Let’s take the Canadian economy to the doctor for a stem-to-stern check-up. What would the doctor find? Some good news and some not so good news. The good news is that the patient looks and feels pretty good.

  • Economic growth is reasonably strong and spread across the country.

  • Inflation is under firm control, job creation is consistently robust and unemployment is at a historic low.

  • Corporate profits are buoyant and the stock markets are at record levels.

  • Canada is running strong trade and current account surpluses.

The not so good news is that the patient seems compla- cent about the future and has come to the examination with a definite ”œif it ain’t broke, don’t fix it” attitude. So what are the troubling signs of this complacency?

  • Sluggish productivity growth is one. Between 2001 and 2005, productivity grew on average only 1 percent com- pared to 3 percent between 1998 and 2000. Canadian productivity growth consistently lags behind that of our major trading partners and competitors.

  • Languishing global competitiveness is another. The World Economic Forum places Canada 12th, just below Taiwan and Israel, and just ahead of France and Aus- tralia. This is up from 16th a year ago but a long distance from where we need to be and can be.

  • A drop in GDP per capita from 5th to 10th in global rankings, sure evidence that Canada has been slow in adapting to changes in the global economy.

  • A large infrastructure gap from transportation networks to buildings to investment in human resources and innovation.

  • Concerns about the ”œhollowing out” of significant Canadian companies.

The former chairman of the US Federal Reserve, Alan Greenspan, said earlier this spring, ”œSerious trouble does not develop from problems that people worry about but from situ- ations that nobody worries about.” And that seems to be our problem.

Canada is blessed with an abun- dance of natural resources ”” a crutch of convenience that has, to some extent, enabled us to achieve high growth rates without too much effort or ingenuity on our part. As the saying goes, ”œWe were born on third base but think we hit a triple.” In fact our economy is per- forming well below potential. We need to challenge this complacency and start planning and committing for the econ- omy we want tomorrow.

Do we see our future increasingly as part of a global economy or one shielded from, or indifferent to, a trend toward greater integration and freer movements of capital, goods and services?

Some Canadians on the left hanker after the impossible: a dynamic, entre- preneurial, risk-free economy where the government ignores the global dynamic and tries to pick the winners and look after the losers. Some European coun- tries are finding that the result of striving for this kind of impossibility is low growth and high unemployment. ”œEurosclerosis” is what it was called a few decades ago.

As we experience an accelerating pace of globalization and technolo- gy change, the economy we need is one that embraces risk and entrepreneur- ship. We should hack away at policies and attitudes that are holding us back and establish a policy and business envi- ronment that coherently advances the national interest. We need decisions by governments that are bold and strategic, not merely tactical. We also need busi- ness leadership that inspires innovation and growth and helps stimulate a more competitive, more productive policy and regulatory environment.

A good place to start is with investment.

The case for foreign investment scarcely needs to be made. It is a vital part of the international economy. In recent years, global foreign investment inflows have been growing on average by 30 to 40 percent annually. Global exports of goods and services have been growing at 2 to 4 percent.

Some 77,000 firms are multina- tional in their activities, each account- ing for an average of 10 separate foreign affiliates. Worldwide sales by foreign affiliates are nearly double worldwide exports of goods and servic- es. That is a dramatic example of how global commerce is shifting.

Foreign investment in both direc- tions contributes to enhanced productiv- ity and competitiveness by encouraging product specialization and strengthening cross-border supply chains. When some two thirds of Canada-US trade is intra- firm trade, you can see how important foreign investment is to us.

For all its undoubted importance to Canadian prosperity, we remain seri- ously conflicted in our attitudes to for- eign investment, both inward and outward. The result is unfocused debate and, on occasion, irrational policies.

The best recent illustration may be the curious budget proposal to rescind interest deductibility on foreign investment: a classic example of good intentions overwhelming common sense. Ottawa can be like that.

Both the process and the proposed solution were questionable, as were ini- tial cost estimates about the impact. While remedies to prevent tax abuse may be needed, policy changes that have a dramatic effect on how Canadian business operates should be undertaken only after consultation and with due recognition of the policies and practices of our major trading partners.

International tax regimes are highly complex, even arcane. All the more reason why unilateral changes by Canada should be contemplated with equal pro- portions of caution and prudence.

The ensuing debate and the partial fix on ”œdouble dipping” have distracted attention from what should be the more fundamental issue: whether we have a business tax regime in Canada that is competitive, especially versus that of the United States. Canada cur- rently has the sixth-highest marginal effective tax on capital com- pared, in a recent study by the Royal Bank, to 36 leading industrial and devel- oping countries. Our overall rate of 34 percent is well above the OECD average of 28 percent. It is mostly provincial taxes which make us uncompetitive and which should be the primary focus for reform.

All the tweaks, gimmicks and loopholes in our current tax regime simply mask the high overall rate. They should be replaced by a straight- forward (across the board) lower rate that is genuinely competitive. That, in effect, was a key component in the policy mix that lifted the Irish econo- my from laggard to leader in Europe.

