By most measures Canada is an extremely prosperous and successful country. Whether it is the United Nations Human Development Index (Canada placed 5th among 177 countries in 2005), the World Economic Forum’s international competitiveness ranking (Canada was 13th in 2005), or the OECD’s measure of living standards (Canada’s real GDP per capita was 2nd highest in the G7, 9th in the OECD in 2004), Canada ranks very high as a place to live and a place to do business.
But such outcomes are not preordained, nor should they be taken for granted. They depend on the quality of our policies and institutions as well as the quality of our human resources and our national endowments. And, in a profoundly globalized world, they depend not just on the direction of government policies and business strategies, but also on their flexibility and adaptability " speed matters in enhancing a country’s comparative advantages in today’s competitive and rapidly changing global marketplace. Indeed, Canada’s past experience with 27 years of continu- ous deficits and rising debt is a case in point of how policies can affect economic performance and national opportunity, in this instance for the worse.
The task at hand is to identify the most critical policy challenges and opportunities facing Canada over the medi- um term. In this context, three public policy challenges worthy of such focused analysis and public discussion are the following. First, increasing Canadian productivity growth on a sustained basis with the objective of closing productivity gaps vis-à-vis our main trading partner, the United States. Second, improving our human capital through education and training with the objective of hav- ing one of the best educated societies and economies in the world. Third, enhancing our global economic reach by attracting more global FDI, developing deeper trade links in key markets and creating a stronger ”œCanada brand.”
The key objective of public policy is to increase the well-being of the population in a sustainable manner. The well-being of citizens is a concept that often envelops not only their standard of living but also social goals and secu- rity. These goals need not conflict. For example, enhanced growth in income enables increasing expenditure on health care, education and other social programs, thereby also con- tributing to well-being. Similarly, improved education enables individuals to play a fuller role in society. At the same time, better educated individuals generate the new ideas and new approaches that foster growth in income. In the best of circumstances, economic and social policies are complementary.
There are two basic ways of improving a country’s stan- dard of living: employment growth and productivity growth. Over the last decade, Canada’s success in signifi- cantly improving its standard of living has come about mainly from increasing employment ratios; while produc- tivity growth picked up relative to previous decades, the rebound was less than those of our major trading partners. However, over the next 10 years, the aging population will mean that the pace of employment growth will structurally decline, thereby contributing much less to growth in living standards. The same demographic trends will also lead to greater pressure on pensions and health care expenditures. As this unfolds, the critical challenge facing Canada is to increase productivity growth so that our living standard continues to rise.
Productivity is basically a measure of how well people and physical capital interact within the economy to pro- duce goods and services. To increase productivity perform- ance, focus is needed on what the OECD terms the ”œdrivers of productivity growth”: human capital, physical capital and innovation. In this view, productivity can be improved directly through higher investment in both physical and human capital. Investments in more education and better skills " human capital " allow workers to be more efficient and effective. Workers’ pro- ductivity also rises if they work with more and better equipment. Investments in human capital can also raise productivity levels indirectly through increased innovation. Innovation " new ideas " provides better ways of producing existing goods and services and creates new goods and services. These productivity drivers also reinforce each other.
How has Canada done on the pro- ductivity front in recent years? The simple answer is: better than in previous decades (see figure 1) but not as well as our main trading competi- tors (see figure 2). Relative to the US in particular, gaps in productivity levels have widened, both in aggregate and in most sectors as well. These produc- tivity gaps vis-à-vis the United States are the main reason for differences in our standards of living. And Canada- US productivity gaps have increased over the 1997-2004 period.
With respect to key productivity drivers, Canada’s private sector R&D investment performance is well below best practices elsewhere (figure 3). Public sector research spending has increased, but commercialization of research lags compared with that in the United States in many areas. A sim- ilar picture emerges in private sector investment, particularly in machinery and equipment, where Canada’s investment as a percentage of GDP is the lowest in the G-7 (figure 4).
