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

AN INNOVATION AGENDA FOR THE PUBLIC SECTOR
Lawson Hunter and Peter Nicholson

CANADA’S PRODUCTIVITY AND INNOVATION FAILURES: QUESTIONING THE CONVENTIONAL WISDOM
Jim Stanford

2 11 21 33 42 49 60 70 79 89 95 102 112 119 125

RISING TO MEET THE ASIA CHALLENGE
RISING TO MEET THE ASIA CHALLENGE AND OPPORTUNITY
Dominic Barton

A LEAP-FROG STRATEGY FOR RELATIONS WITH ASIA
Yuen Pau Woo Rana Sarkar

THE BIG CHALLENGE: ADJUSTING TO THE ASIA CENTURY

SQUARING THE CARBON CIRCLE
LOSING THE 2020 BATTLE: WINNING THE 2050 WAR
Lorraine Mitchelmore

CANADA’S CARBON CHALLENGE: REDUCING EMISSIONS WHILE MAINTAINING OUR QUALITY OF LIFE
Ian Mallory BUILDING A LOW-CARBON, HIGH-OCTANE CANADIAN ECONOMY Stewart Elgie and Alex Wood

REDUCING INCOME DISPARITIES AND POLARIZATION
WHY CANADIANS SHOULD CARE ABOUT INCOME INEQUALITY
Mark Cameron

INCOME REDISTRIBUTION IN CANADA INEQUALITY IS NOT INEVITABLE
Sherri Torjman and Ken Battle

Andrew Sharpe

SECURING OUR HEALTH SYSTEM FOR THE FUTURE
LESSONS FROM 2004, PERSPECTIVES FOR 2014
Philippe Couillard

FOUR FEDERAL INITIATIVES TO IMPROVE AFFORDABILITY, PRODUCTIVITY AND ACCOUNTABILITY
Francesca Grosso and Michael Decter Mark Stabile

PAYING FOR THE HEALTHCARE WE WANT

PREFACE

MAKING STRATEGIC CHOICES
GOVERNING IS ABOUT making choices. Sometimes the choices governments make are strategic, the product of hard thinking to address major hurdles which coalesce at a particular point in time. It is our belief that Canada is at such a point in time today and it is for this reason that we have produced this collection of papers to kick-start a discussion about the role of the federal government in Canada. A serious public policy strategy for the country means doing less of some things, while focusing decisively and aggressively on a few important things. This requires indepth analysis of the really big challenges and opportunities facing the country. It requires governments to be straight with Canadians about the risks and rewards that lie ahead, so that citizens will buy into a clear direction set by government. The orientation of this volume – indeed the basic orientation of Canada 2020: Canada’s Progressive Centre – is that the federal government has a vitally important role to play in developing and implementing strategic policies, focusing governments and other institutions in society on the big

challenges the country faces, and mobilizing consensus for action. In other words, we believe that the federal government can be a force for significant and positive change. This does not mean big government. It means intelligent, innovative, analytical and strategic government. It could conceivably result in smaller government, focused on a few big and important areas of policy that really matter to the country’s future.

FIVE CHALLENGES FOR 2020
Today, Canada faces challenges and opportunities that are quite unprecedented in our recent history, although they may seem rather opaque to most Canadians. Our ability to overcome these challenges – and seize the opportunities – will determine the future trajectory of Canada’s economy and society over the next generation. Our standard of living and quality of life could well hang in the balance. This is why we need federal leadership. Canada 2020 contends that there are five fundamental, inter-related challenges confronting the country which require strategic political leadership and policy action from the federal government.

as a result they have had little to no effect on Canada’s overall GHG emissions. Since the 1990s. Canada is not really on the map in China and India today. but also to a weak culture of conservation and inadequate policy and regulatory regimes. Canada is also fast becoming one of the world’s leading fossil fuel producers and exporters. Despite such efforts. Since 1984. successive federal governments have made incremental attempts to broaden and deepen Canada’s trade. we risk falling further behind and losing the revenues that enable us to sustain our standard of living. Rising to meet the Asia challenge The global centre of economic power is inexorably shifting from the West to the East. investment and economic relationships with Asian economies.S. and one of the world’s largest per capita . With that title are likely to come increased emissions. Canada has been on a slow boat to China – indeed to Asia. in stark contrast to many of our major competitors. Modest measures to reduce emissions have been implemented over the past decade. Without this. or at least can realistically aspire to that goal. level to 76% in 2007. There is no better evidence of this shift in economic and financial power than the recent efforts by the European Union to persuade China to help prop up the teetering European financial system. relative productivity in Canada’s business sector has fallen from more than 90% of the U. We must leverage our unique strengths and advantages and become an indispensible part of the new Asian century. It is therefore time for a much more aggressive. There are no signs of things improving: quite the opposite in fact.1 Increasing innovation and productivity Productivity growth and innovation are the sine qua non for economic prosperity. Over the past fifteen years. primarily by investing in university-based research and development and by cutting personal income and corporate taxes. an original signatory to the Kyoto Protocol on climate change. at least in the absence of meaningful measures to combat these. High Canadian emissions are due in part to our unique geography and harsh climate. It is time for the federal government to take a much bolder. As a G8 country. more generally – for many years. 3 2 Squaring the carbon circle Canada has among the highest per capita levels of greenhouse gas (GHG) emissions in the world (although our total contribution to global GHG emissions is low as a result of the relatively small size of the Canadian economy). partly as a result of the fiscal and economic problems plaguing Europe and the United States. more creative and aggressive approach to help deepen Canadian ties with Asia and enable Canadian businesses to take advantage of unprecedented market opportunities in the region. It has even been suggested that Canada is “an energy superpower”. Canada’s lack of productivity growth has been a worrying feature of the economy for decades. But these initiatives have been neither significant nor strategic. the standard policy remedies for dealing with flagging productivity performance. This trend has been underway for twenty years. but it is now reaching a crescendo. Yet Canada’s productivity growth has actually become worse over the past decade. the federal government has been taking steps to try to reverse this trend. notwithstanding the fact that we have some significant advantages over other countries in this region of the world. focused and creative federal policy response to Canada’s productivity growth and innovation challenge.

it has proven to be little more than a stop-gap for a decade. At an extreme. The basic causes of healthcare inflation are well-known: expensive new technologies. Yet the general consensus among experts is that if we stick with the current funding/ administrative models and tax structure. While healthcare delivery is a provincial responsibility. in real terms. The Occupy Wall Street protests. Various reforms to federal income security programs and the tax-transfer system have been put in place over the past twenty years. Income polarization has not. are one early sign of the social discontent that can arise from income polarization and a growing perception that the economy is not working for most people. a feature of all market economies. 5 4 Reducing income disparities and polarization Income inequality has been a creeping problem in Canada and other advanced economies for many years now. led by the federal government. coupled with an aging society. been a big issue on the federal agenda. In 2004. and their analogue in other countries. While this phenomenon is still more acute in the US than in Canada. high-quality healthcare has been a defining feature of Canada and Canadian citizenship for 40 years. Securing our health system for the future Universal. It is therefore time for a serious. . healthcare financing – paying for the system – has been a dual responsibility. Income polarization can have seriously perverse effects on the economy and on society. and to consider strategic policy reforms to head off a looming problem. the top 1% of economic families have accumulated an ever-increasing share of Canada’s wealth.carbon emitters. Unfortunately. including Canada. procedures and drugs that permit us to live longer. Healthcare costs have been rising significantly as a fraction of our national income and as a share of government budgets (especially provincial budgets) for a generation now. It is time for the federal government to analyze and consider the longer term effects of income polarization. but these have not been aimed at dealing with income polarization. With some $41 billion in transfers for health over ten years. unravelling the fabric of a country. to square Canada’s carbon circle and put in place policies that will significantly decrease our GHG emissions. strategic effort. it can undermine social cohesion. in response to rising costs and pressures on provincial treasuries. the 2004 Health Accord was billed “a fix for a generation”. some recent studies suggest the gap between rich and poor – and between the superrich and the middle class – is now growing faster in Canada than in the US. We are also at serious risk of missing opportunities in the low-carbon economy of the future and of becoming increasingly marginalized economically if we fail to act. shared by federal and provincial governments. Medicare as we know it is not financially sustainable. since the beginning of Medicare. Income inequality. is now giving way to income polarization. the federal government announced a major increase in federal fiscal transfers to the provinces for healthcare. The bottom two quintiles of the income scale have seen their market incomes decline. Canada has a moral responsibility to make progress on limiting GHG emissions (if for no other reason than to set an example for the big emitting countries). It is the public service Canadians value most. At the same time. since the early 1980s (though transfers have resulted in some degree of after tax and transfer growth). up until now.

have an opportunity to examine the links between areas (for example. But our belief is that informed. Perhaps it will lead to a consensus among political. and Canadian citizens generally – must work to address the challenges. as we move on. we will. governments at all levels. The areas have all received attention in the past. Our goal is to kick-start a strategic policy conversation throughout the country about The Canada We Want in (or by) 2020. Perhaps it is because of scepticism that the federal government can really make a difference. Many elements of Canadian society – the business community. three in each of the five areas identified above. We also need the federal government to provide leadership on the organizational and accountability issues that underpin our health system in Canada. Perhaps it is because governments and politicians lack the ideas to address these issues. . The time for that conversation is now. and asked them to approach the issues from a strategic policy standpoint. notably healthcare financing). We present this volume as a starting point. Second. 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. in political party platforms. Whatever the cause. Perhaps we have reached the limits of innovative public policy and governance. The scope of federal government activity clearly extends well beyond these five issues. academic and other leaders in Canadian society that the federal government needs to chart a strategic direction for the country to secure Canada’s prosperity and the quality of life Canadians have come to expect. it is time for Canada to break out of this mindset. We have brought together a group of authors. No single entity has the solution. Such a conversation has not been evident to date in Parliament. NGOs. KICK-STARTING THE CONVERSATION This volume contains 15 papers. educational institutions. the effect carbon policy will have on our trading relations or the links between income inequality and productivity). business. A collective effort is required. but often not in a truly strategic way. Our choice to address all the issues together has two implications. strategic decision-making in these areas will go a long way towards securing the Canada We Want in 2020. For this is what has been missing. First. strategic policy approaches on healthcare financing are urgently required. and the effectiveness of policy in general in addressing the key issues of our time. innovative. the broad scope of issues will give us a chance to reflect more critically on the role of the state. or in the media – indeed in any of the places you would usually expect to see it. Or perhaps we are just avoiding the issues – in a collective state of denial – in the hopes that they will resolve themselves in an acceptable way through incremental policy action. in general elections. all experts in their respective areas.As we approach the end of the Health Accord in three years’ time.

a starting point. . The overall aim of the project is to launch a debate about the role of the federal government in Canada. consolidated publication towards the end of 2012. In Phase 2 of the project we will stimulate further conversations in each of our five chosen areas. sometimes they disagree.INTRODUCTION TO OUR PROJECT THIS VOLUME MARKS the culmination of Phase 1 of our project: The Canada We Want in 2020. It is. It will take into account recent changes and lay out proposed future strategies. Canada 2020 will produce a final. But what all authors have in common is a belief in the value of discussing the options and thinking strategically about the issues that Canada faces. We will host a series of panel discussions and web-based exchanges that draw on the papers in this volume. This publication is intended to act as a focus for discussion and a core around which we can bring in ideas from a wider range of people. Drawing on the materials from the previous phases. in this sense. We expect to conclude this phase by mid 2012. Phase 3 will see us narrowing back down and reaching conclusions. This document will summarize our conclusions in each of the five areas. These discussions will tease out areas of agreement and disagreement and begin to focus on implementation challenges. Canada 2020 has called on fifteen authors to share their wide-ranging views in the five areas. Sometimes they agree on policy prescriptions.

canada2020. watch interviews and webcasts and make comments // Contact us directly to arrange joint presentations or discussions Details are on our project site at: www.THE CANADA WE WANT IN 2020 WHAT YOU CAN DO Our aim is to draw as many viewpoints as possible into this project.ca . There are several ways you can get involved: // Attend our series of panel discussions in 2012 // Check our website: download documents.ca Diana Carney Project Coordinator diana@canada2020.

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

Sectoral development policy should. actually gets commercialized. and market allocations more broadly. He presents data that show that Canada’s productivity began to dive just at the point at which we moved into full “liberalization mode”. The vision is of a federal government that would actively strive to ensure particular outcomes Federal efforts should be informed by existing resources and proposals. once developed.S. away from the US model and towards a more interventionist Asian-style solution? . open regulations on foreign investment. Another step that Lynch proposes is to transfer some federal research and development support out of tax credits (which appear to be having a limited effect) and into more direct measures. And the further we have moved down this path. Lynch nods in the direction proposed by Jim Stanford: that is. especially to ensuring that technology. perhaps it is time that our policies moved in a similar direction.THE CANADA WE WANT IN 2020 more effort to this area. we now have the Expert Panel Report on Federal Support to Research and Development (October 2011) which – like Lynch’s paper – stresses the importance of ensuring that innovative firms have adequate access to risk capital. to secure this country’s future. This is the overall thesis of Stanford’s paper. To add to this. the worse our productivity performance has become. instead of relying on the vagaries of trade agreements. be a highly strategic and disciplined effort that draws on every available tool to support chosen sectors. such as the 2008 Competition Policy Review Panel report. while making better use of government procurement to reinforce corporate innovation. in Stanford’s view. In making this last point. Stanford’s solution to this problem is to take a leaf out of the book of the states in East Asia that have adopted a far more interventionist approach to industrial development. The vision is of a federal government that would actively strive to ensure particular outcomes. Canada’s trade volumes are shifting away from the U. He terms this “sectoral development policy” (rejecting the “industrial policy” label which conjures images of old-style support to old style industries). and towards Asia (though at nothing like the pace that the authors in the subsequent section of this volume would like to see). away from simply creating an enabling environment and towards much more deliberate measures to secure productivity improvements in Canada.

The international economic geography is shifting to Asia and other dynamic emerging economies. And we need to tackle our weaknesses. two of the most pressing and pervasive of which are our under-performance in productivity and innovation. There has been a dramatic decline of trust in leadership – whether political.DESPERATELY SEEKING A MORE INNOVATIVE CANADA KEVIN G. 2 . and China and other Asian countries are reluctant to address their consumption-saving-export imbalances. environmental. political. He was made a Member of the Queen’s Privy Council for Canada in 2009. typically through innovation. How is Canada placed in this new global normal? With our myriad advantages. Europe seems unwilling to confront its policy inconsistencies. as well as Executive Director at the International Monetary Fund. It is time to acknowledge. corporate. He was appointed the 20th Clerk of the Privy Council. not rest on them. P. Secretary to the Cabinet and Head of the Public Service of Canada in 2006. in both our public policy and private sector strategy. There are large risks associated with this new global normal. the capacity to realize economies of scale that transcend traditional markets. Things will not be as they were. our biggest risk may be complacency. What is emerging is a new multi-polar world: economic power is being dramatically redistributed. They must also secure the natural resources to satisfy their increasingly affluent citizens and feed their economies. the drivers of success are a global perspective. corporate governance and regulatory crises. Lynch. Prior to that he served as both Deputy Minister of Industry and Deputy Minister of Finance. a position he held until 2009. The digital universe is transforming what markets mean and how social interaction and communication take place. In such a world. LYNCH The Honourable Kevin G. is Vice Chair of the BMO Financial Group. regulatory or moral – due to the cumulative impact of financial. They have relatively stable financial systems and fiscal positions yet inflationary pressures and income inequality challenges threaten. The demographics of aging are creating a global talent hunt. and the ability to sustain productivity growth.C. Competitive firms are increasingly defined by their ability to shape market tastes and create innovative products that disrupt markets. military and intellectual power will follow. that the status quo is no longer viable. We need to build on our many strengths. Countries such as the US seem politically unable to deal with their fiscal problems. INTRODUCTION We are entering a new global normal.

and whether it can make a profit and grow by selling them. 3 THE CANADA WE WANT IN 2020 . the iPad. GPS. Then it has to consider whether and how to fine-tune its products. processes and markets according to what competitors are doing and how consumer tastes are shifting. digital photography. Technology is changing. It is the answer to the often-posed question of how a higher-wage economy like Canada can compete with emerging countries with low costs of production. It has to choose the best possible production and distribution processes. It has to hire.”1 Overall. there are four distinct areas of possible innovation in firms: // Product Innovation this is the technological and planning capacity of a firm to introduce new products and services ahead of competitors. 1999. As Paul Krugman. This improves the firm’s competitiveness and increases what it can pay its workers and earn as its profits. Innovation is the essence of how a dynamically successful firm “stays ahead of the competitive curve”. A typical business thinks about the products it has to sell. it is constantly evolving. New products typically carry higher profit margins and encounter less cost competition than established products. Innovation is the essence of how a dynamically successful firm “stays ahead of the competitive curve” As this typical Canadian firm goes about its planning. the iPod. It lies at the heart of modern competitiveness. This is where innovation enters the picture. the potential customers that will buy them. “America gets more than half its economic growth from industries that barely existed a decade ago – such is the power of innovation. as users of the BlackBerry. ATMs and on-line shopping will attest. or the result of integrating existing leading technologies in a new way that better meets consumer demands. How well it does depends upon how focussed and disciplined it is in seeking continual innovation and productivity enhancement. It drives growth. the world around it is not static. train and compensate workers. and decide what kind of human resource management policies it needs. It improves productivity. But it also has a public purpose: it is an essential ingredient for raising living standards and ensuring the economic growth we need to meet our priorities as a nation. Markets are changing. It raises our living standards. or to develop new markets. Consumer tastes are changing. It gives consumers new choices. or even to create them.WHAT IS INNOVATION AND WHY DOES IT MATTER? Innovation is our ability to create new products and services. The firm has to make decisions about how to cope with this dynamic environment amidst much uncertainty. Competitors are shifting. it is almost everything. Corporate innovation does not happen in the abstract. to produce existing products in different ways. the Nobel Prize winner. to anticipate consumer wants and needs. innovation increases the value of the output produced by a worker – a firm’s productivity. Product innovation can be the result of research and development. It requires a sophisticated understanding of both consumers and technology. It is also incredibly important to an economy.” Consider what innovation and productivity mean at the level of an individual firm. 1 February 18. but in the long-run. wrote recently in the New York Times: “Productivity isn’t everything. Once it decides on its products and markets. it has to decide on how to organize efficiently. As The Economist observed.

innovation essentially has to happen at the corporate level. but still hard-wired into the corporation. But innovation itself is largely a corporate responsibility. through one or more of these four channels. a compelling public narrative about the risks to the nation from a perceived brain drain. The choice for Canadians – and all of us have a stake in the outcome – is whether our innovation approach merely needs some model restyling or whether it requires a more complete model makeover. working separately to develop new products and processes. The usual starting point for analysis of innovation is investments in research and development (R&D).g. In a market-driven economy. It requires active disruption of the status quo and the natural tendency towards incremental improvements. This is no longer the case. using the internet to extend reach) or by creating new products. Internet shopping and online banking are two service sector examples. In the past this problem was essentially counter-balanced by a low Canadian dollar.INCREASING INNOVATION AND PRODUCTIVITY // Market Innovation this is the capacity of a firm to alter its market. The imperative of commercialization of research was recognized and strong links between publicly-funded research and the private sector were promoted. geographically or virtually (e. market and customer knowledge and technology into marketable innovations. by both the public sector and the private sector. for which there was no previous market. in the 1990s. // Process Innovation this is the capacity to change how goods and services are produced and delivered to reduce cost. Management creates “innovation supportive” structures that fight the tyranny of short-termism. Public sector innovation policy In the public sector. Innovative corporations have business structures that accommodate dedicated innovation teams. // Organizational Innovation this is the strategic capacity to convert creativity. The private sector in Canada has not kept pace with many other countries when it comes to investing in innovation. HOW IS CANADA DOING? Innovation is vital to our future. our poor private sector innovation and productivity performance will increasingly constrain our options for the future. Developing global supply chains and identifying risksharing partners in manufacturing are prime examples of process innovation. If unaddressed. improve efficiency and increase convenience for customers. The choice for Canadians is whether our innovation approach needs some restyling or whether it requires a complete makeover 4 . yet we are simply not doing well enough. as are an adequately risk-taking venture capital system and an effective financial system. greater competition among research institutions and far more investment by the government. to a fundamental policy rethink. Another possibility is value-based or “frugal innovation” (for which India is increasingly well-known) whereby firms engineer backwards to achieve the best product for a fixed price point. Public educational and research policies are vital to nurture it. There was a refocusing on global excellence in higher education to be achieved through a more strategic approach to research prioritization. together with clear evidence that our university research capacity had deteriorated led.

Canadian business invests only about 75% as much as US business in leading-edge machinery and equipment and a shockingly low 47. Centres of Excellence and Genome Canada were established. A recent report by the Council of Canadian Academies makes a compelling case that Canada has a real business innovation problem. New excellence-based graduate scholarships (the Vanier Scholarships and the Canada Graduate Scholarships) were introduced. Major new funding was provided for the Granting Councils and an indirect costs-of-research support program.9% as much as American firms in information and communications technologies (ICT). However. University research investments as a proportion of GDP are now higher in Canada than in all other G7 countries. utilities and construction sectors together represent over 16% of Canadian GDP and spend barely 0.aspx) 5 THE CANADA WE WANT IN 2020 . Moreover. The natural resource.3% of sectoral GDP on R&D. (http://www. including the US. In 2008. It spends only 0. This is a tremendous achievement and the fruits of these efforts can now be seen in the quality and quantity of research coming out of our university labs. Independent institutions.ca/en/ assessments/completed/ innovation. Dynamic new engines of research such as the Canada Global Excellence Chairs. two thousand of them. were created at arm’s length from government to build strategic research excellence. there has been remarkable progress in rebuilding the higher education research infrastructure in Canada. Finland and Korea. In short. resulting in fewer new firms and jobs and less new wealth than should be the case. geared to attracting and retaining world-class researchers to our universities.6% of its sectoral GDP on R&D. Canada’s R&D spending is highly concentrated in a few sectors. Sweden. 2 Council of Canadian Academies (2009) Innovation and Business Strategy: Why Canada Falls Short. The Canada Research Chairs were created. with rates in some sectors being less than half those in the US (though there are some “star performers” such as the construction industry). more remains to be done. The service sector accounts for 70% of Canadian GDP. there is a real and present innovation and productivity problem in Canadian business.This renewal went well beyond dollars and cents. Technology and Innovation Council presents data that show aggregate Canadian business productivity levels to be more than 25% lower than those of the US (Figure 2). Commercialization still lags significantly. scienceadvice. Commercialization still lags significantly. It is not just R&D expenditures that are low. Canada ranked 15th among all OECD countries in terms of business R&D expenditures as a % of GDP. Major tax changes were implemented to put charitable giving to Canadian universities and research hospitals on a par with the US. The 2011 Report of the Federal Science. principally the Canada Foundation for Innovation. spend. resulting in fewer new firms and jobs and less new wealth than should be the case Canadian business spending on R&D was only 1% of GDP.6% of GDP. private-sector innovation is another matter. In not much more than a decade. Spending is not the only measure of university research success. roughly half of what the US spends and almost as low as a third of what the leaders.2 This can be appreciated by looking at the international comparisons in Figure 1. Private sector innovation performance University research is on a decided upswing. This is well below the OECD average of 1. Interactions between our research-intensive institutions and the private sector are still too limited and achieving global excellence in education and research requires continuous effort.

