequality in Canada was growing faster than factors in explaining that sector to innovate and optimize. and converging with the US, undermining success.

21 THE CANADA WE WANT IN 2020 INCREASING INNOVATION AND PRODUCTIVITY

change and urbanization. Those were years when Canadian governments grew sub- What if markets work more stantially (relative to GDP), regulations were strengthened, enormous investments were productively and creatively when made in public infrastructure and public services, union membership expanded rapidly, they are guided, supported, and tax rates increased. The convergence reached a peak in 1984, when Canadian private and constrained? sector productivity reached over 90% of US lev- els. But then the trend reversed, and Canadian Canada’s traditional reputation as a more productivity growth fell consistently behind US egalitarian society.2 Ironically, however, the levels – to the point today where our average 2 How Canada Performs, more vigorously we have pursued the vision of private-sector productivity is only 70% of US September 2011. (http:// a self-adjusting, disciplined market economy, levels. www.conferernceboard. the worse our productivity and innovation Ironically, the reversal in that trend coin- ca/hcp) performance has become – relative to both cides with a landmark exercise in Canadian the US and the broader set of industrialized economic policy-making that played a sig- 3 Sharpe, A. (2010) “The nations. As illustrated in Figure 1, over the nificant role in ushering in a more “rational,” Paradox Of Market- last decade, Canada ranked 30th out of the 34 market-oriented approach to most policy Oriented Public Policy countries in the Organization for Economic matters: the Macdonald Commission.4 Its and Poor Productivity Cooperation and Development (OECD) core recommendations – to enter a compre- Growth in Canada”. CSLS according to average annual growth in labour hensive free trade agreement with the US, Research Report 2010-01, productivity. and to restructure social programs so as to p.iii. (http://www.csls.ca/ This seeming contradiction between reduce their “distorting” impact on labour reports/csls2010-01.pdf) Canada’s increasingly business-friendly policy markets – are fully consistent with the mar- environment, and the failure of the resulting ket-centred lens used by traditional econo- 4 Royal Commission on empowered private sector to deliver innovation mists. Continental free trade was explicitly the Economic Union and and productivity growth, has puzzled many of premised on the grounds that it would help Development Prospects the economists who advocated market-driven to eliminate Canada’s residual productivity for Canada, tabled before approaches. For example, Andrew Sharpe of disadvantage relative to the US. The resulting the Mulroney government the Canadian Centre for the Study of Living agreement, signed in 1988, was then sold in 1985 following three Standards (CSLS, Canada’s foremost experts on to Canadian voters (in the famous “free years of consultations and productivity) writes of the “paradox” of poor trade election” of that year) with the help research. productivity performance in our increas- of quantitative economic models which ingly market-oriented economy.3 The Centre’s explicitly built in the assumption that free 5 For more on the use, own data indicate that Canada’s productivity trade would enforce the harmonization of and misuse, of economic performance began to weaken at precisely the Canadian productivity levels with the US.5 models in selling free point in history when Canadian policy-makers In practice, free trade and the restructuring trade agreements, embraced a more hands-off, laissez-faire of social programs have not harmonized our see Stanford, J. (2003) approach. productivity with US levels – and both may, “Economic Models and Figure 2 plots average labour productivity in fact, have undermined it. Indeed, Canada’s Economic Reality: North in Canada’s business (private) sector, as a productivity differential relative to the US, American Free Trade proportion of corresponding productivity which was supposed to disappear under free and the Predictions of levels in the US, as estimated by the CSLS. trade, has tripled since 1985. Tax cuts, dereg- Economists”. International From the 1960s until the mid-1980s, Canadian ulation, privatization, cutbacks in income Journal of Political productivity was catching up to US levels, security programs, and government downsiz- Economy 33(3), 28-49. fuelled by rapid industrialization, sectoral ing have not done the trick either.

22 Average annual labour productivity growth, selected OECD countries 2001 – 2010

Korea US Sweden Finland Japan UK Netherlands Australia Spain France Denmark Germany Belgium Canada Italy

- 1.0 % - 0.5 % 0.0 % 0.5 % 1.0 % 1.5 % 2.0 % 2.5 % 3.0 %

SOURCE: Author’s calculations from OECD, Economic Outlook (2011), Table 12.

Figure 1

Economists who are puzzled by the seem- productive and innovative outcomes? ing contradiction between business-friendly There is a theoretical basis for this and supposedly productivity-enhancing approach in the economic literature on the so- policies, and the failure of Canadian produc- called “developmental state.” The idea, based tivity to improve, search for some remaining on the successful state-led industrialization of imperfections or residual market impedi- several East Asian and Latin American econo- ments to explain the failure of Canadian mies in recent decades, is that innovative, productivity and innovation to take off. productivity-enhancing growth in globally- But what if the starting assumption of their competitive, value-added industries will not model – namely, faith that the unconstrained generally occur spontaneously as a result of operation of private market forces is the the freeing of market forces and “getting prices most efficient, innovative way to organize right.” In fact, historical experience suggests economic activity – is not justified? What if, that the “visible hand” of government inter- in fact, markets work more productively and vention, manifested in a wide range of forms, creatively when they are guided, supported, is more strongly associated with qualitative and constrained, rather than simply being and quantitative economic progress. unleashed? What if the best approach is to The laissez faire policies advocated inter- challenge and direct markets toward more nationally under the so-called Washington

23 THE CANADA WE WANT IN 2020 INCREASING INNOVATION AND PRODUCTIVITY

Average labour productivity, business sector, Canada vs. US, 1947 – 2010

100 % Macdonald Commission Reports 90 %

80 %

70 % Canada (% of US levels)

60 % 1945 1950 1960 1970 1980 1990 2000 2010

SOURCE: Centre for the Study of Living Standards, www.csls.ca.

Figure 2

Consensus (and aped in Canada through the policy over the last quarter-century and the pursuit of free trade agreements, business and simultaneous decline in our absolute and personal income tax cuts, the weakening of relative productivity performance. Our poor income security policies, etc.) have in fact been performance, from this viewpoint, is a conse- associated with weakness in growth, economic quence of our liberalization – not a paradox. structure, and productivity. Countries which Consider Canada’s dismal ranking among have more successfully transformed their role OECD countries according to average produc- in global markets, developed innovative indus- tivity growth over the last decade (discussed tries and expanded productivity (from South above and illustrated in Figure 1). Most of Korea to Brazil to Finland) have generally done the countries that did better than Canada on so on the strength of conscious, interventionist that criterion demonstrate larger government, strategies. higher taxes, and more intrusive regulations than Canada. Indeed, the only countries that did worse than Canada in this period were Interventions must New Zealand, Luxembourg, Mexico and Italy – three of which are marked by even smaller, be smart, efficient, less intrusive government than Canada. Of course, large government by itself is no more and disciplined a guarantee of productivity success than small government (as evidenced by the case of Italy). From this perspective, there is no contra- Interventions must be smart, efficient, and diction between the overwhelmingly market- disciplined. But both the international and friendly orientation of Canadian economic the Canadian experience suggest clearly that

24 market forces on their own cannot be counted // Deindustrialization The flip side of on to guide the economy toward its innovative, Canada’s emerging resource-dependence efficient potential. has been a dramatic erosion of our I attribute Canada’s lousy innovation and manufacturing base, experienced over productivity performance over the past decade the same period. Indeed, a key factor to several aspects of the current market-driven in that deindustrialization has been the structure of our economy: impact of a dramatic appreciation in the Canadian currency which has made // Growing dominance of resource extraction Canadian costs look 65% more expensive Led by surging global commodity relative to international benchmarks prices, the most vibrant sector in than they appeared in 2002. That appre- Canada’s economy in the past decade ciation, in turn, is in large part the result has been resource extraction – especially of Canada’s resource-dependence – and minerals, and above all petroleum. in particular the perception among Immense profits have been enjoyed currency traders that the Canadian dollar by some stakeholders from this is now somehow a “petro-currency.”8 resource boom. But in terms of inno- Some “tough-love” economists pre- 6 Author’s calculations from vation, productivity and sustainability, dicted that an appreciating currency Statistics Canada, CANSIM the growing resource-dependence would foster productivity growth (by Table 3830011. of Canada’s economy leaves much to preventing exporters from relying on be desired. an “undervalued” currency to remain 7 See Stanford, J. Resource firms invest far less in competitive, and also by reducing the (2008) “Staples, research and other innovation than cost in Canadian dollars of imported Deindustrialization, and manufacturing firms generally do. capital equipment). Real-world experience Foreign Investment: Productivity in resource extraction trends has not borne out this hopeful judg- Canada’s Economic downward over time, as the most acces- ment: as a soaring currency undermines Journey Back to the sible deposits of resources are exhausted Canadian competitiveness, investment, Future”. Studies in Political and more difficult and costly reserves employment and exports in all cost- Economy 82, 7-34. have to be tapped. (For example, average sensitive industries (including tourism real labour productivity in the mining and tradable services, as well as manu- 8 That perception may and oil and gas extraction industry factures) have declined, reinforcing our not be justified. After all, declined by one-third between 1999 and one-note dependence on resources. despite the energy boom of 2010 – compared to a 15% improvement Manufacturing is a source of higher- the last decade, petroleum in productivity in manufacturing in the productivity, higher-income employment still accounts for only same time.6) The more our economy and accounts for a vastly disproportionate about 3% of Canada’s specializes in resources (with declining share of total business innovation activity. total GDP: shouldn’t productivity), the more our average In 2010 manufacturing accounted for the exchange rate be productivity performance is pulled down. almost half of all business R&D spending influenced more by the The long-run economic and environ- in Canada, even though manufacturing other 97% of our output? mental sustainability of our dependence accounted for just 12% of GDP.9 The on non-renewable resource extraction decline of manufacturing, therefore, has 9 Author’s calculations from also raises fundamental questions about been a key factor behind Canada’s poor Statistics Canada, CANSIM our future prosperity and well-being.7 performance on both counts. Since 2000, Table 3580024. manufacturing has shrunk by over one- third as a share of total GDP in Canada, 10 Author’s calculations from from 19% to 12%.10 Statistics Canada, CANSIM Table 3790027.

25 THE CANADA WE WANT IN 2020 INCREASING INNOVATION AND PRODUCTIVITY

Value-added products as share of total Canadian merchandise exports, 1986 – 2010

60 %

55 %

50 %

45 %

40 %

35 % % of total merchandise exports

30 % 1985 1990 1995 2000 2005 2010

SOURCE: Author’s calculations from Statistics Canada, CANSIM Table 2280043.

Figure 3

of Canadian merchandise exports con- sisting of value-added manufacturing Other successful products (such as automotive products, machinery, and consumer goods) grew exporters pro-actively seek during the post-era, peaking at close to 60% of all exports by the late 1990s. At that to build advantage in key point Canada could claim to have largely escaped the status of “hewer of wood, desirable sectors drawer of water” that marked our tradi- tional, subordinate role in global trade. // The impact of NAFTA-style trade agree- That progress has been reversed, and ments Orthodox economic theories of quickly, in the past decade. Value-added free trade focus on the purported benefits products now account for less than 40% to a country available from trade- of total exports; the bulk of our export driven specialization in the industries portfolio is once again made up of unpro- corresponding to its so-called “compar- cessed or barely processed resources ative advantage.” Canada’s comparative (agriculture, forestry products, energy, advantage in the eyes of global markets minerals, bulk ores, etc.). Energy exports is clearly in the production and export alone now account for one-quarter of non-renewable resources. The effect of Canada’s total exports (triple their of laissez faire trade deals has clearly share in 1999) and Canadians now been to accentuate this pigeon-hole. As produce more energy for export than for illustrated in Figure 3, the proportion our own use.

26 A key goal of the original 1988 the host economy in unpredictable (and Canada–US trade deal was precisely to undesirable) ways; in Canada’s case, this secure long-run US access to Canadian is manifested in the clear and growing energy (as reflected in the infamous and concentration of foreign investment in unprecedented “proportional sharing” resource industries. clause of that deal). Subsequent trade Canada’s recent relaxation of regula- deals have clearly reinforced the grow- tion on incoming foreign investment ing reliance of our foreign trade on the has been associated with a large inflow extraction and export of non-renewable of such investment, aimed particularly resources – not to mention constraining at the resource extraction and bulk com- (to some extent, but not totally) the abil- modity sectors.11 On balance, how- ity of government to moderate or reverse ever, despite high-profile takeovers of that dependence. resource companies, more capital has I stress that it is not international left Canada than entered it during the trade per se which is the source of this post-free-trade era (with the result that weakness: China, Korea, Brazil, and Canada’s net foreign investment posi- other successful industrializers all rely tion has shifted more toward surplus heavily on exports as an outlet for the than deficit). A disproportionate share production of targeted high-value sec- of that outflow of capital from Canada to tors. However, while these countries other countries has been associated with have exploited trade opportunities as offshore investments by Canadian banks. part of their broader industrial strategy, I would argue that none has practiced “free trade” in the laissez faire spirit of How do you support the NAFTA. Other successful exporters of value-added products do not sit back “national champion” companies? and wait for the laws of “comparative advantage” to dictate what they will sell to Using every policy lever the world. By contrast, they pro-actively seek to build advantage in key desirable in the toolkit sectors – namely, those characterized by increasing returns, technology-intensity, In general, Canada possesses less trade-intensity, and positive regional than a proportionate share of successful, externalities. globally-engaged multinational firms. The very few exceptions (RIM, Magna, // Foreign investment and the dearth of Bombardier) tend to prove the rule. This Canadian-based multinationals Foreign dearth of home-grown, globally-success- investment has complex effects on ful firms, which I argue is the flip side of productivity. Economic evidence suggests unregulated inflows of foreign invest- 11 Since the Investment that, other things being equal, incoming ment (and the resulting unhelpful impact Canada Act was foreign investment is generally associated on our overall industrial structure), implemented in 1984, with productivity improvements in the undermines our innovation, productivity only two foreign takeovers host country (thanks to new technology and trade performance. Don’t get have been turned down and other firm-specific attributes which me wrong: Canadian investments by (out of 1650 reviewed the multinational brings to the industry). foreign-owned firms can add mightily to applications, and over On the other hand, foreign investment our prosperity and productivity (think 14,000 acquisitions in may also alter the industrial structure of of our auto assembly sector, one of our total).

27 THE CANADA WE WANT IN 2020 INCREASING INNOVATION AND PRODUCTIVITY

Unfortunately, the performance of Merely striving to Canada’s business sector on this score has also been disappointing. Business construct an amenable investment as a share of Canadian GDP has declined markedly in recent years. economic and social context And the phenomenon cannot be blamed on inadequate profits or excessive taxa- for private business has tion: pre-tax corporate profits have increased as a share of GDP, and that simply not worked trend has been reinforced by a decline in business taxation (producing a two-fold rare productivity success stories… and improvement in after-tax profitability of 100% foreign-owned!). But it is equally Canadian businesses).12 Business profits clear that we need to be deliberate and in Canada are higher than in the US (per- active in assisting promising Canadian- haps partly due to the ready abundance based firms to succeed on the global of lucrative resource opportunities), yet stage – the same way that other small Canadian firms consistently invest less countries (such as Korea, Netherlands, in real capital (not to mention innova- Sweden, and Finland) have done, and in tion and intangible capital) than their US regulating incoming foreign investment counterparts. to maximize its productivity upside. Explaining the weakness of business 12 See Stanford, J. (2011) How do you support “national investment in Canada, despite strong Having Their Cake and champion” companies? Using every profitability and a very stable, business- Eating It Too: Business policy lever in the toolkit: favourable friendly macroeconomic and policy cli- Profits, Taxes, and access to capital and technology; close mate, is a challenge for economists. What Investment in Canada, alignment with public training and is undeniable, however, is that by this 1961 Through 2010. technology programs; leveraging public metric (as well as others), merely striving Ottawa: Canadian Centre procurement to give these firms a head to construct an amenable economic and for Policy Alternatives. start in their home market; strategic pro- social context for private business, and The gap between corporate motion of their interests through trade then waiting for the private sector to lead cash flow and investment policy (rather than continuing to believe the way to an innovative and productive spending is reflected in like Boy Scouts, on faith, that simply future, has simply not worked. deleveraging and the “following the rules” will help our firms accumulation of liquid succeed). That’s how other exporters, // Lack of sector-focused development strat- assets by Canadian even small countries, have built and egies In earlier decades, Canadian business. expanded their foothold in high-value governments – keen to escape the global markets. resource dependence which was the 13 “Industrial policy” is a legacy of our earlier “staples-based” misnomer for modern // Weak business investment in machinery economy – would intervene proactively strategic development and equipment Economists agree that to foster investment, production and efforts, many of which the concrete installation of new capital export opportunities in targeted high- target sectors of the and machinery is essential to capture value industrial sectors. These policy economy very different most of the productivity benefits of new efforts, often referred to as “industrial from traditional knowledge and technology. There are policy,”13 took many forms and utilized “smokestack” industries. very few innovations that can be accessed many different policy levers: national I prefer the term “sectoral or implemented without investing in preferences in trade deals (such as the development policy.” new machinery. Canada-US Auto Pact), the leveraging of

28 public procurement (as in the Defence flexible – not least in order to avoid the Production Sharing Agreement and strictures on some traditional policy tools similar initiatives), direct public equity that have been imposed by free trade ownership (in the aerospace sector and deals (although those deals leave plenty of elsewhere), and the provision of direct or room for creative governments actively to subsidized technological inputs (which foster domestic investment and sectoral were crucial to the success of early development, as the interventionists in Canadian technology companies such as China, Brazil, Korea, and elsewhere readily Bell-Northern Research or Telesat). prove). The overall goal is more invest- Since the 1980s, these sector-focused ment, innovation, production and exports strategies have fallen by the wayside. in key tradeable sectors. The specific tools Canada’s one and only industrial strategy, to be used (investment policy, technology in the wake of free trade, became (by policy, training policy, procurement policy, default) promoting and leveraging our trade policy, even environmental policy) convenient access to the US market. Of are limitless, so long as a government has a course, that’s hardly enough to attract commitment to apply them creatively. mobile, innovative industries here: many other jurisdictions make the same claim (including, of course, the US itself!). Sector development The demise of Canadian sector strategizing in the 1990s reflected a interventions must be combination of ideology and fiscal constraint. But abandoning these proac- modern, creative, disciplined, tive efforts ran counter to the practice of virtually all other advanced jurisdic- and flexible tions (including, notably, the US, which has effectively used defence, energy, and other departmental resources to foster US This depiction of Canada’s loss of innova- industrial investment and innovation). tive leadership as the result of competitive A recent review of innovation activity market forces (rather than their inhibition) by Canadian businesses concluded that runs contrary to the conventional wisdom policy-makers should “support areas of in my profession. However, it is consistent, particular Canadian strength and oppor- I argue, with the experience of most of the tunity through focused, sector-oriented countries (both developing and advanced) strategies,” following the experience of that have successfully achieved structural past success stories in this regard (such change, export success in innovative sectors, as automotive, aerospace, and telecom- and a consequent boost in living standards munications).14 Sector development and economic opportunity for their citizens. interventions must be modern, creative, To meaningfully address and reverse the disciplined, and flexible. continuing failure of Canadian innovation The sectors targeted will differ from and productivity we therefore need to adopt those in the past: we must pursue invest- a more open-minded approach to economic ment and production opportunities in policy. We must set aside our expectation 14 Council of Canadian sectors like biotech, green energy, telecom that private market forces will produce an Academies (2009) equipment, public transit equipment, optimal, innovative development trajectory. Innovation and Business and other modern, growing, technology- Instead, we should view effective public Strategy: Why Canada Falls intensive sectors. The tools must also be interventions and leadership as a key asset Short, p. 211.

29 THE CANADA WE WANT IN 2020 INCREASING INNOVATION AND PRODUCTIVITY

in nurturing investment and growth in the We should abandon the faith that NAFTA- more desirable industries of the future – rather style trade deals will boost innovation-intensive than as a barrier or inhibitor to private sector industries here; quite to the contrary, these innovation and accumulation. This will require agreements are clearly reinforcing the a longer-term, deliberate effort to rebuild the deindustrialization and emerging resource- capacities of federal and provincial agencies in dependence of the national economy (and this regard (which have atrophied after decades future potential agreements, such as with of ideological and fiscal neglect). Governments the EU and Korea, would clearly have the must be equipped with both the resources and same effect). Instead, Canadian trade officials the business acumen to play an effective role should take a page from Chinese and Brazilian as a full partner in high-value developments. strategists, to maximize the opportunities for Some examples already exist: the government domestic exporters through reciprocal trade of Newfoundland and Labrador has creatively and export-oriented development plans, fostered provincial investment and value- rather than blithely assuming that “free” trade added capabilities in the mining and energy will lift all boats. sectors, through the use of public equity and Finally, government should work with all in other ways; the Ontario government has stakeholders (business, labour, educational stimulated a provincial green energy industry, institutions and others) to devise focused supported by pro-active measures in energy strategies to promote the presence of key supply, pricing, and domestic content. valuable industries here – and to nurture Canadian-based globally-oriented firms in those industries. We should abandon All these strategies have been derided as “picking winners” by a generation of the faith that NAFTA-style market-worshipping economists, who believe that only the private sector can pick winners. trade deals will boost innovation- (In fact, the private sector has done a terrible job of picking winners … as almost any mutual intensive industries fund investor can attest!) But the evidence is clear that we cannot continue to wait for the We must continue to make world-class forces of unregulated private competition to investments in public education, training, and develop Canada’s economy in a sustainable, research (Canada’s record on this score is quite diversified manner. If we want to maximize positive). But we must do a much better job Canadians’ potential for innovation and of ensuring (including through public-private productivity, we will have to collectively step ventures) that the fruits of those efforts are into the fray and make it happen. utilized in the made-in-Canada development of high-value industries and jobs.

30 RISING TO MEET THE ASIA CHALLENGE THE CONTRIBUTORS IN this section all share the of relationships, the more success we will view that Asia is central to Canada’s prosper- have. His paper gives a very real sense of the ity and economic future. The challenge is how dynamism and plasticity of both commercial to accelerate development of the economic, and non-commercial relations with Asia and cultural and social links between Canada and between Asian countries, and the diversified Asia that will ensure that Canada plays a key approach that is required for Canada to get role in the Asian century that is upon us. These ahead. are not old-style, bilateral relationships. They are dynamic, multi-stranded ties: Canada needs to establish itself at the heart of Asia as Canada needs to establish a hub nation, a facilitator and a source of new ideas, not just a traditional trading partner or itself at the heart of Asia as resource provider. Despite being a Pacific nation, Canada is a a hub nation, a facilitator and late arrival on the Asia scene. We must there- fore apply ourselves, strategically, to leapfrog a source of new ideas competitors, gain “mindshare” and build up the very visible brand that will be required to All contributors stress the importance expand our presence in this highly competi- not only of economic, but also of cultural, tive arena. and particularly educational, links between Rana Sarkar espouses a path of “frugal Canada and Asian countries. Dominic Barton commercial diplomacy” with leadership reflects on Australian success in building by the federal government. This would fol- education as a major export industry and low the “frugal innovation” model for which a cornerstone of brand-Australia in Asia. Indian companies are becoming known (and Canada should be able to replicate this suc- which is referenced in Kevin Lynch’s paper in cess on several fronts, but it will succeed only this volume). Sarkar’s view is that the more of there is bold, co-ordinated action, led by useful Canada can make itself in addressing the federal government (with a dedicated the problems with which Asian leaders are Minister for Asia at the helm). Barton also grappling (including resource, population proposes that our government should iden- and climate concerns) and the better the tify strategic sectors for support: this is not a Canadian government is able to “curate” the question of picking champions, but rather of diverse groups involved in developing webs understanding where the real opportunities THE CANADA WE WANT IN 2020

for Canada lie, and putting concerted sup- Yuen Pau Woo focuses on Canada-Asia port behind them. Such a strategy may run energy relations as a core aspect of his pro- counter to recent Canadian political inclina- posed “leap-frog strategy”. He calls for a broad tions, but it is the way that Asian countries relationship on energy, that would extend to themselves conduct business. such areas of cooperation as renewables and Our natural resources are clearly one of carbon pricing (echoing the call for decisive our great advantages. How can we make best action made by the authors in the carbon use of them in the Asian context? Nobody area of this publication). He sees progress on wants Canada to become Asia’s forest, quar- developing the Asia Pacific Gateway, includ- ry or well. Yet they can open doors. What is ing energy pipelines to the West Coast, as required is a smart natural resources policy essential to ensure that Canada does not lose that goes beyond the resources themselves out to emerging alternative sources of ener- to encompass technology transfers and gy supply (such as US shale gas). Pau also human resource exchanges. Such a strat- calls for broad human capital agreements egy must take into account the current and between Canada and Asia; such agreements future needs of all Canadians – the building would have at their base the large and grow- of a resource-revenue fed sovereign wealth ing communities that are truly “at home” in fund is one way to do this – and that leads to either Canada or Asia. Finally, he envisions a deepening mutual investment on both sides future in which the city of Vancouver stands of the Pacific. as the undisputed Asia gateway for north America. These are bold visions, but visions that All contributors stress are clearly warranted by the unprecedented change that we are currently witnessing in the importance not only of global economic relations. Although there are differences in detail between the papers, economic, but also of cultural, the clear message conveyed by all three is that this is not a time for incrementalism or and particularly educational, restraint. If it is to maintain its relevance in the global economic order, Canada must find links between Canada its place at the heart of Asia. and Asian countries RISING TO MEET THE ASIA CHALLENGE AND OPPORTUNITY DOMINIC BARTON

Dominic Barton is the THE CHALLENGE much of our history and culture. In addition Global Managing Director of SHIFTING CANADA’S ECONOMY TOWARDS ASIA to trade and investment flows, there are McKinsey & Company. He For the past 250 years, Canada’s deep and flows of students and tourists, partnerships was McKinsey’s Chairman mutually beneficial economic links with its between businesses, links across civil society of Asia from 2004 – 2009, superpower neighbour to the south have and flows across media, culture and sports. based in Shanghai, and he led stood as a cornerstone of our growth and These connections are mutually supporting: McKinsey’s office in Korea from prosperity. While the US will continue to be former students become business and 2000 – 2004. He is a widely a major economic partner and critical ally political leaders, shared cultural references published author and active for Canada, its hegemonic days are likely smooth business relationships, and flows of participant in many interna- over. Over the decades to come, real growth people and ideas create the mutual under- tional fora. Dominic is a Trustee rates in the west (with its aging populations, standing and trust that is fundamental to of the Brookings Institution, high debt, and slowing productivity growth) economic collaboration. Chairman of the International will continue to lag the east. Canada must Asia, on the other hand, feels geographi- Advisory Committee to the therefore build links with the rising powers of cally and culturally distant, despite the fact President of South Korea on Asia – in particular with China and India – as that Canada is a Pacific nation. Links are National Future and Vision, deep as those with its neighbour to the south. sparse and Canadian businesses lag their and recently became a member The size of the Chinese economy is rivals from other OECD countries in terms of of the Singapore Economic expected to rival that of the American Asian penetration: only half of the 20 largest Development Board’s economy by 2020 – 2030. That gives Canada Canadian companies have operations in Asia – International Advisory Council. only a decade or two to accomplish a major 100% of the top 20 American companies do. re-orientation of its economy. Doing this will For the average Canadian executive, continu- require a significant shift, as Figure 1 shows. ing to grow business in the US may seem to The economic links Canada has con- be a lower risk strategy because of the relative structed with the US are broad as well familiarity and ease of this modus operandi. as deep. There is a web of “connective According to a 2011 opinion poll by the tissue”that binds the two countries, not just Asia Pacific Foundation of Canada, 62% of economically, but also socially, culturally and Canadians think that Asia will be vital to the politically. We share a border, a language and well-being of our country. However, recent

33 consumer research conducted by McKinsey as to why Canada has not done more to & Company found that not only did Chinese capitalize on its strengths. consumers not know where Canada was, but Australia, with a similar size population that the only reference they had for the country and economy, has far deeper links with Asia was that it was the “place to go for clean air”. than Canada does. Australia’s trade with The story is similar amongst Asian business Asia grew from 19% in 1990 to 50% today leaders. In a recent set of interviews we (22% with China alone). Only 12% of Canada’s conducted with prominent businesspeople trade is with Asia (C$13bn of exports go to from China, India, South Korea, Indonesia, China as compared to the nearly C$300bn etc. we found that Canada was barely visible. that goes to the US). In 2010, Australia issued Canada is seen primarily as a link to the 159,000 visas to Asian students compared to US and has less “brand visibility” than Canada’s 47,000, thus investing in personal small countries such as Switzerland or the links that will pay off well into the future. Netherlands. Asian executives were confused

Canada’s investment flows with Asia are significantly lower than with the US and Europe

Location for outward Canadian foreign investment in 2009 Origin of foreign investment into Canada in 2009

Asia1 Asia1 Other 7 % 6 % 7 % Other 23 % US 44 % 52 % US 35 %

Europe 26 %

Europe

1 Includes Australia

SOURCE: Asia Pacific Foundation, McKinsey analysis.

Figure 1

34 THE CANADA WE WANT IN 2020 RISING TO THE ASIA CHALLENGE

Canada to participate in Asia’s urban Asian executives were infrastructure build-out? confused as to why Canada has 2 The emergence of 900 million new middle class consumers not done more to capitalize By 2015, over 900 million new consum- ers will join the middle class in Asia on its strengths (mostly in India, China and Indonesia). In urban China, discretionary spending These differences are not due to physical is expected to constitute 45% of a proximity. It takes 14 hours to fly from Sydney household’s total spend by 2025, up to Beijing – the exact same time as from from 34% in 2000. Consumer products Toronto. And it takes 16 days for a container companies around the world (e.g. P&G, ship to travel from Sydney to Shanghai – the Unilever, Nestle, VW, GM) see this as an exact same time as from Vancouver. And historic opportunity. of course email travels instantly from both countries. Question What products and services It is not just OECD countries that are could Canada sell to Asia’s exploding overtaking Canada. In 1990 Brazil’s trade consumer market? with Asia accounted for 5% of its total; today it accounts for 26% (15% with China alone). 3 Shifts in global trade routes and centres Asian countries are developing a broad THE ASIAN OPPORTUNITY range of important trading relation- FROM URBANIZATION TO INNOVATION ships, especially with other Asian In order to identify opportunities for Canada countries, but also with the Middle in Asia, it is important to understand the East, Africa and Latin America. For forces shaping the region. While Asia is example, exports from Asia to Latin incredibly diverse, with a bewildering array America grew 25% per year from 2003 of languages, cultures and systems of govern- to 2008 (versus 11% to the EU and ment, seven major trends can be identified: 6% to NAFTA).

