The Conference Board’s ”œPerformance and Potential” report for 2005-06 compared Canada’s performance to that of 23 other OECD countries across six broad categories: Economy, Innovation, Environment, Education and Skills, Health and Society. The good news is that Canada continues to score in the top 12 in all six categories. The bad news is that we are slipping relative to other top performers.
Canada has the potential to be a world-beater in every category, but we have been slow in responding to emerging challenges and taking advantage of new opportunities. The policy challenges are many, but three stand out as particu- larly important. First, we need to ensure Canada’s long-term competitiveness in a world that is being transformed by the rise of ”œintegrative trade” and by the growing power of emerging economies, led by China and India. Second, we need to deal with the implications that an aging Canadian population holds for our workforce and fiscal foundations. And third, in a moment of high global demand for our nat- ural resources, we must develop a resource management strategy that maximizes both economic benefits and envi- ronmental sustainability.
All three of these issues call out for national strategies. But can we develop genuinely national strategies in a feder- ation such as ours? Regional parochialism is the ”œelephant in the room” at every federal-provincial meeting on the national policy agenda. Although making the federation work better is not one of the issues discussed in this paper, it is a precondition for tackling the pan-Canadian policy challenges described below.
The first challenge " ensuring our competitiveness in a rapidly changing global economy " is fundamental for a trading nation such as Canada. Decades of trade liberal- ization, more sophisticated and inexpensive transportation and communications systems, the integration of many developing countries in the world economy and advances in management techniques have together given rise to a transformation in the nature of international trade. Rather than producing goods in one place, the world’s most com- petitive firms are now investing heavily in global supply chains, seeking the best quality and best-priced components for their products, whatever the source. As a result, exports increasingly contain imported content, challenging the tra- ditional notion that goods are ”œmade in” only one place.
Foreign direct investment (FDI) has become a key enabler for trade and national competitiveness. Foreign investment in Canada fuels innovation and higher-quality jobs for Canadians. In fact, a recent Statistics Canada study found that foreign-controlled plants accounted for most of the labour productivity growth in Canada’s manufacturing sector during the 1980s and 1990s. Inbound FDI in Canada also provides an increased pool of capital for investments, and generates increased revenues for government.
Outbound FDI is also vital for Canadian competitiveness. Many companies use foreign investment to construct international supply chains, to develop closer contact with their foreign customers and partners and to provide better service, all of which fosters exports from Canada. The OECD has found that, on average, each dollar of outbound FDI gen- erates double that amount in additional exports from the orig- inating country to the recipient " and three to six times the amount in the case of investments in developing countries.
Foreign investment opportunities are exploding due to rapid growth in the leading emerging economies: Brazil, Russia, India and particularly China (the ”œBRIC” countries). Economic power is shifting away from the mature industrial- ized economies, where population growth has slowed or reversed and the cost of pensions and health care for an aging populace looms (see below). The size of China’s middle class " defined as individuals earning US$6,000 or more " may dou- ble within the next five years. India, with its even younger and faster-increasing population, could sustain annual GDP growth in the range of six percent through 2025.
Canada is not adapting fast enough to these new realities. As reported in ”œPerformance and Potential 2005-06,” Canada fell from 3rd to 12th place in the Economy category between 2003 and 2005. And amid growing competition for foreign investment, Canada is keep- ing pace in neither outbound FDI to the BRIC countries, nor inbound FDI into Canada. Furthermore, we placed only 17th in productivity performance, and the gap between Canadian and US pro- ductivity continues to widen. These are sobering results. Our long-term prosperi- ty, and our ability to pay for the social programs and public goods that we value most, depend on our ability to compete effectively on a global scale.
Canada needs to pursue a combined global trade and domestic compet- itiveness agenda to build the founda- tions for our economic success over the long term, reversing the slow slide that will continue if we fail to act. This agenda should include measures that:
Boost innovation and productivity, such as investing in skills and training, including life long learn- ing, improving the commercializa- tion of innovative technologies, closing the infrastructure gap, reducing various taxes on business that discourage investment, streamlining and easing the bur- den of regulations including inter- provincial barriers, and doing a better job of integrating immigrants into the workforce.