7 % 2. Volume 20. Czech REepublic United States Netherlands Sweden Figure 1 HOW DO WE TACKLE OUR INNOVATION DEFICIT? Given the magnitude of our problem. The federal government is not the main driver of private sector productivity and innovation in Canada.9 % 1.3 % 1. a “business-as-usual” approach to innovation will not be enough.9 % 0.7 % 2.2 % 1. Tweaking existing programs and incentives will not turn things around. It does.7 % 1.2 % 1. Productivity and innovation should not be feared but tackled: they are not about working more for less.2 % 1. growth and standard of living.8 % 1. they are essential for raising our living standards. however. That is the responsibility of business itself.5 % 1.4 % 1. Productivity and innovation lie at the intersection between public policy and private sector behaviour Norway Finland Canada Korea Japan 6 .9 % France Luxembourg Australia Austria Iceland Germany Denmark Belgium Ireland United Kingdom SOURCE: OECD (2010) Main Science and Technology Indicators.1 % 1.3 % 1.5 % 2.INCREASING INNOVATION AND PRODUCTIVITY Business sector R&D expenditures as a percentage of GDP (BERD ratio) 15th 2. quite the opposite.0 % 1. have a clear role to play both in framing the required public discussion and in ensuring that business in Canada is underpinned by effective economic measures and an enabling policy environment. We need instead a broad public discussion about what it will take to maintain our competitiveness.0 % 0.8 % 1.

The leaders of both need to be involved in crafting an effective national response.5 80.8 105. universities and labour – to focus attention on the new global normal and how a mature economy such as our own should respond to this.6 107.) 86.1 38.3 49.1 29.7 192.6 73.6 14.3 81.0 72.2 39.5 73.Canada–US labour productivity and selected capital intensities (US = 100) SECTOR AGRICULTURE.0 47. Figure 2 Leadership is needed It will take leadership – in government.9 LABOUR PRODUCTIVITY (2007) MACHINERY & EQUIPMENT* (2000-07 avg.1 25.0 100.7 36.3 74. Below are eight concrete steps the federal government should take to substantially improve our innovation and productivity performance. Technology and Innovation Council (2010) State of the Nation 2010 Report.8 128.4 86. followed by those in which its role is more supportive. 7 THE CANADA WE WANT IN 2020 .5 45.1 19.5 51. scientific and technical service Administrative and waste management Education. business.0 57.6 62.2 70.2 72.0 79.6 72. FORESTRY.5 72. Those in which it plays a lead role are presented first.7 47.9 17.4 88.6 95.1 31. real estate and leasing Professional.) ICT (2000-07 avg.9 70.7 98.6 72.2 91.0 75. productivity and innovation lie at the intersection between public policy and private sector behaviour.6 108.1 46.9 34.4 45.2 35. FISHING AND HUNTING MINING Mining except oil and gas Oil and gas extraction UTILITIES CONSTRUCTION MANUFACTURING SERVICES SECTOR Wholesale trade Retail trade Transportation and warehousing Information and cultural industries Finance.3 28. insurance.2 42. entertainment and recreation Accommodation and food services AVERAGE FOR ALL SECTORS AND INDUSTRIES 90.1 79.9 39. healthcare and social assistance Arts.7 39.8 82.1 47. Simply put.6 * includes information and communications technology (ICT) SOURCE: Science.

Market discipline should drive more corporate management focus on innovation. We need to complement NAFTA by negotiating new economic arrangements with a range of countries. but not trade and investment. 12-21.”3 A starting point would be for the government to revisit the competition policy proposals of the Canadian Competition Policy Review (2008). Policy Options.INCREASING INNOVATION AND PRODUCTIVITY GOVERNMENT TO LEAD Competition matters to corporate behaviour. and with South Korea and Japan. the dynamic emerging economy with which we share much. this mechanism is not working as intended. amongst OECD countries. (2011) “A simple solution to Canada’s innovation problem”. Such a Council should produce global productivity and innovation benchmarks for key sectors. and both markets and boards of directors would be encouraged to take these into account in evaluating corporate performance. judging by corporate R&D levels. government support for business innovation is predominately delivered through the tax system. 8 . including the US). China. As Tom Jenkins recently argued: “The motivation to be productive and to innovate is a primal one related to competition… If you want to have better productivity in our economy we cannot “suggest” to our executives that it would be a good idea. These benchmarks would be made available to the public. including: Brazil. particularly in more protected sectors where productivity and innovation gaps are largest. Unfortunately this mechanism is not working as intended 2 Information matters to corporate behaviour. Instead. Consideration should therefore be given to redirecting some of these innovation tax expenditures to direct support for innovation (which is more the norm. and also contribute to increased competition. Governments – both federal and provincial – need to change regulation to increase market competition in Canada. 32 (8). It should research what firms in each sector in the top five competitor countries are doing to excel Trade agreements with dynamic emerging economies help reinforce a global mindset and orientation amongst Canadian business. more focussed and to proceed with a greater sense of urgency. 1 in innovation and productivity. T. we must “force” their firms to change and become more productive by increasing the competitive intensity. 3 We have one of the most generous research and development tax credits in the world. Indeed. In Canada. India. By creating a national Productivity and Innovation Council the federal government could introduce more ‘information-driven competition’ into Canadian business decision-making. We need to be more strategic. we have one of the most generous research and development tax credits in the world. a country of 200 million people that will soon be the sixth largest economy in the world. Unfortunately. the second largest global economy. 4 3 Jenkins.

Research excellence in our universities is the backbone of an effective innovation system. common purpose technologies in key sectors. In addition. examples from countries such as the US and Israel show the potential impact this industry can have in creating technology champions. We seriously lag other countries as diverse as the US. and ultimately the capacity continually to re-invest. Singapore and the UK in this key supporting element for increased innovation. The venture capital industry in Canada is simply not functioning in the way it should. And. more competitive firms. one the most successful US government agencies) and providing more direct support for developing new. It is essential for our education systems to be geared to the needs of a globally-oriented. to meet the emerging demands of new middle class consumers in Asia. As a new Business Development Bank of Canada (BDC) study clearly stated: “Although the venture capital industry is only one element of the innovation ecosystem. Unfortunately. Ottawa: BDC. Graduates need to emerge with multiple language skills and with meaningful knowledge of other countries. 1 Financing is crucial. Managers and business graduates need to be experts in global marketing.and medium-sized enterprises adopt leading edge technologies and best management practices. (http://www. including: agriculture. bdc. But we also need to insist on accountability from the institutions to ensure that they are focussed on global excellence in their research. One way to achieve this is to design incentives to increase the interactions between research universities and businesses. their cultures and markets. knowledge-based economy. Other possibilities include creating a Canadian equivalent of DARPA (the US Defense Advanced Research Projects Agency. to understand the core technologies for their sectors and to be comfortable in risk assessment of product innovation. Israel. reducing the risk faced by innovative Canadian companies and helping them build market share. Canada is ‘punching below its weight’. we have to become better at commercializing the fruits of this research. GOVERNMENT PLAYS A SUPPORTING ROLE to catalyze renewal in this area. both for innovative start-ups and established firms looking to invest more in innovation and productivity. Opportunities for such technology development exist in many areas. This will help create a virtuous circle of research leading to innovative ideas. building on the innovative re-investments of the last decade.”4 As a way 3 4 BDC (2011) Venture Capital Industry Review. and renewable energy. the Government of Canada could be much more aggressive as a purchaser of innovative goods and services. the oil sands.pdf) 9 THE CANADA WE WANT IN 2020 . jobs and growth. information technology. new products. 2 Education clearly matters in a knowledge-based economy.ca/EN/Documents/ other/VC_Industry_ Review_EN. An examination of the role of intellectual property (IP) rights and whether certain IP regimes provide better incentives to commercialization would be timely. they will be overtaken in the global search for talent and will not be able to lead Canadian businesses to the innovative future that we need. medicine and medical devices. for water and soil remediation.This could be channelled through a revamped and expanded IRAP (Industrial Research Assistance Program) that has a greater focus on helping small. the federal government should consider establishing a Venture Capital Industry Review Panel. We need to continue to fund this public good. If they are not.

We have strong public research capacity in our universities. focussed in sectors where Canada has inherent comparative advantages. More leading edge technology demonstration projects. are one route (carbon capture and storage pilot projects in Saskatchewan and Alberta would be one example). Canada is in an excellent position to prosper. Today. which would bring together university researchers and private sector businesses and give all partners the right to use and customise common intellectual property. provided we tackle our weaknesses. we must avoid complacency. with productivity and innovation being front and centre. and weak private sector innovation and commercialization. We have deep trade links with the US. and yet there is much we need to do. 10 . CONCLUSION Canada is blessed with much. First and foremost. and weak linkages with the dynamic emerging economies. Another way for the government to promote innovation would be to support the establishment of more cooperative technology development centres. We should be desperately seeking a more innovative Canada well before 2020. we have a strong dollar and weak productivity.INCREASING INNOVATION AND PRODUCTIVITY 4 Public-private partnerships can be an effective way of diffusing research and supporting innovation.

Formerly Canada’s senior civil servant in charge of competition policy and enforcement. K-12 education. where he has had a long career as a regulatory and government relations counsel. the activities of which contribute more than a quarter of Canada’s GDP and whose regulatory policies profoundly affect the behaviour of the private sector. the better the value for the taxpayer. Canada’s economic performance is therefore heavily and directly influenced by the productive efficiency of the public sector. The more efficiently the public sector does its job. than by focusing almost exclusively on the acknowledged innovation short-comings of businesses. where opportunities for creativity abound and where the power of governments to effect change is greatest. comprising $367 billion in expenditures on goods and services and $72 billion in capital spending. To illustrate the possibilities. governmental relations and corporate affairs. [It should be noted that there is a structural tendency for the cost of public services to grow faster than overall GDP. The proposals are necessarily high-level but they demonstrate the relevance of the thesis and help prompt a new focus for innovation policy on the public sector itself. he served as executive vice-president and chief corporate officer of Bell Canada and BCE Inc.AN INNOVATION AGENDA FOR THE PUBLIC SECTOR LAWSON HUNTER AND PETER NICHOLSON Innovation is the principal driver of productivity growth and economic prosperity. Mr. Lawson Hunter is head of the Competition/Antitrust Group at law firm Stikeman Elliott. While this emphasis is appropriate up to a point. 1 The government sector of Canada’s economy currently accounts directly for about 26% of GDP (up from 23% pre-downturn. we cite some major challenges and opportunities in four broad domains: healthcare services. 11 THE CANADA WE WANT IN 2020 . From 2003 – 2008. Contemporary discussion focuses almost exclusively on innovation by businesses and on what governments can do to support this. it ignores the elephant in the room: the public sector itself. The thesis of this paper is that government can make a greater contribution to Canada’s innovation performance by putting its own house in order. where he was responsible for overseeing regulatory.. This is because public services 1 Estimates in current dollars based on Q2 2011 GDP at annual rates (Statistics Canada). 1 The public sector is thus a very big “business” in its own right – far larger in terms of both employment and output than the entire manufacturing sector. due to a significant temporary increase in capital spending). Hunter played a key role in drafting the federal Competition Act. public infrastructure and regulatory policy. THE CASE FOR PUBLIC SECTOR INNOVATION Governments need to do much more to promote innovation in their own domains for the following reasons.

and what they cannot. accessibility. Prior to this he was the Deputy Chief of Staff for Policy in the Office of the Prime Minister of Canada and. We are arguing that much greater attention needs to be paid to direct actions that the public sector in general. 4 A more innovative public sector will be a better enabler of business innovation and productivity.INCREASING INNOVATION AND PRODUCTIVITY 3 // Incentives and cultures in public service organizations are too often hostile to innovation are not subject to the cost-constraining discipline of competition and they are more labour-intensive than the average for the rest of the economy. Innovation – defined in simplest terms as new or better ways of doing valued things 2 – within the public sector is the means by which the quality. in physics from Dalhousie University and a PhD in operations research from Stanford University. universal healthcare to an aging population. Innovation can be “internally generated” but it often results from adopting and adapting appropriate innovations that originate elsewhere. They therefore benefit less from the progressive reduction in capital costs due to technological innovation. is needed to spur businesses to be more innovative themselves. Unfortunately.e. The new ideas must eventually “work” – i. and the federal government in particular. Innovative competition policy. programs to promote collaboration with university researchers) are not important – but their effects are indirect. incentives and cultures in public service organisations are too often hostile to innovation and discourage the experimentation and calculated risk-taking required to achieve it. They include: delivery. 2 // Many of the biggest challenges and opportunities facing Canada today lie squarely within the domain of the public sector. addresses the challenge of environmental sustainability. in a fiscally-sustainable way. and MSc. between 2002 – 2003. and design of smarter regulation that identifies. Productivity-increasing innovation is the only way to mitigate this tendency without reducing the level/quality of the services. result in improvements in the efficiency. and regularly re-calibrates. 12 .] // // Dr. of high-quality. He holds a BSc. Peter Nicholson was the inaugural Chief Executive Officer of the Council of Canadian Academies from 2006 – 2009. From 1995 – 2002 he was Chief Strategy Officer of BCE Inc. effectiveness or quality of outcomes. the balance between what markets can be trusted to sort out. can take to improve overall Canadian innovation and productivity. These challenges call for radically innovative approaches. Special Advisor to the Secretary General of the OECD. Nicholson is a Member of the Order of Canada. discovery and implementation of effective methods to educate new generations of “digital natives”. and cost-effectiveness of public goods and services are improved to meet people’s evolving needs and expectations. and provides more efficient access to growth markets beyond North America. investment in a new generation of public infrastructure that incorporates the information and communications technology (ICT) revolution. in particular. 2 Simply coming up with a bright new idea or invention is not sufficient to qualify as innovation. incentives for venture capital. This is not to say that governments’ efforts to support innovation by businesses (for example R&D subsidies and tax breaks. Dr.

coupled with public resignation in the face of services that are merely “good enough”. it is much harder to design incentives to stimulate the kind of innovation that yields productivity growth. risk aversion is due to the high stakes involved given the sheer scale of many public sector activities: failure can have a major social or economic impact. performance measurement and recruitment must be aligned to support innovation”. essentially by default. statistical agencies. User fees have some of the characteristics of prices but they are generally not determined via competitive market processes. Governments in Canada should be playing a greater role in this innovative movement. define the output value of most public services as equal to the monetary value of the wages. the priorities and incentives in most public sector entities do not. While these involve all jurisdictions. Innovation Nation. been very weak. There are no competitive markets to gauge their value via The current emphasis on accountability in the public sector further discourages innovation prices. Without available measures of productivity improvement. Considerable effort is nevertheless underway in some countries – for example the UK. Most public sector entities have highly risk-averse cultures and disincentives to match. Scandinavia and Australia – to develop appropriate and operationally practical measures of output and productivity for several types of public services (notably health. education and municipal services).WHY HAS PUBLIC SECTOR INNOVATION BEEN OVERLOOKED? A cynic might argue that governments simply wish to evade responsibility and keep the focus on the private sector as the source of Canada’s weak innovation/productivity performance. While this is patently untrue. Foremost. the annual percentage change in output per hour worked – has. Between 1984 and 2009.1% per annum. The 2008 UK government White Paper. A fundamental difference between the business and public sectors is that most public goods and services are provided free at the point of consumption. budgeting. productivity in the business sector grew at an average of only 1. promote innovation. There is an old adage that “what gets measured gets done”. total productivity – which is the ratio of output to input – is always equal to one. There is also a more technical factor at play. Thus measured (multifactor) productivity does not grow. stated that: “The Government is uniquely placed to drive innovation in public services. or half the rate in the US. there are more fundamental reasons why the innovation/productivity agenda has not resonated inside the public sector. in practice. is a philosophical (or ideological) view that the public sector is simply not about productivity or the kind of innovation that is directed toward improving efficiency. OPPORTUNITIES FOR PUBLIC SECTOR INNOVATION Below we highlight four key areas that would benefit enormously from greater public sector innovation. The current emphasis on accountability in the public sector has only exacerbated this tendency and further discourages innovation. With output thus defined as equal to input. and often the provinces or 13 THE CANADA WE WANT IN 2020 . Cynical interpretations aside. This is due in part to the disproportionate emphasis that the media and political opposition place on “failures”. And productivity growth – that is. 3 Commercial crown corporations are a partial exception. Major forces such as attitudes to risk.3 When computing their contribution to GDP. capital and other purchased inputs that go into their production. The gross imbalance between risks and rewards thus inhibits the managed risk-taking on which innovation depends. audit. perhaps. indeed. More rationally. through allocating resources and structuring incentives. Between 2005 and 2009 it did not grow at all.

this is no substitute for at least some face-to-face dialogue with well-informed peers (the Med. (These data are already being collected in most cases. the supply of treatment facilities (e. With the support of the provinces. Fortunately. Reps”) could disseminate detailed. on average. The urgency of day-to-day pressures trumps the major behavioural changes required. Reps” employed to disseminate science-based best practices to family farms in the early 20th century. What is needed is innovation on many fronts.g. meeting face-to-face with doctors. we highlight the specific role of the federal government. and of course patient variability militates against a formulaic.4% of GDP. treatment approaches for virtually every medical condition vary widely even within small geographic regions (e. textbook approach. location-specific and individualized data on treatment practices. among neighbouring hospitals in a city). The challenge is to channel the mounting global torrent of data and experience in healthcare innovation into locallyrelevant best practices that will actually be embraced by the multitude of stakeholders in Canada’s various healthcare systems. Healthcare services In 2009 Canadians spent $175 billion on healthcare. a cadre of physicians (“Med.) Small teams would go from hospital to hospital. and from service to service. physicianowned services). Overall it increased by 90% between 2000 and 2009 and it now consumes. demographics and public expectations – continues to outpace by some margin the growth of both the economy and government revenue. though. in the presence of one’s colleagues. many behavioural and systemic. outcomes and costs. some technical. about a third of provincial budgets. We can benefit from the experiments of others. In spite of readily available evidence and best practice guidelines. Several factors contribute to this paradox: physicians are heavily influenced by the treatments in vogue when they were first trained. we do not need to reinvent the wheel. diagnostic services) affects treatment choice as do implicit financial incentives (e. Although such comparative information can readily and confidentially be made available on-line. Canada should. beds. an amount equivalent to 11. busy doctors may simply be unaware of current best practice or there may not be a solid consensus as to what is “best”.g. The situation is insidious: the current fiscal trajectory is unsustainable in the long run but the “crisis” is unfolding only gradually. Reps).g. administrators and other health professionals to discuss variances between their particular practices/results and those of comparable facilities and to talk about accepted best practice. Despite some modest efforts to bend the cost curve. such evidence-based discussions should 14 . Over time. To address this problem the federal government could establish a system loosely modelled on the “Ag.INCREASING INNOVATION AND PRODUCTIVITY municipalities are most directly responsible. There is no silver bullet to solve this complex problem. be advantaged in healthcare innovation due to our public insurance model and the fact that we have a multiplicity of jurisdictions in which to innovate and experiment. The challenge is to channel the mounting global torrent of data and experience in healthcare innovation into locally-relevant best practices 1. healthcare spending – driven by technology. One especially puzzling feature of our present system illustrates the difficulty we have in doing this (and the clear need for an innovative approach).

The genie cannot be put back in the bottle. because we do not yet know what is appropriate. for the next four to five decades. for public sector innovation. Some of this has been happening from the ground up. We require a sense of urgency. How do we hold their attention? How do we inculcate the critical faculties appropriate for an information-besotted culture? How do we equip them to exploit the mind-amplifying potential of information technology? The stakes are monumental. A major commitment to focused and practical research is called for. So the field of education cries out for realistic experimentation and openmindedness. the cost of K-12 education in Canada – $51 billion in 2009. The overwhelming issue is therefore not financial. But the inertia and inherent conservatism of the education establishment will not yield to isolated grassroots innovation. K-12 education Unless it is crowded out by health spending. All governments in Canada have roles to play but the federal government. The federal government is best placed to lead this initiative in view of the broad national benefit. How do we inculcate the critical faculties appropriate for an information-besotted culture? But which approaches are likely to work. but finding the best way to educate successive generations of digital natives. Nowhere is there a greater need. and thus our capacity for innovation and responsible citizenship. lock-step classroom paradigm is no longer appropriate. a tighter variance around best practices and a more nuanced and circumstantial interpretation of such practices. we must not continue to plod along with traditional models. finally. at home and in the community – will substantially shape Canada’s stock of human capital.lead to much greater efficiency. determined leadership is needed to discover and eventually to implement a new education paradigm. The federal government should provide the majority of funding. with some cost-sharing from provinces as they decide to opt in. student-centric learning. While we cannot move too quickly. and plenty of passionate advocates on all sides. The traditional teacher-centric. or a little less than 10% of total provincial and federal government program spending. thanks in part to moderating demographic pressure. is best positioned to lead a national research strategy toward a new education paradigm appropriate for the digital age. to storage in external memory and online search (that can be accessed “just in time”). The base of skills and cultural preparation that we instil today – in schools. 2. Top-down. and what do we mean by “work” in this context? There are theories. a realistic option of individually-paced. further affecting behavioural change. thanks to the commitment and ingenuity of individuals and small groups of teachers. Technology puts virtually all codified human knowledge a few mouse clicks away (at least in principle). This fundamentally transforms the nature of fact-based knowledge acquisition: from storage in one’s own memory (“just in case” one might need it). is fiscally manageable. in collaboration with the provinces. and more exciting opportunity. This might begin with the creation of a “Canada 15 THE CANADA WE WANT IN 2020 . Systems of compensation and other incentives could also be adapted to reflect best practice. but the inconvenient truth is that we simply don’t know. Information technology creates. It is also the agent that is best able to draw on data and expertise from across the country and to disseminate the lessons learned most widely. Radically new approaches to mass education are needed.