1 Rapid large-scale urbanization Question What possibilities are there The urbanization that is underway in for Canada to be an Asian trading hub? Asia, and especially in China and India, is unprecedented. By 2025, almost 2.5 4 The increasing success of Asian companies billion Asians will live in cities and Asia is home to a growing number of more than 220 Chinese cities will have the world’s top companies. From 2005 over 1 million inhabitants (Europe to 2010 the number of Asian compa- has 35 such cities today). Many global nies in the Fortune 500 list more than companies (e.g. GE, Siemens, UTC, doubled from 37 to 76. Bechtel) are supporting this massive urban infrastructure development. Question How can Canada attract more inward investment from Asia and Question Canada has some of the become the location of choice for the most admired cities in the world and Americas headquarters of top Asian some terrific infrastructure businesses – companies? what opportunities are there for

35 5 The world’s fastest growing talent pool A CANADIAN NATIONAL China and India graduate over 8 million ECONOMIC STRATEGY FOR ASIA new college, masters and doctoral The rapid re-orientation of Canada’s econo- students annually. But this is not nearly my towards Asia must be a strategic act, led enough to support Asia’s continued by the federal government and strongly sup- growth. For example, it is estimated ported by Canada’s provincial governments, that Asia needs roughly 1,500 more its business leaders and its civil society. polytechnic schools. The re-orientation of Canada’s economy towards Asia is unlikely to happen organical- Question Can Canada turn its ly – and certainly not at the speed required. successful education system into a The kind of strategic thinking, action and major export industry? How else might coordination required to achieve this will be Canada benefit from Asia’s talent pool a challenge in Canada’s decentralized system and education needs? of governance. But previous challenges have brought Canada’s government, business and 6 Insatiable resource demand civil society communities together to act Asia’s dramatic growth is putting strong jointly to address major issues. We must do pressure on natural resources especially it again. For without such strategic action, land, energy and water. By 2020, 40% of Canada’s future prosperity and political the world’s arable land may be needed power and relevance are at risk. to feed China alone. Between 2010 and 2030, China’s natural gas usage is expected to quadruple. By 2014, Asia’s The re-orientation of demand for pulp and paper products is estimated to be more than double Canada’s economy towards North America’s demand. Asia is unlikely to happen Question How can Canada supply Asia’s resource needs in a value-added organically way that is environmentally responsible and equitable to future generations In essence, Canada must become more of of Canadians? an Asian-facing nation. In doing so, we must move beyond our current trading pattern with 7 From low cost to high innovation Asia: exporting natural resources and import- With its very large and demanding ing manufactured goods. There must be more consumer base, massively increased value added to the relationship. Australia government and corporate R&D is also resource-rich, but is taking steps to investments and an ability to build new avoid becoming merely a “quarrying nation” industries from scratch, Asia is becom- for China. Canada must do the same. We ing a global source of innovation. have many assets to deploy: our long history as a trading nation, a multicultural popula- Question How can Canadian companies tion, vibrant cities, natural resources, our be innovators in Asia, as well as benefit high quality of life, a successful education from Asian innovations? system and a strong business community. We need to act quickly and aggressively to develop a robust national economic strategy for Asia. While developing and executing

36 THE CANADA WE WANT IN 2020 RISING TO THE ASIA CHALLENGE

such a strategy will be a complex process ic budgets. The UK, for example, recently over several years, there are five steps the re-oriented the budgets and priorities of government might consider to get started: its Foreign and Commonwealth Office away from Western developed countries 1 Establish an Asia Advisory Council and towards Asia. to provide advice on key opportunities and challenges 3 Actively pursue strategies The Prime Minister of Canada should to increase cultural and educational establish an Asia Advisory Council made ties with Asia up of 15-20 influential Asia-based politi- Economic ties are not built by promoting cians and business people (along the lines trade and investment alone; they rest on of the International Advisory Council to a broader base of social and cultural links. the Economic Development Board of Canada currently has no mechanism or Singapore). The group should meet for institution to provide a centre of gravity roughly 1.5 days each year with senior for such efforts. The National Centre on government officials, including the Contemporary Asia, as proposed by the Prime Minster and Finance Minister. A Asia Pacific Foundation, could play such support system for the Council is critical a role. Such a centre, with a sufficiently to ensure that initiatives are pursued ambitious mandate and budget, could and delivered. The Council must also act as a prominent force for increasing the be established as a long-term body with cultural and educational links between terms that exceed the electoral cycle. Canada and Asia. For example, it could: // Promote Asian experiences (exchanges, hosting, language immersion, co-op We need to act quickly terms, internships) for a dramatically increased number of Canadian high and aggressively to develop school and university students. // Encourage a major increase in Asian a robust national economic content in our education systems especially for kindergarten through strategy for Asia grade twelve. // Increase access to Asian language 2 Re-weight diplomatic studies in schools and universities. activities towards Asia // Sponsor a national Asia speaker series In addition, the federal government that would bring prominent Asian should strengthen diplomatic ties businesspeople, politicians, artists between Canada and Asia, as these are and thinkers to Canada and give them critical to opening other opportunities exposure in Canadian media. in Asia. Specific steps might include // Partner with prominent Canadian increasing the number of consulates in business leaders to develop a biennial Asia (especially in some of the 100 or more Canadian-Asian CEO conference. Chinese cities that will enter the top 600 // Encourage the CBC and other cultural cities in the world in the next 15 years), and media organizations to develop increasing the tempo and seniority more Asia content. of official trips to Asia, encouraging // Encourage more Canada-Asia linkages prominent Asian government officials to through the arts and sports. visit Canada and re-allocating diplomat-

37 4 Select five to seven key sectors for focused support to help Canada The government could develop ”global champions” that can compete successfully in Asia actively support strategic I would not encourage the government to “pick winners” or provide direct support sectors that can help drive the to individual companies. However, the government could, in conjunction with re-orientation of Canada’s provincial governments and, ideally, the Asia Advisory Council, identify and economy towards Asia actively support strategic sectors that can help drive the re-orientation of B) FINANCIAL SERVICES Canada’s financial Canada’s economy towards Asia. This system came through the 2008 crisis in is, in fact, a very Asian approach – Asian stronger shape than those of other devel- governments are often mystified that oped economies. Our regulatory system Western governments do not do this and banks are globally recognized as more generally. role models for effective governance Selecting the specific sectors would and risk management. Canada should require further analysis and a fair, leverage that recognition to establish transparent process by the Canadian closer financial ties to Asia. This should government. But based on the trends be a two-way street, with Canadian banks outlined above, there are six that I would having greater access to the growing highlight: consumer markets of Asia and Asian financial institutions channelling Asian A) INFRASTRUCTURE Canada has some of savings and capital into investments the most admired infrastructure in the in Canada. At the governmental level, world. Our cities have consistently been ways should be sought to help support recognized as being amongst the best Asian economies apply Canadian finan- by The Economist’s Most Liveable Cities cial best practices. Efforts should also be Index (Vancouver, Toronto and Calgary made to link and harmonize financial were all listed in the top five this year) and policies and systems, in particular with we have developed some very successful China, India and Indonesia. infrastructure models and companies (e.g. SNC-Lavalin, Infrastructure Ontario C) AEROSPACE Canada has much to offer and TransCanada Corporation). in terms of know-how, products and Federal government officials should services in aerospace. Montreal’s help in introducing Canadian infra- Bombardier is the third largest civil structure companies to senior officials aircraft manufacturer in the world and in the largest Chinese cities. They could we have many successful suppliers to the also encourage partnerships between industry as well. China and other Asian Canadian resource companies and countries are keen to develop aerospace infrastructure firms to build and operate industries. The Canadian government ports, railways, airports and toll roads in could have significant impact by facili- Asian countries. tating the development of business relationships between Canadian and Asian firms in this strategic industry.

38 THE CANADA WE WANT IN 2020 RISING TO THE ASIA CHALLENGE

D) EDUCATION 97% of urban Chinese educational partnerships with Asia just parents expect their children to go to as strongly. university. In 2000, Australia adopted an ambitious strategy to take advantage E) TOURISM By 2020 it is expected that of that opportunity. Today, education there will be over 400 million annual is Australia’s third largest export, repre- tourist trips coming from Asia to desti- senting $18.6 billion for the economy nations globally. Many businesses and and 125,000 jobs in 2009. By comparison, communities in Canada depend on tour- Canada’s global education exports were ism. For example, tourism accounts for only $6.5 billion in 2009, despite the one in eight jobs in British Columbia. fact that Canada is seen in Asia as one of The federal government should the most desirable places to receive an encourage the marketing of Canadian education. tourist attractions in Asia and help ensure Increasing the number of Asian that such attractions are friendly to Asian students studying in Canada has benefits tourists (e.g. language translations, beyond the pure economics: it also raises familiar food options). Canada could also the profile of our country in Asia and look at establishing companies focused provides an avenue for future Asian on the “start-to-finish” experience of leaders to experience Canada firsthand. Asian tourists. In addition to helping to attract Asian students to Canada, the government F) NATURAL RESOURCES The federal gov- should also encourage strong universities ernment should work with provincial and technical schools (such as the British governments and Canadian businesses Colombia Institute of Technology) to to develop a clear position and approach build campuses in Asia. to managing our natural resources and the industries’ relationships with Asia. Canada is the world’s largest producer Canada must of potash, the second largest exporter of wheat and the third largest producer proactively invest in its and exporter of natural gas. We also have the third largest proven reserves of oil resource infrastructure (behind Saudi Arabia and Venezuela) and we should be a major player (and shaper) But Canada will only succeed in in the global agri-food industry. Growing these areas with support at the highest Asian interest in both consuming and level. For example, State Councillor Liu owning Canadian resources is inevitable. Yandong, the highest-ranking woman This presents both opportunities and in China, recently met with US Secretary risks for Canada. Overseas investment of State Hillary Clinton to discuss could help bring down the cost of devel- educational ties with the US. State opment, expand and modernize our Councillor Liu then toured the campus resource infrastructure and create more of MIT with a delegation that included jobs for Canadians. It could also allow China’s Education Minister and signed us to encourage a hub of resource com- an agreement whereby China will pro- panies to set up in Canada. For example, vide 10,000 new scholarships for Chinese Calgary could become a place where students to study in the US. Canada most major oil and gas companies, needs its senior leaders to promote including Asian ones, have important

39 parts of their headquarters (e.g. R&D, natural resource and food companies financing) offices. Canada should also be that are global leaders. Changing this is a hub for major agribusinesses. key to ensuring that the benefits from To take full advantage of this oppor- knowledge, technology and value-added tunity Canada must proactively invest in in the natural resources industries flow its resource infrastructure. For example, to Canada. we cannot build an energy link to Asia, nor become an energy superpower, How will we ensure that future unless pipelines to the West Coast are generations of Canadians benefit built and the necessary export facilities/ from the renewable resources shipping lanes authorized. As the cre- we are extracting today? ation of such infrastructure would cross Many of our most important resources provincial lines and involve a variety of are non-renewable. As Asia and the world stakeholders, the federal government demand more of Canada’s resources, can play a significant role in leading and we must ensure that we are not simply facilitating discussions. spending the wealth of future genera- At the same time, it is imperative that tions. Norway provides an example. In Canada has a long-term plan for manag- 1991 it established a national fund to ing its resource endowment. hold and invest the profits from its oil resources. To date, Norway has put over Such a plan must address three questions: $560 billion in this fund – over $100,000 per person in the country. Only the inter- Under what conditions and to what est is spent so the capital remains intact. degree should foreign ownership of Although Alberta inaugurated a similar Canadian resources be allowed? fund in 1976, oil revenues ceased flowing Canada’s current policy on foreign to it in 1987. Today, Alberta’s oil revenue ownership is unclear to many. Canada (and the income from the remaining has historically allowed the sale of many fund) is funneled into the government of our natural resource companies to operating budget. The Government of foreign ownership (e.g. Imperial Oil to Canada should consider working with ExxonMobil, Stelco to US Steel, Alcan Alberta (and other resource rich provinces) to Rio Tinto). Yet the recent takeover bid to (re)establish such funds to ensure that for Saskatchewan’s Potash Corp. was future generations of Canadians benefit blocked by the federal government. As from our resource endowment. Some resources become more valuable it is portion of interest income from the important that we have a clear position fund income could be used to support on which resources may be sold to the broader re-alignment of Canada’s owners outside of Canada and under economy towards Asia. what conditions. Foreign ownership rules should be designed to support an environment that allows globally competitive Canadian The Prime Minister has champions to emerge (as opposed to protecting uncompetitive local players made, and must continue from global competition). Despite being a natural resource and agri-food super- to make, Asia a priority power, Canada has surprisingly few

40 THE CANADA WE WANT IN 2020 RISING TO THE ASIA CHALLENGE

How do we most responsibly manage cabinet rank responsible for the whole our resources from an environmental of the Asia agenda, cutting across and social perspective? ministries and departments. The The government should continue to work Minister for Asia would be a key contact closely with natural resources businesses, point for Canadian businesses, civil environmental groups, indigenous society and Asian governments. peoples’ groups and local communities In making such an appointment, the to ensure that Canada supplies Asia’s Prime Minister would send an unmistak- growing resource needs in a sustainable able signal that Canada is fundamentally and responsible way. shifting its economic orientation.

5 Appoint a Minister for Asia and –––––––– create a Cabinet Committee on Asia to drive and take accountability for The world is re-balancing towards Asia; this agenda Canada must re-balance with it. Canada Nothing gets done in government has benefited greatly from two centuries without leadership. The Prime of deep links with other Western nations, in Minister has made, and must con- particular the US. Those links will continue tinue to make, Asia a priority. But to be important, but Canada must now there must also be focused lead- rapidly build links with Asia that are at least ership within the Ministry on this as deep, broad and strong. This will not issue. While some cabinet ministers happen without strong federal government have elements of the Asia agenda in leadership. As a convener and leader the their portfolio (e.g. the Minister of federal government should bring together International Trade also has the title major stakeholders to determine how of Minister of the Asia-Pacific Gateway), Canada’s Asia strategy should be formed Asia is just one amongst many issues. In and implemented. We must act quickly the past there was a Secretary of State for and decisively to ensure our place at the Asia within Foreign Affairs, along with table. Canada’s own Asia century must other regionally focused Secretaries of start now. State. However, what I am proposing is something different: a minister with

41 A LEAP-FROG STRATEGY FOR RELATIONS WITH ASIA YUEN PAU WOO

The re-emergence of China as a global power growth. For some, this shift in focus has already Yuen Pau Woo is is a subject that has found its way into the occurred: in a 2010 Asia Pacific Foundation President and CEO of the boardroom deliberations of corporate Canada survey of Canadian businesses in China, 20% Asia Pacific Foundation of and dinner conversations of Canadian fami- of respondents reported that more than half Canada. Pau is an advisor to lies. Chinese-made goods dominate our stores of their global revenues already came from the the Shanghai WTO Affairs and the fact that China is the world’s second People’s Republic. Consultation Centre and the largest economy is now widely recognized by Canadians too are starting to take note. In Canadian Ditchley Foundation. Canadians. a speech delivered shortly before his first visit He is on the Global Council of During the global recession of 2008 – 2009, to Beijing as Minister of Foreign Affairs, John the Asia Society in New York it was continued Chinese demand for com- Baird said: “China is incredibly important to and is a board member of the modities that helped moderate the economic our future prosperity. My government gets it Mosaic Institute. Since 2006, downturn in Canada. While Canadian exports and as Canada’s new minister of foreign affairs, Pau has been coordinator of to every other major market fell in 2009, sales to I get it.” the State of the Region Report, China rose by 7%. An unprecedented surge in But what is it that Canadians “get” about the the flagship publication of the Chinese demand for lumber took place just as rise of China, and of Asia more broadly? And Pacific Economic Cooperation the US housing market was collapsing, saving what are they going to do about it? Not enough, Council. He is also on the edito- the wood industry in British Columbia industry I fear. rial board of Pacific Affairs. from what would have been catastrophic loss- There is no doubt that China looms large es. By May 2011, BC was exporting more wood in the minds of Canadians. The Asia Pacific products to China than to the US. Foundation of Canada’s 2011 national opin- China’s growing importance for Canadian ion poll found that 66% of Canadians agreed exports means that the Chinese market (and with the statement: “the influence of China in indeed other Asian and emerging country the world will surpass that of the United States markets) can no longer be ignored. Indeed, in ten years” (up from 60% in 2010). 62% of it is likely the case that in a number of key respondents agreed that Asia is vital to the well- industries, “tipping points” have been crossed being of Canada, and China ranked second to which will result in sustained corporate the US in terms of importance for Canada’s attention to China, leading to even stronger prosperity.

42 THE CANADA WE WANT IN 2020 RISING TO THE ASIA CHALLENGE

But there are no prizes for recognizing tions, in part because of opposition from the obvious. To “get” that China is a global the Canadian automobile industry. The economic player and that Asia is vital for Americans started their own negotiations Canada’s economic prosperity is simply with Korea more than a year after Canada did, to be on the same page as virtually every and came to an agreement in 2009 – overcom- other major industrialized country. Canada’s ing the objections of their own, much larger, recognition of Asia’s importance has come automobile sector. The federal government belatedly. If some of our industries have recently announced negotiations with India just now reached the tipping point and are on a Comprehensive Economic Partnership beginning to place serious emphasis on Agreement and raised the prospect of free Asian markets, they are doing so at least ten trade talks with Japan. If these negotiations years after their counterparts in comparable end up languishing as the Singapore and economies such as Australia. In the same Korea deals have, Canada’s image in Asia will way, the federal government may now “get be further tarnished. it”, but Ottawa has come late to a party where Our government should send a strong most of the guests have already arrived. signal that Canada does not intend to be The challenge for government policy, left out of the rapidly evolving trade and therefore, is not just to “get it”, but to “get investment architecture of the Asia Pacific ahead of it”. For the federal government, a region, including nascent groups such as the three-year program of policy catch-up should Trans-Pacific Partnership (TPP). 1 Pursuing be combined with an ambitious longer-term trade agreements with Asian countries will program of policy leap-frog. The goal should mean confronting protectionist measures at be no less than for Canada to be the most home, some of which are deeply entrenched. Asia-engaged country in the western world. If nothing else, putting agreements such as the TPP on the domestic political agenda will force a re-assessment of protectionism in The challenge for government Canada and focus attention on the very steep price that is paid for protectionist measures. policy is not just to “get it” There is an urgent need to: // bring trade negotiations with but to “get ahead of it” Singapore and Korea to a successful conclusion; // actively seek membership in the POLICY CATCH-UP Trans-Pacific Partnership; and Trade and investment agreements // investigate trade and investment Canada has no trade agreements with Asian agreements with other Asian partners, countries. Worse, Ottawa has developed a on a bilateral or sub-regional basis, 1 The Trans-Pacific reputation for not being able to close trade for example with the Association of Partnership (TPP) is an deals with Asian partners. Despite starting Southeast Asian Nations (ASEAN). Asia-Pacific regional trade negotiations with Singapore more than a agreement currently being decade ago, a deal has yet to be reached. In Political Engagement negotiated between the US the interim, Singapore concluded twelve There has been no shortage of ministerial and eight other partners agreements with other trading partners, visits to Asian countries since 2009. China (Australia, Brunei, Chile, including the United States, Australia, China, alone has hosted numerous visits by federal Malaysia, New Zealand, India, Japan and Korea. Likewise, the proposed cabinet ministers in the last 24 months and Peru, Singapore, and Canada–Korea Free Trade Agreement is the Prime Minister has made visits to Asia an Vietnam). unfulfilled even after six years of negotia- annual priority. Political engagement with

43 Asian counterparts is an essential part Regional strategy of broader relationship building, and the Canada has been notably absent in discussions government should not be squeamish about on evolving regional architecture in Asia either the frequency or cost of making these and has, until recently, shown no interest regular visits (other countries are not). in joining new regional institutions such Political engagement in Asia should be as the East Asia Summit. Although Canada stepped up in the following ways: is a dialogue partner of the ASEAN Regional Forum (ARF), Ottawa’s participation at ARF // A joint mission to India and China of the meetings has been inconsistent at best. Prime Minister and provincial and ter- Tellingly, a recent ARF initiative to convene ritorial leaders would send a powerful an annual meeting of defence ministers includ- signal of Canada’s commitment to the ed all dialogue partners, but not Canada. region. The Council of the Federation proposed such a mission at its recent meeting in Vancouver. The federal gov- Purely bilateral strategies ernment should act swiftly on this pro- posal, allowing plenty of preparation are an incomplete and potentially time to maximize the impact of such a mission. misleading approach to

// Ottawa should actively court the top crafting an Asia strategy echelon of leaders (including the next generation of political leadership) from Asian regional integration is largely driven China, India, Japan, ASEAN and Korea, by the private sector. The fragmentation bringing them to Canada and exposing and lengthening of supply chains across them to a wide range of Canadian the region have led to explosive growth in capabilities and assets. MPs of all intra-regional trade and investment and parties should also be encouraged to driven closer economic cooperation between 2 Track Two Diplomacy – participate in parliamentary friendship countries. Canadian trade and investment also known as “private- groups with Asian counterparts. In the promotion strategies must therefore take citizen diplomacy”– has same way that previous generations of account of backward and forward linkages become particularly Canadian parliamentarians have built across the region. Intra-Asian exports important in East Asia long-term relationships with American account for more than half of total Asia and involves a wide and European counterparts, engage- exports, with much of intra-Asian trade range of multilateral ment with Asia’s political class should consisting of intermediate goods. Hence exchanges designed to be de rigueur for Canadian politicians. purely bilateral strategies – and the concom- help governments deal Furthermore, the government should itant measures of country-to-country trade with issues ranging from invest in “Track Two” mechanisms for and investment – are an incomplete and economic cooperation policy dialogue with Asian counter- potentially misleading approach to crafting to peacekeeping and parts, as part of a broad-based effort to an Asia strategy. conflict prevention. engage with Asian leaders across indus- A more effective regional strategy requires Kim Beng Phar (2006) try, civil society, and the think-tank Canada to: “Asia’s Informal community.2 Diplomacy”. Harvard // Actively seek a seat at the East Asia International Review. Summit, starting with observer status, (http://hir.harvard.edu/ if necessary. Even if full membership article-authors/kim-beng- is not attainable, there is value in being phar)

44 THE CANADA WE WANT IN 2020 RISING TO THE ASIA CHALLENGE

closely associated with a grouping strategy that is supported at the highest levels that could emerge as the premier body of government and the private sector. Leap- representing Asian political frogging our competitors will also require a and economic interests. commitment to equipping Canadians with the knowledge and skills to be effective in an // Engage more deeply with ASEAN increasingly Asia-centric world. both to enhance Canada’s access to Asian regional fora and to broaden Canada-Asia energy relations Canada’s diplomatic ties in a region Prime Minister Harper has described that is still vulnerable to sub-regional Canada as an energy superpower, but abun- rivalries and security threats (ema- dance does not in itself translate into power. nating not least from the growing However large the resource base, a country economic, political and military that is dependent on one customer is more power of China and India). of a captive supplier than a superpower. Hence the need for Canada to diversify its // Increase the bureaucratic resources energy exports beyond the United States. dedicated to working on Asian coun- Fortunately, Asian demand for alternative tries and on Asia as a region. sources of energy supply is as great as the Canadian need for new, non-North American markets. Accordingly, the federal government Leap-frogging our competitors should: will also require a commitment // Expedite approvals for the building of pipelines to transport oil and gas to equipping Canadians with to the west coast, and for tankers to enter the waters off the west coast to the knowledge and skills to be ship oil or liquefied natural gas to Asia. The review process for these proposals effective in an increasingly should be subject to rigorous social and environmental assessment, Asia-centric world including full consideration of the views of First Nations communities that // Develop metrics for Canada’s perfor- will be affected. It is, however, critical mance in Asia that take into account that over-riding emphasis be given to the nature of regional production Canada’s long-term national interest. networks and the growing integration There is an urgent need to put in place of Asian markets. the infrastructure for export of energy to Asia, given the fierce competition in this POLICY LEAP-FROG marketplace from Central Asia, Russia, If Canada is to increase both private sector and Australia, in addition to traditional market share and, importantly, the “mind Gulf suppliers. Given its abundance share” of Asian leaders on regional and global of shale gas, even the United States may issues, policy catch-up will not be sufficient. be in a position to supply energy to Asia A leap-frog strategy for Asia would target a before Canada does. few key areas in which Canada already has recognized advantages, and leverage these assets through a well-resourced, long-term

45 // Broaden the Canada-Asia energy relationship to include: exchange of Canada’s people-to-people energy-related expertise; cooperation on renewable energy, human resource ties with China are arguably development and labour mobility; and two-way investment. A broad- longer, deeper, and more gauge energy relationship with Asia that addresses many of the region’s profound than those of any other energy security and green-growth objectives is essential if Canada is Western country to establish itself as a serious energy player in the region, indeed as a true Capacity building: education “energy superpower”. and human capital cooperation Canadians may now understand the impor- // Provide leadership on key energy tance of Asia for Canada, but they retain a issues such as carbon pricing, major curious reluctance to invest in learning about infrastructure projects, renewable Asia and Asian languages. The Asia Pacific energy and foreign investment in Foundation of Canada’s 2011 national poll the energy sector. At the root of the found that only 39% of Canadians support various policies towards strengthening “more emphasis on Asia and Asian languages Canada-Asia energy relations is the in the education system”. need for a national energy strategy Major investment is required to ensure that will provide clarity on such issues a more globally-oriented education system, and enable industry and provincial not only in K-12, but also at the post- governments to make long-term secondary level. Foreign student recruitment, investments. curriculum development, overseas intern- ships, and student/faculty exchanges are // Resolve residual uncertainty about already being pursued by institutions across whether foreign investment – and the country. A leap-frog strategy for Asia has especially state-led investment – is to go even further and should include major welcome in “strategic” industries in scholarship programs that enable top students Canada, including oil and gas. While from Asia to spend time in Canada as well Canada should reserve the right to as young Canadians to study in Asia. These reject foreign investment on national activities should be grounded in bilateral security grounds or a broader test of agreements with Asian countries (starting “net benefit”, the overall stance of the with China) that promote cooperation in Investment Canada Act should be to education or, better still, in human capital warmly encourage foreign capital. To more broadly. this end, the requirement in the Act Canada’s people-to-people ties with for special scrutiny of investment by China are arguably longer, deeper, and more state-owned enterprises and sovereign profound than those of any other Western wealth funds should be repealed. country. It is not just the large number of ethnic Chinese living in Canada and Canadians living in greater China. Rather, it is that this is a transnational community that is equally comfortable on either side of the Pacific. It has the potential to connect

46 THE CANADA WE WANT IN 2020 RISING TO THE ASIA CHALLENGE

Canadian and Asian interests in a way that From gateway to gateway economy goes well beyond the narrow lens of “dias- The federal government’s Asia Pacific pora politics”. As an example, over 70 schools Gateway and Corridors Initiative (APCGI), across China already offer Canadian high which kicked off in 2006, signalled Ottawa’s school curriculum to mostly native Chinese commitment to improve the port, road, and students. Building on such existing links, the rail infrastructure of western Canada, in federal government should: order to capture a larger share of in-bound trans-Pacific shipments. The project has // Engage in a strategic dialogue with key been a great success thus far and the ports Asian countries (starting with China) of Prince Rupert and Metro Vancouver can on human capital cooperation. This now compete with American rivals on the initiative should involve not only west coast. Throughput at these ports has schools, universities and colleges, but increased and better handling capacity has also research councils, professional accelerated delivery times to (mostly US) organizations, industry, etc., and destinations. The transportation sector include within its scope objectives has grown and thousands of jobs have been such as: joint training of officials, created. collaboration among research councils, If competitiveness is to be maintained, facilitation of two-way flows of highly- the federal government must continue to skilled workers, and mutual recognition monitor – and where necessary intervene of credentials. in – regulatory impediments, labour disputes, environmental issues, trade actions, and // Promote teaching about Asia and other challenges that affect these trade Asian languages in schools by funding routes. For the APGCI to be the flagship Asia national programs that can be an initiative that it was intended to be, however, adjunct to provincial education cur- it is imperative for the focus to move beyond ricula and which incentivize schools, throughput (such as the number of containers colleges and universities to sharply moving through ports) to the creation of a increase their Asia-related content. “gateway economy” in which value-added activities take place in and around the // Launch a major Asian scholarship gateway. Examples include business initiative, in conjunction with the and professional services, supply chain provinces and the private sector, management, maritime services, green to provide opportunities for 50,000 transportation, education and training, and Canadians to study in Asia over the the establishment of Asian regional head next five years, and for a similar number offices for North America. of Asians to come to Canada. The focal point for development of an Asia Pacific gateway economy should be the city of Vancouver. As the most Asian city outside of Asia, Vancouver occupies a special position in Vancouver has the potential the western world. It is not simply that ethnic Asians make up about 40% of the population; to be a powerful asset in Canada’s it is also that the city as a whole is oriented towards Asia in a way that creates a unique relations with Asia environment for the development of busi- ness, cultural, government and scholarly links with Asian countries. Positioned in this way,

47 Vancouver has the potential to be a powerful // Establish Vancouver as the preferred asset in Canada’s relations with Asia. (but by no means exclusive) venue for In practical terms, this will mean investing Asia-focused events. This is not simply in expertise, cultural institutions, trade about conferencing facilities, which and investment promotion, and convening are already in place, but has to do with capabilities in Vancouver that connect programming high-level visits to the Canada and Asia. It will mean mobilizing city, attracting major conventions a critical mass of people, knowledge, and and festivals, and investing in networks that establish the city as the go-to supporting “soft infrastructure” such place for Asia connections in North America as scholarship and business and and indeed across the western world. While think-tank networks. The federal this idea of concentrating resources in one government is in a unique position to location may be politically difficult, the case attract and host inter-governmental for Vancouver – in geographic, demographic, fora and semi-official meetings that historical, and political terms – is compelling. are part of Canada’s responsibility as a The federal government should therefore: member of Asia Pacific organizations.