Rather than piecemeal solutions prompted by allegations about ”œtax havens” or ”œtax abuse,” we need a broad-gauged reform based on com- parative analyses and direct consulta- tions with relevant stakeholders, extending beyond the narrow policy corridors of Ottawa.

If the objectives are competitiveness and fairness, we need a tax regime that is attractive and equitable and preferably one that creates an advantage and not a handicap for operations in Canada.

If our policy framework is compet- itive, we will attract investment and stimulate economic growth. If it is not competitive, our economy will suffer. It is that simple.

The underlying message, however, is that business should not be docile or complacent when measures are pro- posed that would negatively affect its ability to grow and compete. Ottawa is a charming city, but it does not have a monopoly of wisdom. ”œBusiness” should not be a pejorative term for government or our society more generally and yet, more often than not, the perceptions in Canada about business, notably big busi- ness, are more negative than positive.

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Most politicians see value in small and medium-sized entities ”” the ”œbul- wark of employment,” ”œthe lifeblood of growth,” etc. Few see the direct link between the success of so-called ”œbig” firms and our much smaller enterpris- es. That is a story that needs better telling if business expects to gain attention and a fair hearing from those with political power.

Since 1997, Canada has been a net exporter of foreign investment as Canadians are searching out and find- ing profitable opportunities in the glob- al economy. This investment brings Canadian firms access to markets for exports, access to valuable sources of imports and access to technology, criti- cally, participating in global value chains. A recent KPMG study showed that Canadian firms are purchasing for- eign assets at a faster clip than foreign- ers are buying Canadian companies.

One reason may be that, according to the OECD, Canada has the highest level of explicit restrictions on foreign equity ownership in the G7 ”” primarily in the financial and telecommunica- tions sectors. And yet, these are precise- ly the areas where technology changes are stimulating more global integration.

But there are growing concerns that foreign acquisitions of Canadian business are ”œhollowing out” our Canadian economy. (Here, too, there are suggestions about complacency, if not indifference, on the part of gov- ernment and business.)

It seems to me that the current poli- cy and regulatory regime would benefit from a full review. We should start by tak- ing a very hard look at existing restric- tions to see whether, or to what extent, they continue to serve any useful pur- pose. We should strive for greater reci- procity generally and more transparency on investments. Should state-controlled entities, whether from Brazil or China or wherever, have the ability to acquire companies in our market while they are protected from similar actions in their market. Even some companies that are not state-controlled are shielded by regu- lations at home from takeovers by others. Is that fair or equitable?

Boards of public companies in the United States have greater scope to fend off hostile takeovers than do their Canadian counterparts. Bondholders in Canada are similarly disadvantaged. What objective or national interest do these differences serve?

At the same time, we should con- sider new criteria or review provisions or more precise definitions of ”œnet benefit to Canada” that would enable us to safeguard sectors deemed to be vital and to bolster, not hobble, the few Canadian global champions we have. At a minimum, we should insti- tute safeguards that would enable the government to review acquisition efforts by state-controlled entities and by foreign investors whose home markets block Canadian com-
panies from similar activity in
their markets.

Virtually every country in the world, including the bastion of free enterprise on our southern border, has the means to review and block transactions in the name of national security or the national interest. Remember, too, however, that the ”œnationality” of a corporation may not be as significant as we might think. Thomson, which recently bid for Reuters, for instance, is incorporated in Canada. Yet 81 percent of its sales are in the United States along with its main office and 70 per- cent of its assets. Only 2 percent of its sales and 5 percent of its assets are in Canada.

What matters even more than who owns significant opera- tional assets in Canada is what is being done to ensure that they grow and pro- vide long-term benefit for Canada. That should be the overriding objective for any policy review.

Economic theory is one thing but rising nationalist sentiments may require some nimble political footwork on this issue. It is not really a question of nationalism or fairness per se. There will never be a truly fair global standard for invest- ment and there will always be nationalist undercurrents and not just in Canada. The objective of a full review would be greater fairness, more balance or reciproc- ity, more certainty and stability for capi- tal markets and a more favourable climate for investment in Canada ”” with a focus that extends beyond the next quarter’s financial performance.

Canadian trade policy, like invest- ment, needs a serious look. It is cur- rently stuck in neutral and going nowhere fast. The government tells us that its highest priority is the successful conclusion of the multilateral trade negotiations. The problem is that the Doha Round, as it is called, is in the Doha doldrums and Canada is no longer a member of the inner circle of countries that will determine the fate of these negotiations. It seems all that the government (and Parliament) has to say about Doha is that Canada will be implacable in its defence of Canadian agricultural protectionism. It is no wonder that we are not a player in the big leagues in Geneva.