Investments in public infrastructure need to be given greater priority in the innovation/productivity agendas of governments in Canada As in the case of healthcare. J. The great benefit of being in the vanguard of education innovation would be: (i) a headstart in building. no. 4. In 2009. And it should be innovative. this accounted. years of heaviest infrastructure investment (1962 – 1973). analogous in concept (but not necessarily in modus operandi) to the Canada Foundation for Innovation. In almost every case there will be opportunities for public–private partnerships. and (ii) that the hiatus in investment since the 1970s has left an infrastructure deficit that needs to be addressed systematically. 45% is under the provinces. the appropriate skills for the future. 5 It should be undertaken with the promotion of productivity growth as a principal objective. The message of these findings is: (i) that investments in public infrastructure need to be given greater priority in the innovation/ productivity agendas of governments in Canada. IRPP Policy Matters. 5 Approximately 55% (by value) of public infrastructure in Canada is within municipal jurisdiction. They concluded that over the period 1962 – 2006. Professor James Brox of the University of Waterloo has modelled the impact of public infrastructure on manufacturing productivity and come to broadly similar conclusions. we should strive to develop and use new highperformance construction materials and methods (building codes must become more innovation-tolerant). Vol. Wulong Gu and Ryan Macdonald of Statistics Canada analysed the impact on business productivity of government investment in infrastructure. our cultural and linguistic diversity. A new. on average. for 9% of labour productivity growth in the business sector. and our ICT-savvy population.INCREASING INNOVATION AND PRODUCTIVITY Foundation for Innovation and Research in Education” (C-FIRE). The exercise 16 . engineering and construction. Public infrastructure In 2007. and (ii) a proving ground to help Canadian developers of new education products (such as the white “smart” boards produced by Calgary-based Smart Technologies). But the innovation agenda must also encompass the public policy function itself.2. Thus it should focus on issues such as how to facilitate the movement of Canadian products to new high-growth markets. (While the recent economic stimulus measures were a good start. The federal contribution to infrastructure investment is now largely through shared-cost transfers. For example. from a Canadian perspective. Canada is well-placed to be a global leader in education innovation by virtue of our multiple jurisdictions (which create opportunities for realistic experimentation). to incorporate ICTs to create “smarter” infrastructure and to be more energy-efficient. Such partnerships not only facilitate business sector productivity but also build the capability of Canadian companies to compete in the burgeoning global market for infrastructure planning. the optimal structuring of which will also require innovative approaches. inadequate investment in public infrastructure has very significant economic consequences. long-term infrastructure investment strategy must encompass the municipal. and that the contribution was much greater in the early 4 Brox. and only about 5% is federally owned. 3. the per capita stock of public infrastructure in Canada was about 23% below the peak achieved in 1980.4 Apart from the general public inconvenience and potential safety risks this entails. 9. their main objective was to “make work” and they were designed to be temporary). (2008) “Infrastructure Investment: The Foundation of Canadian Competitiveness”. Regulation The examples thus far have focussed on the public sector as the delivery agent. provincial and federal governments.

Oakes (the “Oakes test”). (2006) “Regulation. begetting new regulations to fill the gaps. energy and. This is particularly true for attempts to restrain market behaviour. This sets out five conditions that must be met before 6 Conway. [As a starting point. P.75% higher every year over the period 1985–2003. A 2006 multi-country OECD study estimated that if Canada were to have adopted. D. Supply management in the agricultural area provides a good example of regulation that inhibits productivity and innovation. such as supply management in the agricultural sector. a number of immediate issues arise. OECD Economics Dept. the nation’s average annual productivity growth would have been 0. telecommunications – Canada still has a significant regulatory burden. in each sector of the economy. should instead be subject to a rigorous. By inhibiting the ability to exploit economies of scale and scope.] Despite some deregulation in the last 25 years – principally in the areas of transportation.. Working Paper No. Competition and Productivity Convergence”. Competition inevitably keeps breaking out in unregulated areas.6 Even allowing for uncertainties in these econometric estimates. Such policy should be based on three pillars: Forward-looking. Nicoletti. 509. The airline industry in Canada is a case in point. to some extent. supply management results in higher prices for consumers and adversely affects the ability of food processors to compete with imported product. F. whether economic or social. innovative regulatory policy should seek to identify the many valid public policy purposes served by regulation and establish whether there are alternatives that achieve the same regulatory objectives with a lesser impact on innovation and productivity. we should dust off the recommendations in the September 2004 report of the External Advisory Committee on Smart Regulation and give much greater priority to the findings of the Competition Policy Review Panel (the Wilson panel) that reported more than three years ago in June 2008. at least relative to the remarkably innovative decades after World War II. this is an extremely large effect that demonstrates the very substantial impact that regulation can have on productivity. innovative regulatory policy should seek to identify the many valid public policy purposes served by regulation Standards-based regulation Most regulations are imposed under statutes that delegate to the executive branch the authority to determine what is in the public interest. All regulation. New thinking – including a fundamental reappraisal of our approach to regulation – is badly needed.of this has stagnated over the past 25 years. Second. Paris: OECD. In facing up to this problem. Our belief is that that discretion should be limited. Much of this is federally mandated. rather than deregulating. First. In effect. & Steiner. the least restrictive regulations among the countries surveyed. 17 THE CANADA WE WANT IN 2020 . G. de Rosa. Another example of negative fallout from regulation comes from foreign ownership restrictions that deter innovation by preventing Canadian firms from reaching international scale. standards-based test to ensure that it is efficient and minimally intrusive in achieving its objectives.. There is rarely any fundamental reassessment as to whether the entire regulatory scheme remains appropriate for the purpose for which it was first enacted. regulation begets regulation. Forward-looking. they create an unconstrained discretionary model of intervention. One way to do this would be to rely on the test developed by the Supreme Court in R vs. regulators regulate: regulatory bodies are focused on regulating.

covering 18 . In setting telecommunications regulation. the Oakes test must be legally binding on all regulatory agencies. An appropriate alternative review body for federal regulatory initiatives would be the Competition Tribunal. the CRTC was required to: (a) rely on market forces to the maximum extent feasible. Reviews should allow for the possibility that the regulatory policy framework may need to be fundamentally amended or even laid to rest. They should be wide-ranging. 4. First. The limit must be rationally connected to the objective (i. the review function might be handled by the courts were it not for the fact that courts in Canada – as contrasted. 2. The limit must be proportionate to the objective. it would likely act with a high degree of fairness and rigour in the application of legal tests and standards. There is no evidence in Canada that it has. perhaps not surprising given the powerful bias towards continued regulation and incremental change. and (d) ensure regulation did not deter efficient entry or encourage economically inefficient entry. It is time for the federal government to step forward to reset the regulatory agenda Applying the Oakes test broadly to all policy and regulations would bring much needed discipline and rigour to the regulatory process. Regulatory regimes therefore require objective and regular review to determine whether they remain effective in achieving their intended policy objectives. Two things are required. so specialized sectoral expertise can be readily brought in. The Tribunal has a number of advantages: // it comprises judges and non-judges. (b) adopt regulation that was efficient and proportionate. // its expertise in developing competition policy links well to the objective of identifying minimally-intrusive regulatory measures. affected parties must be permitted to challenge an agency’s compliance with the test and there must be an effective legal review mechanism. 5.e. the government must demonstrate how the objective would be advanced). 1. An example of the approach would be the government’s 2006 policy directive to the Canadian Radio-televison and Telecommunications Commission (CRTC).INCREASING INNOVATION AND PRODUCTIVITY governments can be justified in encroaching on fundamental rights and freedoms under the Charter (the criteria could apply equally in the regulatory context). Accountability Standards-based regulation is effective only if complemented by an objective accountability regime for governments and regulators. Second. The positive outcomes of the intrusion must outweigh its negative effects.e. In principle. Periodic reviews The increased speed of technological and other change means that regulatory adjustment must accelerate. it must interfere to the minimum extent with normal activity). The intrusion or limit must have a pressing and substantial objective. The limit must be minimally impairing (i. (c) interfere with the operation of competitive market forces to the minimum extent necessary. 3. for example. and // because of its Federal Court members. with the US – have adopted an extreme curial deference when reviewing activities of all specialized regulatory agencies.

it may be appropriate to involve the Commissioner of Competition (either as an advocate or “friend of the court”. 19 THE CANADA WE WANT IN 2020 . It would limit non-market distortion to the minimum needed to achieve regulatory objectives and. Because part of the objective is to ensure that regulation does not stand in the way of market forces. It needs to harness the talent and idealism of a new generation. the opportunities and challenges are different but. possibly. and establishing a confident role in the North American economy through the Auto Pact and the FTA. then NAFTA). The public sector needs to get its “mojo” back. It is time for the federal government to step forward to reset the regulatory agenda.all manner of regulation. it would spur businesses in Canada to be more innovative and thus more productive. as this paper has sought to illustrate. creating Canada’s unique model of the modern welfare state. Today. defining our citizenship through the Charter of Rights and Freedoms. as outlined above. A CONCLUDING OBSERVATION The objective of this paper has been to build the case for a powerful commitment to innovation across the public sector in Canada. would have a meaningful impact on business sector productivity. as the lead reviewer). binding the country together with crown initiatives in transportation and communications. forward-looking approach. no less in need of imagination and commitment. or. All that’s needed is leadership. The agenda is there. by vigorously promoting competition. An aggressive. and should be conducted by objective third parties to avoid the dangers of regulatory capture (a symbiotic relationship developing between regulator and regulatee). Throughout our nation’s history there have been epochs of spectacular public sector creativity (for example opening the West.

INCREASING INNOVATION AND PRODUCTIVITY

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.

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CANADA’S PRODUCTIVITY AND INNOVATION FAILURES:

QUESTIONING THE CONVENTIONAL WISDOM
JIM STANFORD
Traditional economists believe that unregulated, competitive markets are the best mechanism for allocating economic resources (capital, labour, etc.) and ensuring that they are used to maximum human benefit. They believe that these private markets are inherently efficient and self-adjusting. The best thing for government to do is set stable “ground rules” for the operation of markets (protecting property rights, and so on), and then get the heck out of the way – letting the forces of selfinterest and competition take care of the rest. When it comes to Canada’s long-standing preoccupation with improving our dismal record on productivity and innovation, the standard prescription of these traditional economists is, therefore, clear. To improve efficiency, improve markets. Eliminate the “distorting” effects of taxes. Eliminate regulations or barriers to full competition (through free trade agreements, deregulation of product markets and business conditions, and other efforts to “cut red tape”). Use “tough-love” labour and social policies to strengthen personal incentives and produce a more disciplined, “flexible” labour market. That will then unleash the full potential of the private sector to innovate and optimize. Until the financial crisis and resulting recession of 2008 – 09, of course, the US economy was often held up as the prototype of a rational and efficient, if unforgiving, market-driven economy. US productivity growth was high, the standard story went, because Americans have freed markets to work their magic. If we want high productivity too, we should do the same thing. This storyline was never fully consistent with the facts: many other countries with big government, high taxes, and stronger government regulations demonstrate productivity and productivity growth records equal or superior to the US. And the debacle of the financial crisis and subsequent stubborn recession have obviously reduced the appeal of the US approach.1 Nevertheless, the traditional faith of economists in markets ultimately underpins the dominant trend in Canadian policy in recent decades, and explains why Canada’s overall society has become more market-sensitive, even market-dominated, during this period. During this time we have also become more similar to the US. For example, the Conference Board of Canada recently reported that income inequality in Canada was growing faster than and converging with the US, undermining

Jim Stanford is an economist
with the Canadian Auto Workers, Canada’s largest private-sector trade union. He received his PhD in Economics from the New School for Social Research in New York, and also holds economics degrees from Cambridge University and the University of Calgary. He writes an economics column for the Globe and Mail and is a member of CBC TV’s regular National News economics panel. His book,

Economics for Everyone, was
published in 2008.
1

Canada’s claim to fame through that difficult period has been that we avoided bank failures and hence experienced a less painful recession than did the US. It is interesting that Canada’s stronger banking regulations and our publiclyowned mortgage insurer are acknowledged to be crucial factors in explaining that success.

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THE CANADA WE WANT IN 2020

INCREASING INNOVATION AND PRODUCTIVITY

What if markets work more productively and creatively when they are guided, supported, and constrained?
2

How Canada Performs, September 2011. (http:// www.conferernceboard. ca/hcp)

3

Sharpe, A. (2010) “The Paradox Of MarketOriented Public Policy and Poor Productivity Growth in Canada”. CSLS Research Report 2010-01, p.iii. (http://www.csls.ca/ reports/csls2010-01.pdf)

4

Royal Commission on the Economic Union and Development Prospects for Canada, tabled before the Mulroney government in 1985 following three years of consultations and research.

5

For more on the use, and misuse, of economic models in selling free trade agreements, see Stanford, J. (2003) “Economic Models and Economic Reality: North American Free Trade and the Predictions of Economists”. International Journal of Political Economy 33(3), 28-49.

Canada’s traditional reputation as a more egalitarian society.2 Ironically, however, the more vigorously we have pursued the vision of a self-adjusting, disciplined market economy, the worse our productivity and innovation performance has become – relative to both the US and the broader set of industrialized nations. As illustrated in Figure 1, over the last decade, Canada ranked 30th out of the 34 countries in the Organization for Economic Cooperation and Development (OECD) according to average annual growth in labour productivity. This seeming contradiction between Canada’s increasingly business-friendly policy environment, and the failure of the resulting empowered private sector to deliver innovation and productivity growth, has puzzled many of the economists who advocated market-driven approaches. For example, Andrew Sharpe of the Canadian Centre for the Study of Living Standards (CSLS, Canada’s foremost experts on productivity) writes of the “paradox” of poor productivity performance in our increasingly market-oriented economy.3 The Centre’s own data indicate that Canada’s productivity performance began to weaken at precisely the point in history when Canadian policy-makers embraced a more hands-off, laissez-faire approach. Figure 2 plots average labour productivity in Canada’s business (private) sector, as a proportion of corresponding productivity levels in the US, as estimated by the CSLS. From the 1960s until the mid-1980s, Canadian productivity was catching up to US levels, fuelled by rapid industrialization, sectoral

change and urbanization. Those were years when Canadian governments grew substantially (relative to GDP), regulations were strengthened, enormous investments were made in public infrastructure and public services, union membership expanded rapidly, and tax rates increased. The convergence reached a peak in 1984, when Canadian private sector productivity reached over 90% of US levels. But then the trend reversed, and Canadian productivity growth fell consistently behind US levels – to the point today where our average private-sector productivity is only 70% of US levels. Ironically, the reversal in that trend coincides with a landmark exercise in Canadian economic policy-making that played a significant role in ushering in a more “rational,” market-oriented approach to most policy matters: the Macdonald Commission.4 Its core recommendations – to enter a comprehensive free trade agreement with the US, and to restructure social programs so as to reduce their “distorting” impact on labour markets – are fully consistent with the market-centred lens used by traditional economists. Continental free trade was explicitly premised on the grounds that it would help to eliminate Canada’s residual productivity disadvantage relative to the US. The resulting agreement, signed in 1988, was then sold to Canadian voters (in the famous “free trade election” of that year) with the help of quantitative economic models which explicitly built in the assumption that free trade would enforce the harmonization of Canadian productivity levels with the US.5 In practice, free trade and the restructuring of social programs have not harmonized our productivity with US levels – and both may, in fact, have undermined it. Indeed, Canada’s productivity differential relative to the US, which was supposed to disappear under free trade, has tripled since 1985. Tax cuts, deregulation, privatization, cutbacks in income security programs, and government downsizing have not done the trick either.

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The laissez faire policies advocated internationally under the so-called Washington 23 THE CANADA WE WANT IN 2020 .0 % SOURCE: Author’s calculations from OECD. and the failure of Canadian productivity to improve. search for some remaining imperfections or residual market impediments to explain the failure of Canadian productivity and innovation to take off. rather than simply being unleashed? What if the best approach is to challenge and direct markets toward more productive and innovative outcomes? There is a theoretical basis for this approach in the economic literature on the socalled “developmental state.Average annual labour productivity growth.” The idea. manifested in a wide range of forms. innovative way to organize economic activity – is not justified? What if. productivity-enhancing growth in globallycompetitive.” In fact. in fact. Economic Outlook (2011).5 % 0.0 % 0.5 % 1. is that innovative. faith that the unconstrained operation of private market forces is the most efficient. But what if the starting assumption of their model – namely.5 % 2. value-added industries will not generally occur spontaneously as a result of the freeing of market forces and “getting prices right.0 % 1.0. historical experience suggests that the “visible hand” of government intervention.0 % 2. selected OECD countries 2001 – 2010 Korea US Sweden Finland Japan UK Netherlands Australia Spain France Denmark Germany Belgium Canada Italy .5 % 3. Table 12.1. is more strongly associated with qualitative and quantitative economic progress. supported. based on the successful state-led industrialization of several East Asian and Latin American economies in recent decades. Figure 1 Economists who are puzzled by the seeming contradiction between business-friendly and supposedly productivity-enhancing policies.0 % . markets work more productively and creatively when they are guided. and constrained.

US. the weakening of income security policies. policy over the last quarter-century and the simultaneous decline in our absolute and relative productivity performance. Countries which have more successfully transformed their role in global markets. 1947 – 2010 100 % Canada (% of US levels) 90 % Macdonald Commission Reports 80 % 70 % 60 % 1945 1950 1960 1970 1980 1990 2000 2010 SOURCE: Centre for the Study of Living Standards. Indeed. Of course. from this viewpoint. Figure 2 Consensus (and aped in Canada through the pursuit of free trade agreements. Interventions must be smart. higher taxes.ca. interventionist strategies. and disciplined. less intrusive government than Canada. Canada vs. But both the international and the Canadian experience suggest clearly that Interventions must be smart. there is no contradiction between the overwhelmingly marketfriendly orientation of Canadian economic 24 . developed innovative industries and expanded productivity (from South Korea to Brazil to Finland) have generally done so on the strength of conscious. is a consequence of our liberalization – not a paradox. efficient. Luxembourg. Most of the countries that did better than Canada on that criterion demonstrate larger government. efficient.) have in fact been associated with weakness in growth. the only countries that did worse than Canada in this period were New Zealand. and productivity. etc. business sector. economic structure. Mexico and Italy – three of which are marked by even smaller. www. and disciplined From this perspective. Our poor performance. large government by itself is no more a guarantee of productivity success than small government (as evidenced by the case of Italy). and more intrusive regulations than Canada. business and personal income tax cuts.INCREASING INNOVATION AND PRODUCTIVITY Average labour productivity. Consider Canada’s dismal ranking among OECD countries according to average productivity growth over the last decade (discussed above and illustrated in Figure 1).csls.

10 6 Author’s calculations from Statistics Canada. higher-income employment and accounts for a vastly disproportionate share of total business innovation activity.7 // Deindustrialization The flip side of Canada’s emerging resource-dependence has been a dramatic erosion of our manufacturing base. Indeed.”8 Some “tough-love” economists predicted that an appreciating currency would foster productivity growth (by preventing exporters from relying on an “undervalued” currency to remain competitive. and Foreign Investment: Canada’s Economic Journey Back to the Future”. Since 2000. petroleum still accounts for only about 3% of Canada’s total GDP: shouldn’t the exchange rate be influenced more by the other 97% of our output? 9 Author’s calculations from Statistics Canada. employment and exports in all costsensitive industries (including tourism and tradable services. as the most accessible deposits of resources are exhausted and more difficult and costly reserves have to be tapped. That appreciation. even though manufacturing accounted for just 12% of GDP. is in large part the result of Canada’s resource-dependence – and in particular the perception among currency traders that the Canadian dollar is now somehow a “petro-currency. CANSIM Table 3790027. But in terms of innovation. despite the energy boom of the last decade. Manufacturing is a source of higherproductivity. 8 That perception may not be justified. (For example. and also by reducing the cost in Canadian dollars of imported capital equipment). has been a key factor behind Canada’s poor performance on both counts. Productivity in resource extraction trends downward over time.market forces on their own cannot be counted on to guide the economy toward its innovative. the most vibrant sector in Canada’s economy in the past decade has been resource extraction – especially minerals. Studies in Political Economy 82. manufacturing has shrunk by over onethird as a share of total GDP in Canada. productivity and sustainability. the growing resource-dependence of Canada’s economy leaves much to be desired. average real labour productivity in the mining and oil and gas extraction industry declined by one-third between 1999 and 2010 – compared to a 15% improvement in productivity in manufacturing in the same time. 7 See Stanford. as well as manufactures) have declined. (2008) “Staples. CANSIM Table 3580024. efficient potential. and above all petroleum. 10 Author’s calculations from Statistics Canada. experienced over the same period. Resource firms invest far less in research and other innovation than manufacturing firms generally do. Deindustrialization. therefore. I attribute Canada’s lousy innovation and productivity performance over the past decade to several aspects of the current market-driven structure of our economy: // Growing dominance of resource extraction Led by surging global commodity prices. The long-run economic and environmental sustainability of our dependence on non-renewable resource extraction also raises fundamental questions about our future prosperity and well-being. a key factor in that deindustrialization has been the impact of a dramatic appreciation in the Canadian currency which has made Canadian costs look 65% more expensive relative to international benchmarks than they appeared in 2002. CANSIM Table 3830011. the more our average productivity performance is pulled down. J. from 19% to 12%. After all.9 The decline of manufacturing. In 2010 manufacturing accounted for almost half of all business R&D spending in Canada. 25 THE CANADA WE WANT IN 2020 . reinforcing our one-note dependence on resources. investment. Real-world experience has not borne out this hopeful judgment: as a soaring currency undermines Canadian competitiveness.6) The more our economy specializes in resources (with declining productivity). Immense profits have been enjoyed by some stakeholders from this resource boom. 7-34. in turn.