// (Re)locate to Vancouver those Together, these actions will put Canada government agencies that have a well on the way to an effective leap-frog significant Asia focus. Such units strategy with regard to Asia in general and should be given high levels of China in particular. Most components of the autonomy and should be treated strategy will require co-operation with other as top-level bureaus rather than levels of government, with the private sector outposts of Ottawa departments. and with civil society. However, federal lead- A newly-established federal “Agency ership is critical, and it has to come from the for Canadians Abroad” could, for very top. The Prime Minister should signal example, be located in Vancouver, a national commitment to Asia by way of a with principal responsibility for major policy statement that is directed not establishing connections with the only to Canadians, but also to Asian leaders. estimated 600,000 Canadian More than a speech about the need to citizens living in Asia. increase business with Asia, this statement should be about Canada’s place in the Asia // Focus on attracting Asian regional Pacific region and Ottawa’s commitment to head offices to Vancouver, in conjunc- be an integral part of its future. tion with provincial and municipal authorities.

48 THE CANADA WE WANT IN 2020 THE BIG CHALLENGE: ADJUSTING TO THE ASIA CENTURY RANA SARKAR

Rana Sarkar is the For future historians it is a safe bet that the in the decades ahead. Nonetheless, the world President and Chief Executive biggest story of the first decade of the 21st we live in, the goods, services and culture we Officer of the Canada-India century will be the re-emergence of Asia – consume, and the way we understand global Business Council. He also not 9/11 or the global financial crisis. The power, will increasingly be created in and serves as a Senior Fellow and vertiginous numbers accompanying Asia’s influenced by Asia. This is a sharp departure Co-Chairman of the Advisory roaring re-emergence inspire mixed reac- from the past. Board for the Munk School of tions in the West: mostly fear and greed, but In this new environment, Canada’s long- Global Affairs at the University occasionally hope. term prosperity and security will depend on of Toronto. Previously, Rana With burgeoning foreign exchange its ability to understand and seize economic was a co-founder and director reserves, high savings rates, active sovereign opportunities in Asia (particularly in the of Rawlings Atlantic Limited, a wealth funds and cash-rich banks and twin giants of China and India, but also in cross border advisory firm, and companies, Asia will increasingly displace countries such as Vietnam and Indonesia). Content Partners, a fast growing the West as the world’s provider of capital. The emergence of new, non-western webs media promotions agency. He Across Asia, trillions are being invested in of global power means that Canada’s is a member of the advisory new infrastructure. Hundreds of new, smarter success in extended global markets – from council of the Literary Review of cities are being built: over 300 million people Latin America to Africa – and our ability to Canada and the Mowatt Centre in India alone are expected to move from the project our values overseas, will depend for Policy Innovation. countryside to urban centres over the next critically on how much we matter in Asia. quarter century. And as Asian countries shift from export-driven to consumption-driven ASIA’S WICKED PROBLEMS economies, they are becoming the greatest Despite all this optimism, Asia also faces markets of scale for the 21st century. mounting problems. Asian countries are at Over the coming decades, Asia will the forefront of the biggest collective action become the centre of aspiration, innovation challenges of our time, from critical short- and technology, and it is Asia that will set ages of water, power and food, to a need to the standards and norms that will influence fill education, healthcare and infrastructure us all. Cultural power will follow economic gaps. Add to these demographic change, power. There will likely be reverses and stalls environmental degradation, healthcare and

49 climate change and the scope of concern is networks. In the new global economy, ideas clear. Finding sustainable solutions for these equate to value. Ideas are mobile, so for “wicked problems” is the preoccupation of countries and companies, being “top of policy-makers across Asia. mind” is an increasingly important part of The evolving and complex relationships being competitive. between Asian companies and countries are also likely to be critical. Over half of Asia’s trade is intraregional. New regional institu- Asian countries are at the tions – not tied to legacy systems – are being created, and new generations of government forefront of the biggest collective and business leaders are taking the helm. Countries and companies are focused on action challenges of our time, each other as key partners, competitors, threats and sources of opportunity. Security from critical shortages of water, dilemmas abound; China is the elephant in the room. power and food, to a need Asian countries also face uncertainty in their relations with other regions. Asian to fill education, healthcare companies are able to draw on vast pools of savings and have strong competitive advan- and infrastructure gaps tages. However, as new players, they lack experience and sometimes the necessary Diplomacy has also changed. The growing tools to forge effective relationships. Growing influence of non-state actors, such as opposition in Africa to Chinese resource NGOs and business leaders, and private investments is but one example. events such as the World Economic Forum Outsiders that offer practical, targeted (WEF), continue to undermine traditional, assistance to Asian countries to overcome hierarchical forms of organization. Countries these “wicked problems” and to help manage must therefore reach far broader and ever- their international relationships – both inside changing constituencies in order to get things and outside their neighbourhood – will be done. The new role of states is to co-ordinate well-placed to reap economic and political the energy and efforts of these “wise crowds” benefits. in the pursuit of national interests. Dense global networks may democratize NEW TERMS OF TRADE diplomacy, but they also lead to the emer- AND NEW DIPLOMACY gence of dominant nodes or hubs through New companies and new leaders in Asia are which information, culture, goods, capital and without preconceptions about whom they people flow. These hubs do not correspond should partner with. Competition for their to the traditional distribution of power. Cities attention – not to mention their markets, such as Dubai and Singapore have catapulted capital and talent – is, and will continue onto the world stage despite their size. to be, intense. The good news for Canada Successful diplomacy requires understanding is that, amidst this historical power shift, and targeting key hubs, as well as identifying anything is possible. and promoting new ones. Asia’s reawakening coincides with ongoing Countries that fail to understand and change in the nature of international adjust to these new patterns of business and relations, brought on by the rapid growth diplomacy will fall behind. The key tools in of transportation and communication this environment are being visible, useful

50 THE CANADA WE WANT IN 2020 RISING TO THE ASIA CHALLENGE

and getting connected. Additional resources gears in our existing approach towards Asia will help, but it is more important to be is a start. But we need to go further. strategic and clever with how they are used. Canada’s reputation as a gateway to natural Done right, countries can punch well above resources may open the door to trade and their weight. investment with Asia, but it is our ability to be resourceful that will keep that door open. WHAT SHOULD THE FEDERAL We must be responsive to Asia’s crisis needs GOVERNMENT DO? and recognize where we can play additional In Canada, governments and big business roles, be it in education, healthcare, environ- are coming late to the party; Canada is falling mental stewardship or elsewhere. behind its global competitors. By now most Likewise, we must be resourceful in the leaders, if not the public, are getting quietly tools we use. We need make smart investments worried about global economic realignment and implement co-ordination strategies and looking to get their Asian game on. But that build Canada’s profile and play to the how? And what can and should the federal new rules of the networked world. Designed government do to help, particularly in these properly, such investments and strategies lean economic times? offer high rewards for little money down; Competition for Asia’s attention is intense. something that we may term as “frugal Despite Canada being a Pacific Rim nation, commercial diplomacy”. with long-established Asian Canadian dias- poras (at 3.5 million total, Asian diasporas in 1 Double down on existing policy Canada make up a larger percentage of the A good starting point for Canada is to population than in any other G7 country), redouble its efforts and add more resourc- Canada’s understanding of the “new Asia” is es to our existing policy of commercial partial, at best. Given the mismatch between engagement with Asia, as outlined in our strategic need to be in Asia, our domestic the Department of Foreign Affairs and understanding of the market, and the market’s International Trade’s (DFAIT’s) Global understanding of us, there is need for a Commerce Strategy. It is a given that strong federal leadership role. we need to pursue more bilateral trade and investment protection agreements and rapidly conclude current negotia- Canada’s reputation as a tions (particularly the Comprehensive Economic Partnership agreement with gateway to natural resources may India and our free trade agreement with Korea). These agreements will serve as open the door to trade and symbols of Canada’s interest in Asia and as templates for further deals. investment with Asia, but it is our More trade offices should be estab- lished in key regional centres as well as ability to be resourceful that will second and third tier cities, particularly in China and India. We should also step up keep that door open engagement with regional inter-govern- mental forums, such as the Trans-Pacific Canada must develop a coherent and Partnership and Association of South East consistent strategy, complete with guide Asian Nations (ASEAN), and continue to posts and assessment measures, to move develop the Pacific Gateway initiative. forward in an Asia-centric world. Shifting More effective air travel agreements should

51 be pursued and education and research regional differentiation: each region has a partnerships should be increased dramati- compelling story to tell, but it should tell cally, fulfilling pledges already made. it under the Canadian umbrella. We should also continue to make In the coming years, as fiscal and our trade and investment rules more program crises crowd the agenda, there is transparent and to reform our immigra- a very real danger that high-level engage- tion system so that it encourages talent ment with Asia will fall by the wayside. circulation to Canada. Demographic We should do everything we can to guard changes in western countries are fuelling against this danger: with our major trading increased competition for qualified partners facing a protracted period of immigrants from Asian and elsewhere. slow growth, an effective Asia strategy Canada has a long-standing tradition of is ever more essential for our economic immigration but it cannot afford to be health. complacent; systems need to be in place that encourage the best to come here. To be most effective, we should 2 Lead from the top Any new strategy for Asia must be led, co-ordinate Asian visits and and be seen to be led, from the top. This is expected by countries such as China, exploit synergies between all levels Korea and Singapore, where the state still plays a major role in the economy. of government To focus attention, two Cabinet ministers with economic portfolios should be appointed, one for India and one for 3 Create occasions and China. Co-ordination between ministers support iconic projects and portfolios is also essential: we must To ensure consistency and visibility, seek synergies between our efforts in the federal government should focus different Asian countries, as well as other on creating or joining regular forums parts of the world. of interaction in target Asian countries. Our Prime Minister must be visible in We should look to anchor our efforts the region, travelling – strategically and around these. For the past five years, predictably, rather than episodically – the Canada China Business Council has with thematically (or sectorally) selected run a successful week of activities every versions of Team Canada. Such an effort November to engage top government and will be highly symbolic. Asian countries business leaders. Similarly, the Canada- value the engagement of top leaders and India Business Council has established a Prime Ministerial leadership on engaging business forum for top leaders in India at Asia will help galvanize the private sector the same time as the WEF India Summit and the public at large. and just prior to the China week of To be most effective, we should coor- activities (making the best use of dinate Asian visits, and exploit synergies government and business leaders’ between all levels of government. Currently, time in the region). The federal visits to Asia by federal, provincial and government should look to support other public officials are uncoordinated and curate similar annual occasions in all and often confusing for our hosts. regional centres to galvanize senior busi- Coordination does not mean losing our ness leaders and focus media attention.

52 THE CANADA WE WANT IN 2020 RISING TO THE ASIA CHALLENGE

Canada’s brand can also be enhanced into elite and popular imaginations by strategically associating with iconic, through smart, strategic investments. highly-visible projects in Asian countries. These might include: For instance, we should look to co-ordi- nate Canadian participation in high- // Canada Brand Equity Foundation profile efforts such as the Delhi–Mumbai Smart countries, from Singapore Industrial Corridor, Asia’s largest building to Qatar, aggressively manage their project. Equally, we might consider brands abroad. Borrowing from working with Chinese regions to target similar institutions worldwide, a a smart city project in which Canadian Canada Brand Equity Foundation investors and companies can take a should be established, co-funded leadership role, or, perhaps, develop a joint by the provinces and industry program with the Indian Space Research and operated at arm’s length from Agency. Engaging in such projects government. This body should would focus the bilateral relationship be tasked with managing and and bring together top talent and com- measuring the perception of panies, leading to further collaboration Canada in key hubs, cities and and thicker networks. regions of Asia. Its initial goal could Canada should also look to maximize be to map and engage 10,000 key the value of its home-grown events leaders, influencers, entrepreneurs, and icons to build visibility in Asia. For academics and journalists. It example, the Toronto International Film should partner with polling and Festival could be used as an anchor for citizen engagement experts and our Asia digital media strategy, and engage top private sector talent become a key bridge to inserting more and digital entrepreneurs as advi- Canada into Asian popular culture. sors and contributors, showcasing their work in the process. Such a foundation could achieve sig- Canada’s brand can also nificant results with modest seed investment through an incentiv- be enhanced by strategically ized partnership model. associating with iconic, // Digital CBC Asia Broadcast and digital content still highly-visible projects matters. Canada is absent from the airwaves and digital commons in Asian countries of Asia. Other countries, such as Russia, France, the UAE and the UK, have established broadcast brands 4 Develop Brand Canada in Asia which help shape the tastes, To succeed in this competition for preference and the worldviews of attention, Canada needs to command a millions. Even smaller countries higher “mindshare” of its would-be part- from Latin America and the Middle ners in Asia. The federal government has East are entering the fray. The CBC a major leadership and co-ordinating role has the reputation and talent to play in developing and promoting a pools to compete (internally and strong brand. This brand can be inserted amongst Canada’s diaspora pop-

53 ulations). It should use these to 6 Go to the head of the parade: create an expanded service in Asia be proactive with regional with a strong emphasis on creating and global institutions relevant digital content for local The post-war multilateral institutions, markets. in which Canada was prominent, are now in a state of atrophy. In newer 5 Target the hubs institutions, such as the G20, our role Since we cannot be everywhere at the is precarious. While we should remain same time, we need to prioritize specific engaged in these forums, for added clout locations for engagement. By identifying we should create or take leadership in and targeting key trade hubs and nodes new institutions with growth potential. connecting Asian business networks, Canada needs to get ahead of the curve: Canada can reach more actors and we should pinpoint where the action countries while limiting our costs. This is, identify gaps, and join or create insti- is a departure from traditional bilateral tutions to fill these voids. To be most commercial diplomacy. effective, such institutions should relate Two types of hubs should be focal to Canada’s core advantages. points for Canada’s commercial diplo- macy in Asia. First, there are intra-Asian hubs. Places like Dubai, Kuala Lumpur, Canada must promote itself Singapore and even tax-haven Mauritius are becoming indispensible conduits for as a connector nation and business with China and India. Second are the critical non-Asian hubs. London, build the connecting infrastructure New York and San Francisco are important global gateways. Not only are they key to support this sources of investment into Asia, they also house the foreign headquarters of a We have a history in this. In 1991, growing number of Asian firms looking Natural Resources Canada (NRCan) to expand their global operations. In worked with the mining industry to create many cases, Canada has a better chance the Ottawa-based International Council of attracting investment and trade by on Mining and the Environment to help targeting these offices than by targeting diffuse knowledge and awareness of their home bases. environmental issues in mining. Within We should also promote Canada as a five years, the organization’s membership conduit for the international strategies covered 60% of the western world’s metal of Asian businesses. For instance, we production. More recently, NRCan took should help address India’s resource on the role of secretariat (and major requirements, not just by selling resources financier) for the Intergovernmental to India, but by using our global resource Forum on Mining, Minerals, Metals and finance and services leadership to help Sustainable Development. India access Brazil. Equally, Canadians Canada should aggressively expand can be useful to Japanese and Korean this type of institutional leadership to companies hoping to build their markets other crisis needs. We should leverage our in India. Canada must promote itself as a expertise to create regional institutions connector nation and build the connect- focused on water management, pandem- ing infrastructure to support this. ics and air pollution, for example.

54 THE CANADA WE WANT IN 2020 RISING TO THE ASIA CHALLENGE

7 Establish a Canadian British Open University models – would “Open University” in Asia galvanize resources and attention at a Education is the gateway to our economic critical moment in Asia’s growth while relationship with emerging Asia. This helping to meet one of Asia’s crisis needs. is particularly true in markets such as India where, to meet current demand, 8 Curate wise crowds and empower over 1,000 new universities would need them to work on Canada’s behalf to be built in the coming decade. Since A challenge for the federal government nowhere near this number will be built, is that most economic activity and other means of delivering education new diplomacy happens outside of its will be found. To help fill the gap, a con- sightlines. Canada’s businesses, academic sortium of Canadian universities could institutions, NGOs, provincial govern- offer programs online (predominantly) ments and private citizens are already and also on physical campuses in Asia, active in Asia and are important faces through partnerships. This calls for a for Canada. co-ordinated national approach, led by Any exclusively top-down or overly- the federal government in co-operation bureaucratic approach runs up against the with the provinces and key nodal “distributed power” grain of our networked institutions such as the Association of world. It risks missing important Universities and Colleges of Canada initiatives and failing to capitalize on (AUCC) and the U15 group of Canadian effective approaches that are run outside research universities. government. In this context, the federal Engaging Asia is critical for all government needs to help source and Canadian universities. Many already coordinate leadership from below, acting have advanced strategies in place and are as a facilitator, enabler and information set to attract more students, establish more provider and making available open- research and commercial partnerships source tools that enable others to lead. This and develop more faculty exchanges. could include a “wiki-events” calendar However, a strong signal would be sent that would enable open-source sharing to the region if the federal government of itineraries and allow groups to “self were to sponsor the creation of a single organize” events and partner in real time. institution branded under Canada’s ban- In addition, we need to create ner, again, using mostly digital delivery. bottom-up incentives for participation Creating a Canada University – perhaps using contests and challenges to get as a 21st-century hybrid of the highly Canadians to promote Canada’s brand successful American University and overseas. For instance, we could build on DFAIT’s Investment Champions program, which currently recruits Canadian Any exclusively top-down business leaders to offer opportunities to foreign investors. We should push it one or overly-bureaucratic approach step further by offering a special desig- nation or monetary prizes to companies, runs up against the academics or civil society organizations that go global under the Canadian banner. “distributed power” grain A similar challenge could be issued to find a more systematic way for members of our networked world of diaspora communities to share oppor-

55 tunities, skills and connections between 9 Engage in serial experimentation their old and new worlds. and measure results But our open-source strategy should An overarching part of Canada’s Asia not be limited to Canadians. For a small (and global) strategy should be serial sum, we can offer a “Canadian X-Prize” to experimentation. Not all the ideas out- motivate smart crowds outside Canada lined above will work, but we need to to work on our behalf, particularly in experiment to see what gains traction. Asia. This means picking a country and a We should follow the lead of the smartest specific problem (e.g. rural electrification companies that rely on “fast failure” to in a given Indian region) and offering find their way in a world changing too a prize in conjunction with Canadian fast for 20-year plans. and local universities, as well as leading Canadian companies. This would be a cost-effective, high-profile way to build Canada must collect better perception of Canada as a useful and innovative nation with which it is worth trade and investment data that doing business. Private equity and venture funds truly reflects how the global are another way to get Canada more involved. For instance, the federal gov- economy works ernment could incentivize Canadian pension funds and capital providers, But Canada cannot experiment through lead organizations such as effectively without proper benchmarks Export Development Canada, to work and means of assessment that rapidly with Canadian universities and local and accurately evaluate the impact of venture partners to invest in high-growth policies and programs. For instance, sectors. With the right partners, these the Canada-India Business Council has seed investments would be highly visible found that official bilateral trade and and get Canadian talent engaged in investment figures dramatically under- Asian innovation and help resolve our estimate the density of business relations commercialization challenge. On a larger between the two countries (because scale, it is also time to revisit the old much of this is in under-counted services argument to build a sovereign wealth or is conducted through intermediary fund pooling our resource rents to invest countries and organizations). at home and abroad. Such a fund would enable us to invest at scale in Asia and put us at the top table of global capital We must identify new ways partners for Asia’s leading companies and governments. to make ourselves useful in Asia and to bring Canada to the top of the Asian mind

56 THE CANADA WE WANT IN 2020 RISING TO THE ASIA CHALLENGE

Canada must collect better trade and CONCLUSION investment data that truly reflects how The centre of the global economy is steadily the global economy works. Organizations shifting towards Asia; Canada needs to such as Statistics Canada should be adjust. Our current strategy – pursuing trade encouraged to improve their measure- agreements with key countries, expanding ment of Canada’s economic relationship commercial representation and getting into with Asia, capturing more of our services regional forums – is a great start, and we trade and trans-shipments through should double-down on these efforts. But we other countries. The Canada Brand must do more – much more. We need to be Equity Foundation would also have a creative and resourceful and take advantage role to play in this respect, providing of cutting-edge, cost-effective tools of diplo- time series data on Canada’s profile in macy. Above all we must identify new ways Asia. This would allow us to evaluate our to make ourselves useful in Asia and to bring efforts and add leverage when engaging Canada to the top of the Asian mind. business and government leaders in the region.

57 SQUARING THE CARBON CIRCLE BOTH ADVANCED AND emerging markets are moving inexorably towards a low-carbon Canada urgently future. Yet Canada has no coherent strategy to reduce carbon consumption. needs a meaningful national Despite coming from very different perspectives – a global energy company, a carbon strategy green economy think tank and an investor in the development of natural resources – all the contributors in this section agree upon opportunity, rather than a threat. We should the imperative for change. Canada urgently strive to position ourselves as the world’s most needs a meaningful national carbon strategy environmentally-responsible producer of that will reduce our emissions and provide all manner of goods and services (including the certainty that businesses and individuals manufactured goods and natural resources) require for effective future planning. in a future that will nevertheless be based on This is not, then, a business versus the carbon, at least for the next few decades. environment problem, as it has often been Clearly there is a long way to go before we painted. Indeed, all authors are at pains to can claim this title. But action must start now. stress the need for Canada to identify a path The authors are not, though, in agreement as that will enable it to continue to prosper eco- to the steps that should be taken. nomically, including through exploitation of Mitchelmore and Elgie & Wood both our natural resources. But, for myriad reasons, favour putting a price on carbon. Shell’s we must put in place a national carbon strategy preferred starting point is a cap-and-trade or framework which – Lorraine Mitchelmore system for the power generation/industry/ argues – should be closely intertwined with a manufacturing sector. This should be part of a national energy framework (something that comprehensive policy framework that tailors Yuen Pau Woo also calls for in the Asia section measures for each sector. It should go hand in of this volume). Ian Mallory points out that this hand with a variety of “no regrets” measures, is an opportunity for us to do both “the right such as increases in energy efficiency and thing” and the “smart thing” at the same time. technology investment (particularly to push If we fail to do so, we risk marginalization promising technologies through to wide in the global low-carbon economy. Stewart deployment). Elgie and Alex Wood stress that Canada In an ideal world (ah, for an ideal world!), should view this nascent economy as an Elgie & Wood prefer a broad-based carbon THE CANADA WE WANT IN 2020

tax. A portion of the revenues from such a carbon-based fuel that will help move us to a tax should, in their view, be used to offset low-carbon future and, like the other authors, the need for future personal tax increases. he points out the scope for efficiency-based The rest should be reinvested in low-carbon reductions in carbon emissions. Interestingly, infrastructure and clean technology devel- he argues that most of these measures can also opment. While favouring a tax, the authors be justified on a public policy basis, unrelated certainly recognize the merits of a cap-and- to carbon. trade system. For them, what is key is trading; Together, then, the contributors make a they argue strongly against a “command and powerful plea for Canada to move forward control” system for carbon regulation, though in the carbon area. Recent events, including this appears to be the direction in which the protests and proposed legislative bans on our federal government is currently moving. oil, have underscored the fact that the world For Mallory, this is actually positive: he does care what we do and that failing to act praises the recently-announced federal gov- will increase our economic vulnerability ernment regulations to phase out coal-fired immeasurably. For this reason alone, now is power generation (unless carbon sequestration the time for federal leadership in the devel- measures are in place), despite the fact that he opment of a comprehensive strategy to limit is generally opposed to increased regulation. our national emissions. He is a strong proponent of natural gas as the

We should strive to position ourselves as the world’s most environmentally-responsible producer of all manner of goods and services LOSING THE 2020 BATTLE: WINNING THE 2050 WAR LORRAINE MITCHELMORE

Lorraine Mitchelmore is The dual global challenges of mitigating tion associated with technology development, President of Shell Canada Ltd. climate change and supplying the expected strong growth in the energy sector, and the She also holds the roles of surge in global energy demand are formi- high costs of emission reduction stand in the Canada Country Chair and dable. The two issues are highly integrated way of near-term progress. Offsets could help VP Onshore Exploration and the policy direction adopted for each will close the gap, but the magnitude of offsets & Appraisal for Upstream impact the other. required, and the time needed to implement Americas. She has over 25 Canada needs effective and innovative an offset program with credibility, reduce the years of experience in the inter- federal policies that will enhance our posi- value of this solution. national oil and gas industry, tion as a global energy supplier, broaden our Overall, it is the absence of a comprehen- having started her career on market access to meet global energy demand sive climate change policy framework, one the exploration and production and at the same time reduce our greenhouse that takes into account the factors above and side. Lorraine is a board mem- gas (GHG) emissions. We must succeed on starts to put in place the required systems and ber of the Canadian Association both fronts at the same time: as federal and infrastructure, that is the key impediment to of Petroleum Producers, the provincial energy ministers tackle the devel- meeting our targets. Developing such a frame- Conference Board of Canada opment of a national energy framework, work – which, in our view, should incorporate and a member of the Catalyst they must collaborate in the development of a carbon pricing mechanism – must therefore Canada Board of Advisors. cohesive and effective national policies that become a federal government priority. This She is also a member of the will enable Canada to become a low carbon is a long-term project and the effort required Canadian Council of Chief economy. should not be underestimated. Executives. Canada is a major global energy supplier and also one of the world’s highest per capita THE CONTEXT GHG emitters. Our emissions increased by To its credit, the federal government has 142 million tonnes between 1990 and 2008,1 already implemented some important GHG making it highly unlikely that we can meet our reduction initiatives (e.g. vehicle efficiency 2020 Copenhagen target of a 17% reduction regulations, ecoACTION), but more needs to from 2005 emissions levels without significant be done, especially on the consumer demand 1 The Conference Board economic impact (Figure 1). The diversity of side. Programs need to be longer-term and of Canada, 2011. GHG emissions sources, the long-term transi- more cost effective, and we need to set more

60 Possible 2020 outlook for Canada

740 There is almost no possibility of meeting the 2020 target without significant supplementary action 720 Assumes 7 GW (nearly half) of the 700 coal generation capacity closes Possible post recession emissions bounce back 680

660 Megatonnes

640

620

2020 target 2005 less 17% 600 2005 2005–9 Coal CAFE* More Industrial CCS Oil sands Natural gas Possible baseline recession retirement standards biofuels gasses expansion for power 2020 etc. scenario * Corporate Average Fuel Economy – regulations improving vehicle fuel economy SOURCE: Shell

Figure 1

ambitious objectives. In the near term there same time, energy efficiency technologies are also a number of regulatory, technological applied to energy production will help offset and “no regret” initiatives that can help us move the projected increase in GHG emissions, forward and position us to make the large-scale but until breakthrough technologies such as reductions that will ultimately be required. carbon capture and storage (CCS) are widely As a starting point, we need to understand deployed, increased GHG emissions from the our current GHG profile and realistically Canadian energy sector are forecast. assess our opportunities for GHG reduction. Widespread non-fossil fuel motive power Figure 2 shows that our three largest sources (i.e. electricity, hydrogen) for the transporta- of GHG emissions are the oil and gas industry tion network will ultimately be required, but (the emissions from which are rising as this this solution lies well beyond 2020. The costs of industry expands and more energy-intensive near term transportation technology solutions sources come on line), electrical power gen- will be high and, given the rate of fleet turnover, eration and transportation. will happen only gradually. The federal govern- Canada is fortunate to have abundant ment has recently implemented a biofuels low-GHG power generation capacity (hydro regulation that could provide a more immedi- and nuclear). This means that switching from ate reduction of transportation emissions, but coal-fired power, while important, will not offer this regulation is focused on biofuel volume the very significant GHG reduction that can targets. We have missed the opportunity to be achieved through the same switch in the enhance the impact of biofuels by failing to US. Nevertheless, the ongoing development specify a reduction of biofuel carbon intensity of renewable and low carbon fuels for power and thus failing to incent greater investment in generation remains vitally important. At the low-carbon biofuel technologies.

61 THE CANADA WE WANT IN 2020 SQUARING THE CARBON CIRCLE

Sources of Canada’s GHG emissions (2005) Waste and others 54 Mt * Transportation Agriculture 164 Mt 74 Mt 8% 10% 22%

Buildings 11% 80 Mt 17% Electricity 11% 126 Mt Emission-intensive trade-exposed industries 21% 80 Mt * Oil and Gas Mt = Megatonnes 153 Mt SOURCE: Environment Canada (2011) Canada’s Emissions Trends.

Figure 2

Demand-side management holds consider- sions from tropical and other forests offers able promise for GHG reductions in both trans- an immediate option for GHG reduction at portation and power generation, but resistance relatively low cost. will be strong from a society that highly values Current federal policy in Canada is to mobility and a quality of life enhanced by align with US GHG policy so as to avoid modern technological conveniences. competitiveness impacts and triggering Looking beyond these three highest border tariffs and import taxes. For example, emitting areas to other energy intensive Canada has not only adopted the identical industries, we see continued efforts to Copenhagen 2020 reduction target, but also implement efficiency measures to help offset plans to adopt “equivalent” regulations to the growth-linked increases in GHG emissions. highly prescriptive equipment regulations This process could be made more effective the US Environmental Protection Agency will through trading and the purchase of domes- place on US industry. Given the economic tic offsets from non-regulated sectors (such and trade ties between the two countries, as agriculture, forestry and waste). However, this alignment of policy may seem to make this cannot happen until a robust and cred- sense politically and economically. However, ible trading infrastructure is in place. there are significant GHG-related differences The one untested opportunity of note for between the US and Canada that make US Canada might be the GHG offset associated policies less well-suited for Canada. For with Reducing Emissions from Deforestation example: and Forest Degradation (REDD). Deforestation // Coal power fuel-switching may reduce currently accounts for about 18% of global US GHG emissions close to the target: GHGs. Reducing deforestation and thus emis- this is not the case in Canada.