OECD studies provide strong empir- ical support of the importance of these drivers of growth. For example, drawing on diverse international experience, OECD analysis suggests that increasing private, non-residential investment by one percentage point of GDP will increase GDP per capita by 1¼ percent. Increasing business R&D investment, one proxy for innovation, by 0.1 per- centage point of GDP, is estimated to have a similar impact.
Given the degree of business sector competition and integration within North America, it is surprising that there has not been greater convergence of sectoral (and hence aggregate) pro- ductivity performance, and this is something we need to understand more fully. Increased investments in the key factors that propel productivity growth are clearly needed, but this also calls out for a better understanding of why we have relatively under-invested over a considerable period of time.
In this regard, it is important to recognize that many of the invest- ments in the drivers of productivity growth are made by individuals and businesses, not government. For their part, governments must enhance their policy frameworks to encourage Canadians to invest more in these productivity drivers. Sound macroeconomic poli- cy also plays a key support- ive role: Canada must not miss the opportunity over the next decade to continue to reduce its debt burden, increase national savings, keep inflation low and stable, and have a competitive tax regime.
No discussion of policy challenges would be complete without considering the key role of education and training. A good educational system is a source of sustained advantage in three ways. First, in the labour force of the 21st century, well-educated knowledge workers are the new ”œnatural resource”of the new global economy. Second, it is indisputable that a strong educational system is needed to foster innovation. Third, by increasing education, citizens are better equipped to contribute to the development of public policy and participate fully in public discourse.
In framing the importance of human capital formation, several global trends bear on the role of education and training in shaping individual, business and national success. These include:
The greater complexity of modern life. We are living in an extraordinarily inter-connected global economy, with capital, goods and services moving around the world in unprecedented volume and with unprecedented speed. Fifty years ago, most of a business person’s competitors were local and well known; 25 years ago they were regional and known; today, they are global and often anonymous. Fifty years ago product life cycles were over 10 years; today, they are less than a year. As Tom Friedman has so eloquently argued, the only con- stant is change: ”œif globalization were a sport, it would be the 100 metre dash, over and over and over.”
The world has moved dramatically toward market-based economies. Wall by Deng’s reforms in China, large swaths of the global econo- my have now entered market- oriented systems to varying degrees. Continued trade liberal- ization through the WTO, and the rise of truly global capital markets, are accelerating this process of change and binding the various players together in networks of capital, foreign direct investment and global supply chains.
The internet (and related communi- cations technology) has fundamen- tally changed the paradigm for processing, distributing and acquiring information. It has opened up incomprehensible stores of data to citizens. But data is not the same as information, and information is not necessarily knowledge " in other words, adding value to all this data depends on an individ- ual’s ability to process this increas- ingly ubiquitous global data warehouse.
In this environment, education is increasingly recognized as a key ”œgrowth driver”for economies at all stages of development, and a key determinant of an individual’s rela- tive economic success within any par- ticular economy. OECD estimates suggest that adding one year to the average educational attainment in a country can increase its GDP per capi- ta by 5 percent. Not many invest- ments produce such large economic payoffs as education.
Where does Canada stand? A couple of illustrative statistics are useful to demonstrate the richness of the issues involved. One Canadian strength is that 44 percent of the pop- ulation has some post-secondary edu- cation " the highest in the OECD (see table 1). But, in a knowledge-based world, with growing competition from countries like China, will less than 50 percent or even 60 percent be adequate to ensure our competitive- ness in the future? Notwithstanding the overall statistics, our rate of uni- versity education is less than that of a number of competitors, particularly the US. Is this something that we should be concerned about? And, Canada still has significant high school drop out rates, which impose increasing economic costs as the econ- omy shifts to ever more complex production processes in all sectors.