CANSIM Table 2280043.). 26 . the bulk of our export portfolio is once again made up of unprocessed or barely processed resources (agriculture. forestry products. Figure 3 Other successful exporters pro-actively seek to build advantage in key desirable sectors // The impact of NAFTA-style trade agreements Orthodox economic theories of free trade focus on the purported benefits to a country available from tradedriven specialization in the industries corresponding to its so-called “comparative advantage. At that point Canada could claim to have largely escaped the status of “hewer of wood. subordinate role in global trade. peaking at close to 60% of all exports by the late 1990s. and consumer goods) grew during the post-era. in the past decade.INCREASING INNOVATION AND PRODUCTIVITY Value-added products as share of total Canadian merchandise exports. Value-added products now account for less than 40% of total exports. Energy exports alone now account for one-quarter of Canada’s total exports (triple their share in 1999) and Canadians now produce more energy for export than for our own use.” Canada’s comparative advantage in the eyes of global markets is clearly in the production and export of non-renewable resources. drawer of water” that marked our traditional. The effect of laissez faire trade deals has clearly been to accentuate this pigeon-hole. That progress has been reversed. bulk ores. 1986 – 2010 60 % % of total merchandise exports 55 % 50 % 45 % 40 % 35 % 30 % 1985 1990 1995 2000 2005 2010 SOURCE: Author’s calculations from Statistics Canada. the proportion of Canadian merchandise exports consisting of value-added manufacturing products (such as automotive products. etc. and quickly. minerals. machinery. energy. As illustrated in Figure 3.

The very few exceptions (RIM. however. only two foreign takeovers have been turned down (out of 1650 reviewed applications. On the other hand. globally-successful firms. and positive regional externalities. which I argue is the flip side of unregulated inflows of foreign investment (and the resulting unhelpful impact on our overall industrial structure). globally-engaged multinational firms. one of our 11 Since the Investment Canada Act was implemented in 1984. while these countries have exploited trade opportunities as part of their broader industrial strategy. Brazil. despite high-profile takeovers of resource companies. in Canada’s case. This dearth of home-grown. but not totally) the ability of government to moderate or reverse that dependence. Bombardier) tend to prove the rule. 11 On balance. technology-intensity. undermines our innovation. Don’t get me wrong: Canadian investments by foreign-owned firms can add mightily to our prosperity and productivity (think of our auto assembly sector. and other successful industrializers all rely heavily on exports as an outlet for the production of targeted high-value sectors.000 acquisitions in total). aimed particularly at the resource extraction and bulk commodity sectors. they pro-actively seek to build advantage in key desirable sectors – namely. Magna. those characterized by increasing returns. Subsequent trade deals have clearly reinforced the growing reliance of our foreign trade on the extraction and export of non-renewable resources – not to mention constraining (to some extent. How do you support “national champion” companies? Using every policy lever in the toolkit In general. // Foreign investment and the dearth of Canadian-based multinationals Foreign investment has complex effects on productivity. However. trade-intensity. Other successful exporters of value-added products do not sit back and wait for the laws of “comparative advantage” to dictate what they will sell to the world. productivity and trade performance. Canada’s recent relaxation of regulation on incoming foreign investment has been associated with a large inflow of such investment. Economic evidence suggests that. Canada possesses less than a proportionate share of successful. incoming foreign investment is generally associated with productivity improvements in the host country (thanks to new technology and other firm-specific attributes which the multinational brings to the industry). I would argue that none has practiced “free trade” in the laissez faire spirit of the NAFTA.A key goal of the original 1988 Canada–US trade deal was precisely to secure long-run US access to Canadian energy (as reflected in the infamous and unprecedented “proportional sharing” clause of that deal). more capital has left Canada than entered it during the post-free-trade era (with the result that Canada’s net foreign investment position has shifted more toward surplus than deficit). 27 THE CANADA WE WANT IN 2020 . this is manifested in the clear and growing concentration of foreign investment in resource industries. foreign investment may also alter the industrial structure of the host economy in unpredictable (and undesirable) ways. and over 14. A disproportionate share of that outflow of capital from Canada to other countries has been associated with offshore investments by Canadian banks. By contrast. Korea. other things being equal. I stress that it is not international trade per se which is the source of this weakness: China.

// Weak business investment in machinery and equipment Economists agree that the concrete installation of new capital and machinery is essential to capture most of the productivity benefits of new knowledge and technology. I prefer the term “sectoral development policy. and that trend has been reinforced by a decline in business taxation (producing a two-fold improvement in after-tax profitability of Canadian businesses). close alignment with public training and technology programs.INCREASING INNOVATION AND PRODUCTIVITY Merely striving to construct an amenable economic and social context for private business has simply not worked rare productivity success stories… and 100% foreign-owned!). is that by this metric (as well as others). 12 See Stanford. have built and expanded their foothold in high-value global markets. and in regulating incoming foreign investment to maximize its productivity upside. that simply “following the rules” will help our firms succeed). leveraging public procurement to give these firms a head start in their home market. There are very few innovations that can be accessed or implemented without investing in new machinery. How do you support “national champion” companies? Using every policy lever in the toolkit: favourable access to capital and technology. yet Canadian firms consistently invest less in real capital (not to mention innovation and intangible capital) than their US counterparts. on faith. despite strong profitability and a very stable. Sweden. even small countries. and then waiting for the private sector to lead the way to an innovative and productive future. But it is equally clear that we need to be deliberate and active in assisting promising Canadianbased firms to succeed on the global stage – the same way that other small countries (such as Korea. Netherlands.”13 took many forms and utilized many different policy levers: national preferences in trade deals (such as the Canada-US Auto Pact). Unfortunately. and Investment in Canada.12 Business profits in Canada are higher than in the US (perhaps partly due to the ready abundance of lucrative resource opportunities). merely striving to construct an amenable economic and social context for private business. production and export opportunities in targeted highvalue industrial sectors. businessfriendly macroeconomic and policy climate. These policy efforts.” 28 . The gap between corporate cash flow and investment spending is reflected in deleveraging and the accumulation of liquid assets by Canadian business. strategic promotion of their interests through trade policy (rather than continuing to believe like Boy Scouts. That’s how other exporters. many of which target sectors of the economy very different from traditional “smokestack” industries. and Finland) have done. J. however. Canadian governments – keen to escape the resource dependence which was the legacy of our earlier “staples-based” economy – would intervene proactively to foster investment. is a challenge for economists. What is undeniable. Explaining the weakness of business investment in Canada. Taxes. Ottawa: Canadian Centre for Policy Alternatives. has simply not worked. the performance of Canada’s business sector on this score has also been disappointing. Business investment as a share of Canadian GDP has declined markedly in recent years. And the phenomenon cannot be blamed on inadequate profits or excessive taxation: pre-tax corporate profits have increased as a share of GDP. often referred to as “industrial policy. 1961 Through 2010. the leveraging of 13 “Industrial policy” is a misnomer for modern strategic development efforts. (2011) Having Their Cake and Eating It Too: Business Profits. // Lack of sector-focused development strategies In earlier decades.

telecom equipment. energy. innovative industries here: many other jurisdictions make the same claim (including. Brazil. disciplined. so long as a government has a commitment to apply them creatively. disciplined. p. and elsewhere readily prove). training policy. The tools must also be flexible – not least in order to avoid the strictures on some traditional policy tools that have been imposed by free trade deals (although those deals leave plenty of room for creative governments actively to foster domestic investment and sectoral development.public procurement (as in the Defence Production Sharing Agreement and similar initiatives). these sector-focused strategies have fallen by the wayside. Canada’s one and only industrial strategy. innovative development trajectory. even environmental policy) are limitless. The demise of Canadian sector strategizing in the 1990s reflected a combination of ideology and fiscal constraint. and a consequent boost in living standards and economic opportunity for their citizens. that’s hardly enough to attract mobile. Sector development interventions must be modern. creative. became (by default) promoting and leveraging our convenient access to the US market. 29 THE CANADA WE WANT IN 2020 . technology policy. I argue. direct public equity ownership (in the aerospace sector and elsewhere). 14 Sector development interventions must be modern. Of course. A recent review of innovation activity by Canadian businesses concluded that policy-makers should “support areas of particular Canadian strength and opportunity through focused. sector-oriented strategies. of course. 211. To meaningfully address and reverse the continuing failure of Canadian innovation and productivity we therefore need to adopt a more open-minded approach to economic policy. with the experience of most of the countries (both developing and advanced) that have successfully achieved structural change. and the provision of direct or subsidized technological inputs (which were crucial to the success of early Canadian technology companies such as Bell-Northern Research or Telesat). Instead. the US itself!). However. export success in innovative sectors. green energy. notably. it is consistent. We must set aside our expectation that private market forces will produce an optimal. But abandoning these proactive efforts ran counter to the practice of virtually all other advanced jurisdictions (including. and other departmental resources to foster US industrial investment and innovation). we should view effective public interventions and leadership as a key asset 14 Council of Canadian Academies (2009) Innovation and Business Strategy: Why Canada Falls Short. production and exports in key tradeable sectors. and flexible This depiction of Canada’s loss of innovative leadership as the result of competitive market forces (rather than their inhibition) runs contrary to the conventional wisdom in my profession. The overall goal is more investment. public transit equipment. the US. and flexible. and other modern. and telecommunications). trade policy. The sectors targeted will differ from those in the past: we must pursue investment and production opportunities in sectors like biotech. aerospace. innovation. growing. creative. Since the 1980s. in the wake of free trade. as the interventionists in China. Korea. procurement policy.” following the experience of past success stories in this regard (such as automotive. The specific tools to be used (investment policy. which has effectively used defence. technologyintensive sectors.

Instead. Governments must be equipped with both the resources and the business acumen to play an effective role as a full partner in high-value developments. We should abandon the faith that NAFTAstyle trade deals will boost innovation-intensive industries here. But we must do a much better job of ensuring (including through public-private ventures) that the fruits of those efforts are utilized in the made-in-Canada development of high-value industries and jobs. diversified manner. deliberate effort to rebuild the capacities of federal and provincial agencies in this regard (which have atrophied after decades of ideological and fiscal neglect). government should work with all stakeholders (business. to maximize the opportunities for domestic exporters through reciprocal trade and export-oriented development plans. through the use of public equity and in other ways. Finally. supported by pro-active measures in energy supply. labour. such as with the EU and Korea. quite to the contrary. pricing. rather than blithely assuming that “free” trade will lift all boats. the Ontario government has stimulated a provincial green energy industry. who believe that only the private sector can pick winners. We should abandon the faith that NAFTA-style trade deals will boost innovationintensive industries We must continue to make world-class investments in public education. and research (Canada’s record on this score is quite positive). we will have to collectively step into the fray and make it happen. Canadian trade officials should take a page from Chinese and Brazilian strategists. Some examples already exist: the government of Newfoundland and Labrador has creatively fostered provincial investment and valueadded capabilities in the mining and energy sectors. This will require a longer-term. (In fact.INCREASING INNOVATION AND PRODUCTIVITY in nurturing investment and growth in the more desirable industries of the future – rather than as a barrier or inhibitor to private sector innovation and accumulation. would clearly have the same effect). All these strategies have been derided as “picking winners” by a generation of market-worshipping economists. training. educational institutions and others) to devise focused strategies to promote the presence of key valuable industries here – and to nurture Canadian-based globally-oriented firms in those industries. 30 . and domestic content. If we want to maximize Canadians’ potential for innovation and productivity. these agreements are clearly reinforcing the deindustrialization and emerging resourcedependence of the national economy (and future potential agreements. the private sector has done a terrible job of picking winners … as almost any mutual fund investor can attest!) But the evidence is clear that we cannot continue to wait for the forces of unregulated private competition to develop Canada’s economy in a sustainable.

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

but visions that are clearly warranted by the unprecedented change that we are currently witnessing in global economic relations. and putting concerted support behind them. Pau also calls for broad human capital agreements between Canada and Asia. If it is to maintain its relevance in the global economic order. including energy pipelines to the West Coast. links between Canada and Asian countries Yuen Pau Woo focuses on Canada-Asia energy relations as a core aspect of his proposed “leap-frog strategy”. What is required is a smart natural resources policy that goes beyond the resources themselves to encompass technology transfers and human resource exchanges. Our natural resources are clearly one of our great advantages. He sees progress on developing the Asia Pacific Gateway. Such a strategy may run counter to recent Canadian political inclinations. as essential to ensure that Canada does not lose out to emerging alternative sources of energy supply (such as US shale gas). Finally. such agreements would have at their base the large and growing communities that are truly “at home” in either Canada or Asia. Yet they can open doors. Canada must find its place at the heart of Asia. Such a strategy must take into account the current and future needs of all Canadians – the building of a resource-revenue fed sovereign wealth fund is one way to do this – and that leads to deepening mutual investment on both sides of the Pacific.THE CANADA WE WANT IN 2020 for Canada lie. but it is the way that Asian countries themselves conduct business. Although there are differences in detail between the papers. All contributors stress the importance not only of economic. How can we make best use of them in the Asian context? Nobody wants Canada to become Asia’s forest. but also of cultural. the clear message conveyed by all three is that this is not a time for incrementalism or restraint. quarry or well. and particularly educational. These are bold visions. . He calls for a broad relationship on energy. that would extend to such areas of cooperation as renewables and carbon pricing (echoing the call for decisive action made by the authors in the carbon area of this publication). he envisions a future in which the city of Vancouver stands as the undisputed Asia gateway for north America.

Doing this will require a significant shift. That gives Canada only a decade or two to accomplish a major re-orientation of its economy. and flows of people and ideas create the mutual understanding and trust that is fundamental to economic collaboration. links across civil society and flows across media.RISING TO MEET THE ASIA CHALLENGE AND OPPORTUNITY DOMINIC BARTON Dominic Barton is the Global Managing Director of McKinsey & Company. and slowing productivity growth) will continue to lag the east. Chairman of the International Advisory Committee to the President of South Korea on National Future and Vision. While the US will continue to be a major economic partner and critical ally for Canada. despite the fact that Canada is a Pacific nation. real growth rates in the west (with its aging populations. culture and sports. not just economically. According to a 2011 opinion poll by the Asia Pacific Foundation of Canada. but also socially. The size of the Chinese economy is expected to rival that of the American economy by 2020 – 2030. there are flows of students and tourists. Canada’s deep and mutually beneficial economic links with its superpower neighbour to the south have stood as a cornerstone of our growth and prosperity. a language and much of our history and culture. culturally and politically. its hegemonic days are likely over. Canada must therefore build links with the rising powers of Asia – in particular with China and India – as deep as those with its neighbour to the south. We share a border. on the other hand. There is a web of “connective tissue”that binds the two countries. and he led McKinsey’s office in Korea from 2000 – 2004. shared cultural references smooth business relationships. feels geographically and culturally distant. Over the decades to come. Asia. In addition to trade and investment flows. continuing to grow business in the US may seem to be a lower risk strategy because of the relative familiarity and ease of this modus operandi. as Figure 1 shows. partnerships between businesses. high debt. recent 33 . THE CHALLENGE SHIFTING CANADA’S ECONOMY TOWARDS ASIA For the past 250 years. The economic links Canada has constructed with the US are broad as well as deep. 62% of Canadians think that Asia will be vital to the well-being of our country. He was McKinsey’s Chairman of Asia from 2004 – 2009. and recently became a member of the Singapore Economic Development Board’s International Advisory Council. For the average Canadian executive. Dominic is a Trustee of the Brookings Institution. He is a widely published author and active participant in many international fora. based in Shanghai. However. These connections are mutually supporting: former students become business and political leaders. Links are sparse and Canadian businesses lag their rivals from other OECD countries in terms of Asian penetration: only half of the 20 largest Canadian companies have operations in Asia – 100% of the top 20 American companies do.

has far deeper links with Asia than Canada does. Australia issued 159. we found that Canada was barely visible. Australia’s trade with Asia grew from 19% in 1990 to 50% today (22% with China alone).consumer research conducted by McKinsey & Company found that not only did Chinese consumers not know where Canada was. India. etc. but that the only reference they had for the country was that it was the “place to go for clean air”.000. The story is similar amongst Asian business leaders. with a similar size population and economy. 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 7% Other Other Asia1 7% 44 % US 6% 23 % 35 % 26 % Europe 1 52 % US Europe Includes Australia SOURCE: Asia Pacific Foundation. Canada is seen primarily as a link to the US and has less “brand visibility” than small countries such as Switzerland or the Netherlands. South Korea. Asian executives were confused as to why Canada has not done more to capitalize on its strengths. Indonesia. In 2010. thus investing in personal links that will pay off well into the future. McKinsey analysis. Figure 1 34 THE CANADA WE WANT IN 2020 . Australia.000 visas to Asian students compared to Canada’s 47. In a recent set of interviews we conducted with prominent businesspeople from China. Only 12% of Canada’s trade is with Asia (C$13bn of exports go to China as compared to the nearly C$300bn that goes to the US).

P&G. And of course email travels instantly from both countries. Question Canada has some of the most admired cities in the world and some terrific infrastructure businesses – what opportunities are there for 4 The increasing success of Asian companies Asia is home to a growing number of the world’s top companies. China and Indonesia). Bechtel) are supporting this massive urban infrastructure development. Question What possibilities are there for Canada to be an Asian trading hub? 1 Rapid large-scale urbanization The urbanization that is underway in Asia. Question How can Canada attract more inward investment from Asia and become the location of choice for the Americas headquarters of top Asian companies? 35 .RISING TO THE ASIA CHALLENGE Asian executives were confused as to why Canada has not done more to capitalize on its strengths These differences are not due to physical proximity. and especially in China and India. seven major trends can be identified: Shifts in global trade routes and centres Asian countries are developing a broad range of important trading relationships. cultures and systems of government.5 billion Asians will live in cities and more than 220 Chinese cities will have over 1 million inhabitants (Europe has 35 such cities today). VW. In urban China. From 2005 to 2010 the number of Asian companies in the Fortune 500 list more than doubled from 37 to 76. with a bewildering array of languages. exports from Asia to Latin America grew 25% per year from 2003 to 2008 (versus 11% to the EU and 6% to NAFTA). but also with the Middle East. It is not just OECD countries that are overtaking Canada.g. especially with other Asian countries. Consumer products companies around the world (e. And it takes 16 days for a container ship to travel from Sydney to Shanghai – the exact same time as from Vancouver. Question What products and services could Canada sell to Asia’s exploding consumer market? 3 THE ASIAN OPPORTUNITY FROM URBANIZATION TO INNOVATION In order to identify opportunities for Canada in Asia. almost 2. For example. Canada to participate in Asia’s urban infrastructure build-out? 2 The emergence of 900 million new middle class consumers By 2015. By 2025. Nestle. UTC. Many global companies (e.g. While Asia is incredibly diverse. is unprecedented. Unilever. Africa and Latin America. GM) see this as an historic opportunity. up from 34% in 2000. over 900 million new consumers will join the middle class in Asia (mostly in India. it is important to understand the forces shaping the region. GE. today it accounts for 26% (15% with China alone). Siemens. In 1990 Brazil’s trade with Asia accounted for 5% of its total. discretionary spending is expected to constitute 45% of a household’s total spend by 2025. It takes 14 hours to fly from Sydney to Beijing – the exact same time as from Toronto.

We have many assets to deploy: our long history as a trading nation. We must do it again. Between 2010 and 2030. masters and doctoral students annually. While developing and executing 7 From low cost to high innovation With its very large and demanding consumer base. business and civil society communities together to act jointly to address major issues. it is estimated that Asia needs roughly 1. Canada’s future prosperity and political power and relevance are at risk. But this is not nearly enough to support Asia’s continued growth. vibrant cities. energy and water. but is taking steps to avoid becoming merely a “quarrying nation” for China. 40% of the world’s arable land may be needed to feed China alone. natural resources. Asia’s demand for pulp and paper products is estimated to be more than double North America’s demand. China’s natural gas usage is expected to quadruple. By 2014. led by the federal government and strongly supported by Canada’s provincial governments. Asia is becoming a global source of innovation. The re-orientation of Canada’s economy towards Asia is unlikely to happen organically – and certainly not at the speed required. In doing so. as well as benefit from Asian innovations? 36 THE CANADA WE WANT IN 2020 . Question How can Canadian companies be innovators in Asia. The kind of strategic thinking. There must be more value added to the relationship. For example. 6 Insatiable resource demand Asia’s dramatic growth is putting strong pressure on natural resources especially land. massively increased government and corporate R&D investments and an ability to build new industries from scratch. Canada must become more of an Asian-facing nation. For without such strategic action. But previous challenges have brought Canada’s government.500 more polytechnic schools. a multicultural population. we must move beyond our current trading pattern with Asia: exporting natural resources and importing manufactured goods. action and coordination required to achieve this will be a challenge in Canada’s decentralized system of governance. Question How can Canada supply Asia’s resource needs in a value-added way that is environmentally responsible and equitable to future generations of Canadians? The re-orientation of Canada’s economy towards Asia is unlikely to happen organically In essence. its business leaders and its civil society. Canada must do the same.5 The world’s fastest growing talent pool China and India graduate over 8 million new college. We need to act quickly and aggressively to develop a robust national economic strategy for Asia. a successful education system and a strong business community. our high quality of life. Question Can Canada turn its successful education system into a major export industry? How else might Canada benefit from Asia’s talent pool and education needs? A CANADIAN NATIONAL ECONOMIC STRATEGY FOR ASIA The rapid re-orientation of Canada’s economy towards Asia must be a strategic act. By 2020. Australia is also resource-rich.