62 // Fuel switching is a relatively low-cost Given the scope and complexity of the GHG reduction solution: Canada climate change challenge, federal authorities therefore faces higher GHG reduction will have to draw on the full suite of policy costs than the US options. Some will work better, or be more // Growth in energy-intensive industries appropriate for particular sectors, than oth- is expected to be much higher in ers. Some are better applied in the near term Canada than in the US: oil sands and while others will take longer to develop and unconventional gas lead this growth. be contingent on the progress of broader global action. But all must be part of the mix. The challenge for Canada is, then, to At the same time as working on climate develop a coherent and harmonized long- change policies, we must also develop a term policy framework that is broad-based Canadian energy strategy (which will inter- and addresses all sectors of the economy. twine with our climate strategy). If we do A hybrid of different policy approaches not, we will miss out on opportunities to must be adopted to gain maximum value in expand our natural resources development emissions reductions, while also ensuring we enhance our position as a global energy supplier. This challenge should be addressed At the same time as through the development of a co-ordinated national climate change policy framework, working on climate change policies, rather than through the piecemeal adoption of various individual measures. we must also develop a Canadian

A CLIMATE CHANGE POLICY energy strategy FRAMEWORK FOR CANADA In the quest for such a framework, a variety of and enhance our access to growing global policy initiatives have been proposed. These energy (and other) markets. Under “business include: as usual” we remain trapped in a regulatory // implementing a market-based carbon quagmire. First Nations relationships and price with trading and offsets for large regulatory assessment and approvals around industrial stationary sources; resource extraction remain unpredictable // accelerating strategic advanced and we do not have the enabling environ- technologies (such as CCS, advanced ment and certainty that we require for future biofuels, power storage, etc); growth in the energy sector, based on a skilled // regulating GHG emissions in the labour force and enhanced innovation. transportation and buildings sectors; If we fail to develop an effective energy // acting to reduce energy consumption in strategy, GHG emissions may initially go the power and transportation sectors; down as we flounder in our efforts to become // acting now on “no regret’ GHG reduc- a major global energy supplier. But this is no tion measures that avoid competitive solution: if Canada’s prosperity is damaged, disadvantage and kick-start emissions this will actually impair our ability to tackle reductions; and GHG emissions as we will not have the eco- // developing a comprehensive nomic capacity to fund further emissions- Canadian Energy Framework that reduction measures. works in tandem with a long-term In developing our climate change policy Canadian Climate Change framework, a single, economy-wide carbon Framework. price is, theoretically, the most efficient

63 THE CANADA WE WANT IN 2020 SQUARING THE CARBON CIRCLE

Typical technology pathway model: Discover & Develop, Demonstrate, and Deploy

100 Discover & Develop 80

60 Demonstration

40

Technology cost CO price Initial deployment Deployment 2 20 through demonstration Higher emitting alternative 0 1 10 100 1000 Number of installations SOURCE: Shell Expected technology cost Figure 3

approach. However, this solution may not technology pathway model which recog- catalyze the early technological change and nizes three clear phases: (i) Discover and initial deployment of technology required Develop (ii) Demonstrate and (iii) Deploy in each and every sector. This is because the (Figure 3). price response varies from sector to sector The three stages allow technology to due to differences in behavior, infrastructure progress down the cost curve. When a new turnover rates, and the utility value of exist- technology is still in the upper part of the ing assets. In some sectors a relatively low cost curve (in the Discover and Develop carbon price would stimulate immediate phase or the early part of the Demonstrate changes as equipment is replaced. In others, phase) deployment incentives, such as car- the costs would remain too high meaning bon pricing, are not on their own sufficient that changes might not occur and advanced to enable change. As costs become lower, technology would not be developed within and with the adoption of a carbon price, an acceptable timeframe. For this reason, this equation should change (as shown by each major sector will require its own tar- the intersection between the green ovals geted policy approach. and the orange bar in the figure above). The Demonstrate phase is key in terms TECHNOLOGY AS A SOLUTION of encouraging learning-by-doing and Technology remains a key consider- delivering essential cost reductions for the ation. There is a need both to increase the Deployment phase. It is the Demonstrate speed with which existing technologies phase that demands the greatest funding are deployed and to develop and bring to because it requires multiple facilities to market new technologies. Shell favours a learn the key efficiencies to reduce costs.

64 The pathway to deployment of CCS, one of policy framework, such as that presented the few technologies that is entirely climate- in Figure 4, can be established. The figure driven and therefore dependent upon policy shows a potential policy framework struc- intervention, can be better understood by ture and provides some generic examples of reference to this technology pathway model. policy approaches within each sector. Our federal government will have to develop its 1 Although a set of CCS technologies own policy framework, tailored to the needs exists (has been discovered and of the country. Regulation will play a key role, developed), there is still vast room for as will market-based mechanisms. improvement. Advances are essen- Regulation is required to initiate technol- tial to improve the efficiency of this ogy development in areas where mitigation important mitigation option prior to measures are very costly and therefore unre- commercialization. sponsive to a carbon price. Regulation can provide incentives for technology develop- 2 CCS is presently stuck at the ment that might otherwise remain stagnant Demonstration phase. This phase is for many years. Examples are regulation on critical to the longer-term deployment improved vehicle efficiency and the develop- of CCS in that it both proves the com- ment of advanced low-carbon intensive bio- mercial application of the technology fuel technologies to reduce transportation in a given location and establishes early emissions, as well as more efficient building infrastructure to support deployment standards. growth. Canada has made positive In designing a “fit-for-purpose” policy progress in this area with federal and framework, the government must be sensitive provincial governments committing a to policy overlap which can have unintended, total of over $2 billion in funding for adverse consequences. As an example, refin- CCS.2 However, more must be done to ery GHG emissions are regulated under con- push CCS through to the Deployment trols on facility-based GHG emissions, but phase. some jurisdictions also include these emis- sions in the lifecycle regulations of blended 3 An important step is to put in place an biofuels. Double regulation can send mixed emissions trading system that includes signals about appropriate reduction strate- a price-signal which will support long- gies and, in the worst cases, lead to failure to term CCS deployment. recognize reductions. 2 This funding is provided The need to develop novel renewable OPTIONS FOR THE DEPLOYMENT through a number of technology and advanced biofuel technolo- PHASE: CARBON PRICING federal and provincial gies from waste feedstocks also underscores In this section we expand upon one “box” programs, such as the the importance of having in place an enabling (highlighted) in Figure 4: proposed carbon Government of Canada’s structure to help push the technologies down pricing for the Deployment phase for power recently created Clean the cost curve. Public funding is likely to generation and industry/manufacturing. Energy Fund. Canada’s be critical in the early Demonstrate phase The implementation of an effective ecoENERGY Technology to enable later deployment of large-scale carbon price at the federal level should be Initiative also provides renewable projects. a critical part of Canada’s GHG reduction $151 million for seven policy framework. Market-based mecha- CCS projects and the DEVELOPING A POLICY FRAMEWORK nisms and the application of a carbon price Government of Alberta is Building on this understanding of the devel- to sectors that are highly responsive to price providing $2 billion to fund opment and deployment of technology, a signals (generally large stationary sources large-scale CCS projects.

65 THE CANADA WE WANT IN 2020 SQUARING THE CARBON CIRCLE

Example of a generic policy framework

Power generation / Industry & Commercial & Land use / Manufacturing Transport domestic (buildings) Agriculture

Discover / Develop Broad energy production, energy use and agriculture R&D policy framework

Large-scale first- Large-scale advanced Encourage step-out Encourage early generation CCS biofuel technology design of efficient adoption of new Demonstrate demonstration production building construction techniques projects

Carbon price legal Vehicle efficiency/ More advanced Best practice framework low-carbon fuel efficiency standards sharing Deploy incentives

Figure 4

such as power generation and large industrial paying a penalty into a technology fund. In facilities) are an effective means of reducing addition, several Canadian provinces have emissions. Our recommendation would be cap-and-trade regulations ready, but not yet to introduce a carbon price, initially, only to implemented. large, stationary point sources. This will pro- The goal of a carbon price is to trigger a vide a sound basis on which to add sectors change in the economy so that the market over time. begins to differentiate between goods Figure 5 gives a brief overview of the vari- and services on the basis of their carbon ous options for implementing a carbon price footprint. The carbon price, initially felt A quick review of the current state of by the emitter (for example, by paying a carbon pricing in Canada clearly demon- tax or by purchasing allowances from the strates the lack of a harmonized Canadian government), is ultimately passed through approach. British Colombia and Quebec to the consumer. The result is that the cost have implemented carbon taxes that put a of most goods and services will increase, price on GHG emissions through a tax on but a new cost ranking will emerge that will fuels or utility services. Alberta, by contrast, alter the purchasing patterns of consum- has a baseline-and-credit system in place to ers. High carbon products will become less reduce the carbon intensity of large industrial competitive; they will either be removed facilities. Companies can supplement their from the market or reengineered to reduce own reductions in facility GHG emissions their carbon footprint. The additional costs by purchasing offsets within the province, or borne by the consumer (paid to the govern-

66 Options for implementing a carbon price

Implementation Option Description

By design, a cap-and-trade system delivers a specific environmental outcome (through the overall cap) and does so at the lowest overall cost to the economy by driving participants progressively to implement projects from left to right across the abatement curve. Once mature, allowances are auctioned by the government into the market with Cap-and-Trade System the funds being recycled back to the consumers purchasing the goods and services from the sectors covered by the system. Early on, as the economy begins adjusting to the carbon pricing mechanism, the government may allocate some or all of the allowances for free. This approach is operating in the power and industrial sectors in the EU.

A carbon tax operates in much the same way as a cap-and-trade approach, although is arguably less efficient in delivering a clear environmental outcome. There is no cap, Carbon Tax but it does establish the new capital flow through the economy and does force price differentiation on the basis of relative carbon footprints and market response

In a baseline-and-credit approach the government establishes a baseline emission

for each sector, typically on a CO2/unit of production basis. The participants can earn credits by exceeding the baseline. If they fall short they have to surrender credits. Credits are tradable and can be banked as in the cap-and-trade approach. There are several Baseline-and-Credit challenges with this approach including: the uncertainty of the environmental outcome; Approach the complexity of managing the system due to the need for accurate benchmarking; the lack of market liquidity resulting in poor price discovery; and the fact that system does not set up the same flow through the economy as does a cap-and-trade or carbon tax approach.

A project mechanism approach effectively reverses the capital flow. The government buys from the emitters, which means it must raise taxes to extract this money from the consumer. The consumer might get some of this back through a lower cost of goods and services as projects increase efficiency. However, it means that the market does not determine the way forward – rather the government does through its selection Project Mechanism of projects to fund (a matter of some complexity). Finally, this approach results in a somewhat random attack on the abatement curve, rather than the comprehensive and ordered attack that a carbon price, ideally via cap-and-trade, would deliver. Project mechanisms are currently in place in many developing countries due to the carbon price opportunity delivered through the Clean Development Mechanism of the Kyoto protocol.

Figure 5 ment in the form of a carbon tax or the competitiveness effects and the risk of carbon purchase of allowances) must then be offset, leakage (i.e. moving facilities across borders either through personal tax reductions or a to jurisdictions with no carbon price). decrease in sales tax. In an ideal world, policy measures should Additionally, emissions-intensive domes- be as consistent as possible across as wide a tic industries that are exposed to foreign range as possible. They should start between imports or export markets without a similar states and provinces and extend over time carbon cost should be shielded to mitigate across free trade zones, leading ultimately to global consistency.

67 THE CANADA WE WANT IN 2020 SQUARING THE CARBON CIRCLE

Draft Canadian climate change policy framework Power generation / Industry & Commercial & Land use / Manufacturing Transport domestic (buildings) Agriculture

Discover / Develop Clean Energy Fund and ecoENERGY Initiatives

CCS demonstration Biofuels from Innovative step REDD credits Demonstrate (e.g. Alberta) waste feedstock change in building design

Energy Efficiency Act Renewable fuel Improved building Low till agriculture Regulation on coal- content (Biofuel Bill) standards fired electricity Passenger automobile regulation (in and light truck GHG Deploy development) emission regulations Alberta SGER BC Carbon Tax Western Climate Initiative

SGER – Specified Gas Emitters Regulation Figure 6 The carbon price can reasonably be set or baseline-and-credit approach – may be by only one mechanism in a given jurisdic- important forerunners. tion. Shell believes that cap-and-trade is the preferred carbon pricing approach as it offers AN IMPLEMENTATION ROADMAP certainty in emissions reductions, the greatest The first step for Canada is to assess what the compliance flexibility, and the lowest cost current federal regulatory and policy landscape of compliance through market mechanisms looks like, including the parameters set by any such as trading and offsets. However, we also emergent Canadian energy strategy. recognize that greater flexibility and efficien- Figure 6 takes the previous generic policy cy comes at the cost of greater complexity. framework and applies it to Canada. While not While a global cap-and-trade system may be exhaustive, it illustrates the many gaps that need the ultimate long-term goal, simpler carbon to be filled in order to develop an integrated and pricing approaches – such as a carbon tax coordinated national policy framework. The second step is to develop policy approaches that fit within this framework, Shell believes that cap-and-trade cover all sectors of the economy and are based on long-term (i.e. 20+ years) environmental is the preferred carbon pricing objectives. By 2020, the federal government should have a fully developed policy framework approach as it offers certainty in place (bear in mind that the EU took ten years to establish a similar framework and it is still a in emissions reductions work in progress).

68 The following are some of the measures // Opportunities abound to reduce that will likely be required: demand for transportation (e.g. bet- ter urban planning and lower GHG // Regulations aimed at phasing out transportation options for both public coal power generation and moving to and commercial uses). A carbon tax lower-carbon sources, such as natural on transportation fuels is, on the other gas, will significantly reduce GHG hand, likely to be relatively ineffective emissions. However, to live up to the as it will not be high enough to stimu- Government of Canada’s commitment late either changes in behaviour or the that 90% of electricity should be gen- very expensive technological measures erated from non-emitting sources by that are required. 2020, there must be clarity on the role of renewables. A carbon price would be // Proposed measures in the area of the most effective stimulant to renew- commercial building are relatively able power. short term and limited in their reach. Establishing longer-term policy frame- // Industry, in general, is at present works with ambitious but achievable largely unregulated, though the fed- goals that are tailored to Canada’s eral government has announced plans needs, must be a priority. A facilitating to change this. The problem is that framework to enhance and encourage a prescriptive, regulatory approach more public and private R&D and without a carbon price and market innovation will be an essential compo- mechanisms is likely to be extremely nent. costly and inefficient. Furthermore, it will not stimulate trading across –––––––– sectors (such as between agriculture and forestry and industry). If the gov- There are clearly great challenges that must ernment is determined to implement be overcome in the years ahead. While long- prescriptive, performance-based regu- term actions are being designed we should lation to align with the US, we urge the not lose the ability or will to act. There are a incorporation of market mechanisms multitude of short-term “no regret” steps in (such as trading and domestic offsets) areas such as energy efficiency, transporta- as well as funding for technology, so tion demand management, renewables these regimes can readily transform and innovation that can be taken today into more efficient carbon pricing that will move Canada forward without approaches in years to come. impairing the competitiveness of Canadian businesses. These should not be ignored. // Biofuels regulation must evolve from The Government of Canada must not allow a volume-based, agriculturally-driven its inability to meet the 2020 target to delay policy to one which focuses on reduced action that will help put our house in order carbon intensity and better technologies. by 2050.

69 THE CANADA WE WANT IN 2020 CANADA’S CARBON CHALLENGE: REDUCING EMISSIONS WHILE MAINTAINING OUR QUALITY OF LIFE IAN MALLORY

Ian Mallory is President As the world struggles to implement an Anybody who does not think this is a of Pickworth Investments LP, effective regime to restrict carbon emissions real risk should consider the protests in a Calgary-based venture into the atmosphere, Canada’s situation the US during the summer of 2011 over development firm focused sticks out prominently – and often awk- the Keystone XL Pipeline. The project has on natural resources in the wardly. Although many other countries emit become a lightning rod in certain quarters Americas. He has been an much greater volumes of carbon than we do, of the US for allegedly abetting a huge executive at three major Canada enjoys two special distinctions: (i) increase in greenhouse gases. Approval Canadian power and gas we are the second largest per capita emitter could well be denied by the US authorities. utilities. Prior to that he was of carbon in the world (after Australia); and If the project does not proceed, it would Counsel to the Treasury of the (ii) as we expand our production from the have a significant impact on the oil sands, World Bank. Ian is a graduate oil sands and increase exports to the United an industry that, if well managed, can help of Harvard, the University of States and other countries, we appear to be maintain our national level of prosperity for Toronto, and Cambridge, and ever more hooked on carbon. the next 50 years. was called to the bar of Ontario Our efforts to manage carbon emissions This is not to suggest that Canada should in 1986. He has been an adjunct will therefore remain firmly in the interna- make its policy merely to please our part- professor at the law school of tional spotlight. Institutions in most of our ners. There has been lots of independent, Georgetown University and key markets in the US, Europe and Japan innovative and positive policy discussion in an instructor at the business will be looking to see Canada manage our Canada on global climate change. The point school at the University carbon emissions in a way that is respon- is rather that whether or not Canada wants of Calgary. sible and commensurate with our level to do the “right thing” for the global climate, of social development and international we should certainly do the “smart thing” This paper is dedicated standing. If we do not assume a leader- and work to manage our carbon in our own to the memory of Ken ship position on this issue, our economy self-interest. McCready, one of Canada’s will attract negative attention, including, We need to recognize that fossil fuels pioneers in thinking about possibly, foreign taxes and sanctions will drive our economy for the next 25 sustainable development on our products and services, as well as years, whether we like it or not. Renewable as it pertains to carbon lost opportunities within the future energy is a wonderful source – and should emissions. “carbon-lite” economy. be brought on stream as fast as practicable

70 to replace oil and gas – but we are two or three major technical breakthroughs away Whether or not Canada from that happening. While we are working on those breakthroughs, the question is: wants to do the “right thing” how do we manage our production and consumption of carbon most intelligently? for the global climate, we should

GOVERNMENTAL HOT AIR certainly do the “smart thing” In the past, the Government of Canada’s (and some provinces’) emission manage- do. And if we are to meet our Copenhagen ment policies have seemed to be predicated target – even at a later date, say by 2030 – largely on hope and mass ascetic denial. we will have to implement an ambitious Grand gestures were made, and ambitious national program of carbon efficiency that targets set, without sufficient thought will affect the lives of every Canadian. being given to how they would be attained. Canada agreed to extremely challenging WHEREIN LIES CANADA’S goals for carbon reduction – in the Kyoto CARBON PROBLEM? Protocol in 1998 to 6% below our 1990 levels Before we consider the solution, it is by 2012, and in the Copenhagen Accord in imperative that we be clear on the dimen- 2009 to 17% below our 2005 levels by 2020 sions of the problem. The principal sources – without any clear plan of how to get there. of carbon emissions in Canada are: Sure, Rick Mercer implored each of us to save a tonne of air by staying at home (or // thermal power plants that burn something). And the coast-to-coast rally fossil fuels (so, ultimately, consumers of roundtables and sprinkling of relatively of electricity); modest incentives to carbon-friendly causes // road transportation, particularly was somehow supposed to yield significant automobiles and commercial fleets; reductions in emissions. // heating of buildings; and With that kind of kick-off “action plan”, it // the production of oil, gas and should be no surprise that in 2011 Canada chemicals. remains far from meeting the targets to which we have committed. We have not made any progress at all on a total basis, We need more objectivity although our national carbon-intensiveness (per-unit-of-GDP) has declined somewhat if we are to understand exactly over the past six years. Most of this decline, however, is due to the efforts of those prov- where we are and what inces and private sector companies that adopted a proactive approach for their own we need to do political or business reasons. The Hon. Rona Ambrose, a federal gov- Among fossil fuels, the hierarchy of car- ernment minister, admitted (with refreshing bon emissions is very clear: coal is the worst, candour) as early as 2006 that we were not followed by fuel oil and gasoline. Natural going to be close to meeting our targets on gas is the least carbon-emitting fossil fuel, the original schedule. We need more of that although unconventional sources (shale type of objectivity, if we are to understand gas, coal-bed methane) can be less good exactly where we are and what we need to than their conventional cousin.

71 THE CANADA WE WANT IN 2020 SQUARING THE CARBON CIRCLE

POLICY GOALS AND CONSTRAINTS 3 Regulatory schemes are complicated Facing this problem, what should be our and expensive to administer. policy goals? There are four key ones: 4 Renewable energy – solar, wind, 1 Reduce significantly carbon emissions small hydro, tidal, etc. – can help but, on a gross and per capita basis. technologically and developmentally, they will not come close to filling the 2 Maintain economic growth. carbon space for the next 20 years. 3 Secure an economic and political leadership role in the new carbon-lite CURRENT SOLUTIONS economy. In Canada, six specific solutions to the carbon problem have been promulgated 4 Minimize taxes and government and to various – often nominal – degrees regulation. implemented.

As is usually the case for big problems, 1 Carbon tax A broad-based tax on there is tension between the goals: finding the consumption of carbon is an the best solutions will be an exercise in economist’s dream, for its apparent creativity and optimization. even-handedness, relative ease of application and alleged effective- There are four key considerations in ness. In reality, a broad application policy development: of a carbon tax – in the short term, anyway – is as likely to hurt as much 1 Carbon is an essential driver of our as help. In order to pack the desired economy today. Blunt reductions will transformational punch, the tax impose costs that will reduce economic will have to be so high as to impair growth and (initially anyway) impair our economic growth. (The British our international competitiveness. Columbia carbon tax, slated to rise to 6.67 cents per litre of gasoline in 2012, 2 To the extent that big carbon emitters is way too low to stop SUV-lovers from such as China, India and Russia are turning the ignition.) Further, a broad not with the global carbon-reduction tax also does not adequately promote program, Canada’s gross reductions the desirability of moving people en will be ineffectual on a global basis. masse to the “second best” solution, We therefore run the risk of impos- fossil fuels with lower carbon counts. ing sacrifices on our economy to no significant benefit for anyone. 2 “Cap-and-trade” system of regulation This is another good economist’s concept that could work well for large A broad application volume emissions that have regional sources and impact (such as oxides of nitrogen and sulfur). For CO emis- of a carbon tax is as likely 2 sions – which are not “pollutants” but to hurt as much as help an inert by-product that is in global, not local, over-abundance – in a huge, growing, regionalized country such as

72 Canada, the challenges of using such a If we can squeeze more energy-value mechanism would be enormous. Cap- per unit of carbon emitted, both our and-trade might help keep the lid on gross and per capita emissions will

CO2, but in an inclusive system there fall. There are dozens of ways that we would likely be significant leakage can increase energy efficiency and, and constant attempts to recalibrate. with the help of recent technological (“What if I can buy a carbon offset from improvements, we should be able to offshore Norway, or plant some trees in do this without sacrificing economic Niger, or help Alberta cows belch less? growth. Indeed, there has been more Do I have more room to emit? Maybe profound progress in energy efficiency I can even sell the excess?”) If just a technology over the past five years few large emitters were included in the than there has in renewable energy regulation, there would not be enough generation. In the electricity sector liquidity to establish a proper market. alone, a combination of LED lighting, Accordingly, let’s not go there – yet “smart grid” distribution systems, and anyway. upgrades to modern machinery and appliances can reduce consumption of 3 Prohibition of carbon emissions in the electricity for urban areas by over 20%. absence of sequestration This instru- ment, under which big point sources of carbon would be required to shut There has been more progress down (or not start up) unless they could sequester their carbon emis- in energy efficiency technology sions in underground storage reser- voirs, has been derided as clumsy, over the past five years than anti-economic and a prime example of over-regulation. A number of ambi- there has in renewable energy tious carbon capture and sequestra- tion (CCS) projects are currently generation being piloted, mainly in Alberta. In the long run, some configuration of 5 Investment in renewables A quick these is likely to be highly effective in switch from fossil fuels to renew- reducing carbon emissions. As CCS is able energy is the pet policy of many expensive, it raises the cost of the car- climate activists. It is a laudable and bon-emitting activity (and therefore essential goal. We will get there even- tends to reduce its incidence) much tually: with continued improvements more than a broad-based carbon tax in technology, the price of power from 1 We have world-class would – and in a directed manner, wind, small hydro (including promis- expertise in energy with little collateral economic dam- ing new “very-low-head” turbines), innovation in Canada, age. We should therefore double-up solar, tidal, hydrogen and bio-mass though our financing on the development and evaluation generation will become sufficiently institutions are not always of these CCS projects. competitive to meet base-load sufficiently risk-assuming – demand. But probably not for another see Vancouver’s Chrysalix 4 Investment in energy efficiency This 25 years. Energy venture capital seems to be the “also-ran” of carbon To accelerate this transition to as the capable financial management policy, but it remains renewables, more help from govern- exception in Canada that one of the most cost-effective options. ments will be required. Additional proves this rule.

73 THE CANADA WE WANT IN 2020 SQUARING THE CARBON CIRCLE

support for research and development NOW WHAT? THE SMART, would be very welcome.1 However, the CRASH ANTI-CARBON PROGRAM real challenges lie in commercializa- If we want to meet our carbon targets in the tion and finding ways to support new next 20 years, we need to engineer a massive technologies through the “valley of shift in the profile of our national energy death” between perfecting the tech- consumption and production. We must nology and securing the first pilot attack the point-sources of carbon with projects and commercial contracts. as much vigour and precision as possible, Government can help, facilitating trying very hard to avoid collateral damage initial commercial contracts through: to other economic activities in the process. (i) setting up “feed-in tariff” arrange- Regrettably, this means a greater number of ments (as in Ontario); (ii) using their regulations – but more specific and directed own procurement programs (as with ones. the City of Calgary); or (iii) offering In order to get public buy-in for this specific project subsidies, such as massive shift, and to ensure that we do not the federal Wind Power Production hobble our economy with constraints that Incentive (WPPI) program. Needless many other larger countries are eschewing, to say, such catalytic programs for we need to subject each of our main anti- the private sector need to be carefully carbon programs to a second test: is there designed to ensure that they are open sufficient public policy rationale to adopt to all comers, have tough performance this measure for reasons unrelated to car- standards in place and taper off over bon? Fortunately, with the exception of tar- time. geted CCS projects in the highest-emissions situations, the answer for all the measures recommended below should be “yes”. We must attack the The list below provides details. It should be noted that natural gas features promi- point-sources of carbon nently as a solution rather than a problem. This might sound counter-intuitive, as with as much vigour and natural gas is a fossil fuel that emits carbon. However, as it emits much less carbon per precision as possible unit of energy generated than other fossil fuels, a quick switch to natural gas will have a huge and early impact on both total and 6 Expansion of nuclear power Switching per capita carbon emissions in Canada. to nuclear power is another “good idea” That is not to say that natural gas is with- that is highly problematic in imple- out its own complications.2 Certainly the mentation. While nuclear can be safe development of “unconventional” natural in well-controlled circumstances, the gas (shale gas and coal-based methane) has 2 See David Suzuki disasters at Fukushima and Chernobyl its own environmental challenges (land- Foundation & the Pembina have demonstrated that conditions in use, water contamination, etc.) that must Institute (2011) Is natural the real world conspire to make this be carefully managed. David Suzuki and gas a climate change a risky, and ultimately expensive, fuel the Pembina Institute also caution against solution for Canada? source. With so many other energy a massive expansion in natural gas infra- (http://www.davidsuzuki. options available, Canada should “just structure because they think this could lock org/publications/ say no” to new nuclear power, for the the country into fossil fuels for many years reports/2011/) best practical reasons. and impede the shift to renewables. On that

74 point, we should remember that natural gas can act as an “enabler” of renewable energy. Natural gas can provide The biggest problem with wind, small hydro, and solar energy is that their production the background “swing-supply” depends entirely on the vagaries of the ele- ments: natural gas (with turbine and smart that will allow more renewables grid technology) can provide the background “swing-supply” that will actually allow more to be deployed renewables to be deployed. These are the recommended measures: reduce all kinds of pollution (other than visual) and help grow new, criti- 1 Reduce emissions from electricity cal industries in Canada. // Action: Require the conversion of all b. Federal role: Expand WPPI-type pro- coal and fuel-oil fired power plants to grams that provide temporary grants natural gas, unless CCS systems are in to newer technologies, including tidal place. power. Direct federal procurement a. Non-carbon justification: This will to include the purchase of new green have a major positive impact on local power, including by making available levels of various kinds of pollution. commercial test sites on suitable b. Federal role: Set tough emissions federal properties. Tidal power, in standards. particular, could benefit enormously from a range of initial test sites with // Action: Improve the efficiency of elec- government as the customer. tricity consumption. With the instal- lation of new, efficient technologies, 2 Get vehicles, especially big and Canadians can readily reduce their gasoline-burning cars, off the road consumption of electricity by 15% or // Action: Encourage smaller cars. more within five years. a. Non-carbon justification: Having less a. Non-carbon justification: As many metal per capita on the roads and in of these technologies have short the garages of our cities brings obvi- pay-back periods under current ous and numerous benefits to all. energy prices, there will be an ongo- b. Federal role: Raise taxes on bigger cars, ing economic benefit to making the eliminate them on the smallest cars. switch. b. Federal role: Swing both stick and // Action: Promote “congestion charges” carrot. Ban the least-efficient in the cores of our biggest cities, as has technologies (bye bye, higher wattage been done in central London (where a incandescent bulb!), and provide collateral benefit of the charge is said to limited-time incentives (tax and be a 12% reduction in carbon emissions). grants) for installation of newer a. Non-carbon justification: Same technologies. Expand informational benefit as in a) above. programs on energy efficiencies to b. Federal role: Tie the federal gas assist consumers. tax transfer to the imposition of a congestion charge in cities with a // Action: Stimulate more renewable metropolitan population of over energy projects. two million initially, reducing to one a. Non-carbon justification: This will million after 2020.

75 THE CANADA WE WANT IN 2020 SQUARING THE CARBON CIRCLE

// Action: Expand public transit, especially // Action: Switch to natural gas heating rail (or light rail), in all urban areas. from fuel oil or electricity. Natural gas a. Non-carbon justification: This is a is usually more efficient for heating public good that brings numerous than electricity (even natural gas fired benefits to the community. electricity) and is cheaper than fuel b. Federal role: Provide grants for a oil. portion of capital costs to encourage a. Non-carbon justification: Same ben- new construction (not operation). efit as in a) above. Also supports the Provide generous tax credits for a Canadian natural gas industry which portion of annual commuter passes. is experiencing a cyclical downturn. b. Federal role: Give natural gas a ten- // Action: Promote the use of biodiesel, year exemption from any increase in especially in fleets. Biodiesel is a more federal energy taxes (including any environmentally friendly fuel than carbon tax). ethanol and it can be produced in abundance in Canada. 4 Demand carbon-efficient production a. Non-carbon justification: This will from oil and gas and chemical industries help develop a major new industry, This is the newest frontier in anti- with significant export potential. carbon policy, and the one that is b. Federal role: Reduce taxes on biodiesel. prompting industry and government (both provincial and federal) to come 3 Reduce carbon emissions from buildings together to establish a mutually accept- // Action: Invest in insulation retrofits. able framework. This could reduce emissions in cities The desired policy actions will by more than 10%. include: i) eliminating existing waste a. Non-carbon justification: This will that emanates from flaring and inef- also reduce energy bills. ficient machinery and/or recovering b. Federal role: Provide limited-time waste heat for usage; ii) deploying enhanced tax credits and grants for technologies that will produce more retrofit to encourage quick conver- oil and gas for less energy input, sion. (This is already being promoted particularly in the oil sands; and iii) through the “ecoEnergy” program, establishing CCS projects to neutralize but should be expanded.) emissions from the most significant point-sources. Unfortunately, apart from the eco- nomic benefits associated with more With the installation of new efficient production, these actions cannot be as well justified for reason of efficient technologies, Canadians can collateral public benefits as the other actions above. (Production of oil and readily reduce their consumption gas is usually located in rural or remote locations and presents less scope for of electricity by 15% or more switching and optimization). However, many companies are now displaying a within five years positive attitude towards these chal- lenges, as is illustrated by various CCS projects being launched in Alberta.