Furthermore, quantitative meas- ures aside, there are also quality issues. Should we be more focused on the quality of education Canadians receive? Here, Canada does well on average compared to other OECD countries on standardized interna- tional tests (on math, science and reading scores for 15-year olds, Canada’s rankings were in the 3rd-to- 8th place range. However, there is a wide range of educational attainment scores across provinces within Canada. What about disciplines: should we be concerned about our relatively weak orientation toward certain disciplines, such as manage- ment, commerce, and the natural sci- ences, and the possible impact on our capacity for innovation? And what about graduate degrees, particularly in areas that are aligned with our comparative advantages as a coun- try? Do we need better incentives in these areas through excellence-based scholarships to encourage the world’s best students to pursue doctorates in Canada?
Globalization is increasingly knit- ting together the world’s economies through trade, financial flows, technology and migration. In recent decades, trade has grown faster than GDP, and investment has out- paced trade. And, measured by either trade or investment, Canada has one of the most open economies " it is the world’s fifth largest trader, with the sixth largest stock of inward FDI. But the world is not static, and competi- tive forces are constantly shifting.
Thus, to state the obvious, the world matters, and matters greatly, for Canada. Whether it is the internation- al trade and investment rules-of-the game, the international financial architecture, international surveillance and policy coordination, or interna- tional development, Canada’s interests are always at stake and we need to seek outcomes that support our compara- tive advantages and our values.
In considering the importance of enhancing our global economic reach, several factors are worth bearing in mind:
First, trade and investment increasingly go hand in hand. For example, about 40 percent of Canada-US trade is intra-firm. Similarly, highly linked trade and investment networks are evident in parts of Asia and the EU. In this context, while inward FDI stocks as a percentage of GDP are still quite high in Canada compared to many other G7 countries, our rel- ative position has deteriorated sig- nificantly over the last 20 years as Canada’s share of global FDI (and North American FDI) has declined (see figure 5). Given the growing importance of intra-firm trade links, this trend may impact on long-run trade growth prospects unless it is reversed.
Second, having the US " the world’s largest, richest, and most productive economy " as our main export market is a signifi- cant advantage that we need to deepen. At the same time, emerg- ing Asia, particularly China, is growing at such a sustained pace and scope that it is showing signs of reversing secular declines in global commodity prices. It has the potential for stimulating enormous domestic demand, provided the pace of policy reform continues. In this con- text, with our substantial natural resource endowment and export potential in the services area, China is an economy and market that warrants ever increasing Canadian attention.
Third, in the competitive interna- tional market for trade and invest- ment, branding matters. Is our international economic profile consistent with our economic weight? As a relatively large, resource rich, high income, multi- cultural country, Canada has the potential to enhance its global economic reach. Part of this entails increasing our competitive- ness, part involves our policies, and part should be a focus on pro- jecting to the world why Canada matters. Particularly in attracting FDI, it is important to establish in the minds of global investors the comparative advantages of Cana- da, the whole of which is the Canadian brand.
To be at the top rank of global liv- ing standards, Canada needs to be at the forefront of globally competitive economies. With 40 percent of our GDP coming from trade today, we need a clear global focus on what it will take to be competitive over the next decade. In short, is 13th on the World Economic Forum ”œBusiness Competitiveness Rankings” where we want to be, given the dynamic com- petitive forces such as the US and China at play in the world?
What is it going to take to enhance our global economic reach? Relative to China and India, Canada’s competitiveness neither should nor can be based on wage costs; it has to be based on rising productivi- ty, higher-end products and services, and human capital. Relative to the US, our competitiveness needs to be based on productivity, specifically closing Canada-US gaps, and the quality of our products, services and labour force. Finally, competitiveness means we need to be more attractive to global FDI, which increasingly shapes global trade and drives growth.
While the focus for these policy challenges is Canada, and the goal is a prioritized list to concentrate public policy discussion, the lens must be decidedly global. We need also to be careful to avoid increasingly sterile distinctions between economic and social policy, between domestic and international policy. For example, is an effective immigration policy with efficient labour market integration a foreign policy, a social policy, an eco- nomic policy, just good 21st century public policy? Finally, in all our poli- cy formulation and delivery, we need to focus on flexibility, adaptability and speed, in both the public and pri- vate sectors.