for example. // Encourage the CBC and other cultural and media organizations to develop more Asia content. it could: // Promote Asian experiences (exchanges. The group should meet for roughly 1.RISING TO THE ASIA CHALLENGE such a strategy will be a complex process over several years. politicians. as proposed by the Asia Pacific Foundation. We need to act quickly and aggressively to develop a robust national economic strategy for Asia 2 Re-weight diplomatic activities towards Asia In addition. recently re-oriented the budgets and priorities of its Foreign and Commonwealth Office away from Western developed countries and towards Asia. ic budgets. increasing the tempo and seniority of official trips to Asia. Such a centre. A support system for the Council is critical to ensure that initiatives are pursued and delivered. // Encourage more Canada-Asia linkages through the arts and sports. the federal government should strengthen diplomatic ties between Canada and Asia. // Sponsor a national Asia speaker series that would bring prominent Asian businesspeople. could act as a prominent force for increasing the cultural and educational links between Canada and Asia. with a sufficiently ambitious mandate and budget. For example. The National Centre on Contemporary Asia. // Increase access to Asian language studies in schools and universities. artists and thinkers to Canada and give them exposure in Canadian media. The UK. including the Prime Minster and Finance Minister.5 days each year with senior government officials. // Partner with prominent Canadian business leaders to develop a biennial Canadian-Asian CEO conference. encouraging prominent Asian government officials to visit Canada and re-allocating diplomat- 37 . as these are critical to opening other opportunities in Asia. could play such a role. 3 Actively pursue strategies to increase cultural and educational ties with Asia Economic ties are not built by promoting trade and investment alone. internships) for a dramatically increased number of Canadian high school and university students. they rest on a broader base of social and cultural links. there are five steps the government might consider to get started: 1 Establish an Asia Advisory Council to provide advice on key opportunities and challenges The Prime Minister of Canada should establish an Asia Advisory Council made up of 15-20 influential Asia-based politicians and business people (along the lines of the International Advisory Council to the Economic Development Board of Singapore). Specific steps might include increasing the number of consulates in Asia (especially in some of the 100 or more Chinese cities that will enter the top 600 cities in the world in the next 15 years). hosting. Canada currently has no mechanism or institution to provide a centre of gravity for such efforts. language immersion. The Council must also be established as a long-term body with terms that exceed the electoral cycle. co-op terms. // Encourage a major increase in Asian content in our education systems especially for kindergarten through grade twelve.

products and services in aerospace. But based on the trends outlined above. in fact. Our regulatory system and banks are globally recognized as role models for effective governance and risk management. India and Indonesia. airports and toll roads in Asian countries. They could also encourage partnerships between Canadian resource companies and infrastructure firms to build and operate ports. ways should be sought to help support Asian economies apply Canadian financial best practices. However.g. transparent process by the Canadian government. railways. At the governmental level. there are six that I would highlight: A) INFRASTRUCTURE Canada has some of the most admired infrastructure in the world.4 Select five to seven key sectors for focused support to help Canada develop ”global champions” that can compete successfully in Asia I would not encourage the government to “pick winners” or provide direct support to individual companies. Selecting the specific sectors would require further analysis and a fair. identify and actively support strategic sectors that can help drive the re-orientation of Canada’s economy towards Asia. the government could. SNC-Lavalin. The government could actively support strategic sectors that can help drive the re-orientation of Canada’s economy towards Asia B) FINANCIAL SERVICES Canada’s financial system came through the 2008 crisis in stronger shape than those of other developed economies. Federal government officials should help in introducing Canadian infrastructure companies to senior officials in the largest Chinese cities. with Canadian banks having greater access to the growing consumer markets of Asia and Asian financial institutions channelling Asian savings and capital into investments in Canada. Canada should leverage that recognition to establish closer financial ties to Asia. 38 THE CANADA WE WANT IN 2020 . Toronto and Calgary were all listed in the top five this year) and we have developed some very successful infrastructure models and companies (e. a very Asian approach – Asian governments are often mystified that Western governments do not do this more generally. Montreal’s Bombardier is the third largest civil aircraft manufacturer in the world and we have many successful suppliers to the industry as well. Our cities have consistently been recognized as being amongst the best by The Economist’s Most Liveable Cities Index (Vancouver. This should be a two-way street. the Asia Advisory Council. C) AEROSPACE Canada has much to offer in terms of know-how. Efforts should also be made to link and harmonize financial policies and systems. The Canadian government could have significant impact by facilitating the development of business relationships between Canadian and Asian firms in this strategic industry. China and other Asian countries are keen to develop aerospace industries. This is. in conjunction with provincial governments and. Infrastructure Ontario and TransCanada Corporation). in particular with China. ideally.

Canada is the world’s largest producer of potash. Canada’s global education exports were only $6. the highest-ranking woman in China. Growing Asian interest in both consuming and owning Canadian resources is inevitable. State Councillor Liu Yandong. have important Canada must proactively invest in its resource infrastructure But Canada will only succeed in these areas with support at the highest level. E) TOURISM By 2020 it is expected that there will be over 400 million annual tourist trips coming from Asia to destinations globally. the second largest exporter of wheat and the third largest producer and exporter of natural gas. In 2000. Australia adopted an ambitious strategy to take advantage of that opportunity.000 jobs in 2009. By comparison. In addition to helping to attract Asian students to Canada. For example. familiar food options). tourism accounts for one in eight jobs in British Columbia. The federal government should encourage the marketing of Canadian tourist attractions in Asia and help ensure that such attractions are friendly to Asian tourists (e. education is Australia’s third largest export. Overseas investment could help bring down the cost of development.g. State Councillor Liu then toured the campus of MIT with a delegation that included China’s Education Minister and signed an agreement whereby China will provide 10. It could also allow us to encourage a hub of resource companies to set up in Canada. Many businesses and communities in Canada depend on tourism.RISING TO THE ASIA CHALLENGE D) EDUCATION 97% of urban Chinese parents expect their children to go to university. For example.6 billion for the economy and 125. F) NATURAL RESOURCES The federal government should work with provincial governments and Canadian businesses to develop a clear position and approach to managing our natural resources and the industries’ relationships with Asia. This presents both opportunities and risks for Canada. language translations.000 new scholarships for Chinese students to study in the US. Canada needs its senior leaders to promote 39 .5 billion in 2009. For example. the government should also encourage strong universities and technical schools (such as the British Colombia Institute of Technology) to build campuses in Asia. despite the fact that Canada is seen in Asia as one of the most desirable places to receive an education. representing $18. Today. recently met with US Secretary of State Hillary Clinton to discuss educational ties with the US. including Asian ones. educational partnerships with Asia just as strongly. Calgary could become a place where most major oil and gas companies. Canada could also look at establishing companies focused on the “start-to-finish” experience of Asian tourists. expand and modernize our resource infrastructure and create more jobs for Canadians. Increasing the number of Asian students studying in Canada has benefits beyond the pure economics: it also raises the profile of our country in Asia and provides an avenue for future Asian leaders to experience Canada firsthand. We also have the third largest proven reserves of oil (behind Saudi Arabia and Venezuela) and we should be a major player (and shaper) in the global agri-food industry.

technology and value-added in the natural resources industries flow to Canada. Under what conditions and to what degree should foreign ownership of Canadian resources be allowed? Canada’s current policy on foreign ownership is unclear to many.g. Alberta’s oil revenue (and the income from the remaining fund) is funneled into the government operating budget. Today. we cannot build an energy link to Asia. Imperial Oil to ExxonMobil. Despite being a natural resource and agri-food superpower. the federal government can play a significant role in leading and facilitating discussions. Canada should also be a hub for major agribusinesses. Norway provides an example. At the same time. Yet the recent takeover bid for Saskatchewan’s Potash Corp. As resources become more valuable it is important that we have a clear position on which resources may be sold to owners outside of Canada and under what conditions. Foreign ownership rules should be designed to support an environment that allows globally competitive Canadian champions to emerge (as opposed to protecting uncompetitive local players from global competition). and must continue to make. To take full advantage of this opportunity Canada must proactively invest in its resource infrastructure. Canada has historically allowed the sale of many of our natural resource companies to foreign ownership (e. Canada has surprisingly few The Prime Minister has made. As the creation of such infrastructure would cross provincial lines and involve a variety of stakeholders. How will we ensure that future generations of Canadians benefit from the renewable resources we are extracting today? Many of our most important resources are non-renewable. Stelco to US Steel. Such a plan must address three questions: natural resource and food companies that are global leaders. As Asia and the world demand more of Canada’s resources.000 per person in the country. Although Alberta inaugurated a similar fund in 1976. Changing this is key to ensuring that the benefits from knowledge. The Government of Canada should consider working with Alberta (and other resource rich provinces) to (re)establish such funds to ensure that future generations of Canadians benefit from our resource endowment. unless pipelines to the West Coast are built and the necessary export facilities/ shipping lanes authorized. For example. R&D. oil revenues ceased flowing to it in 1987. was blocked by the federal government. Only the interest is spent so the capital remains intact. it is imperative that Canada has a long-term plan for managing its resource endowment. Asia a priority 40 THE CANADA WE WANT IN 2020 . financing) offices.parts of their headquarters (e.g. we must ensure that we are not simply spending the wealth of future generations. Norway has put over $560 billion in this fund – over $100. nor become an energy superpower. To date. Alcan to Rio Tinto). Some portion of interest income from the fund income could be used to support the broader re-alignment of Canada’s economy towards Asia. In 1991 it established a national fund to hold and invest the profits from its oil resources.

the Prime Minister would send an unmistakable signal that Canada is fundamentally shifting its economic orientation. the Minister of International Trade also has the title of Minister of the Asia-Pacific Gateway). Those links will continue to be important. Asia a priority. Asia is just one amongst many issues.RISING TO THE ASIA CHALLENGE How do we most responsibly manage our resources from an environmental and social perspective? The government should continue to work closely with natural resources businesses. civil society and Asian governments. The Minister for Asia would be a key contact point for Canadian businesses. along with other regionally focused Secretaries of State. We must act quickly and decisively to ensure our place at the table. In making such an appointment. Canada’s own Asia century must start now.g. cutting across ministries and departments. in particular the US. Canada has benefited greatly from two centuries of deep links with other Western nations. 5 Appoint a Minister for Asia and create a Cabinet Committee on Asia to drive and take accountability for this agenda Nothing gets done in government without leadership. But there must also be focused leadership within the Ministry on this issue. While some cabinet ministers have elements of the Asia agenda in their portfolio (e. This will not happen without strong federal government leadership. and must continue to make. indigenous peoples’ groups and local communities to ensure that Canada supplies Asia’s growing resource needs in a sustainable and responsible way. what I am proposing is something different: a minister with 41 . The Prime Minister has made. Canada must re-balance with it. –––––––– The world is re-balancing towards Asia. However. broad and strong. As a convener and leader the federal government should bring together major stakeholders to determine how Canada’s Asia strategy should be formed and implemented. environmental groups. cabinet rank responsible for the whole of the Asia agenda. In the past there was a Secretary of State for Asia within Foreign Affairs. but Canada must now rapidly build links with Asia that are at least as deep.

it was continued Chinese demand for commodities that helped moderate the economic downturn in Canada. There is no doubt that China looms large in the minds of Canadians. sales to China rose by 7%. Chinese-made goods dominate our stores and the fact that China is the world’s second largest economy is now widely recognized by Canadians. I get it. He is on the Global Council of the Asia Society in New York and is a board member of the Mosaic Institute. and China ranked second to the US in terms of importance for Canada’s prosperity. By May 2011. Indeed.A LEAP-FROG STRATEGY FOR RELATIONS WITH ASIA YUEN PAU WOO The re-emergence of China as a global power is a subject that has found its way into the boardroom deliberations of corporate Canada and dinner conversations of Canadian families. leading to even stronger growth.” But what is it that Canadians “get” about the rise of China. China’s growing importance for Canadian exports means that the Chinese market (and indeed other Asian and emerging country markets) can no longer be ignored. My government gets it and as Canada’s new minister of foreign affairs. John Baird said: “China is incredibly important to our future prosperity. 20% of respondents reported that more than half of their global revenues already came from the People’s Republic. In a speech delivered shortly before his first visit to Beijing as Minister of Foreign Affairs. The Asia Pacific Foundation of Canada’s 2011 national opinion poll found that 66% of Canadians agreed with the statement: “the influence of China in the world will surpass that of the United States in ten years” (up from 60% in 2010). and of Asia more broadly? And what are they going to do about it? Not enough. While Canadian exports to every other major market fell in 2009. the flagship publication of the Pacific Economic Cooperation Council. For some. this shift in focus has already occurred: in a 2010 Asia Pacific Foundation survey of Canadian businesses in China. Canadians too are starting to take note. saving the wood industry in British Columbia industry from what would have been catastrophic losses. 42 THE CANADA WE WANT IN 2020 . “tipping points” have been crossed which will result in sustained corporate attention to China. it is likely the case that in a number of key industries. An unprecedented surge in Chinese demand for lumber took place just as the US housing market was collapsing. Pau is an advisor to the Shanghai WTO Affairs Consultation Centre and the Canadian Ditchley Foundation. I fear. Yuen Pau Woo is President and CEO of the Asia Pacific Foundation of Canada. Since 2006. 62% of respondents agreed that Asia is vital to the wellbeing of Canada. During the global recession of 2008 – 2009. He is also on the editorial board of Pacific Affairs. BC was exporting more wood products to China than to the US. Pau has been coordinator of the State of the Region Report.

on a bilateral or sub-regional basis. Ottawa has developed a reputation for not being able to close trade deals with Asian partners. // actively seek membership in the Trans-Pacific Partnership. India. Our government should send a strong signal that Canada does not intend to be left out of the rapidly evolving trade and investment architecture of the Asia Pacific region. If these negotiations end up languishing as the Singapore and Korea deals have. Singapore. Peru. the proposed Canada–Korea Free Trade Agreement is unfulfilled even after six years of negotia- 1 The Trans-Pacific Partnership (TPP) is an Asia-Pacific regional trade agreement currently being negotiated between the US and eight other partners (Australia. is not just to “get it”.RISING TO THE ASIA CHALLENGE But there are no prizes for recognizing the obvious. There is an urgent need to: // bring trade negotiations with Singapore and Korea to a successful conclusion. Canada’s image in Asia will be further tarnished. If some of our industries have just now reached the tipping point and are beginning to place serious emphasis on Asian markets. including nascent groups such as the Trans-Pacific Partnership (TPP). a three-year program of policy catch-up should be combined with an ambitious longer-term program of policy leap-frog. for example with the Association of Southeast Asian Nations (ASEAN). in part because of opposition from the Canadian automobile industry. In the same way.1 Pursuing trade agreements with Asian countries will mean confronting protectionist measures at home. Singapore concluded twelve agreements with other trading partners. Australia. To “get” that China is a global economic player and that Asia is vital for Canada’s economic prosperity is simply to be on the same page as virtually every other major industrialized country. much larger. Worse. Japan and Korea. Despite starting negotiations with Singapore more than a decade ago. Canada’s recognition of Asia’s importance has come belatedly. New Zealand. The challenge for government policy. but to “get ahead of it”. Chile. Brunei. tions. and Vietnam). China. For the federal government. In the interim. putting agreements such as the TPP on the domestic political agenda will force a re-assessment of protectionism in Canada and focus attention on the very steep price that is paid for protectionist measures. automobile sector. The federal government recently announced negotiations with India on a Comprehensive Economic Partnership Agreement and raised the prospect of free trade talks with Japan. and came to an agreement in 2009 – overcoming the objections of their own. Political Engagement There has been no shortage of ministerial visits to Asian countries since 2009. a deal has yet to be reached. and // investigate trade and investment agreements with other Asian partners. they are doing so at least ten years after their counterparts in comparable economies such as Australia. The challenge for government policy is not just to “get it” but to “get ahead of it” POLICY CATCH-UP Trade and investment agreements Canada has no trade agreements with Asian countries. Likewise. therefore. China alone has hosted numerous visits by federal cabinet ministers in the last 24 months and the Prime Minister has made visits to Asia an annual priority. The Americans started their own negotiations with Korea more than a year after Canada did. If nothing else. but Ottawa has come late to a party where most of the guests have already arrived. The goal should be no less than for Canada to be the most Asia-engaged country in the western world. including the United States. Malaysia. the federal government may now “get it”. some of which are deeply entrenched. Political engagement with 43 .

Asian counterparts is an essential part of broader relationship building, and the government should not be squeamish about either the frequency or cost of making these regular visits (other countries are not). Political engagement in Asia should be stepped up in the following ways: // A joint mission to India and China of the Prime Minister and provincial and territorial leaders would send a powerful signal of Canada’s commitment to the region. The Council of the Federation proposed such a mission at its recent meeting in Vancouver. The federal government should act swiftly on this proposal, allowing plenty of preparation time to maximize the impact of such a mission. // Ottawa should actively court the top echelon of leaders (including the next generation of political leadership) from China, India, Japan, ASEAN and Korea, bringing them to Canada and exposing them to a wide range of Canadian capabilities and assets. MPs of all parties should also be encouraged to participate in parliamentary friendship groups with Asian counterparts. In the same way that previous generations of Canadian parliamentarians have built long-term relationships with American and European counterparts, engagement with Asia’s political class should be de rigueur for Canadian politicians. Furthermore, the government should invest in “Track Two” mechanisms for policy dialogue with Asian counterparts, as part of a broad-based effort to engage with Asian leaders across industry, civil society, and the think-tank community.2

Regional strategy Canada has been notably absent in discussions on evolving regional architecture in Asia and has, until recently, shown no interest in joining new regional institutions such as the East Asia Summit. Although Canada is a dialogue partner of the ASEAN Regional Forum (ARF), Ottawa’s participation at ARF meetings has been inconsistent at best. Tellingly, a recent ARF initiative to convene an annual meeting of defence ministers included all dialogue partners, but not Canada.

Purely bilateral strategies are an incomplete and potentially misleading approach to crafting an Asia strategy
Asian regional integration is largely driven by the private sector. The fragmentation and lengthening of supply chains across the region have led to explosive growth in intra-regional trade and investment and driven closer economic cooperation between countries. Canadian trade and investment promotion strategies must therefore take account of backward and forward linkages across the region. Intra-Asian exports account for more than half of total Asia exports, with much of intra-Asian trade consisting of intermediate goods. Hence purely bilateral strategies – and the concomitant measures of country-to-country trade and investment – are an incomplete and potentially misleading approach to crafting an Asia strategy. A more effective regional strategy requires Canada to: // Actively seek a seat at the East Asia Summit, starting with observer status, if necessary. Even if full membership is not attainable, there is value in being

2

Track Two Diplomacy – also known as “privatecitizen diplomacy”– has become particularly important in East Asia and involves a wide range of multilateral exchanges designed to help governments deal with issues ranging from economic cooperation to peacekeeping and conflict prevention. Kim Beng Phar (2006) “Asia’s Informal Diplomacy”. Harvard International Review. (http://hir.harvard.edu/ article-authors/kim-bengphar)

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closely associated with a grouping that could emerge as the premier body representing Asian political and economic interests. // Engage more deeply with ASEAN both to enhance Canada’s access to Asian regional fora and to broaden Canada’s diplomatic ties in a region that is still vulnerable to sub-regional rivalries and security threats (emanating not least from the growing economic, political and military power of China and India). // Increase the bureaucratic resources dedicated to working on Asian countries and on Asia as a region.

strategy that is supported at the highest levels of government and the private sector. Leapfrogging our competitors will also require a commitment to equipping Canadians with the knowledge and skills to be effective in an increasingly Asia-centric world. Canada-Asia energy relations Prime Minister Harper has described Canada as an energy superpower, but abundance does not in itself translate into power. However large the resource base, a country that is dependent on one customer is more of a captive supplier than a superpower. Hence the need for Canada to diversify its energy exports beyond the United States. Fortunately, Asian demand for alternative sources of energy supply is as great as the Canadian need for new, non-North American markets. Accordingly, the federal government should: // Expedite approvals for the building of pipelines to transport oil and gas to the west coast, and for tankers to enter the waters off the west coast to ship oil or liquefied natural gas to Asia. The review process for these proposals should be subject to rigorous social and environmental assessment, including full consideration of the views of First Nations communities that will be affected. It is, however, critical that over-riding emphasis be given to Canada’s long-term national interest. There is an urgent need to put in place the infrastructure for export of energy to Asia, given the fierce competition in this marketplace from Central Asia, Russia, and Australia, in addition to traditional Gulf suppliers. Given its abundance of shale gas, even the United States may be in a position to supply energy to Asia before Canada does.

Leap-frogging our competitors will also require a commitment to equipping Canadians with the knowledge and skills to be effective in an increasingly Asia-centric world
// Develop metrics for Canada’s performance in Asia that take into account the nature of regional production networks and the growing integration of Asian markets.

POLICY LEAP-FROG
If Canada is to increase both private sector market share and, importantly, the “mind share” of Asian leaders on regional and global issues, policy catch-up will not be sufficient. A leap-frog strategy for Asia would target a 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 energy-related expertise; cooperation on renewable energy, human resource development and labour mobility; and two-way investment. A broadgauge energy relationship with Asia that addresses many of the region’s energy security and green-growth objectives is essential if Canada is to establish itself as a serious energy player in the region, indeed as a true “energy superpower”. // Provide leadership on key energy issues such as carbon pricing, major infrastructure projects, renewable energy and foreign investment in the energy sector. At the root of the various policies towards strengthening Canada-Asia energy relations is the need for a national energy strategy that will provide clarity on such issues and enable industry and provincial governments to make long-term investments. // Resolve residual uncertainty about whether foreign investment – and especially state-led investment – is welcome in “strategic” industries in Canada, including oil and gas. While Canada should reserve the right to reject foreign investment on national security grounds or a broader test of “net benefit”, the overall stance of the Investment Canada Act should be to warmly encourage foreign capital. To this end, the requirement in the Act for special scrutiny of investment by state-owned enterprises and sovereign wealth funds should be repealed.