76 An excellent example is Shell’s Quest Project, which will capture, transport After years of and store more than one million tonnes disappointment there is of CO2 per year from Shell’s Scotford Upgrader starting 2015. This project which will cost $1.3 billion, has received now cause for optimism a grant of $745 million (over 15 years) from the Government of Alberta, and ous about implementing the type of solu- $120 million from the Government of tions proposed in this paper: that is a series Canada’s fund for research and develop- of targeted regulations to attack the critical ment of clean energy. point-sources of carbon emissions and the In addition to providing such cata- stimulation of alternatives to carbon-based lytic grants, alongside the provinces, for consumption. the first CCS projects, the federal govern- In its proposed Reduction of Carbon ment can also play a very important role Dioxide Emissions from Coal-Fired in reducing carbon emissions in oil and Generation of Electricity Regulations pub- gas by: (i) setting reasonable emissions lished for comment on August 27, 2011, the standards for carbon producing point- federal government made two very impor- sources, including fossil fuel extraction, tant declarations: (i) that coal-fired power processing and transportation; and (ii) plants without a CCS system will effectively using tax policy to encourage the adop- be phased out; and (ii) that the target emis- tion of new technologies for efficient sions standards for power plants (and by production and reduction of waste. implication, eventually other heavy indus- Significant additional discussion will tries) will be set by high-efficiency natural be required between government and gas. The first declaration is important as it industry to find the right framework. demonstrates the determination to make Needless to say, however, government an immediate and significant impact on should take a proactive stance to ensure point sources of carbon, while limiting col- that such a framework gets implement- lateral damage to the economy as a whole. ed within a reasonable time. The second declaration properly highlights the critical role of natural gas as the “good It is clear from the list of actions above carbon emitter” that will, if properly encour- that Canada still has a long way to go to put aged, allow us fully to face up to our current in place mechanisms that will reduce our carbon challenge. carbon emissions in order that we can meet It is hoped that these regulations will our international responsibilities and, hope- recognize that if CCS systems are shown to fully, also maintain our economic growth be effective in reducing net coal-fired atmo- and quality of life. Nonetheless, after years spheric emissions to at or below natural gas of disappointment, and underperformance levels, coal-fired plants deserve a carefully compared to many provincial counterparts, monitored new lease on life. there is now cause for optimism. We will see in the months ahead whether The federal government is finally assum- this initiative is followed up with equally ing a leadership stance. It has eschewed a bold and well-targeted federal measures. national carbon tax and a cap-and-trade system – which are the right moves at this time, as explained above. And it has recently demonstrated that it might indeed be seri-

77 THE CANADA WE WANT IN 2020 SQUARING THE CARBON CIRCLE

lenge. Second, the diversity and complex- If CCS systems are shown to be ity of the proposed targeted point source and alternative-development approach is effective in reducing emissions, likely to be more effective in a decentralized administrative environment. coal fired plants deserve a carefully This approach will require detailed regu- lation and enforcement, well-directed fund- monitored new lease on life ing and uncommon co-operation between all levels of government and the private A NATIONAL CARBON AGENCY? sector. This is likely best achieved if senior The broad scope of possible federal policy federal government officials provide only measures in this space raises the question broad policy guidance to their experts in of whether they should be brought together the various sectors, as well as the appropri- in a tightly organized package with unified ate funding and legislative support to make administrative direction. However compel- them stick. Any high profile, unified admin- ling this might sound, it is probably not istration for national carbon action would worth the effort. First, any bureaucratic ini- perhaps best be deployed as a monitoring tiative whose moniker contains words that agency and external information bureau, to sound anything like “national”, “energy” tell the world how – in the words of the song and “program” will create bad harmonics in from a durable Canadian rock band – we can corners of the country that are particularly get there if we try. important for the resolution of this chal-

78 BUILDING A LOW-CARBON, HIGH-OCTANE CANADIAN ECONOMY STEWART ELGIE AND ALEX WOOD

The year 2010 witnessed several his- China and Canada) sign on to binding targets Stewart Elgie is the toric events, with profound implications for greenhouse gas (GHG) emissions reduc- founder and chair of Sustainable for Canada’s economic and environmental tions as part of the Copenhagen Accord. At Prosperity, Canada’s leading future. the same time, Canada’s oil sands became a green economy think tank and First, global investment in clean energy prime target of global environmental protest policy-research network. He capacity surpassed investment in fossil – a trend which has intensified in 2011. is also a professor of law and fuel-based capacity for the first time. Overall These events underscore two important economics at the University spending on clean energy has risen by over realities for Canada. One is that the world of Ottawa and director of the 500% from 2004 – 2010, to $211 billion.1 It is is shifting to a low carbon economic future. university’s interdisciplinary projected to grow a further ten-fold by 2020, One can debate the pace, but the shift is Environment Institute. In 1991 to reach a total of US$ 2.3 trillion.2 unmistakable. This low carbon transforma- he founded Ecojustice, now Second, 2010 was tied for the warmest tion will affect most aspects of our economy Canada’s largest non-profit year in the Earth’s recorded history. This and lives: the buildings we inhabit, the trans- environmental law organization, record-high heat has spawned record-low portation we use, the products we make, and and between 2001 and 2003 Arctic sea ice levels and other catastrophic the energy that powers us. Many are labelling was the founding executive effects, such as BC’s devastating mountain it “the next industrial revolution”, and most director of the multi-stakeholder pine beetle outbreak (which continues to of the world’s major economies are shifting Canadian Boreal Initiative. In spread eastwards). their spending and policies to prepare for it. 2001 Stewart was awarded the Third, global oil production hit record lev- The second reality is that, despite this Law Society of Upper Canada els in 2010 – despite growing concerns that low carbon trend, fossil fuels and energy medal for exceptional lifetime we are at, or near, peak oil – as did domestic intensive industries are likely to remain a contributions to law, its highest production in Canada (the bulk of it coming major part of the global economy for decades honour. from oil sands).3 Demand for timber, miner- to come. Absent unforeseen technological als and other resource products (which tend breakthroughs or ecological catastrophe, the to be energy intensive) also continued to shift to cleaner technologies and energy, and 1 UNEP & Frankfurt School grow. the replacement of global capital stocks, can (2011) Global Trends 2010 also saw an unprecedented number only happen so quickly. In the meantime, in Renewable Energy of countries (141: including the US, EU, a growing global population and rising Investment.

79 THE CANADA WE WANT IN 2020 SQUARING THE CARBON CIRCLE

standard of living (especially in developing problem of global climate change. While countries) will mean that demand for fossil this paper focuses mainly on the economic fuels and other natural resources will remain dimensions of the issue, there are of course strong. And Canada is a major producer of very compelling scientific and moral argu- both. ments for acting, which have been well canvassed elsewhere. Canada must view the THE PACE OF OUR TRANSFORMATION low carbon economy as an Countries around the world are wrestling with the same issues as Canada. Their opportunity, not a threat approaches generally fall into one of three groups: go fast, go slow, or go smart. There are plausible arguments to support each To some, these twin realities seem to point approach. in opposite directions – with the implication that we must choose between supporting the // Go fast countries are betting that the “new economy” or the “current economy”. shift to a low carbon economy will be In fact, the two realities can – and must – be faster than most expect. If this hap- reconciled. How to do so is the vital question, pens, early mover countries such as Alex Wood is Senior with profound implications for Canada’s Norway – which aims to be carbon Director, Policy and Markets at future prosperity. What policies will enable neutral by 2030 (despite the fact that it Sustainable Prosperity, Canada’s Canada to capitalize on its strengths in the is a major oil exporter) – South Korea, leading green economy think economy of today while also preparing Germany and Denmark stand to tank and policy research net- the country for success in the low-carbon benefit. All are moving aggressively to work. Prior to this he worked economy of tomorrow? accelerate clean energy and technol- as Special Advisor, Corporate The answer, we argue, is that Canada ogy development through green taxes, Environmental Affairs at TD must view the low carbon economy as an incentives, targeted spending and Bank Financial Group and Acting opportunity, not a threat – including for its other polices. Chief Executive Officer and oil and resource industries. Canada should President of the National Round move aggressively to adopt smart, cost effec- // Go slow countries are betting that the Table on the Environment and tive policies that will not only encourage low carbon economy will emerge more the Economy, where he devel- clean energy and technology growth, but slowly than expected. These countries oped a national program exam- will also position Canada as the world’s most are generally reluctant to impose addi- ining the role of fiscal policy in environmentally sustainable producer of oil, tional costs on domestic industries and promoting the long-term reduc- gas, natural resources and other manufac- consumers in order to address a global tion of carbon dioxide emis- tured products. Indeed, failure to respond problem (climate change) or prepare for sions. Alex started his career to the demands of an ever-greening global a new economic reality that is just start- with the World Wildlife Fund in marketplace will pose a growing threat to ing to unfold. The US is a prime example; Washington, D.C.. Canadian exporters – as we see with Europe’s it has refused to regulate carbon emis- proposed low-carbon fuel standard, which sions (nationally) and has abandoned could make market access to the EU a real its Kyoto target (although it is ramping 2 Pew Charitable Trusts issue for Canadian oil sands producers. The up spending on clean energy). (2010) Global Clean Power: most important (but not the only) policy A $2.3 Trillion Opportunity. needed to drive this change is to put a mean- // Go smart is a middle path. Countries in ingful price on carbon emissions. this group assume that the low carbon 3 BP Statistical Review of Effective carbon policies will also enable transition will happen, but believe World Energy (2011). Canada to do its part to address the critical that traditional sectors will remain

80 important for many years. They are (the high-powered US campaign to block the hedging their bets, putting in place Keystone pipeline is the latest example), and modest, cost-effective policies to foster beginning to tarnish other sectors as well. This low carbon options while still support- may be why powerful industry voices such as ing the growth of traditional industry the Canadian Council of Chief Executives, and energy sectors. Examples include, and others, have begun publicly to push for Australia (its carbon tax exempts national carbon pricing regulations. motor fuels and provides major sup- A “go slow” (or “go with the US”) carbon port for carbon-intensive resource strategy is therefore neither safe, nor in sectors), parts of Europe, and China Canada’s overall economic – let alone envi- (which is rapidly building coal power ronmental – interest. plants, while raising fossil fuel taxes The economy of the future is likely to and becoming a leader in clean energy reward companies (and countries) that are production and low carbon transpor- energy efficient, low polluting, and use scarce tation). natural resources efficiently. Rather than see- ing this shift as a threat, and resisting change, Canada generally falls into the “go slow” Canada should view it as an opportunity. camp, at least nationally.4 We are one of That means putting in place policies to get the few developed countries still without a ahead of the wave of change – in the same national carbon pricing scheme or a plan to way that we did when we negotiated one of introduce one. Moreover Canada’s carbon the world’s first continental free trade agree- emissions have risen more than almost any ments in the late 1980s, and slashed our fiscal other OECD country since 1992. We have deficit in the early 1990s. These far-sighted abandoned our Kyoto target, and our green government actions both involved some economic spending lags behind that of most short-term pain, but they positioned Canada competitor nations. to prosper in the shifting global economic So which of the three approaches is best reality of the time. for Canada? “Go slow” may seem the safest, We now face a new (and potentially in the short-run: it avoids imposing costs on greater) economic shift, and similarly pre- our industries and consumers that are not scient policies are needed to prepare Canada faced by our major competitor, the US. In the for it. To be clear, that does not mean simply medium-term, however, this may leave us following the “go fast” climate policy path dangerously ill-prepared. Pegging ourselves of countries such as Sweden, Germany or to the US, a country on the trailing edge of Denmark, whose economies are quite differ- global low-carbon change, may well hamper ent from ours. Rather, Canada should pursue the future competitiveness of many Canadian its own “go smart” path to a low-carbon industry sectors, by failing to spur necessary future, along the lines of Australia – through innovation and efficiencies. By following the cost-effective policies that foster eco-inno- 4 Several provinces – such as US we also run the risk that an American vation but also reflect its inherent economic BC, Ontario and Quebec – policy – when it does come – will put domestic strengths, including a rich endowment of are in the “go fast” or “go interests first, to our detriment (think: “buy natural resources and related know-how.5 smart” camps. American”). For Canada, being a green economic Moreover, it is not even clear that this leader does not mean just building more 5 Certain provinces (such as strategy heads off short-term pain. Growing windmills, solar panels, electric cars and BC, Ontario and Quebec) pressure from carbon-conscious consumers, other clean technology products (though may be positioned to environmental NGOs and investors is increas- these are likely to be of growing importance). pursue a more aggressive ingly threatening Canadian oil and gas exports It also means becoming the world’s most low-carbon policy path.

81 THE CANADA WE WANT IN 2020 SQUARING THE CARBON CIRCLE

environmentally responsible producer of oil, GETTING FROM HERE TO THERE timber, minerals, vehicles, and other energy What public policies and investments will intensive, manufactured products. “Made in best accelerate Canada’s economy-wide shift Canada” should become a recognized brand to a low-carbon future? of environmental leadership, across all sec- A full answer to this question is beyond tors – through real changes to practices and the scope of this paper, since it involves most policies, not just better communications. aspects of our economy and society. However, This will be an undoubted challenge, but an overall low-carbon policy package should with our resource wealth, diverse manufac- feature an array of tools, including: turing base, and highly educated and skilled // public investments in green workforce, we should rise to meet it. infrastructure (transit, buildings, electrical grid, etc.); // incentives to help strategic “Made in Canada” should clean energy and tech industries get established; become a recognized brand of // carbon pricing, across the economy; // regulation, where pricing is less environmental leadership effective (e.g. product standards, building codes); and Our ability to do so is illustrated by the // research support to spur low-carbon recent history of our forestry sector. Twenty innovation (technical, economic years ago, this sector stood in the cross-hairs and policy). of global environmental opposition, as a result of its outdated practices. After a decade Here we focus on carbon pricing, the of intense conflict, marked by international single most important measure that Canada boycotts and massive civil disobedience, the can take. A carbon price will ripple through industry is now embracing sustainability the economy, reaching all producers and as an economic opportunity, not a threat. consumers, and motivate behavioural and It has adopted world-leading standards for investment changes – much more quickly, forest certification and practices, is working widely and efficiently than could be accom- hand-in-hand with environmental groups plished by regulating all of these activities to protect endangered species and spaces, separately. has dramatically reduced its carbon emis- There are two main ways to price carbon: sions, and is developing innovative new through a tax or fee on emissions or a cap- bio-products. Forestry is a real-life example and-trade system. Both pricing approaches of how Canadian resource and industry sec- can achieve reductions at much lower cost tors can position themselves to prosper in an than traditional “command and control” ever-greening, low carbon global economy. regulation. Moreover, we may not be quite as far The efficacy of a trading approach was behind as some critics make out. The demonstrated by the US Acid Rain program federal government has already brought in – the first large-scale experiment with emis- new vehicle fuel efficiency standards (with sions trading. The program achieved 25%

the US), is investing in carbon capture and greater reductions in sulphur dioxide (SO2) at storage technology (in partnership with roughly half the cost of a conventional regula- some provinces), and is planning to regulate tory approach. Its success has inspired the carbon emissions from coal power. creation of carbon trading regimes in a grow- ing number of jurisdictions, including Europe,

82 Changes in GHG emissions and GDP due to carbon taxes in various European countries

Change in GHG emissions due to carbon taxes Change in GDP due to carbon taxes

0 1

- 2 0.5

- 4

% difference % difference 0 - 6

- 8 - 0.5 1994 1997 2000 2003 2006 2009 2012 1994 1997 2000 2003 2006 2009 2012

Slovenia | UK | Netherlands | Germany | Sweden | Finland | Denmark

SOURCE: Ekins, P. (2007). An assessment of ETR on the competitiveness of selected industrial sectors. COMETR (Competitiveness Effects of Environmental Tax Reforms). Figure 1

New Zealand, the Northeast US states, and on GDP, mainly due to tax shifting which, Alberta. While it is too early to measure cost amongst other things, can increase invest- savings from these programs, US government ment in growing economic sectors such as 6 Tax shifting occurs studies indicate that a national carbon trading clean energy).6 when the revenues from scheme would generate cost-savings of over British Columbia passed North America’s environmental taxes are 50% compared to more traditional command first true carbon tax in 2008.7 Since then, used to lower other types and control carbon regulations (of the type BC’s per capita fuel use has fallen nearly 3% of taxes, particularly on that Canada is currently considering). compared to the rest of Canada, making BC income or labour. Overall Carbon taxes have also proven to be a the country’s most fuel-efficient province.8 taxes are not raised, just cost-effective way to meet climate goals. Six The tax has now risen to $25/tonne (higher shifted. The result is western-European countries have brought than Europe’s current carbon market price), higher taxes on things them in since the 1990s, and a major yet it appears to have had no adverse effects we want to discourage EU-sponsored study found them to have on the province’s GDP (which is essentially (pollution), and lower both positive environmental effects (causing unchanged relative to other provinces) – in taxes on things we want emissions reductions of 2–7%) and beneficial large part because all revenues are used to cut to encourage (investment economic impacts (a small, positive effect other taxes. and employment).

83 THE CANADA WE WANT IN 2020 SQUARING THE CARBON CIRCLE

In addition to lowering costs, carbon pric- What is clear is that either type of carbon ing is also more effective than conventional pricing system is preferable to command and regulation at stimulating innovation. The control regulation. Yet there is growing con- reason is that an emissions price creates an cern that Canada may choose this inferior economic reward for each additional unit of route. From 2005 – 2010, the federal govern- emission reduction – which simply setting an ment issued a series of plans for carbon cap- emission standard does not do. If a company and-trade systems. But its recently-released can find innovative ways to reduce emis- regulations for power plant emissions follow 7 Quebec brought in a sions below the targeted level, it will make a command and control approach. While it is climate levy in 2007, but (or save) more money. A recent OECD study perhaps understandable that trading would it is too small to have any documents the innovation-inducing effects be excluded from regulations that deal only real effect on emissions. achieved by various green taxes.9 Similar with power plants (a very limited trading results can normally be obtained from emis- market), the government has indicated that 8 Sustainable Prosperity sions trading. it may follow this same path when extend- (2011) (unpublished If it is to be effective, carbon pricing ing carbon controls to other sectors. Given research: report in must be well designed. There are examples the manifest benefits of a pricing approach, preparation). of poorly designed carbon taxes (Norway’s, this would be a huge missed opportunity. for example, includes overly broad exemp- At the very least we could incorporate some 9 OECD (2010) Taxation, tions) or emissions trading schemes (e.g. elements of pricing by building trading and Innovation and the the EU system over-allocated allowances offset options into intensity-based emission Environment. Paris: OECD. in its first phase) and we must learn from standards (as Alberta has done). these. Sustainable Prosperity, working with An important feature of carbon pricing 10 Sustainable Prosperity a group of economic, business and environ- is that, by definition, it generates revenues. (2009) Eight Principles mental experts, has identified key principles With a tax, firms pay for every ton of carbon for Carbon Pricing. for effective carbon pricing systems. For emitted. With cap-and-trade it is less clear: (http://www. example, the systems should be: (i) com- certainly firms must pay for all emissions sustainableprosperity.ca/ prehensive; (ii) simple; (iii) predictable; (iv) over their assigned cap level, and most econ- article11) adaptable; and (v) have a price sufficient to omists argue they should also be made to pay achieve environmental targets.10 for every tonne emitted – which is typically 11 The EU trading system Of the two carbon pricing approaches – a done by selling or auctioning allowances to currently charges for less tax on emissions, and a cap-and-trade sys- emit. If such allowances are allocated with- than 10% of allowances tem – most economists prefer a tax (as do a out payment, based on existing emissions, (slated to rise to over 50% growing number of Canadian industries and this effectively rewards those who are already by 2013). Australia’s new environmental groups). They point to several emitting the most. Nevertheless, there is carbon pricing system main advantages, including simplicity (it typically strong pressure from firms for gov- requires firms to pay a builds on the existing tax system), compre- ernments to allocate most allowances for free fixed price of $23/tonne hensive coverage (across the whole economy), – an approach which is rife with potential for for all of their allowed ease of establishment (BC’s tax was developed backroom manipulation. Auctions, by con- emissions. Alberta uses in just a few months), low transaction costs trast, are transparent and generate funds that an alternative approach, (no trading fees), and greater price certainty can be used to buffer the impacts of climate allowing firms to pay into – ideally by starting with a modest price that policy on vulnerable groups or sectors, or for a government “technology ramps up steadily over time (as BC’s does), other important economic or environmental fund” at $15 for each to allow firms time to plan and adjust. A well- goals (discussed below).11 tonne emitted over their designed cap-and-trade system, however, can It is estimated that a national Canadian limit (a similar fund was be almost as effective and comprehensive, carbon-pricing scheme would initially gen- in previous federal policy and brings the added benefit of certainty of erate about $5 – 15bn annually (for a tax, or proposals). emissions reductions. cap-and-trade with full auctioning, based

84 on a carbon price of $15 – $20/tonne), rising thereafter with the price of carbon. Even a A large portion of potential more limited technology fund approach (like the Alberta model) could generate revenues carbon revenues should be of close to $1 billion per annum. The question then becomes: how best to used to support low-carbon use these carbon revenues? Options include deploying them to: infrastructure and clean i) reduce distortions in the broader tax system – by cutting taxes on income, invest- technology development ment or labour; ii) address competitiveness issues 1 We need major investment in public arising from the carbon price – e.g. with infrastructure to support a low carbon time-limited tax breaks or refunds for trade- economy. The list of key investments exposed, energy-intensive sectors; includes: a smart electrical grid (to iii) offset the proportionally greater boost energy efficiency, and enable impact of a carbon price on vulnerable clean power producers to feed in); regions or low-income households – with public transit; clean energy generating targeted tax refunds (as was done in BC); or facilities; carbon capture and storage iv) fund low-carbon public infrastructure distribution capacity; energy efficient or clean technology research and development. public buildings and housing; as well as research to advance low carbon Each option has some merit. Certainly technology and innovation. government should use a portion of the revenues to buffer the adverse effects of 2 The transformation to a low-carbon carbon pricing on vulnerable groups, regions economy will also require major or industry sectors. The most economically private investments in infrastructure efficient option is to channel most or all of and technology (in electric cars, carbon the revenues into cutting taxes on labour or capture, biofuels, clean power, energy- income, to spur investment, employment efficient plant and equipment, etc.). and growth (as was done in BC, and many Expected short-term carbon prices (in EU countries). Indeed, it has been estimated the range of $15 – $30/tonne) are far that recycling all revenues into tax cuts too low to drive the scale of investment would reduce the impact of a carbon price and change needed. Therefore, public on Canada’s economy to negligible levels incentives will be needed to kick-start (roughly 0.1% of GDP annually through the necessary private investments. 2020).12 However, at a time of record deficits, when it may be hard to justify further tax 3 Considerations of intergenerational cuts, the main function of carbon revenues equity also support such a reinvest- might be to fund critical public investments ment. The effects of climate change without the need for tax increases. will be felt, most deeply, by future Thus, in Canada’s present economic generations. It is only fair that much 12 National Roundtable on circumstances, we would argue that a large of the rent from depleting this non- the Environment and portion of potential carbon revenues should renewable resource (in the form of Economy (2009) Achieving be used to support low-carbon infrastructure carbon revenues) be reinvested in 2050: A Carbon Pricing and clean technology development, for the building a low carbon economy that Policy for Canada. Ottawa: following reasons: will enrich future Canadians. NRTEE.

85 THE CANADA WE WANT IN 2020 SQUARING THE CARBON CIRCLE

The best approach to revenue recycling fossil fuel and energy-intensive industries or is likely to be some combination of tax cuts, building a low-carbon economy. Both prem- buffering vulnerable constituencies, and ises are largely false. As regards the first one, investing in clean technology and infrastruc- the short-term costs associated with a well- ture. Over time, the focus should shift more designed carbon pricing policy will be mini- towards tax cuts, as deficits start to fall and mal – roughly 0.1% of GDP annually. And the carbon prices rise, stimulating low carbon benefits are enormous: not only will Canada investment with less need for public support. be well-positioned to prosper in a future low- Substituting pollution taxes for income carbon world, but we will also play our due taxes has a further benefit in that it decouples part in lessening the massive costs of climate overall tax revenues from labour income. change. This is particularly important in view of The second premise is also flawed, and Canada’s aging population. As an aging paints a false dichotomy: moving forward nation, we will be working less (so paying less with effective climate policy is as important income taxes) but demanding more services, to the economic success and security of especially healthcare. By shifting taxes more Canada’s energy and resource sectors as it is towards consumption and pollution (which to the clean technology sector. The emerging will normally fall more slowly than aggregate low-carbon economy will require not only income as the population ages) the level of windmills, biofuels and BlackBerries, but public revenues, and thus the capacity to also oil, timber and minerals, as well as cars, provide services, can be better maintained. trains and chemicals. Canada should strive This approach is the one that British to become the world’s most environmentally Columbia has utilized to great effect. The responsible producer of natural resource carbon tax has given it fiscal space to signifi- and manufactured products – an increas- cantly reduce income taxes. BC now boasts ingly important market advantage – while the lowest rates in Canada for both corporate also growing its clean energy and technology and personal income taxes. sectors. It is not an either/or choice, and the soon- CONCLUSION er we get past that misconception the sooner The debate around carbon policy in Canada we can get on with developing smart climate is often clouded by two major misconcep- policies – starting with federal carbon pricing tions: first, that policies to reduce GHGs and – that will position Canada to prosper in the build a low carbon economy will hamper economy of tomorrow, while bolstering the Canada’s competitiveness and, second, that economy of today. Canada must choose between developing its

86 REDUCING INCOME DISPARITIES AND POLARIZATION POVERTY REMAINS A SIGNIFICANT and grow- ing on services such as health and education: ing problem in Canada. Income polarization Sharpe’s own research shows these to have is also increasing steadily, to a degree that an important equalizing effect. Yet he would could threaten social cohesion. Since tech- like to move beyond these. He believes that nological advances and globalization both the federal government should capitalize on tend to increase inequalities as returns to the current heightened public concern about unskilled labour decline, this is a problem inequality – as evidenced by global protests – that will not go away in the absence of signifi- and take this opportunity to enact bold new cant policy action. It is also a problem, as our measures in favour of the less well-off. contributors stress, that is shared with many other developed countries, though recent increases in income inequality in Canada are This is a problem that towards the high end of the spectrum. Of the papers in this section, only one – will not go away in the absence that by Andrew Sharpe – suggests a signifi- cant rethink of the income support system of significant policy action that has been in place, with little change, for more than 20 years. Sharpe argues that our All authors are at pains to stress the criti- system should be underpinned by an equal- cal role that government taxes and transfers ity of opportunity agenda, in which greater play in mitigating inequality. The remaining efforts are made to smooth out both financial two papers in this section argue that these and human capital starting points. At pres- measures are – or could be – effective on their ent, by contrast, we have a system that takes own. Thus, rather than moving beyond these, unequal starting points as a given, focussing either in terms of rationale or actual mea- instead on correcting the subsequent excess- sures, the federal government simply needs es of market allocations. to increase the magnitude of the transfers it A key change under such a system would makes and/or to extend the number of peo- be the imposition of an inheritance tax. This ple who are eligible. move would bring Canada in line with almost Sherri Torjman and Ken Battle are highly all other developed countries. Sharpe does concerned with the dynamics of poverty and not advocate abolishing the existing system inequality which, they assert, matters in its of taxes and transfers. These would remain a own right, over and above its relationship vital pillar, as would continued public spend- with poverty. Mark Cameron’s paper also THE CANADA WE WANT IN 2020 REDUCING INCOME DISPARITIES AND POLARIZATION Torjman and Battle’s preferred vehicle for increasing federal government support Inequality matters to low and low-middle income Canadians is the Canada Child Tax Benefit (CCTB). Not in its own right, over and above only is this already in place, but it is (almost) universal. They also discuss the Working its relationship with poverty Income Tax Benefit (WITB) and call for this to be extended further upwards (in income notes the importance that we, as humans, terms). Cameron, on the other hand, favours attribute to fairness. His paper makes the the WITB over the CCTB, though recognizes case that even those on the right of the politi- the value of both. He also highlights the value cal spectrum, who believe in smaller govern- of those institutions in our country that foster ment and less intervention, should be ready “civic equality” (for example, the health sys- to do more to counter inequality. This is part- tem and public schools) and cautions against ly because in societies that begin to unravel piecemeal privatization of these which could due to social tensions arising from inequal- dangerously undermine equality of access. ity, increased government engagement is In short, though their starting points are likely to be required. To head this off, and diverse, all the contributors call for the federal to cater to our sense of fairness, the federal government to take deliberate steps to coun- government should therefore pre-emptively ter soaring inequality and ensure that the increase its redistributive efforts. Canada we want in 2020 is the Canada that less advantaged groups might want too.