The government has ambitions to negotiate a series of bilateral free trade agreements but other countries, notably the United States and Australia, are well ahead of us. While Canada has negotiated only three agreements in the last 13 years, namely with Israel, Costa Rica and Chile, the US has concluded more than a dozen, including the recently announced agreement with South Korea. Australia has concluded four and has seven more under negoti- ation. Even Chile with ten agreements under its belt is racing ahead of Canada.

The March 2007 budget targets South Korea, Singapore, the Andean Community, the European Free Trade Association (EFTA), and Caribbean and Central American countries for atten- tion. ”œSuccess in these negotia- tions,” the budget tells us, ”œwill position Canada for further progress in opening markets for Canadian business.”

If bilateral agreements with this group make sense, why not negotiate such agreements with China or India, two of the largest and fastest-growing economies in the world? Or Japan? Why not break with Canadian tradition and think big as we did in negotiating the Free Trade Agreement with the United States?

Frankly, I do not under- stand why we are pursuing any of these negotiations unilater- ally and outside the framework of NAFTA despite the increasingly integrated nature of our North American economies.

We like to think of the United States system of government as divided, grid- locked and incapable of clear decision- making. And yet, despite a weakened president in the White House and a Congress controlled by trade-averse Democrats, Washington fashioned a con- sensus earlier this month to approve four more free trade agreements (Peru, Panama, Colombia and South Korea).

On trade policy, the voice of the business community seems somewhat mute, dominated more by sectoral blockers than by more broadly based needs to change.

The previous government aban- doned a longstanding and reason- ably effective consultative mechanism with the business community on trade negotiations in favour of a politically correct but ineffective process with civil society groups. The consequence is a trade policy that is nebulous, short-term and more responsive to narrow protectionist interests than to longer-term needs. In my view, the previous, sectoral consultation process should be reactivated.

Closer to home, other provincial governments should follow the excel- lent example of Alberta and British Columbia and dismantle internal bar- riers to trade and impediments to the mobility of labour, as well as obsolete or overlapping regulations.

Premier Jean Charest’s pro- posal to negotiate free trade with Ontario merits strong support. Just imagine what free trade in Canada would do for our economy.

A sensible trade policy strategy begins right here at home, where artificial barriers and out-of-date regulatory provisions thwart productivity. But those who favour more open trade have to speak up against those who are opposed.

Trade and investment policies are not the only issues suffering from complacency. We have a serious deficit in infrastructure, human capital and innovation. For too long, we have let the national infrastructure deteriorate. The signs are everywhere ”” clogged transportation in our big cities, crum- bling bridges, roads and buildings, not to mention hospitals and schools. We have also underinvested in education and in research and development.

That, I suggest, is the real ”œfiscal imbalance” in today’s Canada. There will be serious long-term environmental and economic costs unless we give a higher priority, more funding and clearer accountability between levels of govern- ment to these essential building blocks.

Roger Martin of the Rotman School of Management points out that 64 cents of investment in educa- tion and infrastructure brings a dollar in return. If we instill a spirit of excel- lence over egalitarianism in our edu- cational system and we upgrade our infrastructure to meet the challenge of globalization, we will strengthen both the scope and the capacity for innova- tion in Canada. It will not come from osmosis. We need facilities and educa- tors that inspire imagination and innovation.

When Bill Gates visited Canada in February he posed a critical question. ”œWhat is our edge? What is our unique thing in North America?” His answer in essence was investing in education, changing the way we teach, changing the way we evaluate the per- formance of students and teachers, adapting to the latest technologies and experimenting. He urged direct engagement by the business commu- nity to drive interest and innovation in education. Gates concluded that the economies that make serious break- throughs in education will succeed in an era when the world is indeed flat and the pace of global change is unprecedented (see Policy Options, April 2007.

The price of minority government may unfortunately be the triumph of short-term political tactics over the national interest. But complacency about the future is not confined to the government or public policy. Think about the owners of great Canadian firms like Eaton’s, who thought that their past was their future and who are now history. Think about the Eastman Kodak company, which dismissed digi- tal cameras as a passing fad and is now fighting to survive.

We need to nurture a healthier culture of entrepreneurship in Canada, stimulating and nurturing home- grown champions and substituting some competitive zeal for the timidity and caution so prevalent in Canadian boardrooms.

With that diagnosis, the time is ripe to disabuse our patient of any belief in complacency. If we truly believe our political rhetoric about the value of freedom, let us adopt practices and goals that enable young Canadians to flourish with ideas and achievement. If we aim at less than the best, remember that the result will be second rate.

From governments, we need a pol- icy framework ”” in terms of spending, tax, regulations and interprovincial barriers ”” that will facilitate produc- tivity and innovation. From the pri- vate sector, we need an appetite for risk as well as reward and a determina- tion to adapt aggressively to the chal- lenges of global competition. Instead of a culture of entitlement, we need a climate of entrepreneurship. Most of all, we need a healthy partnership between the public and private sectors, replacing complacency and inertia with commitment and action.

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