Canada’s people-to-people ties with China are arguably longer, deeper, and more profound than those of any other Western country
Capacity building: education and human capital cooperation Canadians may now understand the importance of Asia for Canada, but they retain a curious reluctance to invest in learning about Asia and Asian languages. The Asia Pacific Foundation of Canada’s 2011 national poll found that only 39% of Canadians support “more emphasis on Asia and Asian languages in the education system”. Major investment is required to ensure a more globally-oriented education system, not only in K-12, but also at the postsecondary level. Foreign student recruitment, curriculum development, overseas internships, and student/faculty exchanges are already being pursued by institutions across the country. A leap-frog strategy for Asia has to go even further and should include major scholarship programs that enable top students from Asia to spend time in Canada as well as young Canadians to study in Asia. These activities should be grounded in bilateral agreements with Asian countries (starting with China) that promote cooperation in education or, better still, in human capital more broadly. Canada’s people-to-people ties with China are arguably longer, deeper, and more profound than those of any other Western 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

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over 70 schools across China already offer Canadian high school curriculum to mostly native Chinese students. The focal point for development of an Asia Pacific gateway economy should be the city of Vancouver. etc.000 Canadians to study in Asia over the next five years. cultural. Throughput at these ports has increased and better handling capacity has accelerated delivery times to (mostly US) destinations. and mutual recognition of credentials. but also research councils. professional organizations. Building on such existing links. Vancouver has the potential to be a powerful asset in Canada’s relations with Asia From gateway to gateway economy The federal government’s Asia Pacific Gateway and Corridors Initiative (APCGI). The project has been a great success thus far and the ports of Prince Rupert and Metro Vancouver can now compete with American rivals on the west coast. it is also that the city as a whole is oriented towards Asia in a way that creates a unique environment for the development of business. which kicked off in 2006. // Launch a major Asian scholarship initiative. universities and colleges. The transportation sector has grown and thousands of jobs have been created. 47 . government and scholarly links with Asian countries. Positioned in this way. Vancouver occupies a special position in the western world.RISING TO THE ASIA CHALLENGE Canadian and Asian interests in a way that goes well beyond the narrow lens of “diaspora politics”. and the establishment of Asian regional head offices for North America. maritime services. Examples include business and professional services. labour disputes. environmental issues. trade actions. collaboration among research councils. // Promote teaching about Asia and Asian languages in schools by funding national programs that can be an adjunct to provincial education curricula and which incentivize schools. This initiative should involve not only schools. If competitiveness is to be maintained. however. and rail infrastructure of western Canada. supply chain management. industry. in conjunction with the provinces and the private sector. signalled Ottawa’s commitment to improve the port. As the most Asian city outside of Asia. facilitation of two-way flows of highlyskilled workers. the federal government should: // Engage in a strategic dialogue with key Asian countries (starting with China) on human capital cooperation. colleges and universities to sharply increase their Asia-related content. For the APGCI to be the flagship Asia initiative that it was intended to be. it is imperative for the focus to move beyond throughput (such as the number of containers moving through ports) to the creation of a “gateway economy” in which value-added activities take place in and around the gateway. green transportation. education and training. and include within its scope objectives such as: joint training of officials. in order to capture a larger share of in-bound trans-Pacific shipments. and other challenges that affect these trade routes.. the federal government must continue to monitor – and where necessary intervene in – regulatory impediments. and for a similar number of Asians to come to Canada. As an example. to provide opportunities for 50. It is not simply that ethnic Asians make up about 40% of the population. road.

This is not simply about conferencing facilities. and convening capabilities in Vancouver that connect Canada and Asia. and investing in supporting “soft infrastructure” such as scholarship and business and think-tank networks. // Establish Vancouver as the preferred (but by no means exclusive) venue for Asia-focused events. and networks that establish the city as the go-to place for Asia connections in North America and indeed across the western world. A newly-established federal “Agency for Canadians Abroad” could. cultural institutions. Such units should be given high levels of autonomy and should be treated as top-level bureaus rather than outposts of Ottawa departments. federal leadership is critical.Vancouver has the potential to be a powerful asset in Canada’s relations with Asia. attracting major conventions and festivals. and it has to come from the very top. Most components of the strategy will require co-operation with other levels of government. but has to do with programming high-level visits to the city. with the private sector and with civil society. The federal government should therefore: // (Re)locate to Vancouver those government agencies that have a significant Asia focus. The federal government is in a unique position to attract and host inter-governmental fora and semi-official meetings that are part of Canada’s responsibility as a member of Asia Pacific organizations. the case for Vancouver – in geographic. historical. in conjunction with provincial and municipal authorities.000 Canadian citizens living in Asia. While this idea of concentrating resources in one location may be politically difficult. Together. which are already in place. this will mean investing in expertise. and political terms – is compelling. demographic. In practical terms. However. It will mean mobilizing a critical mass of people. knowledge. The Prime Minister should signal a national commitment to Asia by way of a major policy statement that is directed not only to Canadians. for example. // Focus on attracting Asian regional head offices to Vancouver. this statement should be about Canada’s place in the Asia Pacific region and Ottawa’s commitment to be an integral part of its future. with principal responsibility for establishing connections with the estimated 600. More than a speech about the need to increase business with Asia. be located in Vancouver. these actions will put Canada well on the way to an effective leap-frog strategy with regard to Asia in general and China in particular. 48 THE CANADA WE WANT IN 2020 . trade and investment promotion. but also to Asian leaders.

services and culture we consume. the world we live in. innovation and technology. The vertiginous numbers accompanying Asia’s roaring re-emergence inspire mixed reactions in the West: mostly fear and greed. Canada’s longterm prosperity and security will depend on its ability to understand and seize economic opportunities in Asia (particularly in the twin giants of China and India. but occasionally hope. Hundreds of new. power and food. With burgeoning foreign exchange reserves. Over the coming decades. Asian countries are at the forefront of the biggest collective action challenges of our time. high savings rates. Asia will increasingly displace the West as the world’s provider of capital. There will likely be reverses and stalls in the decades ahead. Previously. Cultural power will follow economic power. Asia will become the centre of aspiration. This is a sharp departure from the past. ASIA’S WICKED PROBLEMS Despite all this optimism. The emergence of new. to a need to fill education. Across Asia. and Content Partners. He also serves as a Senior Fellow and Co-Chairman of the Advisory Board for the Munk School of Global Affairs at the University of Toronto. and the way we understand global power. Rana was a co-founder and director of Rawlings Atlantic Limited. environmental degradation. Asia also faces mounting problems. but also in countries such as Vietnam and Indonesia). smarter cities are being built: over 300 million people in India alone are expected to move from the countryside to urban centres over the next quarter century. Nonetheless. a fast growing media promotions agency. will depend critically on how much we matter in Asia. He is a member of the advisory council of the Literary Review of Canada and the Mowatt Centre for Policy Innovation. from critical shortages of water. active sovereign wealth funds and cash-rich banks and companies. they are becoming the greatest markets of scale for the 21st century. For future historians it is a safe bet that the biggest story of the first decade of the 21st century will be the re-emergence of Asia – not 9/11 or the global financial crisis. healthcare and infrastructure gaps. will increasingly be created in and influenced by Asia. the goods. trillions are being invested in new infrastructure. healthcare and 49 . and it is Asia that will set the standards and norms that will influence us all. Add to these demographic change. non-western webs of global power means that Canada’s success in extended global markets – from Latin America to Africa – and our ability to project our values overseas. And as Asian countries shift from export-driven to consumption-driven economies. In this new environment.THE BIG CHALLENGE: ADJUSTING TO THE ASIA CENTURY RANA SARKAR Rana Sarkar is the President and Chief Executive Officer of the Canada-India Business Council. a cross border advisory firm.

from critical shortages of water. such as NGOs and business leaders. Successful diplomacy requires understanding and targeting key hubs. and new generations of government and business leaders are taking the helm. Countries must therefore reach far broader and everchanging constituencies in order to get things done. culture. The key tools in this environment are being visible. healthcare and infrastructure gaps Diplomacy has also changed. Asian countries are at the forefront of the biggest collective action challenges of our time. Countries that fail to understand and adjust to these new patterns of business and diplomacy will fall behind. Dense global networks may democratize diplomacy. Countries and companies are focused on each other as key partners. Cities such as Dubai and Singapore have catapulted onto the world stage despite their size. capital and talent – is. The new role of states is to co-ordinate the energy and efforts of these “wise crowds” in the pursuit of national interests. Finding sustainable solutions for these “wicked problems” is the preoccupation of policy-makers across Asia. Asian companies are able to draw on vast pools of savings and have strong competitive advantages. In the new global economy. However. Competition for their attention – not to mention their markets. ideas equate to value. Growing opposition in Africa to Chinese resource investments is but one example. The good news for Canada is that. useful NEW TERMS OF TRADE AND NEW DIPLOMACY New companies and new leaders in Asia are without preconceptions about whom they should partner with. These hubs do not correspond to the traditional distribution of power. Ideas are mobile. to a need to fill education. power and food. networks. capital and people flow. but they also lead to the emergence of dominant nodes or hubs through which information. goods. being “top of mind” is an increasingly important part of being competitive.climate change and the scope of concern is clear. China is the elephant in the room. Security dilemmas abound. hierarchical forms of organization. Asian countries also face uncertainty in their relations with other regions. as well as identifying and promoting new ones. The growing influence of non-state actors. brought on by the rapid growth of transportation and communication 50 THE CANADA WE WANT IN 2020 . as new players. New regional institutions – not tied to legacy systems – are being created. competitors. intense. Asia’s reawakening coincides with ongoing change in the nature of international relations. threats and sources of opportunity. targeted assistance to Asian countries to overcome these “wicked problems” and to help manage their international relationships – both inside and outside their neighbourhood – will be well-placed to reap economic and political benefits. and private events such as the World Economic Forum (WEF). and will continue to be. they lack experience and sometimes the necessary tools to forge effective relationships. Over half of Asia’s trade is intraregional. anything is possible. continue to undermine traditional. The evolving and complex relationships between Asian companies and countries are also likely to be critical. amidst this historical power shift. so for countries and companies. Outsiders that offer practical.

if not the public. we must be resourceful in the tools we use. We should also step up engagement with regional inter-governmental forums. 1 Double down on existing policy A good starting point for Canada is to redouble its efforts and add more resources to our existing policy of commercial engagement with Asia. to move forward in an Asia-centric world. such investments and strategies offer high rewards for little money down. But we need to go further. We must be responsive to Asia’s crisis needs and recognize where we can play additional roles. More trade offices should be established in key regional centres as well as second and third tier cities. Canada’s reputation as a gateway to natural resources may open the door to trade and investment with Asia. Likewise. More effective air travel agreements should Canada’s reputation as a gateway to natural resources may open the door to trade and investment with Asia. Designed properly. These agreements will serve as symbols of Canada’s interest in Asia and as templates for further deals. at best. Given the mismatch between our strategic need to be in Asia. By now most leaders. but it is more important to be strategic and clever with how they are used.5 million total. Shifting 51 . there is need for a strong federal leadership role. Asian diasporas in Canada make up a larger percentage of the population than in any other G7 country). such as the Trans-Pacific Partnership and Association of South East Asian Nations (ASEAN). governments and big business are coming late to the party. Canada is falling behind its global competitors. Despite Canada being a Pacific Rim nation. particularly in China and India. but it is our ability to be resourceful that will keep that door open. gears in our existing approach towards Asia is a start. complete with guide posts and assessment measures. We need make smart investments and implement co-ordination strategies that build Canada’s profile and play to the new rules of the networked world. be it in education. particularly in these lean economic times? Competition for Asia’s attention is intense. Done right. healthcare. It is a given that we need to pursue more bilateral trade and investment protection agreements and rapidly conclude current negotiations (particularly the Comprehensive Economic Partnership agreement with India and our free trade agreement with Korea). our domestic understanding of the market. but it is our ability to be resourceful that will keep that door open Canada must develop a coherent and consistent strategy. and the market’s understanding of us. and continue to develop the Pacific Gateway initiative. as outlined in the Department of Foreign Affairs and International Trade’s (DFAIT’s) Global Commerce Strategy. WHAT SHOULD THE FEDERAL GOVERNMENT DO? In Canada.RISING TO THE ASIA CHALLENGE and getting connected. Canada’s understanding of the “new Asia” is partial. Additional resources will help. countries can punch well above their weight. But how? And what can and should the federal government do to help. something that we may term as “frugal commercial diplomacy”. environmental stewardship or elsewhere. with long-established Asian Canadian diasporas (at 3. are getting quietly worried about global economic realignment and looking to get their Asian game on.

provincial and other public officials are uncoordinated and often confusing for our hosts. the Canada China Business Council has run a successful week of activities every November to engage top government and business leaders. 2 Lead from the top Any new strategy for Asia must be led. fulfilling pledges already made. we should coordinate Asian visits. Asian countries value the engagement of top leaders and Prime Ministerial leadership on engaging Asia will help galvanize the private sector and the public at large. and exploit synergies between all levels of government. and be seen to be led. Demographic changes in western countries are fuelling increased competition for qualified immigrants from Asian and elsewhere. To focus attention. We should look to anchor our efforts around these. For the past five years. Similarly. We should do everything we can to guard against this danger: with our major trading partners facing a protracted period of slow growth.be pursued and education and research partnerships should be increased dramatically. Our Prime Minister must be visible in the region. Canada has a long-standing tradition of immigration but it cannot afford to be complacent. The federal government should look to support and curate similar annual occasions in all regional centres to galvanize senior business leaders and focus media attention. Currently. the federal government should focus on creating or joining regular forums of interaction in target Asian countries. but it should tell it under the Canadian umbrella. To be most effective. 52 THE CANADA WE WANT IN 2020 . Coordination does not mean losing our To be most effective. systems need to be in place that encourage the best to come here. we should co-ordinate Asian visits and exploit synergies between all levels of government 3 Create occasions and support iconic projects To ensure consistency and visibility. travelling – strategically and predictably. Korea and Singapore. the CanadaIndia Business Council has established a business forum for top leaders in India at the same time as the WEF India Summit and just prior to the China week of activities (making the best use of government and business leaders’ time in the region). Such an effort will be highly symbolic. two Cabinet ministers with economic portfolios should be appointed. Co-ordination between ministers and portfolios is also essential: we must seek synergies between our efforts in different Asian countries. In the coming years. visits to Asia by federal. We should also continue to make our trade and investment rules more transparent and to reform our immigration system so that it encourages talent circulation to Canada. This is expected by countries such as China. as well as other parts of the world. one for India and one for China. there is a very real danger that high-level engagement with Asia will fall by the wayside. as fiscal and program crises crowd the agenda. from the top. regional differentiation: each region has a compelling story to tell. where the state still plays a major role in the economy. an effective Asia strategy is ever more essential for our economic health. rather than episodically – with thematically (or sectorally) selected versions of Team Canada.

Asia’s largest building project. academics and journalists. Engaging in such projects would focus the bilateral relationship and bring together top talent and companies. influencers. from Singapore to Qatar. For instance. preference and the worldviews of millions. Such a foundation could achieve significant results with modest seed investment through an incentivized partnership model. // Digital CBC Asia Broadcast and digital content still matters. This body should be tasked with managing and measuring the perception of Canada in key hubs.RISING TO THE ASIA CHALLENGE Canada’s brand can also be enhanced by strategically associating with iconic. Canada should also look to maximize the value of its home-grown events and icons to build visibility in Asia. highly-visible projects in Asian countries. Borrowing from similar institutions worldwide. into elite and popular imaginations through smart. we should look to co-ordinate Canadian participation in highprofile efforts such as the Delhi–Mumbai Industrial Corridor. This brand can be inserted 53 . These might include: // Canada Brand Equity Foundation Smart countries. have established broadcast brands in Asia which help shape the tastes. Its initial goal could be to map and engage 10. such as Russia. The CBC has the reputation and talent pools to compete (internally and amongst Canada’s diaspora pop- Canada’s brand can also be enhanced by strategically associating with iconic. co-funded by the provinces and industry and operated at arm’s length from government. showcasing their work in the process. entrepreneurs.000 key leaders. develop a joint program with the Indian Space Research Agency. leading to further collaboration and thicker networks. Canada needs to command a higher “mindshare” of its would-be partners in Asia. The federal government has a major leadership and co-ordinating role to play in developing and promoting a strong brand. It should partner with polling and citizen engagement experts and engage top private sector talent and digital entrepreneurs as advisors and contributors. a Canada Brand Equity Foundation should be established. we might consider working with Chinese regions to target a smart city project in which Canadian investors and companies can take a leadership role. Even smaller countries from Latin America and the Middle East are entering the fray. highly-visible projects in Asian countries 4 Develop Brand Canada To succeed in this competition for attention. and become a key bridge to inserting more Canada into Asian popular culture. the Toronto International Film Festival could be used as an anchor for our Asia digital media strategy. perhaps. or. Other countries. strategic investments. the UAE and the UK. Equally. Canada is absent from the airwaves and digital commons of Asia. France. aggressively manage their brands abroad. For example. cities and regions of Asia.

Second are the critical non-Asian hubs. Equally. for example. our role is precarious. 5 Target the hubs Since we cannot be everywhere at the same time. Kuala Lumpur. we should help address India’s resource requirements. we need to prioritize specific locations for engagement. This is a departure from traditional bilateral commercial diplomacy. In 1991. Canada must promote itself as a connector nation and build the connecting infrastructure to support this. Metals and Sustainable Development. the organization’s membership covered 60% of the western world’s metal production. First. Minerals. Canada has a better chance of attracting investment and trade by targeting these offices than by targeting their home bases. While we should remain engaged in these forums. such as the G20. they also house the foreign headquarters of a growing number of Asian firms looking to expand their global operations. It should use these to create an expanded service in Asia with a strong emphasis on creating relevant digital content for local markets. but by using our global resource finance and services leadership to help India access Brazil. 54 THE CANADA WE WANT IN 2020 . Canadians can be useful to Japanese and Korean companies hoping to build their markets in India. We should also promote Canada as a conduit for the international strategies of Asian businesses. Natural Resources Canada (NRCan) worked with the mining industry to create the Ottawa-based International Council on Mining and the Environment to help diffuse knowledge and awareness of environmental issues in mining. Within five years. In newer institutions. Not only are they key sources of investment into Asia. Singapore and even tax-haven Mauritius are becoming indispensible conduits for business with China and India. such institutions should relate to Canada’s core advantages. NRCan took on the role of secretariat (and major financier) for the Intergovernmental Forum on Mining.ulations). In many cases. Two types of hubs should be focal points for Canada’s commercial diplomacy in Asia. are now in a state of atrophy. For instance. in which Canada was prominent. More recently. Canada should aggressively expand this type of institutional leadership to other crisis needs. Canada must promote itself as a connector nation and build the connecting infrastructure to support this We have a history in this. identify gaps. To be most effective. Canada can reach more actors and countries while limiting our costs. By identifying and targeting key trade hubs and nodes connecting Asian business networks. 6 Go to the head of the parade: be proactive with regional and global institutions The post-war multilateral institutions. Canada needs to get ahead of the curve: we should pinpoint where the action is. New York and San Francisco are important global gateways. London. for added clout we should create or take leadership in new institutions with growth potential. We should leverage our expertise to create regional institutions focused on water management. pandemics and air pollution. and join or create institutions to fill these voids. not just by selling resources to India. there are intra-Asian hubs. Places like Dubai.

a consortium of Canadian universities could offer programs online (predominantly) and also on physical campuses in Asia. over 1. a strong signal would be sent to the region if the federal government were to sponsor the creation of a single institution branded under Canada’s banner. we need to create bottom-up incentives for participation using contests and challenges to get Canadians to promote Canada’s brand overseas.000 new universities would need to be built in the coming decade. It risks missing important initiatives and failing to capitalize on effective approaches that are run outside government. In addition. NGOs. However. Engaging Asia is critical for all Canadian universities. acting as a facilitator. provincial governments and private citizens are already active in Asia and are important faces for Canada.RISING TO THE ASIA CHALLENGE 7 Establish a Canadian “Open University” in Asia Education is the gateway to our economic relationship with emerging Asia. This calls for a co-ordinated national approach. This is particularly true in markets such as India where. In this context. led by the federal government in co-operation with the provinces and key nodal institutions such as the Association of Universities and Colleges of Canada (AUCC) and the U15 group of Canadian research universities. which currently recruits Canadian business leaders to offer opportunities to foreign investors. To help fill the gap. academics or civil society organizations that go global under the Canadian banner. the federal government needs to help source and coordinate leadership from below. to meet current demand. Since nowhere near this number will be built. Canada’s businesses. other means of delivering education will be found. establish more research and commercial partnerships and develop more faculty exchanges. We should push it one step further by offering a special designation or monetary prizes to companies. Many already have advanced strategies in place and are set to attract more students. academic institutions. This could include a “wiki-events” calendar that would enable open-source sharing of itineraries and allow groups to “self organize” events and partner in real time. again. through partnerships. enabler and information provider and making available opensource tools that enable others to lead. A similar challenge could be issued to find a more systematic way for members of diaspora communities to share oppor- Any exclusively top-down or overly-bureaucratic approach runs up against the “distributed power” grain of our networked world 55 . we could build on DFAIT’s Investment Champions program. For instance. Creating a Canada University – perhaps as a 21st-century hybrid of the highly successful American University and British Open University models – would galvanize resources and attention at a critical moment in Asia’s growth while helping to meet one of Asia’s crisis needs. using mostly digital delivery. Any exclusively top-down or overlybureaucratic approach runs up against the “distributed power” grain of our networked world. 8 Curate wise crowds and empower them to work on Canada’s behalf A challenge for the federal government is that most economic activity and new diplomacy happens outside of its sightlines.

We should follow the lead of the smartest companies that rely on “fast failure” to find their way in a world changing too fast for 20-year plans. we can offer a “Canadian X-Prize” to motivate smart crowds outside Canada to work on our behalf. This would be a cost-effective. We must identify new ways to make ourselves useful in Asia and to bring Canada to the top of the Asian mind 56 THE CANADA WE WANT IN 2020 . high-profile way to build perception of Canada as a useful and innovative nation with which it is worth doing business. Not all the ideas outlined above will work. For instance. With the right partners. the federal government could incentivize Canadian pension funds and capital providers.g. but we need to experiment to see what gains traction.tunities. it is also time to revisit the old argument to build a sovereign wealth fund pooling our resource rents to invest at home and abroad. For a small sum. For instance. rural electrification in a given Indian region) and offering a prize in conjunction with Canadian and local universities. skills and connections between their old and new worlds. these seed investments would be highly visible and get Canadian talent engaged in Asian innovation and help resolve our commercialization challenge. Canada must collect better trade and investment data that truly reflects how the global economy works But Canada cannot experiment effectively without proper benchmarks and means of assessment that rapidly and accurately evaluate the impact of policies and programs. to work with Canadian universities and local venture partners to invest in high-growth sectors. the Canada-India Business Council has found that official bilateral trade and investment figures dramatically underestimate the density of business relations between the two countries (because much of this is in under-counted services or is conducted through intermediary countries and organizations). Private equity and venture funds are another way to get Canada more involved. as well as leading Canadian companies. But our open-source strategy should not be limited to Canadians. 9 Engage in serial experimentation and measure results An overarching part of Canada’s Asia (and global) strategy should be serial experimentation. This means picking a country and a specific problem (e. On a larger scale. particularly in Asia. Such a fund would enable us to invest at scale in Asia and put us at the top table of global capital partners for Asia’s leading companies and governments. through lead organizations such as Export Development Canada.

and we should double-down on these efforts. This would allow us to evaluate our efforts and add leverage when engaging business and government leaders in the region. The Canada Brand Equity Foundation would also have a role to play in this respect. Above all we must identify new ways to make ourselves useful in Asia and to bring Canada to the top of the Asian mind. expanding commercial representation and getting into regional forums – is a great start. cost-effective tools of diplomacy. We need to be creative and resourceful and take advantage of cutting-edge. Organizations such as Statistics Canada should be encouraged to improve their measurement of Canada’s economic relationship with Asia. 57 . CONCLUSION The centre of the global economy is steadily shifting towards Asia. Canada needs to adjust. But we must do more – much more.RISING TO THE ASIA CHALLENGE Canada must collect better trade and investment data that truly reflects how the global economy works. Our current strategy – pursuing trade agreements with key countries. capturing more of our services trade and trans-shipments through other countries. providing time series data on Canada’s profile in Asia.