All authors are at pains to stress the critical role that government taxes and transfers play in mitigating inequality WHY CANADIANS SHOULD CARE ABOUT INCOME INEQUALITY MARK CAMERON

Mark Cameron has over Income inequality in Canada has increased wealth and income at the top of the socio- 15 years’ experience working over the past two decades, although the economic ladder increases dramatically, as in government, consulting and extent and effects of this widening inequality long as those at the middle or lower rungs industry, with a focus on public have become most apparent in the past are benefiting at least to a modest extent? policy. He has worked for several several years. The 2008 financial crisis, and Is relative inequality of income a problem MPs and Ministers, and in the the recession which followed it, led to job if everybody’s lot is improving at least Privy Council Office. He has and asset losses, especially among those in somewhat? also worked as a consultant lower income groups. Many people became Yes, relative inequality does matter, for on environmental and energy rapidly and abruptly aware of the precari- several reasons. Extreme income inequality, policy. From 2006 – 2009 he ousness of their financial position. even where the least well off are still served as Director of Policy Today, it is not only traditional voices making economic gains, can undermine and Research and Senior Policy on the left that are expressing alarm about the sense of social cohesion necessary for Advisor to the Prime Minister widening inequality: centrist and conser- a democratic society. Human nature is of Canada. He later worked vative voices from business leaders to the acutely sensitive to relative fairness and for Ontario Power Generation Conference Board of Canada have also positional status. We know from experi- and recently joined Research joined the conversation. But with a majority ments in psychology and behavioural In Motion as Director, Global Conservative federal government that is economics, such as the Ultimatum Game Public Policy. Mark was educated pursuing an agenda of fiscal retrenchment, developed by Werner Güth and others, at McGill University and the is income inequality an issue that could or that most people will reject an apparently University of British Columbia. should be on the short- or medium-term “unfair” distribution of rewards, even if federal agenda? I would argue that it is. rejecting it will make them personally 1 Güth, W., Schmittberger, It is worth asking, at the outset, why worse off.1 Similarly, surveys show that W. & Schwarze, R. (1982) governments should concern themselves most people would rather live in a society “An Experimental Analysis with inequality at all. Obviously, a primary where they make $100,000 while everybody of Ultimatum Bargaining”. objective for governments is securing eco- else makes $85,000 than one in which they Journal of Economic Behavior nomic growth and ensuring that the whole make $110,000 while everybody else makes and Organization 3 (4), of society benefits from such growth. $200,000, even when it is clearly explained 367–388. Theoretically, should it then matter if that they will have higher purchasing

89 Changes in Gini coefficients from mid 1980s to mid-2000s

0.10

0.05 Turkey Australia Greece Ireland Spain France 0.00 Italy OECD Japan Mexico Austria Canada Finland Norway Sweden Belgium Hungary Portugal Germany Denmark Netherlands Luxembourg New Zealand

United States - 0.05 Czech Republic United Kingdom

- 0.10

SOURCE: OECD (2008) Growing Unequal?: Income Distribution and Poverty in OECD Countries.

Figure 1

power, a larger house size, etc. in the second unity. It can delegitimize commerce and scenario, as compared to the first.2 business and invite destructive protectionism A society in which a small group is perceived and overregulation. Inequality, in short, is a con- to be benefiting unfairly, or where there are wide servative issue too.”3 gaps between social and economic classes, can So, if there are ample philosophical and lead to dissension, jealousy and anti-social practical grounds for both left and right to be behavior, even if the less well-off are still making concerned about income inequality, what do material gains. This, in turn, can lead to increas- we know about the state of income inequality es in crime, loss of participation in social and in Canada and its underlying causes? And what charitable organizations, and greater demands can we do to address this? for government intervention to help deal with Choosing the right policy prescription 2 Solnick, S. J. & Hemenway, these social tensions. Such a scenario should requires an accurate diagnosis, so it is important D. (1998) “Is More Always concern not only social democrats or liberals to understand what has caused increases to Better?: A Survey about who see equality as an important social goal inequality in Canada and elsewhere. Only then Positional Concerns”. in its own right, but also conservatives who are will we be able to identify measures that are like- Journal of Economic concerned about maintaining public support ly to be successful in addressing it. Behavior and Organization, for free markets and limited government. Inequality in market income has been grow- Vol. 37, 373-383. As conservative commentator David ing in almost all advanced economies for the Frum has written, “Equality in itself past several decades as a consequence of eco- 3 Frum, D. (2008) “The never can be or should be a conservative nomic globalization, technological change, Vanishing Republican goal. But inequality taken to extremes can reduced progressivity in taxation, and the shift Voter”. New York Times overwhelm conservative ideals of self- from an industrial to a service-based economy. Magazine, September 5, reliance, limited government and national Increased integration of the global economy 2008.

90 THE CANADA WE WANT IN 2020 REDUCING INCOME DISPARITIES AND POLARIZATION

Gini indexes using three measures of adjusted income

0.50

0.45

0.40

0.35

0.30

0.25 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Market income Total income After-tax income

SOURCE: Conference Board of Canada (2011) Canadian Income Equality. http://www.conferenceboard.ca/hcp/hot-topics/canInequality.aspx Figure 2

and rapid technological change have brought When looking at inequality data, it is import greater rewards for highly-skilled workers and to note that inequality can be measured both managers. Lower-skilled workers, by contrast, in terms of market incomes (before taxes have been forced to compete with workers and transfers) and disposable incomes (after in developing economies and have seen taxes and transfers). Focusing specifically on far smaller gains. While domestic policy can cer- Canada, we see from Figure 2 that inequalities tainly address tax and transfer issues which, in in market income grew rapidly in the 1990s, as turn, affect final income distribution, it is very did inequality in disposable incomes to a lesser difficult for any government to affect the broad- extent. Government policies have therefore er shifts in the global economy that affect mar- had some effect in dampening the increase in ket incomes. post-tax and transfer disposable incomes. Figure 1 shows changes in Gini coefficients However, Figure 3 shows that while (essentially the measure of what percentage of government policies became gradually more income redistribution would be necessary to redistributive from about 1980 through the eliminate all income inequality) in OECD coun- mid 1990s (so the difference between the Gini tries between the mid-1980s and mid-2000s. coefficient for market income distribution Income inequality has grown in the United and that for post tax and transfer income dis- States and Canada more quickly than the OECD tribution grew larger), during the late 1990s average, but most OECD countries have seen there was a considerable reduction in the level inequality increase. of redistribution. Taxes and transfers have

91 Difference between the Gini index using adjusted market income and adjusted after-tax income

- 0.06

- 0.08

- 0.10

- 0.12

- 0.14

- 0.16 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

SOURCE: Conference Board of Canada (2011) Canadian Income Equality. Canadian Income Equality. http://www.conferenceboard.ca/hcp/hot-topics/canInequality.aspx Figure 3

reduced inequality, but the impact is now at least in the short term. But, as we have smaller. This is likely the result of the reduc- already seen, governments are in a position tion of federal transfer payments and the to address inequality in disposable income, subsequent reduction in provincial welfare especially through the tax and transfer programs (motivated by the desire for cost system. savings, but also a philosophical choice in The current government has, in fact, some provinces, as in the US, for welfare put in place modest measures that reduce reform). Redistribution through tax and transfers income inequality. Since 2006, the basic per- has leveled off since 2000 and both market sonal exemption has been increased, the income and disposable income inequality have Universal Child Care Benefit (UCCB) and remained relatively stable. Nonetheless, the Working Income Tax Benefit (WITB) have trend to greater inequality remains clear. been brought in, and the Goods and Services Tax (GST) was reduced – all measures that WITH THE SITUATION BECOMING WORSE, benefited low-income households (even if HOW SHOULD GOVERNMENTS RESPOND? many critics argued that the UCCB and GST The broad international trend to increased cut should have been designed more progres- inequality of market incomes in advanced sively). As a result of these measures, Statistics economies is likely beyond the capacity of Canada data shows that even while the market federal and provincial governments to address, income of households in the lowest income

92 THE CANADA WE WANT IN 2020 REDUCING INCOME DISPARITIES AND POLARIZATION

quintile dropped between 2005 and 2009, brought in the Universal Child Care Benefit, post tax and transfer disposable income for analogous to the old Family Allowance, and this group grew, and their relative share of restored a per child tax deduction. Some social disposable income remained constant. policy critics have argued that these measures, The government should be encouraged which are not targeted to lower income house- to continue in the directions it has set for holds, are regressive. However, restoring some itself, remaining cognizant of the impact of form of universal recognition of the social value of child-raising was an important – and politically popular – objective of the current government The government should which it will be loath to give up. But having restored a degree of universality to the child continue to enhance the Working benefit system, the government should ensure that future increases are targeted more towards Income Tax Benefit lower- and middle-income households through the Canada Child Tax Benefit (CCTB) tax and transfer changes on lower income and National Child Benefit Supplement. groups. In particular, the government should While enhancing existing programs such as continue to enhance the WITB. WITB and the CCTB are admittedly incremental The WITB, which was implement- measures that will only have a modest impact ed in 2007 and expanded in 2009, is one on income inequality, I believe this course of of the most important poverty reduction action makes the most sense at the present measures taken in recent years. It supple- time. As the government seeks to eliminate ments the incomes of low earners and helps the large fiscal deficit run up in response to remove disincentives to seeking paid work the recent recession – and with the recovery instead of remaining on social assistance still slow and uncertain – it is unlikely that any programs. As initially designed, however, WITB government would want to increase taxes was brought in at such a low level that it excluded dramatically in order to fund greater benefit many of the working poor. Enhancements increases. Instead, governments are more likely brought in in Budget 2009 will ensure that to be persuaded to build on programs they it will at least benefit anybody working have already initiated or enhanced, such as the full-time at minimum wage. Over time, the WITB and the CCTB. federal government should continue to extend Changes to taxes and benefits alone will not be able to turn around a 30-year international trend towards income inequality in advanced Governments should economies – although they can perhaps arrest the increase in inequality in disposable seek to enhance civic equality incomes. But governments should also keep in mind other means of ensuring social cohesion by emphasizing common by ensuring that people are treated as equals and feel respected as equals, even if significant institutions income disparities exist. As the American writer Mickey Kaus has argued, as economic dispari- WITB further up the income ladder, and prov- ties become harder to overcome with conven- inces should integrate their income support tional policy measures, governments should programs with Ottawa to increase its impact. move from policies that simply try to achieve The government should also continue to more equal distribution of income towards enhance child benefits. The current government policies that seek to enhance civic equality by

93 emphasizing common institutions where citi- represents an important component of social zens meet as equals, regardless of income.4 equality. Just as extreme income equality can In Canada, we are fortunate to have many undermine social cohesion, measures aimed at of these public institutions – such as public improving civic engagement can help citizens schools and a universal health care system. to interact as equals in key areas of public life While many have proposed reforms to health- and social services. care and education to reduce costs or improve As the economy recovers, the government efficiency, policy makers should keep in mind should pursue a mix of strategies. It should that these are institutions that help preserve increase benefits directed to the working poor social cohesion and social equality, and market- and low income families, significant enough oriented reforms to education and healthcare to ensure that the lowest income quintile should be structured in ways that do not allow continues to increase its level of disposable the better-off simply to buy superior services income in both absolute and relative terms, or exempt themselves from these important while also undertaking measures to enhance social institutions. civic equality by protecting important public Governments can also pursue other means institutions and enhancing a common sense of of promoting social cohesion and civic engage- citizenship. Through these measures Canada ment, whether through voluntary or military can ensure that the broader global trends service, or greater knowledge of and pride driving income inequalities do not under- in Canadian history and culture. The current mine Canada’s social compact and the sense of government has taken some steps in these civic equality that a free and democratic areas. It should also keep in mind that pro- society requires. moting the common values of citizenship

4 Kaus, M. (1992) The End of Equality. New York: Basic Books.

94 THE CANADA WE WANT IN 2020 INCOME REDISTRIBUTION IN CANADA ANDREW SHARPE

Andrew Sharpe is Most developed countries have experienced This has hugely boosted the income of the Executive Director of the increased market income inequalities in top 1%, the income group that has been Ottawa-based Centre for the recent decades. A large number of factors driving, almost single-handedly, the recent Study of Living Standards, have been identified as contributing to this rise in inequality. Overly generous com- a non-profit research development. The decline in unionization pensation practices in the financial sector organization he founded in has meant that fewer workers enjoy the ben- have also contributed to the large increases 1995. Prior to this he was efits of collective bargaining, an equalizing in the incomes of top earners. Head of Research at the force in income distribution. Governments At a household level, increased assor- Canadian Labour Market and in many instances have failed to raise mini- tative mating, defined as the tendency for Productivity Centre and Chief, mum wages in line with overall wage gains, persons with similar education and qualifi- Business Sector Analysis, at disadvantaging the worst paid workers. cations to marry one another (a male doc- the Department of Finance. He Deregulation has often hurt certain groups tor who in the past married a nurse now is also founder and Editor of of workers such as truck drivers and air flight marries another doctor), has led to the rise the International Productivity attendants, as has privatization of public ser- in the number of high income two-earner Monitor and Executive vices. households. Director of the International At the same time, skill-biased techno- Association for Research logical change, related to the information THE IMPACT OF INCOME TRANSFERS AND in Income and Wealth. technology revolution, has reduced the TAXES ON INEQUALITY IN CANADA He received a PhD in overall demand for the services of the poor- The distribution of income in this country economics from McGill ly educated, and globalization has meant is greatly affected by government policy. University in 1982. that employers can now outsource produc- Statistics Canada produces estimates of tion to low-cost countries. This decreases income distribution based on three differ- the bargaining power of workers and so ent measures: (i) market income, defined as reduces their incomes further. earnings plus net investment income and At the other end of the spectrum, faulty private retirement income; (ii) total income, corporate governance oversight procedures which includes transfer payments; and (iii) have resulted in a massive rise in CEO com- after-tax income (which includes all taxes pensation relative to the average worker. and transfers). It is the after-tax distribution

95 Ratio of top to bottom quintile income in Canada, adjusted for family size

Market income Total income After-tax income 1981 9.70 5.66 4.78 1989 10.26 5.60 4.57 2000 13.13 6.95 5.69 2009 14.28 7.06 5.64 Point change 1981–1989 0.6 -0.1 -0.2 1989–2000 2.9 1.3 1.1 1981–2000 4.6 1.4 0.9 1981–2009 1.1 0.1 0.0 Total Growth % 1981–2009 47.2 24.7 18.1

SOURCE: Statistics Canada (2011) Income in Canada 2009.

Figure 1

that is the most relevant from the perspective the highest quintile (2.9%). The final, after-tax of private consumption, as it reflects the ratio between the top and bottom quintiles inequality in access to marketed output. It was lower still at 5.64 to 1 or 40% of the 1 A quintile is a portion of does not, however, reflect access to public market income ratio. Figure 2 shows the a frequency distribution services. Once this is factored in, we see a absolute figures for the various measures containing one-fifth of slightly different picture, as I explain below. of income for the year 2009. the total sample. The top In 2009, the ratio of the market income To track broad trends in income inequality, quintile represents the of the top quintile to the bottom quintile the Gini coefficient is a well-accepted indica- average adjusted income was 14.28 to 1.1 For every dollar of market tor. It reflects the dispersion of the income of the 20% of all economic income earned by a person in the bottom distribution, and its value ranges from zero families who recorded the quintile, a person in the top quintile to one. While a value of zero would indicate highest income; the bottom received $14.28 (Figure 1). Income trans- that income is equally divided among quintile is the same for those fers greatly boosted the total income of Canadians, a value of one would mean that with the lowest income. The those in the bottom quintile and reduced a single household receives all the income quintile distribution takes the top/bottom income ratio by one half in the economy. Therefore, when income into account only economic to 7.06 to 1. This is the result of the high inequality increases, the Gini coefficient goes families (not unattached government transfer rate for the lowest up and vice versa. individuals) and is adjusted quintile (amounting to 52.0% of adjusted The Gini coefficient tells the same story for changes in family size total income of this quintile) compared to about the impact of transfers and taxes over time.

96 THE CANADA WE WANT IN 2020 REDUCING INCOME DISPARITIES AND POLARIZATION

Adjusted income by quintile for economic families, 2009

$120,000

$100,000 105,900 102,800 $80,000 82,900 $60,000 57,600

$40,000 52,800 48,800 41,600 36,800 15,000 35,800 $20,000 14,700 28,400 7,200 26,500 20,900 0 Bottom quintile Second quintile Third quintile Fourth quintile Top quintile

Market income Total income After-tax income SOURCE: Statistics Canada (2011) Income in Canada 2009.

Figure 2

on income inequality. In 2009, the Gini quintiles grew by around 18%, the income coefficient for market income was 0.515. of the middle quintiles grew by around 25%, When income transfers were included, it but the incomes of the top quintile grew dropped by 16.5% (0.085 points) to 0.430. by close to 40%. With taxes factored in, it was an additional Figure 1 shows the extent to which taxes 0.036 points lower at 0.394, a further 7.0% and transfers have reduced market income decline. Income inequality as expressed inequality over the period 1981 to 2009. by the after-tax Gini coefficient was thus In 1981 the low to high quintile ratio of roughly three quarters (76.5%) of the level income after taxes and transfers was 4.78, of inequality for market income. or about half what it would have been for market income (9.7). By 2009 these figures HOW HAVE REDISTRIBUTIVE had switched to 5.64 (after taxes and trans- MEASURES CHANGED OVER TIME? fers) and 14.28 (market). In simple terms, Between 1981 and 2009 inequality in Canada then, after-tax income inequality rose by grew, according to both measures (top to 18.1% over this period while market income bottom quintile ratio and the Gini coefficient). inequality rose by 47.2%. Redistribution Figure 3 shows that the real market incomes measures had more of an effect on the lowest of the bottom two quintiles actually fell over quintile in 2009 than they did in 1981. But this period, while that of the top quintile rose such measures were not strong enough by 43.2%. When taxes and transfers are taken fully to offset the sharp increase in market into account the incomes of both the bottom inequality that took place over this period.

97 Percentage change in income for economic families 1981 – 2009

50 %

40 % 43.9 43.2 38.9 30 % 25.4

20 % 23.9 23.1 19.5 19.2 17.8 17.6

10 % 15.4 12.3 11.5 -3.2 -2.7 0 %

-10 % Bottom quintile Second quintile Third quintile Fourth quintile Top quintile Market income Total income After-tax income

SOURCE: Statistics Canada (2011) Income in Canada 2009.

Figure 3

Gini coefficients for the time tell a similar to 9.9% between 1982 and 2007. This means tale. Canada was a more unequal society in that 1% of Canadian households command terms of income distribution in 2009 than nearly 10% of our total income, a trend 2 Heisz (2007) reached a it was in 1981, but it would have been far towards income polarization that is at once similar conclusion for the more unequal without the greater redistrib- alarming and very public. Such accu- 1981 – 2004 period. While utive role of the state.2 Nonetheless, there mulation at the top has almost certainly governments are now doing was still a significant increase in after-tax contributed to the perception that overall more on the redistributive income inequality in this country over the inequality has risen more than is in fact front relative to 1981 – as period: government could have done, and the case. This is something that needs gauged by their impact on could be doing, more to offset rising mar- to be accorded special attention in the after-tax income relative to ket inequalities. development of future federal government market income – an OECD As noted, the top 1% of earners have redistributive policies. study found that the extent accumulated massive sums in recent years. of this redistribution effort The market income share of the top 1% A BROADER APPROACH has diminished since 1994 of super-rich households increased 5.9 TO REDISTRIBUTION (OECD, 2008). This decline percentage points from 7.7% in 1982 to Discussions of redistribution are generally has been largely driven 13.8% in 2007, accounting for the entire framed in terms of government taxes and by the declining role of increased income share for the top quintile transfer payments and the effect of these on transfers such as welfare as a whole.3 The after-tax income share of various income groups. But the issues are payments and employment the top 1% increased 3.4 points from 6.5% much broader. The discussion can be extended insurance.

98 THE CANADA WE WANT IN 2020 REDUCING INCOME DISPARITIES AND POLARIZATION

to include government spending on public top four income quintiles, and was much goods, such as education and health, and weaker in the bottom quintile, largely due how this is distributed between groups. It to differential rates of enrollment in post- can also take in other breakdowns of the secondary education. population such as by age group, educational This broader approach to redistribution attainment level, and region. highlights the important redistributive role played by government spending on goods and services such as health and education. Erosion of public Public services are therefore an essential element of the redistributive effort of gov- services will tend to ernment. Erosion of public services will thus tend to increase inequality, something that increase inequality is not often at the forefront of discussion when cuts are proposed. The Centre for the Study of Living Another interesting fact that comes Standards (CSLS) has recently released a to light when taking a broader view of report that provides such a broader analysis of distribution issues is that the largest the net redistributive effects of government redistribution in Canada, in terms of net taxation and total spending.4 It found that government expenditure, actually takes in 2005, the latest year for which data are place across generations, not income available, net government expenditures groups. In 2005, households headed by in Canada were $2,557 (2000 US dollars) a person 65 or over received, on aver- per household, consisting of $11,653 in age, net government spending of $24,091, government transfers i.e. income support compared to $-2,452 for households with a programs, $9,306 in public consumption (e.g. head aged below 65. This situation reflects education, health), and -$18,401 in taxes. A the Old Age Security and Guaranteed household in the bottom income quintile Income Supplement payments made to received $4,245 in net government expendi- seniors, the higher healthcare expenditures ture, in the second lowest quintile $6,065, in for this group, and the lower taxes paid, the middle quintile $7,588, in fourth quintile reflecting lower income. $4,707, and in the top quintile -$9,821. This generational redistribution is a 3 Veall, M. (2010) “Top It is notable that it is the middle quintile, normal part of the implicit contract Income Shares in Canada: not the bottom quintile, that benefits the between the state and the population, Updates and Extension”. most from net government spending and whereby persons pay taxes during their Working Paper Department that it is the top quintile that benefits the working lives and then receive significant of Economics, McMaster least (largely because of the higher taxes income support and health benefits during University. paid by households in this quintile). the latter part of their lives. However, this (http://worthwhile.typepad. Different types of government expenditure aspect of overall redistribution can easily com/veall.pdf) programs have different redistributive be forgotten. There is a tendency for people impacts. For example, absolute spending on to believe that most of the contributions 4 Sharpe, A., Murray, A., healthcare was found to be similar across they are paying to redistributive efforts Evans, B. & Hazell, E. (2011) income groups, implying an equalizing favour the poorest income groups, when “The Levy Institute Measure effect on the overall income distribution, in fact they mostly favour the old (there is of Economic Well-being: given that this spending represents a much of course some overlap between these Estimates for Canada, 2000 greater share of the broadly-defined income two groups). and 2005”. CSLS Research of the poor than of the rich. In contrast, Report 2011-09. education spending was concentrated in the

99 POLICY RESPONSES // Intergenerational inequality Fundamental changes have occurred in Unlike most other developed coun- the Canadian labour market, and in society tries, including the United States, in general, in recent decades due to global- Canada does not have an inheritance ization and technological change. During tax in place. The introduction of such this time, redistribution policies have played a tax could contribute significantly to a key role in reducing income inequality in greater equality of opportunity in this Canada. However, the tax/transfer system country and should have a moderating should do still more to ensure that the after-tax effect on market income inequalities distribution of income in this country down the line. Critical implementation remains within a socially acceptable range. issues include the income threshold The system must evolve to keep up with at which the tax kicks in (people with the changing economic environment. In a relatively modest estates should not recent paper Robin Boadway from Queen’s be affected) and how to minimize tax University has cogently argued that the avoidance possibilities for the rich. redistributive role of the tax/transfer system in Canada is inadequate and needs rethink- // Post-secondary education ing.5 He points out that the rate structure of There are a number of market fail- the tax system as a whole has considerably ures associated with post-secondary flattened, especially at the provincial level, education. Education is a particularly and that transfers to the least advantaged, risky form of investment: low income such as those on welfare, have worsened individuals are subject to liquidity significantly over the last 30 years. In his view, constraints because of the difficulty of an equitable tax transfer system should borrowing against future human capi- redistribute so as to compensate for the (dis) tal, and persons from disadvantaged advantages with which people are endowed backgrounds are poorly prepared to suc- “through the luck of birth” (page 176). ceed. Government policies are needed Boadway argues for an equality of to address these market failures. This opportunity agenda. This would be a sig- would, in turn, help reduce inequality as nificant modification of the system that we more people from lower quintiles would currently have in place, which is largely be able to access the type of educa- focused on outcomes and smoothing tion that enables them to move up the the excesses of market allocations, with income ladder. Potential policies in relatively little regard for starting points. this areas include greater sheltering of Boadway focuses particularly on inter- investment in human capital through generational inequality and access to post- the tax system (for example, a wider secondary education. range of deductions for expenditures linked to education), a fully-funded income-contingent student loan system, 5 Boadway, R. (2011) and more grants to students from low “Rethinking Tax-Transfer income families. Policy for 21st Century Canada” in Gorbet, F. & Sharpe, A. (eds.) New Directions for Intelligent Government in Canada: Papers in Honour of Ian Stewart. Ottawa: CSLS.

100 THE CANADA WE WANT IN 2020 REDUCING INCOME DISPARITIES AND POLARIZATION

A reasonable degree of equality is widely expanded and the contribution that the rich regarded as a key societal goal. Given make to achieving greater equality of out- the inherent tendencies of the market to comes should be increased. Public services generate inequality, it is important that that benefit all citizens, such as public transit, government intervene through redistribu- should be further developed. Measures that tive policies to offset market forces and promote equality of opportunity, such as ensure that income inequalities remain inheritance taxes and better access to post- within socially acceptable limits. These secondary education for the poor, should policies take three forms. First, tax/transfer also be implemented. policies drive a wedge between market and The Occupy Wall Street movement post-tax income shares. Second, government has focused the attention of the world on spending on public goods and public growing inequality. Many political leaders, services such as education and health is including the Governor of the Bank of profoundly equalizing (something that Canada and the Minister of Finance, have needs to be clearly recognized as we plan for expressed sympathy with the issues identi- the future of such services). Third, equality fied by this movement. This situation provides of opportunity can temper the growth of an historic opportunity for Canadians market inequalities in the first place. to rethink our approach to addressing The way forward for Canada to become inequality. A national debate on how gov- a more equal society must include all three ernments in Canada can most effectively policy approaches. Programs that are effective redistribute income to prevent growing in assisting disadvantaged groups should be inequalities is urgently needed.

REFERENCES Heisz, A. (2007) “Income Inequality and Redistribution in Canada: 1976 to 2004”. Statistics Canada Analytical Studies Research Paper 298.

OECD (2008) Growing Unequal: Income Distribution and Poverty in OECD Countries. Paris: OECD.

Sharpe, A. & Ross, C. (2011) “The Living Standards Domain of the Canadian Index of Well-being: An Update”. CSLS Research Report 2011-15.

101 INEQUALITY IS NOT INEVITABLE SHERRI TORJMAN AND KEN BATTLE

Here’s the bottom line: the kids and paying the rent, in the trenchant Sherri Torjman is Vice- // Poverty and inequality matter. words of Mel Hurtig.2 President of the Caledon // Governments play a vital role At last count, in 2009, close to 3.2 million – Institute of Social Policy. She in tackling poverty and inequality. one in 10 Canadians – lived on a low income. has written in the areas of // The federal government holds the key This national average masks the fact that welfare reform, customized levers, which are already in place. certain groups (including aboriginal people, training, disability income and recent immigrants and persons with dis- supports, the social dimension POVERTY MATTERS abilities) face an even greater risk of poverty. of sustainable development Canada has established a reputation Not surprisingly, the poverty rate rises and and community-based poverty throughout the world as a peace-loving and falls with the economic tides, as illustrated reduction. In 2006 she authored stable nation. Inside our borders, an equally by Figure 1, which shows the close corre- the book Shared Space: The bright image emerges. A recent survey by spondence between the low income and Communities Agenda. She has the Centre for the Study of Living Standards unemployment rates. advised the government on (CSLS) found that most Canadians consider The undulating ups and downs of the tax measures for people with themselves happy – or very happy – with poverty waves are enough to make you sick; at disabilities as well as on childcare their lot in life.1 On July 1 this year, Maclean’s least that is the conclusion of a burgeoning and disabilities more generally. released an article on why it is a great time to body of international evidence. Of all the In 2010 Sherri was a recipient be living in Canada. hazards of life below the poverty line, none of the Top 25 Canadians Award Unfortunately, all this sunshine fails to so dramatically separates low-income from the Canadian Association cast light on a serious problem lurking just Canadians from the rest of society as the of Retired Persons. below the sparkling surface. health gap. People living on low incomes Far too many Canadians do not count have a shorter average lifespan and run a themselves among the happy campers. These greater risk of illness and disability than 1 CSLS (2011) “Happiness are the families that live in poverty. These are those with more money. as a Goal for Public Policy: the households that spend higher than aver- The struggle to live on an inadequate Ready for Primetime?” age proportions of their income on food, income increases the scope, frequency and CSLS Research Note 2011-1. clothing and shelter. Every day is a struggle severity of stress for families, thereby raising (http://www.csls.ca/notes/ just to get by. They choose between feeding parents’ and children’s susceptibility to a Note2011-1.pdf)

102 THE CANADA WE WANT IN 2020 REDUCING INCOME DISPARITIES AND POLARIZATION

Low income rate and unemployment rate, 1976 – 2009 16 %

14 %

12 %

10 %

8 %

6 %

4 %

2 % 0 % 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

SOURCE: Statistics Canada Low income rate Unemployment rate

Ken Battle is President of the Figure 1 Caledon Institute of Social Policy. wide range of physical, psychological and study in Britain put its price tag at an annual Before founding Caledon in 1992, social problems. The relationship between £25 billion or 2% of GDP. Here at home, he was Director of the National income level and all these types of risk is federal and provincial governments across Council of Welfare, a citizens’ typically strong and inverse. Canada lose between $8.6 billion and advisory body to the Minister The effects of poverty are felt very early in $13 billion in income tax revenue to poverty of National Health and Welfare. life. The odds of never seeing a first birthday every year.3 Ken was educated at Queen’s are worse for low-income babies in general University and the University and aboriginal infants in particular. Low INEQUALITY IS DIFFERENT of Oxford, and has taught at birth weight is an important predictive indi- FROM POVERTY: IT MATTERS TOO both Queen’s and Carleton. He cator of troubled childhood development Poverty is not, however, the only concern. It has advised the federal govern- and poor adult health. is closely linked to – but remains separate and ment on key issues of social But poor means more than just poor distinct from – the related problem of inequality: policy. Ken was awarded the health. Poverty is a serious and stubborn the gap in the average incomes of rich and Order of Canada in 2000 and the problem, imposing heavy social, economic poor households. Over the past quarter- Saskatchewan Distinguished and personal costs that affect all Canadians. century, earnings of the wealthy in Canada Service Award in 2004. Low incomes lead to lost opportunities for grew by 16% while those of the poor actually individuals, the economy and society. The dropped by 21%. The only positive note in this 2 Hurtig, M. (2000) Pay the Rent persistence of low incomes means that story is that inequality would be much worse or Feed the Kids? Toronto: governments are called on for higher social in the absence of government measures in the McClelland & Stewart. spending while the tax revenue that is needed form of redistributive social programs, and to fund the very programs that are aimed progressive taxes and benefits. 3 All these studies are cited at preventing and reducing low income The numbers tell a powerful story. An in Ontario Association of is foregone. exhaustive body of evidence from around Food Banks (2008) The Cost A US report estimated that child poverty the world shows the wide-ranging negative of Poverty: An Analysis of the in that country costs $500 billion a year – or impact of extreme inequality. Economic Cost of Poverty in 4% of GDP – in increased crime, reduced Research on health inequalities and the Ontario (see pages 7 and 17). productivity and poor health. A similar social determinants of health has found that

103 social status has a powerful effect on health. prisingly, raise the risk of falling below the The psychological damage resulting from low income line. When unemployment rises, being at the bottom of the socioeconomic as it did in the recessions of the past few ladder can be devastating. A groundbreaking decades, more widespread and deeper low study of UK civil servants found that those in income is sure to follow. the junior ranks were three times more likely But unemployment is not the only feature to die in a year than colleagues from senior of the economy that contributes to poverty. ranks, with a sliding gradation from top to The labour market itself is a prime driver of bottom. low income. More than half of low-income Societies marked by substantial inequality households in Canada can be classified as sooner or later pay the price. Regardless of a “working poor”. People in these households nation’s wealth, it will be more dysfunctional, work full time in the labour market but do violent and unhealthy from both physical and not earn enough money to lift them out of emotional perspectives if the gap between poverty. income groups grows too wide. Poorer coun- tries with less unequal wealth distribution have been found, on the basis of wide-ranging More than half of low-income indicators, to be more healthy and happy than richer, more unequal nations. households in Canada can be

VARIOUS FACTORS CONTRIBUTE classified as “working poor” TO POVERTY AND INEQUALITY There are strong forces that fuel persistent The problem is partly due to the growth low income; these are deeply rooted in the of “nonstandard” work, which includes economy, in labour markets and in society. part-time, seasonal and temporary work. Contrary to public perception, most There has been a corresponding erosion of poverty is not an inherited condition of middle-wage employment, including middle a small, hard-core group that passes its management positions and well-paid blue- “affliction” from one generation to another. collar jobs in traditional industries, such as While a substantial segment of the population manufacturing and transportation. has low income at some point, poverty is Social factors are also major contributors usually a transitory rather than persistent to poverty. Unfortunately, poverty is a moth- problem. Most of the poor escape poverty erhood issue − literally. Bearing and raising and their risk of falling back declines children play an important part in making over time. women vulnerable to low income, especially However, certain groups – notably single if they are raising children on their own. parents, unattached individuals, those with An increasing number of families with low education, visible minorities, recent children are headed by single parents, main- immigrants and persons with disabilities – ly women. Children raised by single mothers run a higher risk of persistent poverty. They run a much higher risk of poverty than those tend to be poor longer, suffer more frequent in two-parent families − 21.5% compared to bouts of low income and face diminishing 9.5%, respectively (2009 figures). Fortunately, chances of escaping poverty the longer they there has been considerable progress against remain below the poverty line. poverty among single-parent families Most Canadians rely on employment as over the years, due to growth in mothers’ their chief source of income. Bouts of unem- employment rates and improvements to ployment and underemployment, not sur- child benefits.