Encourage outbound and inbound FDI through a comprehensive invest- ment facilitation and promotion strategy, including investment pro- tection agreements to improve Canadian investors’ access to foreign markets, along with targeted efforts to expand Canadian service exports.
Foster the competitiveness of the North American economy (since the US remains Canada’s principal trading partner) by upgrading bor- der infrastructure, facilitating the movement of goods across our bor- ders through expanded pre-clear- ance programs, and eliminating unnecessary regulatory differences and barriers to trade and invest- ment between our countries.
Promote the development of Canada’s major cities " which are drivers of the country’s trade and economic pros- perity " by providing them with fis- cal resources commensurate with their importance to the Canadian economy, as well as the governance capacity to pursue integrated plan- ning initiatives. Investing in our large cities is also an effective strategy for the development of small town and rural Canada " forthcoming Conference Board research showns that economic growth in our major cities contributes to growth in small- er communities. Issues of social cohe- sion and environmental sustainability in our increasingly crowded and diverse cities should also be addressed in the context of an urban renewal strategy.
Part of the competitiveness agenda overlaps with the second major challenge: preparing for the impact of the demographic revolution.
By 2025, more than 20 percent of Canada’s population will be over age 65 " double the proportion in 1980. And the elderly dependency ratio (the per- centage of people aged 65 or over to the working age population) will jump from 19 percent in 2005 to 33 percent in 2025. These changes will place increased pressure on our fiscal foundations and what’s left of our workforce. And we don’t have much time to adjust: at most, 10 years before the full effects begin to kick in.
The escalating costs of health care will pose a sig- nificant fiscal challenge in the coming years. The provinces and federal gov- ernment will need to con- tinue their efforts to improve health care deliv- ery while restraining growth in costs. The Supreme Court’s Chaoulli decision of June 2005 opened the door to exploring greater choice in health care delivery methods while maintaining the public system. Provinces may be able to learn impor- tant lessons from each other: as recent research by the Conference Board indi- cates, some provinces have achieved health outcomes better than other provinces while spending less overall on their health care systems.
Pensions in Canada will also be under increased pressure as the popula- tion ages. Scheduled increases in Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) premiums are suffi- cient to keep the plan actuarially sound, at least until 2021. However, two addi- tional sources of funds for low-income seniors " the Guaranteed Income Supplement and the Old Age Security pension " are paid out of general gov- ernment revenues, with no savings in the present to pay for them in the future, which could pose fiscal chal- lenges for future generations. Further, a recent Conference Board survey revealed growing concern among many of Canada’s chief financial officers about the underfunding of private retirement pension plans by Canadian companies.
Other countries and jurisdictions facing similar challenges have sought to compensate by using public policy to promote higher birth rates, but such efforts have proven ineffective. Higher levels of immigration would help, but Canada is already facing dif- ficulties integrating new immigrants at existing levels.
The most promising strategy is to promote a slight upward move in the average retirement age. Indeed, across the developed world there has been a marked shift towards labour-market programs focused on increasing the supply of older workers, and stimulat- ing the demand for older workers by lowering the costs of employing them. Canada should adopt similar policies in a comprehensive fashion, including:
Reform publicly funded pensions to promote later retirement: Canada is more generous than most OECD countries in that eligibility for the CPP begins at age 60. (In fact, more than 40 percent of Canadi- ans are accessing the CPP retire- ment pension at age 60.) Further, those who choose to continue working past 65 are penalized under the current system.
Implement human resource policies that are friendly to older workers: Canadian governments could con- sider scrapping most or all taxes on income that employees earn after their 65th birthday (after set- ting a tax-free income ceiling). Governments should also subsi- dize training to maintain and expand the skills of older workers.
Change corporate policies and cultures to attract and retain more older work- ers: After decades of early retirement incentives in a labour surplus envi- ronment, small and large Canadian organizations must adjust their human resource strategies to the demographic shift by welcoming and retaining more older workers. Options here include flexible work schedules, lifelong learning oppor- tunities, and ”œbridging jobs” that allow a gradual transition from full- time work to retirement.