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

While favouring a tax. they argue strongly against a “command and control” system for carbon regulation. the authors certainly recognize the merits of a cap-andtrade system. he points out the scope for efficiency-based reductions in carbon emissions. though this appears to be the direction in which the federal government is currently moving. including protests and proposed legislative bans on our oil. Together. We should strive to position ourselves as the world’s most environmentally-responsible producer of all manner of goods and services . now is the time for federal leadership in the development of a comprehensive strategy to limit our national emissions. like the other authors. in their view. For them. have underscored the fact that the world does care what we do and that failing to act will increase our economic vulnerability immeasurably. he argues that most of these measures can also be justified on a public policy basis. A portion of the revenues from such a tax should. Interestingly. be used to offset the need for future personal tax increases. He is a strong proponent of natural gas as the carbon-based fuel that will help move us to a low-carbon future and. despite the fact that he is generally opposed to increased regulation. this is actually positive: he praises the recently-announced federal government regulations to phase out coal-fired power generation (unless carbon sequestration measures are in place). For Mallory. the contributors make a powerful plea for Canada to move forward in the carbon area. what is key is trading. then. For this reason alone. unrelated to carbon. Recent events. The rest should be reinvested in low-carbon infrastructure and clean technology development.THE CANADA WE WANT IN 2020 tax.

She is also a member of the Canadian Council of Chief Executives. 2011. The two issues are highly integrated and the policy direction adopted for each will impact the other. broaden our market access to meet global energy demand and at the same time reduce our greenhouse gas (GHG) emissions. THE CONTEXT To its credit. having started her career on the exploration and production side. in our view. the federal government has already implemented some important GHG reduction initiatives (e. Lorraine is a board member of the Canadian Association of Petroleum Producers. and the high costs of emission reduction stand in the way of near-term progress. the long-term transi- tion associated with technology development. Our emissions increased by 142 million tonnes between 1990 and 2008.1 making it highly unlikely that we can meet our 2020 Copenhagen target of a 17% reduction from 2005 emissions levels without significant economic impact (Figure 1). We must succeed on both fronts at the same time: as federal and provincial energy ministers tackle the development of a national energy framework. Canada needs effective and innovative federal policies that will enhance our position as a global energy supplier. they must collaborate in the development of cohesive and effective national policies that will enable Canada to become a low carbon economy. ecoACTION). The dual global challenges of mitigating climate change and supplying the expected surge in global energy demand are formidable. Overall. Canada is a major global energy supplier and also one of the world’s highest per capita GHG emitters. Developing such a framework – which. 1 The Conference Board of Canada. This is a long-term project and the effort required should not be underestimated. especially on the consumer demand side. Programs need to be longer-term and more cost effective. should incorporate a carbon pricing mechanism – must therefore become a federal government priority.LOSING THE 2020 BATTLE: WINNING THE 2050 WAR LORRAINE MITCHELMORE Lorraine Mitchelmore is President of Shell Canada Ltd. that is the key impediment to meeting our targets. The diversity of GHG emissions sources. She also holds the roles of Canada Country Chair and VP Onshore Exploration & Appraisal for Upstream Americas. but the magnitude of offsets required. and we need to set more 60 . and the time needed to implement an offset program with credibility. one that takes into account the factors above and starts to put in place the required systems and infrastructure. but more needs to be done. the Conference Board of Canada and a member of the Catalyst Canada Board of Advisors. She has over 25 years of experience in the international oil and gas industry. reduce the value of this solution.g. strong growth in the energy sector. it is the absence of a comprehensive climate change policy framework. Offsets could help close the gap. vehicle efficiency regulations.

The federal government has recently implemented a biofuels regulation that could provide a more immediate reduction of transportation emissions. the ongoing development of renewable and low carbon fuels for power generation remains vitally important. given the rate of fleet turnover. while important. increased GHG emissions from the Canadian energy sector are forecast. energy efficiency technologies applied to energy production will help offset the projected increase in GHG emissions. As a starting point. We have missed the opportunity to enhance the impact of biofuels by failing to specify a reduction of biofuel carbon intensity and thus failing to incent greater investment in low-carbon biofuel technologies. will happen only gradually.Possible 2020 outlook for Canada 740 720 700 Megatonnes 680 660 640 620 2020 target 2005 less 17% There is almost no possibility of meeting the 2020 target without significant supplementary action Assumes 7 GW (nearly half) of the coal generation capacity closes Possible post recession emissions bounce back 600 2005 baseline 2005–9 Coal CAFE* recession retirement standards etc. In the near term there are also a number of regulatory. Canada is fortunate to have abundant low-GHG power generation capacity (hydro and nuclear). Widespread non-fossil fuel motive power (i. 61 THE CANADA WE WANT IN 2020 . but until breakthrough technologies such as carbon capture and storage (CCS) are widely deployed. Figure 2 shows that our three largest sources of GHG emissions are the oil and gas industry (the emissions from which are rising as this industry expands and more energy-intensive sources come on line). electrical power generation and transportation. More biofuels Industrial gasses CCS Oil sands Natural gas Possible expansion for power 2020 scenario SOURCE: Shell * Corporate Average Fuel Economy – regulations improving vehicle fuel economy Figure 1 ambitious objectives. hydrogen) for the transportation network will ultimately be required. electricity. At the same time. but this solution lies well beyond 2020.e. will not offer the very significant GHG reduction that can be achieved through the same switch in the US. technological and “no regret” initiatives that can help us move forward and position us to make the large-scale reductions that will ultimately be required. The costs of near term transportation technology solutions will be high and. This means that switching from coal-fired power. Nevertheless. we need to understand our current GHG profile and realistically assess our opportunities for GHG reduction. but this regulation is focused on biofuel volume targets.

SQUARING THE CARBON CIRCLE Sources of Canada’s GHG emissions (2005) Waste and others 54 Mt * Agriculture 74 Mt Transportation 164 Mt 8% 10% 22% Buildings 80 Mt 11% 11% 17% 21% Oil and Gas 153 Mt *Mt = Megatonnes Electricity 126 Mt Emission-intensive trade-exposed industries 80 Mt SOURCE: Environment Canada (2011) Canada’s Emissions Trends. Looking beyond these three highest emitting areas to other energy intensive industries. The one untested opportunity of note for Canada might be the GHG offset associated with Reducing Emissions from Deforestation and Forest Degradation (REDD). Current federal policy in Canada is to align with US GHG policy so as to avoid competitiveness impacts and triggering border tariffs and import taxes. Figure 2 Demand-side management holds considerable promise for GHG reductions in both transportation and power generation. This process could be made more effective through trading and the purchase of domestic offsets from non-regulated sectors (such as agriculture. However. 62 . but resistance will be strong from a society that highly values mobility and a quality of life enhanced by modern technological conveniences. there are significant GHG-related differences between the US and Canada that make US policies less well-suited for Canada. Canada has not only adopted the identical Copenhagen 2020 reduction target. this alignment of policy may seem to make sense politically and economically. Given the economic and trade ties between the two countries. Reducing deforestation and thus emissions from tropical and other forests offers an immediate option for GHG reduction at relatively low cost. we see continued efforts to implement efficiency measures to help offset growth-linked increases in GHG emissions. this cannot happen until a robust and credible trading infrastructure is in place. but also plans to adopt “equivalent” regulations to the highly prescriptive equipment regulations the US Environmental Protection Agency will place on US industry. For example. Deforestation currently accounts for about 18% of global GHGs. For example: // Coal power fuel-switching may reduce US GHG emissions close to the target: this is not the case in Canada. forestry and waste). However.

First Nations relationships and regulatory assessment and approvals around resource extraction remain unpredictable and we do not have the enabling environment and certainty that we require for future growth in the energy sector. etc). based on a skilled labour force and enhanced innovation. // acting now on “no regret’ GHG reduction measures that avoid competitive disadvantage and kick-start emissions reductions. than others. power storage. GHG emissions may initially go down as we flounder in our efforts to become a major global energy supplier. federal authorities will have to draw on the full suite of policy options. Some are better applied in the near term while others will take longer to develop and be contingent on the progress of broader global action. Under “business as usual” we remain trapped in a regulatory quagmire. At the same time as working on climate change policies. to develop a coherent and harmonized longterm policy framework that is broad-based and addresses all sectors of the economy. economy-wide carbon price is. we will miss out on opportunities to expand our natural resources development A CLIMATE CHANGE POLICY FRAMEWORK FOR CANADA In the quest for such a framework. Given the scope and complexity of the climate change challenge. If we fail to develop an effective energy strategy. Some will work better. The challenge for Canada is.// Fuel switching is a relatively low-cost GHG reduction solution: Canada therefore faces higher GHG reduction costs than the US // Growth in energy-intensive industries is expected to be much higher in Canada than in the US: oil sands and unconventional gas lead this growth. In developing our climate change policy framework. But this is no solution: if Canada’s prosperity is damaged. // accelerating strategic advanced technologies (such as CCS. a variety of policy initiatives have been proposed. and // developing a comprehensive Canadian Energy Framework that works in tandem with a long-term Canadian Climate Change Framework. advanced biofuels. This challenge should be addressed through the development of a co-ordinated national climate change policy framework. this will actually impair our ability to tackle GHG emissions as we will not have the economic capacity to fund further emissionsreduction measures. But all must be part of the mix. If we do not. // regulating GHG emissions in the transportation and buildings sectors. rather than through the piecemeal adoption of various individual measures. These include: // implementing a market-based carbon price with trading and offsets for large industrial stationary sources. A hybrid of different policy approaches must be adopted to gain maximum value in emissions reductions. the most efficient 63 THE CANADA WE WANT IN 2020 . // acting to reduce energy consumption in the power and transportation sectors. we must also develop a Canadian energy strategy (which will intertwine with our climate strategy). At the same time as working on climate change policies. we must also develop a Canadian energy strategy and enhance our access to growing global energy (and other) markets. or be more appropriate for particular sectors. then. a single. while also ensuring we enhance our position as a global energy supplier. theoretically.

each major sector will require its own targeted policy approach. In some sectors a relatively low carbon price would stimulate immediate changes as equipment is replaced. In others. Shell favours a 64 . this equation should change (as shown by the intersection between the green ovals and the orange bar in the figure above). this solution may not catalyze the early technological change and initial deployment of technology required in each and every sector. Demonstrate. The Demonstrate phase is key in terms of encouraging learning-by-doing and delivering essential cost reductions for the Deployment phase. When a new technology is still in the upper part of the cost curve (in the Discover and Develop phase or the early part of the Demonstrate phase) deployment incentives. are not on their own sufficient to enable change. For this reason. the costs would remain too high meaning that changes might not occur and advanced technology would not be developed within an acceptable timeframe. TECHNOLOGY AS A SOLUTION Technology remains a key consideration. and with the adoption of a carbon price. and Deploy 100 80 Discover & Develop Technology cost 60 Demonstration 40 20 Initial deployment through demonstration Deployment CO2 price Higher emitting alternative 0 1 10 100 1000 Number of installations SOURCE: Shell Expected technology cost Figure 3 approach.SQUARING THE CARBON CIRCLE Typical technology pathway model: Discover & Develop. and the utility value of existing assets. such as carbon pricing. There is a need both to increase the speed with which existing technologies are deployed and to develop and bring to market new technologies. infrastructure turnover rates. As costs become lower. The three stages allow technology to progress down the cost curve. However. It is the Demonstrate phase that demands the greatest funding because it requires multiple facilities to learn the key efficiencies to reduce costs. technology pathway model which recognizes three clear phases: (i) Discover and Develop (ii) Demonstrate and (iii) Deploy (Figure 3). This is because the price response varies from sector to sector due to differences in behavior.

tailored to the needs of the country. Regulation can provide incentives for technology development that might otherwise remain stagnant for many years. Canada has made positive progress in this area with federal and provincial governments committing a total of over $2 billion in funding for CCS.2 However. Examples are regulation on improved vehicle efficiency and the development of advanced low-carbon intensive biofuel technologies to reduce transportation emissions. Regulation is required to initiate technology development in areas where mitigation measures are very costly and therefore unresponsive to a carbon price. This phase is critical to the longer-term deployment of CCS in that it both proves the commercial application of the technology in a given location and establishes early infrastructure to support deployment growth. In designing a “fit-for-purpose” policy framework. more must be done to push CCS through to the Deployment phase. lead to failure to recognize reductions. a 65 THE CANADA WE WANT IN 2020 . there is still vast room for improvement. Our federal government will have to develop its own policy framework. 2 The need to develop novel renewable technology and advanced biofuel technologies from waste feedstocks also underscores the importance of having in place an enabling structure to help push the technologies down the cost curve. Double regulation can send mixed signals about appropriate reduction strategies and. can be better understood by reference to this technology pathway model. Advances are essential to improve the efficiency of this important mitigation option prior to commercialization. one of the few technologies that is entirely climatedriven and therefore dependent upon policy intervention. the government must be sensitive to policy overlap which can have unintended. Regulation will play a key role. as will market-based mechanisms. DEVELOPING A POLICY FRAMEWORK Building on this understanding of the development and deployment of technology. An important step is to put in place an emissions trading system that includes a price-signal which will support longterm CCS deployment. Market-based mechanisms and the application of a carbon price to sectors that are highly responsive to price signals (generally large stationary sources This funding is provided through a number of federal and provincial programs. The implementation of an effective carbon price at the federal level should be a critical part of Canada’s GHG reduction policy framework. As an example. adverse consequences.The pathway to deployment of CCS. 1 Although a set of CCS technologies exists (has been discovered and developed). OPTIONS FOR THE DEPLOYMENT PHASE: CARBON PRICING In this section we expand upon one “box” (highlighted) in Figure 4: proposed carbon pricing for the Deployment phase for power generation and industry/manufacturing. can be established. in the worst cases. such as that presented in Figure 4. refinery GHG emissions are regulated under controls on facility-based GHG emissions. 2 3 policy framework. CCS is presently stuck at the Demonstration phase. Canada’s ecoENERGY Technology Initiative also provides $151 million for seven CCS projects and the Government of Alberta is providing $2 billion to fund large-scale CCS projects. Public funding is likely to be critical in the early Demonstrate phase to enable later deployment of large-scale renewable projects. The figure shows a potential policy framework structure and provides some generic examples of policy approaches within each sector. such as the Government of Canada’s recently created Clean Energy Fund. as well as more efficient building standards. but some jurisdictions also include these emissions in the lifecycle regulations of blended biofuels.

only to large. by contrast. Our recommendation would be to introduce a carbon price. The additional costs borne by the consumer (paid to the govern- 66 . High carbon products will become less competitive. initially. Alberta. This will provide a sound basis on which to add sectors over time. or paying a penalty into a technology fund. The result is that the cost of most goods and services will increase.SQUARING THE CARBON CIRCLE Example of a generic policy framework Power generation / Industry & Manufacturing Transport Commercial & domestic (buildings) Land use / Agriculture Discover / Develop Broad energy production. Companies can supplement their own reductions in facility GHG emissions by purchasing offsets within the province. is ultimately passed through to the consumer. initially felt by the emitter (for example. but not yet implemented. The goal of a carbon price is to trigger a change in the economy so that the market begins to differentiate between goods and services on the basis of their carbon footprint. stationary point sources. British Colombia and Quebec have implemented carbon taxes that put a price on GHG emissions through a tax on fuels or utility services. energy use and agriculture R&D policy framework Demonstrate Large-scale firstgeneration CCS demonstration projects Carbon price legal framework Large-scale advanced biofuel technology production Encourage step-out design of efficient building construction Encourage early adoption of new techniques Deploy Vehicle efficiency/ low-carbon fuel incentives More advanced efficiency standards Best practice sharing Figure 4 such as power generation and large industrial facilities) are an effective means of reducing emissions. several Canadian provinces have cap-and-trade regulations ready. has a baseline-and-credit system in place to reduce the carbon intensity of large industrial facilities. they will either be removed from the market or reengineered to reduce their carbon footprint. Figure 5 gives a brief overview of the various options for implementing a carbon price A quick review of the current state of carbon pricing in Canada clearly demonstrates the lack of a harmonized Canadian approach. but a new cost ranking will emerge that will alter the purchasing patterns of consumers. The carbon price. In addition. by paying a tax or by purchasing allowances from the government).

as the economy begins adjusting to the carbon pricing mechanism. 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. typically on a CO2/unit of production basis. rather than the comprehensive and ordered attack that a carbon price. 67 THE CANADA WE WANT IN 2020 . There is no cap. the lack of market liquidity resulting in poor price discovery. would deliver.Options for implementing a carbon price Implementation Option Description By design. In an ideal world. policy measures should be as consistent as possible across as wide a range as possible. A project mechanism approach effectively reverses the capital flow. Credits are tradable and can be banked as in the cap-and-trade approach. They should start between states and provinces and extend over time across free trade zones. 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. although is arguably less efficient in delivering a clear environmental outcome. Once mature. ideally via cap-and-trade. allowances are auctioned by the government into the market with the funds being recycled back to the consumers purchasing the goods and services from the sectors covered by the system. This approach is operating in the power and industrial sectors in the EU. Finally. the government may allocate some or all of the allowances for free. 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. the complexity of managing the system due to the need for accurate benchmarking. which means it must raise taxes to extract this money from the consumer. Cap-and-Trade System Carbon Tax Baseline-and-Credit Approach Project Mechanism Figure 5 ment in the form of a carbon tax or the purchase of allowances) must then be offset. A carbon tax operates in much the same way as a cap-and-trade approach. If they fall short they have to surrender credits. The government buys from the emitters. emissions-intensive domestic industries that are exposed to foreign imports or export markets without a similar carbon cost should be shielded to mitigate competitiveness effects and the risk of carbon leakage (i. However. this approach results in a somewhat random attack on the abatement curve. There are several challenges with this approach including: the uncertainty of the environmental outcome. leading ultimately to global consistency. it means that the market does not determine the way forward – rather the government does through its selection of projects to fund (a matter of some complexity). The participants can earn credits by exceeding the baseline. The consumer might get some of this back through a lower cost of goods and services as projects increase efficiency. Early on.e. either through personal tax reductions or a decrease in sales tax. moving facilities across borders to jurisdictions with no carbon price). 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. Additionally.

SQUARING THE CARBON CIRCLE Draft Canadian climate change policy framework Power generation / Industry & Manufacturing Discover / Develop CCS demonstration (e. the greatest compliance flexibility. While not exhaustive. simpler carbon pricing approaches – such as a carbon tax or baseline-and-credit approach – may be important forerunners. the federal government should have a fully developed policy framework in place (bear in mind that the EU took ten years to establish a similar framework and it is still a work in progress). Figure 6 takes the previous generic policy framework and applies it to Canada.e. it illustrates the many gaps that need to be filled in order to develop an integrated and coordinated national policy framework. Shell believes that cap-and-trade is the preferred carbon pricing approach as it offers certainty in emissions reductions 68 . Alberta) Energy Efficiency Act Regulation on coalfired electricity regulation (in development) Alberta SGER Western Climate Initiative SGER – Specified Gas Emitters Regulation Transport Commercial & domestic (buildings) Land use / Agriculture Clean Energy Fund and ecoENERGY Initiatives Biofuels from waste feedstock Renewable fuel content (Biofuel Bill) Passenger automobile and light truck GHG emission regulations BC Carbon Tax Innovative step change in building design Improved building standards REDD credits Demonstrate Low till agriculture Deploy Figure 6 The carbon price can reasonably be set by only one mechanism in a given jurisdiction. Shell believes that cap-and-trade is the preferred carbon pricing approach as it offers certainty in emissions reductions. By 2020. However. While a global cap-and-trade system may be the ultimate long-term goal. cover all sectors of the economy and are based on long-term (i. we also recognize that greater flexibility and efficiency comes at the cost of greater complexity. 20+ years) environmental objectives. The second step is to develop policy approaches that fit within this framework. AN IMPLEMENTATION ROADMAP The first step for Canada is to assess what the current federal regulatory and policy landscape looks like.g. and the lowest cost of compliance through market mechanisms such as trading and offsets. including the parameters set by any emergent Canadian energy strategy.

These should not be ignored. there must be clarity on the role of renewables. performance-based regulation to align with the US. will significantly reduce GHG emissions. so these regimes can readily transform into more efficient carbon pricing approaches in years to come. A facilitating framework to enhance and encourage more public and private R&D and innovation will be an essential component. must be a priority. Establishing longer-term policy frameworks with ambitious but achievable goals that are tailored to Canada’s needs. renewables and innovation that can be taken today that will move Canada forward without impairing the competitiveness of Canadian businesses. // Proposed measures in the area of commercial building are relatively short term and limited in their reach. While longterm actions are being designed we should not lose the ability or will to act. Furthermore. // Industry. is at present largely unregulated. better urban planning and lower GHG transportation options for both public and commercial uses). to live up to the Government of Canada’s commitment that 90% of electricity should be generated from non-emitting sources by 2020. –––––––– There are clearly great challenges that must be overcome in the years ahead. on the other hand. transportation demand management. it will not stimulate trading across sectors (such as between agriculture and forestry and industry). A carbon price would be the most effective stimulant to renewable power. agriculturally-driven policy to one which focuses on reduced carbon intensity and better technologies. likely to be relatively ineffective as it will not be high enough to stimulate either changes in behaviour or the very expensive technological measures that are required. However. // Opportunities abound to reduce demand for transportation (e.g. though the federal government has announced plans to change this. such as natural gas. in general. 69 THE CANADA WE WANT IN 2020 . we urge the incorporation of market mechanisms (such as trading and domestic offsets) as well as funding for technology. The problem is that a prescriptive. If the government is determined to implement prescriptive. A carbon tax on transportation fuels is. regulatory approach without a carbon price and market mechanisms is likely to be extremely costly and inefficient. // Biofuels regulation must evolve from a volume-based. The Government of Canada must not allow its inability to meet the 2020 target to delay action that will help put our house in order by 2050. There are a multitude of short-term “no regret” steps in areas such as energy efficiency.The following are some of the measures that will likely be required: // Regulations aimed at phasing out coal power generation and moving to lower-carbon sources.