104 THE CANADA WE WANT IN 2020 REDUCING INCOME DISPARITIES AND POLARIZATION

GOVERNMENTS PLAY A VITAL ROLE IN Trends and patterns in income inequality TACKLING POVERTY AND INEQUALITY are tracked by a statistical measure known Tackling poverty means countering these as the Gini coefficient. It can theoretically powerful forces. We need to have more good range from zero (every family unit would jobs; investment in workers through educa- have the same share of income) to one (one tion and training leading to higher knowledge family unit would have all the income and and skill levels; equal pay for work of equal the others would have none). The higher the value; and enforcement of child support Gini coefficient, the greater the degree of agreements – to name just a few vital actions. income inequality. Figure 2 tracks inequality But while such remedies will prevent in Canadian families since 1976. poverty for some Canadians, they cannot The top purple line in Figure 2 represents reduce poverty for others. Recessions continue market inequality, which has increased over- to take their toll and so-called “bad jobs” all since the mid-1970s – from .387 in 1976 are now a permanent feature of the labour to .451 in 2009, a sizable 16.5% increase. The market. Moreover, certain groups typically middle orange line shows the trend in the experience poverty regardless of the state of Gini coefficient for total family income, which the economy – the result of such problems includes both market income and transfers as employment discrimination (especially from government income security programs. for new immigrants), weak job skills and The bottom blue line shows the trend in lack of education, especially as the bar for a inequality after both income taxes and decent job has effectively been raised to post- transfers from income security programs are secondary graduation. taken into account. The Gini coefficient for This is where government is uniquely after-tax income rose from .306 in 1976 to placed to intervene. Its actions can help off- .329 in 2009, an increase of only 7.5%. set the strong economic and social forces The three lines add up to one bottom line: that contribute to poverty. Its measures can Government interventions in the form reduce the growing gap between those with of transfer payments and progressive high incomes and those who are poor. income taxes reduce market income There are two main instruments that inequality derived from employment governments can employ to bridge the earnings and investment. widening gulf between the poor and the well-off: income security programs and measures within the income tax system. THE FEDERAL GOVERNMENT Income security programs for children, HOLDS THE KEY LEVERS seniors and the unemployed pay money Poverty and inequality matter – and so do directly to individuals and families. The governments. But not all governments are income tax system redistributes income and created equal. thus is another powerful and progressive In the case of poverty and income instrument for tackling inequality. Canada inequality, the federal level is the only has a progressive income tax system, which government with the ability to ensure the means that taxes paid increase with rising equitable treatment of citizens in all parts of income. In recent years, both provincial/ the country. Equally important, the federal territorial governments and the federal government already has the key levers – government have made increasing use income security programs and a progressive of the income tax system to deliver cash income tax system – at its disposal to combat payments to lower-income Canadians poverty throughout Canada. through refundable tax credits.

105 Gini coefficients indicate increasing inequality among Canadian families, though government reduces market inequality

0.50

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05 0 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

SOURCE: Statistics Canada Market income Total income After-tax income

Figure 2

Despite the important role of the income income replacement programs in Canada. tax system, it is income security programs that Provinces and territories operate another do the heavy lifting in terms of redistribution. major income replacement program: social Income security programs fall into two cate- assistance (welfare). gories: income supplementation and income While income replacement programs in replacement. Canada are far from perfect, this paper focuses Income supplementation programs bol- exclusively on the income supplementation ster low incomes. The Working Income Tax function. Improvements in income supple- Benefit and Canada Child Tax Benefit are the mentation measures offer the greatest pros- two major income supplementation pro- pects for making a real difference to both grams operated by the federal government. poverty and income inequality. Here’s how. They boost low earnings and low income, Right now, one in four workers makes just respectively. Most provinces and territories $10 an hour or less and close to half of all low- also supplement low income through their income households include at least one work- own child benefits and refundable tax credits. ing adult. This is the problem of the working Income replacement programs, by con- poor. trast, replace income which has been lost One crucial way for governments to due to such commonplace conditions as help the working poor is to top up their unemployment, disability and retirement. low earnings. Québec, New Brunswick and Employment Insurance, Old Age Security/ Saskatchewan offer earnings supplements to Guaranteed Income Supplement and the their low earners. In its 2007 Budget, the fed- Canada/Québec Pension Plan are the core eral government introduced its own earnings

106 THE CANADA WE WANT IN 2020 REDUCING INCOME DISPARITIES AND POLARIZATION

supplementation program, the Working is bolstered by an additional amount – the Income Tax Benefit (popularly known National Child Benefit Supplement – for as WITB). Proposed by Liberal Finance low- and modest-income families. Together, Minister Goodale in his government’s the combined benefits pay low-income 2005 Economic Statement, the WITB families an annual maximum of $3,485 for was carried forward by his Conservative the first child, $3,240 for the second child, successor, Jim Flaherty, in the 2006 Budget and $3,149 for the third and each additional and launched in 2007. child. While promising in theory, the WITB in its This national measure has a number first year provided a meagre payment of up to of strong points. It is a non-stigmatizing, $500 annually for single workers and $1,000 inclusive program that delivers monthly cash for single parents and couples. The program benefits to the large majority of Canadian was targeted so far down the income scale households with children. It pays the same that it excluded many of the working poor. amount to all families with the same level of We praised this first step and then advised income, regardless of source or family type. the government to take more action: raise The CCTB is also pan-Canadian. It provides the value of the WITB and extend it higher a stable and assured income supplement no up the earnings scale in order to help more matter where families live or work. of the working poor. Ottawa responded in However, more can be done to assist families. 2009 by enhancing the benefit and expand- We have proposed that Ottawa raise the CCTB ing its reach. to a maximum annual $5,000 per child − $1,515 However, the WITB still sits at a mod- more than the current $3,485. est maximum $944 for a single worker per Child benefits make a real difference. If year ($1,714 for a family) and cuts out at there were no federal child benefits, the low- a low net income of $17,004 ($26,218 for income rate for families with children would a family). This measure needs a healthy, have been 15% in 2008. Under the current multi-year injection of funds before it system, the low-income rate for families becomes a major weapon in the war with children was 9.3%. Our proposal would on poverty and inequality. But at least the reduce that figure further to 8.3% and would foundation is in place. lift an estimated 40,000 families above the poverty line. Because the recommended increase to Child benefits make the CCTB would be achieved by boosting the base benefit and not the National Child a real difference Benefit Supplement, it would increase benefits not only for low-income families. The Canada Child Tax Benefit (CCTB) is It would also provide a sizable rise in child the most substantial income supplemen- benefits for the modest- and middle-income tation program in the country. It is also a majority of families. powerful tool that the federal government A sole focus upon the lowest-income can wield to tackle poverty and inequality. families would widen the gap between The program delivers cash payments to poor households and those with incomes more than 90% of families with children. It above the poverty line but below average is progressive in that its benefits decline as income. The latter modest-income families incomes increase. also struggle with constrained budgets and The CCTB has a two-tier design. The could certainly use additional cash for their base benefit goes to almost all families. It children.

107 To help pay for a stronger CCTB, the Proponents of a guaranteed income argue federal government could draw on the that it could be delivered as a form of negative estimated $3.5 billion it now spends on income tax, using the income tax system to the Universal Child Care Benefit and the deliver cash to the poor. But, in fact, Canada non-refundable child tax credit. These already makes extensive use of the negative poorly designed measures are inequitable, income tax concept in the design of a range confusing and wasteful and contribute little of income-tested programs for various to the war on poverty and inequality. groups, including the Guaranteed Income The Caledon Institute has also proposed a Supplement, the Canada Child Tax Benefit new disability benefit that would be delivered and the Working Income Tax Benefit. by the federal government. The new Basic If we were to abolish these important Income would remove people with severe measures and replace them with a guaranteed and prolonged disabilities from provincial/ income, we would only end up reinventing territorial welfare rolls and provide a more the current benefits to meet the needs of adequate payment that would be equivalent specific groups in Canadian society. to seniors’ benefits currently in place.4 Fortunately, the foundations to help slay the poverty and inequality dragons are A NOTE ON GUARANTEED already in place in this country. They do not ANNUAL INCOME have to be built − merely built upon − in order Some people argue in favour of a “start-from- to stem poverty and reduce the growing gap scratch” approach to tackling poverty and between rich and poor. inequality. They would prefer to scrap the The federal government needs to step up existing array of income security programs to the plate. It already has both the levers and and replace them with some form of single the leverage to land a solid punch on poverty “guaranteed annual income” that would raise and inequality. all poor Canadians up to the poverty line. The problem with simple solutions such as this is that they are simplistic − and would do little to get at the root causes and dynamics of poverty and inequality. Poverty is a complex multi-dimensional issue that cannot be vanquished with a silver bullet. It requires a variety of strong programs and a range of effective services.

4 Mendelson, M., Battle, K., Torjman, S. & Lightman, E. (2010) A Basic Income Plan for Canadians with Severe Disabilities. Ottawa: Caledon Institute of Social Policy.

108 THE CANADA WE WANT IN 2020 REFERENCES Battle, K. (2008) A Bigger and Better Child Benefit: A $5,000 Canada Child Tax Benefit. Ottawa: Caledon Institute of Social Policy.

Battle, K., Torjman, S. & Mendelson, M. (2009) The Red-Ink Budget. Ottawa: Caledon Institute of Social Policy.

Battle, K, Torjman, S. & Mendelson, M. (2006) Towards a New Architecture of Canada’s Adult Benefits. Ottawa: Caledon Institute of Social Policy.

Marmot, M. & Wilkinson. R. (eds.) (1999) The Social Determinants of Health. Oxford: OUP.

Statistics Canada (2008) Earnings and Incomes of Canadians over the Past Quarter Century, 2006 Census. Ottawa.

Wilkinson, R. & Pickett, K. (2010) The Spirit Level: Why Equality Is Better for Everyone. London: Penguin Books. SECURING OUR HEALTH SYSTEM FOR THE FUTURE CANADA’S UNIVERSAL HEALTHCARE system is putting enormous pressure on provincial and Healthcare costs are federal treasuries at a time of fiscal deficits. Healthcare costs are rising as a percentage of rising faster than GDP in all GDP due to our aging society and healthcare inflation. Our existing health coverage is both developed countries unsuited to our country’s current health needs (focused on acute rather than chronic care) and Change is needed in our health system uneven across the country. Several groups – First not only because of financing issues, but Nations, older people with chronic conditions, also because of the unevenness of coverage those with significant pharma costs and no between provinces and groups. Our health private drug coverage, and the victims of lapses system was designed for earlier times. in medical safety – are particularly ill-served. Recognizing this we must make decisions Such problems are not unique to Canada. that make it more relevant to the challenges Healthcare costs are rising faster than GDP of today, most notably chronic illness and the in all developed countries, which certainly high cost of outpatient drugs (and variability suggests that there will be no easy solutions of coverage across the country). Today, too in this area. Nevertheless, the papers in this many healthcare decisions are played out section lay out clear options for moving for- in the public arena and taken in response ward in a way that will ensure that Canadians to public pressure, rather than being based in 2020 and beyond will have access to the on critical evaluation of need, the efficacy healthcare services they need and want. of treatments and an appropriate strategic All of our healthcare contributors are direction for a system that will always be firmly in support of a continued universal financially constrained. public healthcare system for Canada and all highlight the leadership role that the federal government must play in healthcare. While The federal government healthcare delivery remains a provincial responsibility, our authors are of the view has a key function in focusing that the federal government has a key func- tion in focusing constructive public attention constructive public attention and and debate on healthcare and in projecting a vision of a better health system for Canada. debate on healthcare THE CANADA WE WANT IN 2020 SECURING OUR HEALTH SYSTEM FOR THE FUTURE The 2014 federal-provincial healthcare evidence-based decision-making and a sys- negotiations should focus on real health tems approach that allows health personnel outcomes and finding ways to develop a to move seamlessly between care settings. patient-centred network of providers that The two papers that address the issue of is truly accountable to patients. Allowing funding both reject user fees and argue in the negotiations to get bogged down in favour of new, health-specific social insur- discussion of the minutiae, or hijacked by ance premiums. Raising more money for those who would prefer accountability to be healthcare will certainly be controversial, but clouded, would be a missed opportunity for if we want to maintain a world-class system, all Canadians. we will have to pay for it. This will take a societal consensus that can only be achieved with federal government leadership, real Raising more money for explanation of the options and costs and much better accountability to the public. healthcare will certainly be Efficiencies are important, but not on their own sufficient to carry our health system controversial, but if we want to into the future. For in 2020 we hope to have in place not just a patched-up healthcare maintain a world-class system, we service, but a truly regenerated system that is will have to pay for it. well-positioned to adapt as we advance.

All authors identify the need for concrete change in the way our public health system operates. Mark Stabile focuses on the requirement for better evaluation of which medical procedures we will fund. Philippe Couillard is concerned with bringing physi- cians into the management of the system and ensuring that innovation in health provision is both effectively analyzed and rewarded. Francesca Grosso and Michael Decter focus on the need for simple indicators, better LESSONS FROM 2004, PERSPECTIVES FOR 2014 PHILIPPE COUILLARD

Dr. Philippe Couillard, PC, MD “There is nothing wrong with change, is presently a Strategic Advisor, at SECOR Group. if it is in the right direction” From 2003 – 2008 he served Winston Churchill as Québec’s Minister of Seven years ago, our country’s first ministers WHAT WAS MISSING IN 2004? Health and Social Services. gathered in Ottawa with the intention of Looking back at 2004, what is striking was the He has held many positions achieving an accord that would fix health- lack of detailed and meaningful discussion within medicine, including as care “for a generation”. Sadly, this ambition of healthcare, per se. Most of the discussion Professor at the Université remains unrealized. centered on funding, volumes and wait-times, de Sherbrooke and chief What progress there has been has taken leaving quality, performance and most of surgeon and director of place on the “production” side of our healthcare the core healthcare issues facing Canada on the Surgery Department system: wait-times for targeted procedures the sidelines. In hindsight, this focus on the at the Centre Hospitalier have improved (albeit at considerable cost). production line rather than on the real value Universitaire de Sherbrooke. On the negative side, there remain significant delivered to the user was highly predictable, He is the chairman of the cross-country disparities in coverage for given the often anecdotal level of most media Health Research Foundation prescription drugs, home and long-term coverage of healthcare and the realities of our of Canada, a director of two care. Attempts to improve accountability modern political world. Canadian biotechnology have fallen short of expectations. This is not to say that reducing wait times is companies and a partner at As 2014 approaches, some would like the not important. Shorter wait-times help bolster Persistence Capital Partners, existing accord – including the 6% escalator – user-confidence in our healthcare system. But a private equity investment to be renewed as is. This would be a even more pressing is the need to improve the firm. Dr. Couillard is a member missed opportunity. Our country’s leaders performance of overall healthcare networks. of the Queen’s Privy Council must learn from the experience of 2004 Healthcare services should address our soci- for Canada and sits on the and use the forthcoming rendez-vous as ety’s changing needs and the resulting patient Security and Intelligence a unique opportunity to make real and experience should be comparable to that of Review Committee. perceivable improvements in healthcare for citizens of other affluent countries. The focus all Canadians. should be on delivering high quality, seamless, safe services in a timely fashion.

112 THE ROLE OF THE The reality is that healthcare is a “luxury FEDERAL GOVERNMENT good” accessible to affluent societies such as Since most healthcare responsibilities lie Canada. As such, it is unlikely that the annual at provincial/territorial level, the federal rate of increase in expenses can be brought government is one step removed from the down to less than 4-5% without adverse conse- immediate delivery of services. In spite of this, quences, followed by rebound overspending. the federal government can – and should – So, the focus should not only be on mitigating assume a position of leadership, leveraging costs but also on pursuing better value for its financial contribution to become an money. influential agent for change and focusing the This is particularly important for Canada. entire country’s attention on healthcare (still Over the past two decades we have slipped most Canadians’ number one priority). backwards in performance relative to our My first piece of advice follows from peers. This has not escaped notice: the OECD Hippocrates’ aphorism: “First do no harm…” estimates that by increasing our efficiency in The federal government should be a facilita- healthcare we could save (or reallocate) up to tor and a collaborator, not a self-appointed 2.5 % of our GDP by 2017.1 policeman in this very complex sector. We are not facing a black hole, nor are There is much that is good in our healthcare we likely to see the apocalyptic downfall of system and it could easily be destabilized by our healthcare system. However, if we do not succumbing to the temptation of a scorched make improvements, we will see a growing earth policy. Change, in order to be long lasting, gap between supply and demand and an has to be incremental and feasible: services increasing level of dissatisfaction leading to are delivered as we deliberate, 24 hours a day, “default” and anarchic privatization of the 7 days a week, thanks to the efforts of some of financing of services, instead of a harmonized the best teams in the world. and regulated integration of providers, for Having said that, the key areas that require the benefit of patients. attention are as follows.

Securing better value for money Payment reform should stand It is difficult to argue that Canada’s healthcare sector is not well-funded. In 2009 we ranked as the cornerstone of the next wave 6th among OECD countries in both per capita healthcare spending and health spending of healthcare reform as a % of GDP. Since the budgetary drought of the mid-nineties, healthcare costs have Rather than seeking to change the way we increased rapidly. Globally, all developed fund the current basket of publicly insured countries face the same decoupling of health- services, we should look to reform our care expenses and GDP growth. Variations payment models. How we pay providers and in funding mechanisms across countries – institutions has a profound impact on the subsidized private insurance, social insurance, choices they make (or do not make) and on tax-based funding with or without user fees – the performance of the overall healthcare have limited impact on countries’ ability system. Thus, payment reform should stand as either to “bend the cost curve” or to improve the cornerstone of the next wave of healthcare performance (with the exception of the poor reform. The key is to reward the creation 1 OECD (2011) Economic performance and equity of the very few of real value (high quality outcomes for Policy Reforms: Going for systems that are based purely on private, patients) rather than only volumes of proce- Growth 2011. Paris: OECD. unsubsidized insurance). dures or interventions. Chapter 6, p.229.

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Practically speaking, the value of reducing (ABF) for our hospitals, the equivalent of the wait-time for knee replacement surgery fee-for-service for physicians. While this to less than six months is much reduced if the would be a move in the right direction, ABF patient does not also have good access to better is not the whole answer. Isolated ABF risks integrated care (including seamless transition being inflationary and putting too much between outpatient treatment and hospital, emphasis on hospital care in the continuum home care and rehabilitation, followed by pre- of services. A better response would be to base ventative measures aimed at avoiding other a substantial portion of payment on outcomes similar ailments). Such a scenario is not a (assessed from the perspective of the patient) fantasy. It is a concept elegantly described by rather than solely on the number/type of Michael Porter,2 amongst others, and one that procedures performed. Timely access then is being implemented in many of the foremost becomes an important, but not unique, deter- managed care organizations around the minant. Employing, once again, the example world. In such a system, value is defined and of knee replacement surgery, the desired measured from the perspective of users rather outcome would be an integrated, timely, safe than system managers. Evaluation focuses on and patient-centered management of the high quality outcomes rather than the number condition: osteoarthritis of the knee. of procedures performed in defined clinical When it comes to physicians, we should situations. move in the opposite direction. Rather than the current fee-for-service model, new models combining some form of capitation We need physicians (being paid for keeping a defined population healthy), with incentives for productivity, to participate in the management good practices and outcomes should be of the system identified and promoted. Fixing the dysfunctional relationship between In helping to define – not implement, that physicians and healthcare institutions is a provincial responsibility – such changes, At the birth of our public healthcare system, and ensure that they are adapted to the a Faustian bargain was struck. Many medical varying realities of our system (rural, urban, organizations opposed Medicare and phy- teaching, etc.), the federal government has sicians in both Saskatchewan and Quebec an opportunity to spell out what a “patient went on strike, in the middle of the October centered system” really means. crisis. In response, governments allowed The current block funding of institutions, physicians to retain a free entrepreneur with annual indexation, provides little or no status within publicly-funded hospitals, incentive to innovate or improve efficiency a feature unique in the OECD and, to this (and if efficiency gains are made, savings day, the source of constant tension between cannot easily be identified, captured and managers and professionals. The other reallocated to other parts of the healthcare promise of 1970, that a competitive level of network, such as primary care). Savings compensation for physicians would be main- 2 Porter, M.E. & Teisberg, on paper fail to materialize in reality, more tained, has been honoured, despite bumps E.O. (2006) Redefining money is requested the following year and along the way. Health Care: Creating another circle of virtual savings – and very It is now time for a “new deal” to be struck value-based competition real expenses – begins. between the medical profession and public on results. Boston: Harvard Many argue that the best way to address organizations. Most importantly, we need Business School Press. this problem is with activity-based funding physicians to participate in the management

114 of the system (with adequate compensation (70.6%). This is a direct consequence of for doing so). The best healthcare institutions the exclusion from the initial definition of have strong physician leaders who collaborate Medicare of many of the services required with administrators. to meet our current challenges (an aging Under such a model, physicians and population with chronic health issues). other health professionals (including nurses) would play a pivotal role in identifying best practices and making decisions about Canadians too often optimal resource use. I observed, first hand, enormous benefits from the active face a “disease lottery” involvement of physicians in dealing with a major epidemic of C. Difficile in 2004. Based The solution seems obvious: extend public on this and other experiences, I truly hope coverage of non-core services. But this raises to see the emergence of a new generation of funding issues. Unless we choose to modify physician/leader/managers collaborating physician-hospital coverage to balance this with administrators and other health profes- extended basket of services (which would sionals, to the benefit of patients. be very difficult, politically), we would need to find extra funds. Efficiencies deriving from Adapting the system reform of payment models should yield some to meet our changing needs money, but there is no escaping the fact that At its inception, Canada’s Medicare was nar- if new services are to be covered, new money rowly defined as covering services provided will be required. In the world of healthcare, by physicians, especially in hospitals. This money always comes from citizens’ pockets, made sense at the time. In the second half one way or another, so a form of co-payment of the 20th century Canada’s population (or social insurance model) would need was young and acute health issues were the to be introduced, or else taxes would need major concern. This is no longer the case. We to be significantly increased. It is the respon- therefore need to adapt our system to meet sibility of all governments to present these our country’s changing demographics and choices to the electorate, clearly and with their needs. respective costs and benefits explained. Canadians too often face a “disease lot- tery”. In acute situations patients receive Finding better ways to manage demand excellent care and incur few out-of-pocket Historically, our system has managed to control expenses, apart from prescription drugs, costs only by reducing supply. This led to one coverage of which varies considerably by of the worst decisions of the nineties: cutting province. But the system’s response to medical school enrolment without increasing more contemporary challenges (such as the supply and influence of allied profession- Alzheimer’s disease) is highly deficient. Only als, such as nurse practitioners. The irony is rudimentary home care is provided and that today the shortage of professionals (a self- families and caregivers are left facing signifi- inflicted wound) is invoked as a key argument cant financial challenges. against proposed changes… the typical story of Overall, Canadians pay more privately the dog biting its own tail. and out-of-pocket for healthcare than most Managing demand does not necessarily of our western European counterparts: in mean introducing user fees or other forms of 2009 Canada ranked 22nd among OECD co-payment. Although there is nothing inher- members in terms of the percentage of total ently wrong with these widely-used methods, healthcare spending that is publicly funded my view is that they would simply waste

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energy and resources and yield little positive tion among providers who vie for public impact. Where such revenue models are in payment. place, there have been constant demands for While such implementation decisions exclusion, leading to a decreasing number of take place, of course, at the provincial/ter- payers supplying an increasingly marginal ritorial level, there remains a powerful role amount of money, at considerable admin- for the federal government in signalling the istrative cost. There is also evidence to show type of system that is mostly likely to be able that, when faced with fees, users reduce their to meet the needs of Canadians in 2020 and utilization of all services, both unnecessary beyond. and necessary, which can cause problems down the line. Supporting a more meaningful Nevertheless, an open discussion of the discussion of private vs. public merits of these funding options should be This is the most difficult, sometimes obses- part of our political debate. Taking refuge in sive, part of our conversation on healthcare. the “prohibition” of user fees in the Canada Proponents present the private sector as a Health Act is not an adequate response, panacea, opponents see it as the devil incar- underestimating, as it does, the capacity of nate. Both sides are wrong. informed citizens to engage in a meaningful Across the political spectrum, most observ- conversation on the question. ers agree that family medicine groups in In my view, though, there are more equi- Ontario and Quebec have improved primary table ways to control demand. First, an evi- care delivery and that they demonstrate the dence-based process should be put in place public sector’s capacity to innovate. Such to establish optimal use of new technologies groups are essentially a form of partnership and pharmaceuticals. Once more, the focus between the public system and a private (often should be on outcomes: it is not so much the for-profit) corporation. Their hybrid nature has number of MRI machines that matters (above not, though, stood in their way. Likewise, when a certain minimum) but how they are used. the state acts as an insurer (in the context of On the budgetary side money should flow workers’ compensation, for example), it loses to integrated primary care organizations that its statist inhibitions, employing the services purchase specialised services “upstream” in of private providers, negotiating prices and encouraging competition just as the private sector would. But bring the discussion round An evidence-based to other types of services (e.g. high volume, low intensity procedures such as minor surgery process should be put in and diagnostic procedures) and endless objec- tions are raised. place to establish optimal The social problem associated with the presence of private providers in our healthcare use of new technologies environment is not their existence, but the fact that their resources are not accessible and pharmaceuticals to all. Public funding of privately-delivered services is a simple concept that overcomes the system, based on outcomes and docu- this problem, works to the advantage of all mented needs. (The National Health Service and is entirely compatible with the Canada in the UK is presently moving in this direc- Health Act. So, where there is sufficient density tion, an experiment worth studying.) Lastly, to ensure competition, it makes every sense efforts should be made to induce competi- that the state should determine the price of

116 selected procedures and that all providers – gaps in coverage and a high degree of public and private – should compete for the inequality across the country. It can be open privilege of serving patients. about the fact that extending health coverage It is important to note, however, that while to new areas will require new funding from such competition is feasible in our main cities, governments and citizens. It can state where many providers coexist, competition unequivocally that nothing in the Canada between providers has little practical mean- Health Act prevents competition among ing in our remote and sparsely-populated providers, under public funding. communities where there is only one regional It could also facilitate the creation of an provider. This is one of the factors that sets explicit and credible mechanism for ensur- us apart from western European countries. ing accountability. We need a renewed Health Another is the larger number of (often less Council, composed of existing provincial well-compensated) physicians in such coun- Quality Councils or Commissioners, with tries. Healthcare systems cannot be dislocated representatives from the health professions from their social-historical context, nor can and the public. The role of this jointly-funded they be transferred as blueprints between but independently-governed “Institute for societies. But we can observe lessons from Innovation in Healthcare” (which would elsewhere and adapt them to our reality. subsume our existing Canadian Institute for Health Information as a data provider) Defining and promoting would be to research best practices around accountability in healthcare the country, make them visible and promote Too often, federal-provincial conversations their adoption. on healthcare end up as power and visibility struggles. There is no need to go down that path again. Healthcare is, in large part, a Too often, federal-provincial provincial responsibility and, by insisting on being visible and in control, Ottawa runs the conversations on healthcare risk of transforming the debate on improved, sustainable patient care into a constitu- end up as power and visibility tional battle. In 2004, as the federal govern- ment insisted that provinces should be held struggles accountable for their use of federal transfers, the last days of the conference were spent The Health Council should present an discussing the merits of asymmetric federal- annual report directly to the federal-provin- ism, rather than health outcomes. cial-territorial assembly of Health Ministers. Within the existing constitutional frame- Each provincial/territorial government’s work, credible and visible accountability response to its recommendations would be must, though, be established. It is legitimate evaluated by their respective Quality Council, for the federal government to use its spending and ultimately sanctioned – or rewarded – by power to initiate change and then to receive the electorate. This mode of reporting, coupled credit for it. with the absence of elected officials on the A starting point would be for the federal Council, would ensure its credibility and inde- government to state that change and exper- pendence from political/electoral cycles. imentation (including in coverage and When it comes to federal funding levels, funding methods) are welcome, so long as there is little doubt that arrangements will universal coverage and equity are preserved. be renewed, at least at the new “baseline” It can acknowledge that there are significant level reached in 2014. But the 6% escalator

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would be assessed through an arm’s length The present federal government process (for example by an academic review or the Quality Councils themselves) and the has one strategic decision to take: findings would be tabled and debated in the provincial legislature, which would then be does it want 2014 to be accountable for results.3

a low-profile, rubber-stamping CONCLUSION Our healthcare system is not in crisis. But, like event, or does it want renewal other publicly-funded systems, it is suffering from the classic tension between needs and of our ailing healthcare system resources. Thirty years from now, this tension will still be there, and a new society with its to be part of its legacy? specific needs, challenges and unpredictable technological advances will have emerged. should remain open for discussion and its Our responsibility is to take a step forward continuation linked to substantial progress and to use the 2014 horizon as a catalyst for in performance. change and improved patient care. All of us – One option would be to place all new citizens and governments alike – have a role to funds (beyond the 2014 baseline) in a play and bear a share of the responsibility. dedicated “fund for innovation”, acces- The present federal government has one stra- sible to any province or territory willing to tegic decision to take: does it want 2014 to implement changes that result in increased be a low-profile, rubber-stamping event, or performance from the patient’s point of view. does it want renewal of our ailing healthcare Access to the fund would be dependent on system to be part of its legacy? If the latter, initiatives being approved by the relevant it should act accordingly and ensure that the provincial Quality Council (with input from 2014 discussions live up to their potential as the public and health professionals). Results a formidable lever for change.