Develop an integrated policy frame- work: Governments should work with small and large organizations to develop an integrated policy framework that addresses both the supply-side and demand-side issues of our aging workforce.
The third major challenge facing Canada is to manage our natural resources for both economic success and environmental responsibility. Canada is profoundly affected by the growing international demand for nat- ural resources. In this period of high demand, we have a window of oppor- tunity to develop a national natural resources strategy aimed at maximiz- ing economic benefits while ensuring the long-term sustainability of our resources and environment. This strat- egy should also address the effects of the current resource boom on federal- provincial (and inter-regional) rela- tions in Canada, as well as the importance of urban environments. Unlike the wrong-headed National Energy Policy of the 1970s, a new approach should neither unfairly penalize energy-producing regions nor close off foreign markets.
Climate change must be a centrepiece of this strategy. Canada has declared its commitment to reducing greenhouse gas emissions, but our deeds have fallen well short of our words. Few observers believe that the current plan to achieve an emissions reduction of 270 million tonnes per year by 2012 will be achieved; and many elements of the current plan remain to be clarified or implemented. Specifically:
Canada is lagging behind in the creation of a domestic emissions trading system that will allow large emitters to purchase ”œemis- sion credits” from cleaner sources.
Canada has not set out clear emis- sions reduction obligations for large emitters, and Canadian emitters have not pursued international emissions trading opportunities.
Plans to create a climate fund in Canada for purchasing emissions reduction credits from domestic and international sources are still underdeveloped.
The idea of technology and partnership funds is a good one, but is also lacking in specifics, and is unlikely to produce significant benefits before 2012.
Carrying out these commit- ments is a necessary step towards a more effective cli- mate change policy. However, it will not be sufficient. We must:
Develop a comprehensive climate change strategy beyond 2012.
Reinvigorate an honest and creative national conversa- tion on climate change.
Like the oil and gas industry, the forest sector also faces challenges, but they are primarily economic rather than environmental. Canadian mills are smaller and older than competing mills in other countries, and are not being renewed at the same pace. Part of the problem is that Canada does not have one mammoth forest industry, but several smaller, provincially based industries, with employment clus- tered in Quebec, British Columbia and Ontario. The industry’s attempts to increase efficiency are often ham- pered by provinces’ interference with plans to close unprofitable mills and consolidate production. The provin- cial nature of forest management also typically means that wood must be processed in the province where it is harvested; and this further prevents multi-province companies from rationalizing production into larger and more efficient facilities. Finally, the Canadian industry is also more highly taxed than any other in the OECD save Germany, and is heavily regulated by duplicative federal- provincial regulations.
While Canada has about 20 per- cent of the world’s fresh water, much is locked in glaciers, snow or ice sheets, and most of Canada’s liq- uid water flows to the north, taking it far from populated areas. The regions of Canada most likely to experience the highest growth in demand for water are also those that are most sensitive to water variability and cli- mate change effects. Three Canadian watersheds " the British Columbia interior, the South Saskatchewan, and the Great Lakes " are already reaching full allocation for existing uses, and increasing the stress on these systems could result in irrepara- ble damage.
We need to concentrate on better management of our existing water resources so as to support existing and future domestic uses of water. As well, we must continue to resist pressure from our thirsty southern neighbours for bulk removals or diversions of Canadian water to the US.
Given that most Canadians live in cities, the quality of our urban environments poses serious issues for this country. Beyond continuing to reduce pollutants in our air, water and land, it is time to consider new approaches such as industrial ecology, which considers how cities and industrial clusters can be bet- ter designed to reduce, reuse and recycle waste products. Healthy urban environments are increasingly recognized as an essential prerequisite for the ability of city-regions to attract the talented and cre- ative people who will drive Canada’s innovation and eco- nomic growth.
Canadians are basking in the sunlight of relatively low unemployment, balanced budgets and healthy growth, but there are storm clouds gathering on the horizon. We need long-range, comprehen- sive, national strategies to boost Canada’s competitive- ness in the world, to prepare for the demographic revolution at home, and to manage our natural resources for success and sus- tainability. Ten provincial ”œme first” strategies won’t be enough. We need national leadership and genuine inter-governmental collaboration to address these pan-Canadian issues.