118 FOUR FEDERAL INITIATIVES TO IMPROVE AFFORDABILITY, PRODUCTIVITY AND ACCOUNTABILITY FRANCESCA GROSSO AND MICHAEL DECTER

INTRODUCTION BACKGROUND: CHANGES ALREADY MADE Francesca Grosso is a Maintaining a high quality healthcare system Beginning in the early 1990s, the federal Principal at Grosso McCarthy, in the current era of slower economic growth government made significant changes and a consulting firm specializing and greater healthcare demand will be a huge invested substantial sums in the areas of in health care strategy and challenge for Canada. The task of addressing health information, health research and policy. Francesca served as and managing this challenge falls largely to health informatics. Director of Policy to the Ontario public sector decision makers (since the public Minister of Health and Long sector currently provides 70% of Canadian // Health information The Canadian Term Care from 2001 – 2003. health services financing). Such decision Institute for Health Information (CIHI), Prior to this she was Vice makers must cope with the combined effects was first proposed in the early 1990s by President of Healthcare at of two key factors: (i) an aging population then federal Deputy Minister of Health Environics Research Group. and higher dependency ratios but also (ii) the Margaret Catley-Carlson to consolidate, Francesca worked with Michael vast number of new healthcare interventions, rationalize and improve the collection Decter to establish the Health both diagnostic and in treatment, and of health information. Prior to this, Council of Canada and has been the seemingly boundless public appetite four separate taxpayer-funded bodies involved in the establishment for these. It is not aging per se that is the were engaged in the collection of of several other federal health- problem but aging in the context of increased information: Statistics Canada, Health care agencies. She co-authored, healthcare options. Canada, the Hospital Medical Records with Michael Decter, the 2006 The Government of Canada has an Institute (HMRI) in Ontario and MIS book, Navigating Canada’s important leadership role to play in ensuring in the rest of Canada. The information Health Care: A User Guide to the a sustainable, high quality healthcare system they provided was often up to three Canadian Health Care System. into Canada’s future. This paper describes or four years out of date. HMRI and four key initiatives that would help it build MIS were therefore merged into CIHI. on past successes and provide more dynamic Health Canada transferred much of its and substantive leadership at this critical health statistics activity to the new orga- time. Each initiative has the potential to drive nization and a strong bond was built both an improvement in delivery and an between CIHI and Statistics Canada as increase in the affordability of healthcare. the Chief Statistician serves as Vice Chair

119 THE CANADA WE WANT IN 2020 SECURING THE HEALTH SYSTEM FOR THE FUTURE

of the CIHI Board. CIHI’s budget – These key investments have positioned which is drawn from both federal and Canada to be much more effective in applying provincial sources – has increased evidence both at the point of patient care and from about $10 million a year to over in the management of healthcare services. $40 million. The Institute now stands But are these initiatives bearing fruit? Is the as an important cornerstone of health sizable federal investment that has already information in Canada. With significant been made making a difference to Canadian analytical capacity, it provides critical healthcare? data on issues such as hospital admis- sions, discharges and lengths of stay in WHAT NEEDS TO BE DONE a timely manner. Despite all the investments, many health funding decisions are still driven by vested // Health research In 2000 Dr Henry Friesen, interests advocating for their particular Chair of Canada’s federally-funded causes, rather than by hard evidence as to Medical Research Council (MRC), the efficacy of treatment. Individual patient convinced the federal government to cases land on the front page of our daily transform the organization into the newspapers and cause public opinion Canadian Institutes of Health Research and politicians to swing in favour of new (CIHR). The aim was to move away treatments. Public fears rather than medical Michael Decter is a from a research agenda driven largely evidence drive many decisions. As an example, Harvard-trained economist by the MRC and its staff, to one with all available data supports the view that we and leading Canadian expert broader linkages to the health system are over-medicated, yet payments to phar- on health systems. He as a whole. This important federally- macists for reviewing patient medications served as Deputy Minister led initiative has resulted in both an are only gradually being introduced. of Health for Ontario and increase in and a diversification of In order to capitalize on existing as Cabinet Secretary in the federal health research dollars. Funds investments and achieve an effective and Government of Manitoba. now flow to thirteen virtual health affordable health system for the future, the He has published several research institutes which are much Government of Canada must move to put in books on healthcare and has better linked to clinical decisions and place an evidence-based set of strategies: it held many senior positions health policy. At the same time the needs to provide very specific leadership, in in health management and Canadian Health Services Research partnership with the provinces and territories, health-focused organizations, Foundation, (CHSRF) was established to achieve concrete goals in health services including being the Founding to link the health information and performance. Below we outline four key Chair of the Health Council of research areas. Its mandate is to “pro- initiatives that we believe would help it do so. Canada. He currently serves as mote the use of evidence to strengthen President and Chief Executive health service delivery in Canada”. 1 I mprove accountability Officer of the investment to drive quality improvement management firm, LDIC Inc. // Health informatics Canada Health One of the key thrusts of the 2004 Healthcare Michael was awarded The Infoway was created to lead the devel- Accord was an improvement in accountabil- Order of Canada in 2004. opment of electronic health records. ity. However this fell short due to a failure of Although the provinces worked with the political will and problems with the detail of federal government on this initiative the accountability. What we have ended up and are represented on its governing with instead is too much measurement and board, the $2.1 billion in financing too little management. provided to date has all come from What were supposed to be “comparable federal coffers. indicators”, on issues such as waiting times, became different indicators in different

120 provinces. Such obfuscation has meant that it is hard to hold the provinces to account. While the differences in indicators are slight, What we have ended up with they are sufficient to preclude any sensible national comparison or overview. is too much measurement and Consider the analogy of the labour force survey. This provides both public and private too little management sector decision makers with a great deal of information on how the economy is doing 2 Tackle safety in health delivery and on unemployment rates province-by- The Baker Norton study, jointly commis- province, within various age groups and sioned by CIHI and CIHR and released in across gender lines. Such information enables 2004, documented huge safety issues in the targeting of remedial efforts: the labour force Canadian healthcare system. These take survey provides an effective framework for an enormous toll both in terms of human decision making about employment and suffering and financial cost to the system. economic policy. If provinces were to set The authors calculated that between 9,000 different measures for unemployment (as and 23,000 Canadians die unnecessarily each they do for healthcare) then most of this year, as a result of avoidable errors within value would be lost. the health system. Since then, others have Another problem has been the massive looked at the burden that avoidable injuries number of indicators developed. When it pose to the healthcare system. It is estimated comes to healthcare indicators, more is not by Baker and Norton that the equivalent better: what is required is a simple set of easily of nine hospitals, each with 200 beds, are understood indicators that measure quality, utilized just for “repair” work. timeliness, affordability and access. The Baker Norton report led to the creation The federal government needs to show of the Patient Safety Institute (PSI) head- courage and leadership in the next round quartered in Edmonton and funded by the of health negotiations with the provinces federal government. Despite the excellent and insist on a limited set of relevant efforts of this organization, the safety problem indicators across the country. The aim in Canadian healthcare (and in the healthcare should be to make the system more account- systems of other nations) remains both large able (but accountable to the public – who and intractable. A much more forceful national can draw their own conclusions about effort is required to solve it. performance – as opposed to the provinces Other jurisdictions, including American being more accountable to the federal states such as Minnesota, have been grap- government). Canadians have much to gain pling with this problem. They have used and nothing to lose from having a more legislation and a number of other tools, such as accountable healthcare system. mandatory public reporting of adverse events, Fortunately we already have the health to address it. Meanwhile, Canada has stuck services data gathering and analysis capacity with a largely voluntary approach, relying in place, through the institutions mentioned on the PSI and somewhat strengthened health above, as well as a host of provincial health facility and health services accreditation services organizations (such as the Institute through Accreditation Canada (even this is for Clinical Evaluative Sciences in Ontario) voluntary in some parts of the country). The that can contribute. What is needed now is PSI’s budget is a paltry $10 million a year political will. against a total Canadian healthcare budget of over $140 billion.

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Contrast this with the enormous man- The First Nations and Inuit Health datory efforts undertaken in civil aviation. Envelope was introduced by the federal gov- Each plane crash in Canada is thoroughly ernment in 1994. At that time it totaled more investigated to determine the cause and than $1.1 billion for all health programs; indicate remedial actions. Pilots are tested and today it amounts to about $2 billion per recertified frequently. Healthcare providers, annum. The continuing huge difference in by contrast, can often practice for an entire health outcomes between First Nations/ career without formal recertification or Inuit and other Canadians begs the question: assessment of their competency. The health- is this money being well spent? care system tends to run on the basis that The federal government has made some regulatory colleges, run overwhelmingly by progress in shifting responsibility and dollars the healthcare professionals themselves, will to aboriginal organizations and provincial deal with outlier behaviour. There is no focus governments, but a much more rapid transfer on systemic aspects of the lack of safety in is needed. Fortunately there are some models healthcare. of successful practice from which to learn.

// In BC, a tripartite agreement between The safety problem in the federal government, the province and aboriginal authorities has resulted Canadian healthcare remains in placing $318 million in the hands of a new BC First Nations Health Council. both large and intractable This has given tribal councils greater power to solve issues within their own One way for the federal government to communities, rather than having to change this would be for it to commission a abide by decisions made in Ottawa or smaller-scale Baker Norton review, looking by an ineffective system of regional at specific indicators across the country, on offices run from Ottawa. an annual basis. This would keep the safety issue front and centre. Other ways of address- // In 2006 the federal government provid- ing the problem include increasing the PSI’s ed $3.1 million to a partnership struck funding and insisting on mandatory review between Saint Elizabeth Health Care, and accreditation of hospitals and staff. It an NGO with expertise in nursing care, would be nice to think that hospital stays and the Assembly of Manitoba Chiefs. could be made as safe as flying. The aim was to map ways to manage diabetic foot ulcers and avoid amputa- 3 Transfer healthcare delivery tions. The parameters were realistic for First Nations and Inuit and included there being no commit- Statistics Canada reported in 2000 that ment to increase healthcare staffing life expectancy for aboriginal people was levels in areas that cannot attract such markedly shorter than the Canadian average: resources under normal conditions. 7.4 years shorter for men and 5.2 years for The pilot project built capacity and women. In addition, aboriginal communities care pathways that assisted health care saw increased rates in: infant mortality (22% staff to utilize prevention strategies, higher); tuberculosis (6.2 times higher); undertake early detection, and then diabetes (almost 20% higher); and foot provide treatment and quick access amputations as a result of diabetic foot ulcers to specialists as required. The result (18 – 22% higher). These are dismal statistics. was embraced by the Assembly of

122 Manitoba Chiefs and local communi- // break down the barriers that prevent ties and has since been expanded. individuals practicing in the care setting of their choice; // In Ontario, Aboriginal Health Access // provide professionals with cost Centres – aboriginal community-led, pri- effective, attractive alternatives mary health care organizations – have, to higher pay. since 1994, brought tens of thousands of aboriginal community members into All three problems could be at least the circle of care and support. partially addressed by reform of the pension system for healthcare workers. These examples make sense. Provinces A lack of pension portability is the main and NGOs have expertise in implementing reason why healthcare workers are unwilling health care delivery and aboriginal com- to move out of an acute-care setting into a munities understand their own needs. The community-care setting. A community-care federal government, not really an expert in setting is not only less costly for the funding either, provides the financing. government, it can also provide a less stressful It should therefore move ahead to: work environment and a better quality of // dismantle the inefficient and life for healthcare professionals. Many such ineffective First Nations and Inuit professionals are willing to accept somewhat Health Branch (FNHIB) and regional lower wages in return for these benefits, but health bureaucracy; the sticking point is that hospital employees // shift dollars into more agreements such cannot take with them their generous defined as the tripartite one outlined above; benefit (DB) pensions. Likewise, community- // promote health among First Nations care organizations (which are also provincially youth; and funded) find it hard to attract qualified workers // contract out to NGOs for specialized in the first place because of their lower services such as the non-insured pension offerings. Health Benefits Program, currently run by Health Canada (the manage- ment of which could be akin to the A lack of pension portability Veterans Affairs drug administration or health delivery for the Canadian is the main reason why healthcare Armed Forces). workers are unwilling to move out 4 S tabilize human resources in the health system of an acute-care setting into a Canada’s health system has numerous human resources problems that undermine community-care setting its effectiveness. These include quality con- cerns, chronic shortages and a poor distri- Extending DB plans to other parts of the bution of health professionals. In order to health system (beyond acute care settings) address these, the federal government should would cost money, albeit not a great deal support the provinces to: of money. In Ontario, for example the // encourage professionals to leave Healthcare of Ontario Pension Plan estimated practice before their skills deteriorate; that it would cost just $20 million to bring most of the community sector in line with the hospital sector on the issue of DB pension

123 THE CANADA WE WANT IN 2020 SECURING THE HEALTH SYSTEM FOR THE FUTURE

premiums. At least some of this increase in CONCLUSIONS the pension envelope could be funded by the The federal government has a crucial role federal government. to play in achieving sustainable and high quality healthcare services in Canada. With a focused and strategic approach the Negotiations should have Government of Canada can assist provinces in modernizing Canadian health services. It very specific goals in place for can also realize a return on the significant investments it has made over two decades performance, for productivity, in improved health information, health informatics, health research and evidence for safety and for affordability gathering. Negotiations for renewed health funding The biggest direct contribution the federal for the provinces post the expiry of the government could make to reforming health- current Health Accord in 2014 should have care pensions would be to enable physicians very specific goals in place for performance, to belong to DB pension plans. This would for productivity, for safety and for affordabil- help keep costs in check as many physicians ity. These should be set out in advance by would consider trading pay increases for the the Government of Canada. There will, as ability to belong to a DB plan. The actual move always, be howls of jurisdictional protest would be funded not by the taxpayer, but from the provincial premiers but if the by participating physicians through their federal government sticks to specific and medical corporations. However, effecting such public performance goals, Canadians will be a switch would require changes in Canada better off. Revenue Agency (CRA) legislation. While the required changes are of some complexity, they are certainly not insurmountable.1 A sim- ilar legislative change was made in 2002 when the federal government revised the law to enable doctors to create medical corporations that would benefit from similar tax regimes to other small businesses. This move helped physicians immeasurably and provided the provinces with significant leverage in negotiations with medical associations.

1 Under CRA rules employers can be pension plan sponsors provided they have workers who qualify as employees. Medical corporations do not meet CRA rules for inclusion because their physician employees, also shareholders, are not classified as employees.

124 PAYING FOR THE

HEAL1 THCARE WE WANT MARK STABILE

THE PROBLEM Over this same period, governments have Mark Stabile is Founding Well before the great recession of 2008, Canada’s increased the proportion of their budgets Director of the School of Public healthcare system was sending out signals that that they spend on healthcare. The Ontario Policy and Governance at the it had a financing problem. Healthcare costs in government spends approximately 40% of its University of Toronto and Canada have outpaced growth in tax revenue total budget on health: in 1980 this figure was Professor of Economics and and gross domestic product (GDP) for much less than 30%. This increase is a function of Public Policy at the Rotman of the past few decades. While there have been many things: shares consist of both a numera- School of Management. He times of faster and slower growth (during the tor (healthcare spending) and a denominator is also a Research Associate 1990s while the federal government balanced (all public spending) and these are subject at the National Bureau of the budget, healthcare cost growth slowed sig- to changes in economic growth, tax policy, Economic Research, Cambridge nificantly), on average between 1980 and 2006 and policy decisions on spending for other Massachusetts and a fellow at the annualized growth in healthcare expendi- things. But, overall, healthcare has become the Rimini Centre for Economic tures was 7.5%. The average annualized growth the most significant item of public spending Analysis, Italy. From 2003 – in GDP over that same period was 6.1%. The by provinces. Again, there are many good 2005 he was the Senior Policy result is that we now spend considerably more reasons for this, and Canadians have indicated Advisor to the Ontario Minister on healthcare, both in absolute terms and as a time and again that they prefer a majority of Finance where he worked percentage of GDP, than we did in 1980. publicly-financed, universally-accessible on health, education, and On the whole, this is certainly a good healthcare system that provides high quality tax policy. He has also advised thing. Healthcare has improved tremendously care based on need. This is, however, an the Governments of both over this time period with new technologies, expensive proposition, hence the financing Canada and Ontario on health procedures, and medications that have problem described above. care reform. helped many people. No doubt, some of the It is important to note that this problem spending increase has been wasteful, some is in no way unique to Canada. Across the of the care may be excessive or of marginal OECD, in countries with systems that are benefit, and some may even be harmful, but similar to ours, and in countries with systems the overall story is one of success. Most of us that are quite different, healthcare costs would not want to return to the healthcare are growing faster than GDP. Indeed, when system we had in 1980. one looks at the countries that we typically

125 THE CANADA WE WANT IN 2020 SECURING THE HEALTH SYSTEM FOR THE FUTURE

compare ourselves to in terms of economic federal government continuing past 2014. development – including the UK, continental Some efficiencies are certainly possible, but Western Europe, and the broader com- if we want more healthcare in the future, we monwealth – there is no country in which will almost certainly need to pay more for healthcare costs have grow more slowly than it. So where should the money come from? the overall economy. Public or private sources? This is both comforting and concerning. It is comforting because it suggests that it OPTIONS FOR REFORM is not the Canadian Medicare model that is Given that we will almost certainly be at the root of the problem. The problem is spending more on healthcare tomorrow universal. It is concerning because it suggests than today (forecasts across the OECD are that efforts to make our system work better – in agreement that healthcare costs in the more efficiently, more equitably, and with better developed world are going up, not down, over quality – while clearly important and necessary, the next 50 years), we need to decide how are not on their own likely not solve our we will pay for it. The options for increasing financing problem. All of the healthcare revenue fall into four broad categories: systems in the developed world are trying to make their systems more efficient, less 1 Increase the taxes we already wasteful, etc. Many are far ahead of Canada in have in place. terms of important reforms to payment and delivery within the public system. Once again, 2 Cost-share with patients in the form none have succeeded in getting healthcare of user charges, deductibles, etc. costs to grow more slowly than GDP. It is also worth noting that the financing 3 Allow for more private financing/ problem I have described does not suggest insurance. that the healthcare system is not economically sustainable. There is no single right answer to 4 Diversify public funding streams with the question “how much of our GDP should new public revenue models. we spend on healthcare?”. Most wealthy countries spend around the same as Canada. Note that none of these options preclude A few spend a little more. All have seen finding more efficiencies, reducing waste, growth in the amount spent on healthcare. and improving quality in the system – we 1 I would like to thank Rich nations have the luxury of spending on need continually to do all of these as well! my co-authors for work things they value and if Canadians are getting that I draw on for this valuable care from their healthcare system, Raise taxes article: Irfan Dhalla, there is no reason why we should not spend Option one, raising taxes, is certainly a Colleen Flood, Jacuqeline more on health and less on other goods. But possibility. Taxes as a share of GDP have Greenblatt, Sevil Marandi, we do need to figure out how we are going to come down in Canada over the last decade, and Carolyn Tuohy. pay for it. so there is an argument to be made for I would also like to Economic sustainability is not the same raising certain taxes again. The benefits of extend a special additional as fiscal sustainability. What is clear is that, general taxation are well established, but the thank you to Carolyn across Canada, governments cannot afford to public resistance to tax increases remains, so Tuohy for an ongoing pay for the healthcare system we have now, I will not spend time on them here. collaboration and along with all other public expenditures, exchange of ideas that has employing only the current revenue base. Cost-sharing significantly influenced Most provinces are in significant deficit. All There have been several proposals over the my thinking. are dependent on large transfers from the years to increase cost sharing with patients.

126 Most recently, Quebec proposed a healthcare is available to cover items that are also deductible on doctor visits. There are two covered by the public system. Individuals main arguments in favour of such a proposal. choose private coverage because it offers First, if one believes that there is inefficient some amenities not provided publicly, such use of healthcare services that is patient as shorter waiting times, nicer facilities, etc. driven, then imposing some price on care (they cannot, though, opt out of paying for will increase efficiency. Second, cost sharing has the potential to raise revenue. Economists, including myself, have Private supplemental insurance argued that using cost sharing to raise rev- enue is not likely to be a particularly fruitful does not offer a ready solution policy option. There are several reasons for this. First, cost-sharing systems are expen- to the problem of increasing sive to set up and administer. Second, given our values in Canada, we mostly agree that public healthcare costs any system of cost sharing should exempt the poor and people who are very sick and need public care through general taxation). to make heavy use of healthcare services. Some have suggested this option as However, since the poor and sick are the a solution to Canada’s public healthcare biggest users of healthcare (the two often go financing problems. A few points are worth together) exempting them from user charges noting here. First, countries that have such (which I agree is a good idea) significantly systems in place still have the same financing reduces the revenue that can be raised by issues that Canada has: public healthcare such a system. These two points together costs are growing faster than GDP. Therefore, mean that cost sharing is unlikely to solve the existence of this type of private insurance our revenue problem. does not, in and of itself, eliminate financing problems. Second, these countries generally Increased private funding have a higher share of public health spending Canada’s public-private spending mix has (usually above 80%) and broader public hovered around 70% public, 30% private coverage than Canada does. Private systems for several years. This is on the low side of there are generally small, covering around public financing compared to many OECD 10% of individuals. Their share of total health countries. One reason for this is the nature expenditure is even smaller, often at only of the public-private mix in Canada. In WHO around 1%. Third, what evidence there is on parlance, Canada has complementary private the relationship between public and private insurance: private insurers cover items/sectors supplemental systems suggests that private of health that are not covered publicly. For insurance does not decrease costs in the example, since pharmaceuticals outside the public system. If anything, public expendi- hospital are not covered publicly for many ture often increases through complementary Canadians, a large share of Canadians have utilization, increased overall utilization, and private insurance to cover such expenses. the fact that tax subsidies for private insurance Given the large role that pharma plays in are built into many tax codes (including ours: modern medicine, it should not be surprising employer contributions to employee health that Canada’s private share of financing is insurance are not taxable). relatively high. Jurisdictions such as the UK Therefore, while it is fair to say that and Sweden have supplementary private countries can have private supplemental insurance systems in which private insurance insurance and remain committed to public,

127 THE CANADA WE WANT IN 2020 SECURING THE HEALTH SYSTEM FOR THE FUTURE

universal and accessible insurance (both the can create inefficient restrictions in public UK and Sweden would be good examples of allocations. However, the benefits of providing this), private supplemental insurance does increased public funding to sustain and not offer a ready solution to the problem extend public coverage (funding prescription of increasing public healthcare costs. drugs through a social insurance pool might be the ideal place to begin), of tapping into New public revenue models willingness to pay for increased healthcare The final option for increasing revenues costs among Canadians, and of potentially available for healthcare is to diversify the increasing the redistribution of risks and public financing stream. I have argued income among Canadians through a broader elsewhere, along with colleagues from the Medicare basket, outweighs, in my view, the University of Toronto, that one possible costs of such a scheme. Given the limita- expansion would be to incorporate more tions of the other possibilities for increasing social insurance funding into the Canadian revenue, this final option has the greatest healthcare system.2 potential both to improve the scope and quality of the healthcare system, and to meet A national body that with (limited) public approval. WHAT SHOULD BE COVERED evaluates both medical BY PUBLIC FINANCE? Raising more revenue will not, on its own, be technologies and best practices, sufficient to sustain the healthcare system over the long run. It must be coupled with a across sectors and types strong movement towards evaluation of what should and should not be publicly funded, of providers, is a key element and a rebalancing of the role of the private sector to cover care that does not meet the Many European countries use social insur- criteria for public funding. A national body ance funding – characterized by a clearer link that evaluates both medical technologies between funds collected and benefits received and best practices, across sectors and types – to finance parts of their system. The experi- of providers, is a key element in making sure ence in such countries suggests an increased that public revenues are allocated to the willingness to pay on the part of citizens if most effective forms of medical treatment. they clearly perceive the connection between When a drug provides significant benefit at premiums and benefits. Often collection sys- a modest cost (e.g. insulin for diabetics), it 2 See Flood, C., Stabile, M. tems are arm’s length from the government. would be covered for all who stand to benefit. & Tuohy, C. (eds.) (2008) Individuals are required to pay a monthly When practice decisions by physicians result Exploring Social Insurance: amount that is scaled to earnings, which is in high costs and little benefit, they would Can a Dose of Europe Cure used to cover the cost of the health services not be reimbursed (e.g. MRI scans for minor Canadian Health Care provided. In many European systems employ- headaches and back pain). Finance? McGill-Queen’s ers are also required to contribute on behalf Canadians will have to recognize that University Press, and of their employees. The fund is usually kept the public sector cannot cover all tests and Stabile, M. & Greenblatt, J. separate from general tax revenues, although treatments regardless of how minimally (2010) “To Prefund in some jurisdictions, general taxes are used effective they may be. Where the potential Pharmacare for Canadian to augment the fund where necessary. benefits of diagnostic testing/treatment do Seniors… or Not?” IRPP Public finance theory suggests that ear- not merit public funding, it is reasonable Study No. 2. marking funds in this way is not optimal and to expect that individuals who still choose

128 to pursue such care should be free to do so simultaneously phasing in drug outside the public system, using personal coverage through social insurance resources. premiums. This would leave coverage for All of these changes are possible without the current elderly in place but reduce undoing any of the current structure of the claim of the baby boom on a drug Canadian Medicare, including any changes plan funded by younger generations, to the Canada Health Act. The remaining thereby improving intergenerational challenge is getting from here to there. equity.

A ROADMAP FOR CHANGE There is a role for strong federal leadership in Use the 2014 negotiation moving towards these changes in Canadian Medicare. The 2014 negotiations offer to agree on a framework for the opportunity for the federal government to foster coordination on both evaluation diversified public funding and on diversifying funding streams. Along the way, there is scope to address the growing 3 In those provinces with more general perception among the young of intergen- drug coverage, such as Quebec and erational inequities (in financing and care) BC, the coverage budget could be more by gradually shifting the nature of public explicitly linked to social insurance coverage. The following steps could be part premiums and phased in over time. such a transformation: 4 The federal government could establish, 1 Use the 2014 negotiation to agree on or require the establishment of, a a framework for diversified public national evaluative body (it need not be funding. Options here include having a federal body). This body could build the federal government act as the on the experience and expertise of collection and redistribution agent for existing provincial bodies (although social insurance premiums and using thus far the existing provincial bodies these funds to replace some or all of have not reached the scale that would the current Canada Health Transfer. be required to properly evaluate tech- If the federal government were to take nology and best practice at the level of, on collection, it could also phase in tax for example, the National Institute for point transfers to the provinces to Health and Clinical Excellence in the increase the overall amount of funding UK). Buy-in to the recommendations available while keeping its revenue share about the same. The federal gov- ernment does not, though, have to act as A benefit of a national the collection agent. It could promote this change while taking a back seat in organization for evaluation terms of implementation. is that there would be greater 2 In those provinces where drugs are covered for the elderly but not the consistency in coverage general population, eligibility by age could be gradually phased out by raising across Canada the eligibility age over time, while

129 THE CANADA WE WANT IN 2020 SECURING THE HEALTH SYSTEM FOR THE FUTURE

of this body could be required for If these changes were adopted, the receipt of federal transfers through Canadian healthcare system in 2020 would both the Canada Health Transfer and have kept the best of what we have, and built any future social insurance framework. in elements – diversified public funding, A benefit of a national organization effective evaluation of technologies and for evaluation is that there would practices, and universal access to important be greater consistency in coverage medical care regardless of type – that other across Canada. Currently, provinces successful societies have adopted and tested. that deem technologies ineffective are It would allow all Canadians access to those often pressured into reversing decision services most essential for improved health, because the same technology is offered not just those we deem important today, elsewhere in Canada. but those that will emerge going forward. Perhaps most important of all, it would put in 5 As public coverage for all truly medically place sufficient revenue to fund broad-based necessary services increases, the role of public healthcare, alongside structures to private insurance would change, with ensure that we only fund those services that complementary insurance covering are the most valuable. those items deemed insufficiently cost- effective for public coverage. The private market for this care and coverage would likely be small but sustainable. There are many items/treatments which are unlikely to yield sufficient benefit to secure public subsidy, but for which there is significant consumer demand.

3 Measurement of patients’ satisfaction and of subjective quality of experience has been extensively studied, particularly in the context of chronic diseases. A good review of the question can be found at http://phi. uhce.ox.ac.uk/home.php..

130 PARTNERS

This project would not be possible without the generous support of our partners:

Alterra Power CN

Amgen CIBC

AstraZeneca Manulife

Bluesky Strategy Nexen Group Pickworth Bombardier Investments LP

Building and Power Corporation Construction of Canada Trades Department AFL-CIO Suncor Energy

Canadian Wireless TELUS Telecommunications Association Xerox

And the individual members of the Canada 2020 Founders’ Circle As we approach 2020, the world around us is changing rapidly. For Canada, there are many opportunities, but also fundamental and inter-related challenges. The Canada We Want in 2020 launches a debate about the role of the federal government in Canada in meeting those challenges.

This is the starting point of a year-long project that will culminate in Fall 2012.

ABOUT CANADA 2020 Canada 2020 is a non-partisan, progressive centre working to create an environment of social and economic prosperity for Canada and all Canadians.

Join the conversation at www.canada2020.ca