Prior to that he was Counsel to the Treasury of the World Bank. and Cambridge. Ian is a graduate of Harvard. an industry that. Canada’s situation sticks out prominently – and often awkwardly.REDUCING EMISSIONS WHILE MAINTAINING OUR QUALITY OF LIFE IAN MALLORY Ian Mallory is President of Pickworth Investments LP. Although many other countries emit much greater volumes of carbon than we do. it would have a significant impact on the oil sands. we should certainly do the “smart thing” and work to manage our carbon in our own self-interest. if well managed. foreign taxes and sanctions on our products and services. a Calgary-based venture development firm focused on natural resources in the Americas. Institutions in most of our key markets in the US. There has been lots of independent. CANADA’S CARBON CHALLENGE: As the world struggles to implement an effective regime to restrict carbon emissions into the atmosphere. innovative and positive policy discussion in Canada on global climate change. possibly. He has been an adjunct professor at the law school of Georgetown University and an instructor at the business school at the University of Calgary. We need to recognize that fossil fuels will drive our economy for the next 25 years. including. and (ii) as we expand our production from the oil sands and increase exports to the United States and other countries. our economy will attract negative attention. Renewable energy is a wonderful source – and should be brought on stream as fast as practicable 70 . If we do not assume a leadership position on this issue. If the project does not proceed. whether we like it or not. we appear to be ever more hooked on carbon. Europe and Japan will be looking to see Canada manage our carbon emissions in a way that is responsible and commensurate with our level of social development and international standing. Our efforts to manage carbon emissions will therefore remain firmly in the international spotlight. The point is rather that whether or not Canada wants to do the “right thing” for the global climate. This is not to suggest that Canada should make its policy merely to please our partners. This paper is dedicated to the memory of Ken McCready. Anybody who does not think this is a real risk should consider the protests in the US during the summer of 2011 over the Keystone XL Pipeline. one of Canada’s pioneers in thinking about sustainable development as it pertains to carbon emissions. The project has become a lightning rod in certain quarters of the US for allegedly abetting a huge increase in greenhouse gases. as well as lost opportunities within the future “carbon-lite” economy. He has been an executive at three major Canadian power and gas utilities. the University of Toronto. Approval could well be denied by the US authorities. can help maintain our national level of prosperity for the next 50 years. Canada enjoys two special distinctions: (i) we are the second largest per capita emitter of carbon in the world (after Australia). and was called to the bar of Ontario in 1986.

if we are to understand exactly where we are and what we need to Whether or not Canada wants to do the “right thing” for the global climate. and ambitious targets set. admitted (with refreshing candour) as early as 2006 that we were not going to be close to meeting our targets on the original schedule. coal-bed methane) can be less good than their conventional cousin. // heating of buildings. consumers of electricity). followed by fuel oil and gasoline. say by 2030 – we will have to implement an ambitious national program of carbon efficiency that will affect the lives of every Canadian. the question is: how do we manage our production and consumption of carbon most intelligently? GOVERNMENTAL HOT AIR In the past. although unconventional sources (shale gas. And the coast-to-coast rally of roundtables and sprinkling of relatively modest incentives to carbon-friendly causes was somehow supposed to yield significant reductions in emissions. 71 THE CANADA WE WANT IN 2020 . particularly automobiles and commercial fleets. Grand gestures were made. a federal government minister. The Hon. ultimately. Most of this decline. We have not made any progress at all on a total basis. While we are working on those breakthroughs. WHEREIN LIES CANADA’S CARBON PROBLEM? Before we consider the solution. Canada agreed to extremely challenging goals for carbon reduction – in the Kyoto Protocol in 1998 to 6% below our 1990 levels by 2012. it is imperative that we be clear on the dimensions of the problem. Sure. And if we are to meet our Copenhagen target – even at a later date. without sufficient thought being given to how they would be attained. // road transportation. With that kind of kick-off “action plan”. The principal sources of carbon emissions in Canada are: // thermal power plants that burn fossil fuels (so. and // the production of oil. gas and chemicals. Rona Ambrose. We need more objectivity if we are to understand exactly where we are and what we need to do Among fossil fuels. Natural gas is the least carbon-emitting fossil fuel. and in the Copenhagen Accord in 2009 to 17% below our 2005 levels by 2020 – without any clear plan of how to get there. the Government of Canada’s (and some provinces’) emission management policies have seemed to be predicated largely on hope and mass ascetic denial. however. we should certainly do the “smart thing” do. although our national carbon-intensiveness (per-unit-of-GDP) has declined somewhat over the past six years. We need more of that type of objectivity. the hierarchy of carbon emissions is very clear: coal is the worst. is due to the efforts of those provinces and private sector companies that adopted a proactive approach for their own political or business reasons.to replace oil and gas – but we are two or three major technical breakthroughs away from that happening. Rick Mercer implored each of us to save a tonne of air by staying at home (or something). it should be no surprise that in 2011 Canada remains far from meeting the targets to which we have committed.

67 cents per litre of gasoline in 2012. For CO2 emissions – which are not “pollutants” but an inert by-product that is in global. 1 2 3 4 Reduce significantly carbon emissions on a gross and per capita basis. there is tension between the goals: finding the best solutions will be an exercise in creativity and optimization. they will not come close to filling the carbon space for the next 20 years. In order to pack the desired transformational punch. for its apparent even-handedness. anyway – is as likely to hurt as much as help. To the extent that big carbon emitters such as China. Secure an economic and political leadership role in the new carbon-lite economy. not local. slated to rise to 6. wind. what should be our policy goals? There are four key ones: 3 4 Regulatory schemes are complicated and expensive to administer. (The British Columbia carbon tax. “Cap-and-trade” system of regulation This is another good economist’s concept that could work well for large volume emissions that have regional sources and impact (such as oxides of nitrogen and sulfur). India and Russia are not with the global carbon-reduction program. a broad tax also does not adequately promote the desirability of moving people en masse to the “second best” solution. a broad application of a carbon tax – in the short term. – can help but. As is usually the case for big problems.SQUARING THE CARBON CIRCLE POLICY GOALS AND CONSTRAINTS Facing this problem. etc. technologically and developmentally. tidal. fossil fuels with lower carbon counts. Blunt reductions will impose costs that will reduce economic growth and (initially anyway) impair our international competitiveness. growing. over-abundance – in a huge. relative ease of application and alleged effectiveness. Renewable energy – solar. the tax will have to be so high as to impair our economic growth. is way too low to stop SUV-lovers from turning the ignition. There are four key considerations in policy development: 1 1 Carbon is an essential driver of our economy today. small hydro.) Further. Minimize taxes and government regulation. six specific solutions to the carbon problem have been promulgated and to various – often nominal – degrees implemented. Canada’s gross reductions will be ineffectual on a global basis. 2 Carbon tax A broad-based tax on the consumption of carbon is an economist’s dream. We therefore run the risk of imposing sacrifices on our economy to no significant benefit for anyone. CURRENT SOLUTIONS In Canada. regionalized country such as 2 A broad application of a carbon tax is as likely to hurt as much as help 72 . Maintain economic growth. In reality.

there would not be enough liquidity to establish a proper market. anti-economic and a prime example of over-regulation. 3 Prohibition of carbon emissions in the absence of sequestration This instrument.Canada. Indeed. or help Alberta cows belch less? Do I have more room to emit? Maybe I can even sell the excess?”) If just a few large emitters were included in the regulation. under which big point sources of carbon would be required to shut down (or not start up) unless they could sequester their carbon emissions in underground storage reservoirs. there has been more profound progress in energy efficiency technology over the past five years than there has in renewable energy generation. 4 73 THE CANADA WE WANT IN 2020 . but in an inclusive system there would likely be significant leakage and constant attempts to recalibrate. If we can squeeze more energy-value per unit of carbon emitted. To accelerate this transition to renewables. tidal. but it remains one of the most cost-effective options. There has been more progress in energy efficiency technology over the past five years than there has in renewable energy generation 5 Investment in renewables A quick switch from fossil fuels to renewable energy is the pet policy of many climate activists. But probably not for another 25 years. though our financing institutions are not always sufficiently risk-assuming – see Vancouver’s Chrysalix Energy venture capital as the capable financial exception in Canada that proves this rule. with little collateral economic damage. We will get there eventually: with continued improvements in technology. (“What if I can buy a carbon offset from offshore Norway. Capand-trade might help keep the lid on CO2. Additional 1 We have world-class expertise in energy innovation in Canada. it raises the cost of the carbon-emitting activity (and therefore tends to reduce its incidence) much more than a broad-based carbon tax would – and in a directed manner. a combination of LED lighting. There are dozens of ways that we can increase energy efficiency and. the challenges of using such a mechanism would be enormous. some configuration of these is likely to be highly effective in reducing carbon emissions. with the help of recent technological improvements. hydrogen and bio-mass generation will become sufficiently competitive to meet base-load demand. both our gross and per capita emissions will fall. “smart grid” distribution systems. solar. we should be able to do this without sacrificing economic growth. It is a laudable and essential goal. Accordingly. or plant some trees in Niger. We should therefore double-up on the development and evaluation of these CCS projects. let’s not go there – yet anyway. Investment in energy efficiency This seems to be the “also-ran” of carbon management policy. In the long run. A number of ambitious carbon capture and sequestration (CCS) projects are currently being piloted. and upgrades to modern machinery and appliances can reduce consumption of electricity for urban areas by over 20%. more help from governments will be required. has been derided as clumsy. the price of power from wind. In the electricity sector alone. small hydro (including promising new “very-low-head” turbines). As CCS is expensive. mainly in Alberta.

this means a greater number of regulations – but more specific and directed ones. such catalytic programs for the private sector need to be carefully designed to ensure that they are open to all comers.SQUARING THE CARBON CIRCLE support for research and development would be very welcome. (ii) using their own procurement programs (as with the City of Calgary). with the exception of targeted CCS projects in the highest-emissions situations. for the best practical reasons. or (iii) offering specific project subsidies. org/publications/ reports/2011/) 74 . CRASH ANTI-CARBON PROGRAM If we want to meet our carbon targets in the next 20 years. the answer for all the measures recommended below should be “yes”. fuel source.davidsuzuki. Needless to say. etc. trying very hard to avoid collateral damage to other economic activities in the process. as it emits much less carbon per unit of energy generated than other fossil fuels. water contamination. That is not to say that natural gas is without its own complications.2 Certainly the development of “unconventional” natural gas (shale gas and coal-based methane) has its own environmental challenges (landuse. and to ensure that we do not hobble our economy with constraints that many other larger countries are eschewing. David Suzuki and the Pembina Institute also caution against a massive expansion in natural gas infrastructure because they think this could lock the country into fossil fuels for many years and impede the shift to renewables. However. NOW WHAT? THE SMART. and ultimately expensive. With so many other energy options available. In order to get public buy-in for this massive shift. Canada should “just say no” to new nuclear power. We must attack the point-sources of carbon with as much vigour and precision as possible. 2 See David Suzuki Foundation & the Pembina Institute (2011) Is natural gas a climate change solution for Canada? (http://www. Government can help. a quick switch to natural gas will have a huge and early impact on both total and per capita carbon emissions in Canada. This might sound counter-intuitive. the real challenges lie in commercialization and finding ways to support new technologies through the “valley of death” between perfecting the technology and securing the first pilot projects and commercial contracts. we need to engineer a massive shift in the profile of our national energy consumption and production. have tough performance standards in place and taper off over time.) that must be carefully managed. The list below provides details. we need to subject each of our main anticarbon programs to a second test: is there sufficient public policy rationale to adopt this measure for reasons unrelated to carbon? Fortunately. as natural gas is a fossil fuel that emits carbon. Regrettably. It should be noted that natural gas features prominently as a solution rather than a problem. the disasters at Fukushima and Chernobyl have demonstrated that conditions in the real world conspire to make this a risky. On that We must attack the point-sources of carbon with as much vigour and precision as possible 6 Expansion of nuclear power Switching to nuclear power is another “good idea” that is highly problematic in implementation.1 However. such as the federal Wind Power Production Incentive (WPPI) program. While nuclear can be safe in well-controlled circumstances. facilitating initial commercial contracts through: (i) setting up “feed-in tariff” arrangements (as in Ontario).

eliminate them on the smallest cars. and provide limited-time incentives (tax and grants) for installation of newer technologies.Federal role: Swing both stick and carrot. a. The biggest problem with wind. b. Non-carbon justification: As many of these technologies have short pay-back periods under current energy prices. a. b. there will be an ongoing economic benefit to making the switch. 75 THE CANADA WE WANT IN 2020 . Non-carbon justification: This will 2 Get vehicles. 1 Reduce emissions from electricity / Action: Require the conversion of all / coal and fuel-oil fired power plants to natural gas. / Action: Stimulate more renewable / energy projects. a. as has been done in central London (where a collateral benefit of the charge is said to be a 12% reduction in carbon emissions). including by making available commercial test sites on suitable federal properties. including tidal power. / Action: Improve the efficiency of elec/ tricity consumption. a. These are the recommended measures: Natural gas can provide the background “swing-supply” that will allow more renewables to be deployed reduce all kinds of pollution (other than visual) and help grow new.Federal role: Set tough emissions standards. Non-carbon justification: This will have a major positive impact on local levels of various kinds of pollution.Federal role: Tie the federal gas tax transfer to the imposition of a congestion charge in cities with a metropolitan population of over two million initially. Direct federal procurement to include the purchase of new green power. unless CCS systems are in place. Non-carbon justification: Same benefit as in a) above. Non-carbon justification: Having less metal per capita on the roads and in the garages of our cities brings obvious and numerous benefits to all. Expand informational programs on energy efficiencies to assist consumers. Canadians can readily reduce their consumption of electricity by 15% or more within five years. higher wattage incandescent bulb!). especially big and gasoline-burning cars. and solar energy is that their production depends entirely on the vagaries of the elements: natural gas (with turbine and smart grid technology) can provide the background “swing-supply” that will actually allow more renewables to be deployed. b. critical industries in Canada. off the road // Action: Encourage smaller cars. b. a. in particular. Tidal power. With the installation of new. could benefit enormously from a range of initial test sites with government as the customer. efficient technologies. reducing to one million after 2020. b.Federal role: Expand WPPI-type programs that provide temporary grants to newer technologies.point. // Action: Promote “congestion charges” in the cores of our biggest cities.Federal role: Raise taxes on bigger cars. we should remember that natural gas can act as an “enabler” of renewable energy. Ban the least-efficient technologies (bye bye. small hydro.

) With the installation of new efficient technologies. Provide generous tax credits for a portion of annual commuter passes. especially in fleets. Non-carbon justification: This is a public good that brings numerous benefits to the community. b. a. However. a. b. b. as is illustrated by various CCS projects being launched in Alberta. especially rail (or light rail). (Production of oil and gas is usually located in rural or remote locations and presents less scope for switching and optimization).Federal role: Provide limited-time enhanced tax credits and grants for retrofit to encourage quick conversion. a. Non-carbon justification: This will help develop a major new industry. // Action: Promote the use of biodiesel. but should be expanded. apart from the economic benefits associated with more efficient production. and the one that is prompting industry and government (both provincial and federal) to come together to establish a mutually acceptable framework. Biodiesel is a more environmentally friendly fuel than ethanol and it can be produced in abundance in Canada. ii) deploying technologies that will produce more oil and gas for less energy input.Federal role: Provide grants for a portion of capital costs to encourage new construction (not operation). // Action: Switch to natural gas heating from fuel oil or electricity.Federal role: Give natural gas a tenyear exemption from any increase in federal energy taxes (including any carbon tax). Natural gas is usually more efficient for heating than electricity (even natural gas fired electricity) and is cheaper than fuel oil.Federal role: Reduce taxes on biodiesel. particularly in the oil sands. in all urban areas. The desired policy actions will include: i) eliminating existing waste that emanates from flaring and inefficient machinery and/or recovering waste heat for usage. Canadians can readily reduce their consumption of electricity by 15% or more within five years Demand carbon-efficient production from oil and gas and chemical industries This is the newest frontier in anticarbon policy. Also supports the Canadian natural gas industry which is experiencing a cyclical downturn. 4 3 Reduce carbon emissions from buildings // Action: Invest in insulation retrofits. these actions cannot be as well justified for reason of collateral public benefits as the other actions above. and iii) establishing CCS projects to neutralize emissions from the most significant point-sources.SQUARING THE CARBON CIRCLE // Action: Expand public transit. Unfortunately. many companies are now displaying a positive attitude towards these challenges. 76 . This could reduce emissions in cities by more than 10%. Non-carbon justification: Same benefit as in a) above. with significant export potential. Non-carbon justification: This will also reduce energy bills. a. b. (This is already being promoted through the “ecoEnergy” program.

the federal government can also play a very important role in reducing carbon emissions in oil and gas by: (i) setting reasonable emissions standards for carbon producing pointsources. allow us fully to face up to our current carbon challenge. The federal government is finally assuming a leadership stance. including fossil fuel extraction. Significant additional discussion will be required between government and industry to find the right framework. It has eschewed a national carbon tax and a cap-and-trade system – which are the right moves at this time. after years of disappointment. It is clear from the list of actions above that Canada still has a long way to go to put in place mechanisms that will reduce our carbon emissions in order that we can meet our international responsibilities and. and $120 million from the Government of Canada’s fund for research and development of clean energy.An excellent example is Shell’s Quest Project. coal-fired plants deserve a carefully monitored new lease on life. has received a grant of $745 million (over 15 years) from the Government of Alberta. 2011. and underperformance compared to many provincial counterparts. processing and transportation. which will capture. however. for the first CCS projects. alongside the provinces. government should take a proactive stance to ensure that such a framework gets implemented within a reasonable time. eventually other heavy industries) will be set by high-efficiency natural gas. 77 THE CANADA WE WANT IN 2020 . It is hoped that these regulations will recognize that if CCS systems are shown to be effective in reducing net coal-fired atmospheric emissions to at or below natural gas levels. hopefully. Needless to say. also maintain our economic growth and quality of life. And it has recently demonstrated that it might indeed be seri- After years of disappointment there is now cause for optimism ous about implementing the type of solutions proposed in this paper: that is a series of targeted regulations to attack the critical point-sources of carbon emissions and the stimulation of alternatives to carbon-based consumption. Nonetheless. transport and store more than one million tonnes of CO2 per year from Shell’s Scotford Upgrader starting 2015.3 billion. if properly encouraged. The second declaration properly highlights the critical role of natural gas as the “good carbon emitter” that will. as explained above. In addition to providing such catalytic grants. and (ii) using tax policy to encourage the adoption of new technologies for efficient production and reduction of waste. while limiting collateral damage to the economy as a whole. the federal government made two very important declarations: (i) that coal-fired power plants without a CCS system will effectively be phased out. The first declaration is important as it demonstrates the determination to make an immediate and significant impact on point sources of carbon. there is now cause for optimism. In its proposed Reduction of Carbon Dioxide Emissions from Coal-Fired Generation of Electricity Regulations published for comment on August 27. We will see in the months ahead whether this initiative is followed up with equally bold and well-targeted federal measures. and (ii) that the target emissions standards for power plants (and by implication. This project which will cost $1.

Second. coal fired plants deserve a carefully monitored new lease on life A NATIONAL CARBON AGENCY? The broad scope of possible federal policy measures in this space raises the question of whether they should be brought together in a tightly organized package with unified administrative direction. This is likely best achieved if senior federal government officials provide only broad policy guidance to their experts in the various sectors. as well as the appropriate funding and legislative support to make them stick. Any high profile. unified administration for national carbon action would perhaps best be deployed as a monitoring agency and external information bureau. any bureaucratic initiative whose moniker contains words that sound anything like “national”. to tell the world how – in the words of the song from a durable Canadian rock band – we can get there if we try. “energy” and “program” will create bad harmonics in corners of the country that are particularly important for the resolution of this chal- lenge. However compelling this might sound. 78 . the diversity and complexity of the proposed targeted point source and alternative-development approach is likely to be more effective in a decentralized administrative environment. well-directed funding and uncommon co-operation between all levels of government and the private sector. First. it is probably not worth the effort. This approach will require detailed regulation and enforcement.SQUARING THE CARBON CIRCLE If CCS systems are shown to be effective in reducing emissions.

One can debate the pace. such as BC’s devastating mountain pine beetle outbreak (which continues to spread eastwards).BUILDING A LOW-CARBON. Canada’s oil sands became a prime target of global environmental protest – a trend which has intensified in 2011. Absent unforeseen technological breakthroughs or ecological catastrophe. In 1991 he founded Ecojustice. HIGH-OCTANE CANADIAN ECONOMY STEWART ELGIE AND ALEX WOOD The year 2010 witnessed several historic events.1 It is projected to grow a further ten-fold by 2020. One is that the world is shifting to a low carbon economic future. Many are labelling it “the next industrial revolution”. the products we make. global oil production hit record levels in 2010 – despite growing concerns that we are at. the transportation we use. China and Canada) sign on to binding targets for greenhouse gas (GHG) emissions reductions as part of the Copenhagen Accord. can only happen so quickly. its highest honour. This low carbon transformation will affect most aspects of our economy and lives: the buildings we inhabit. He is also a professor of law and economics at the University of Ottawa and director of the university’s interdisciplinary Environment Institute. and the replacement of global capital stocks. 1 UNEP & Frankfurt School (2011) Global Trends in Renewable Energy Investment. and between 2001 and 2003 was the founding executive director of the multi-stakeholder Canadian Boreal Initiative. The second reality is that. In the meantime. despite this low carbon trend. EU. Overall spending on clean energy has risen by over 500% from 2004 – 2010. First. 79 THE CANADA WE WANT IN 2020 . to $211 billion. At the same time. and the energy that powers us. a growing global population and rising Stewart Elgie is the founder and chair of Sustainable Prosperity. with profound implications for Canada’s economic and environmental future. 2010 was tied for the warmest year in the Earth’s recorded history.3 Demand for timber. fossil fuels and energy intensive industries are likely to remain a major part of the global economy for decades to come. In 2001 Stewart was awarded the Law Society of Upper Canada medal for exceptional lifetime contributions to law. global investment in clean energy capacity surpassed investment in fossil fuel-based capacity for the first time. minerals and other resource products (which tend to be energy intensive) also continued to grow. now Canada’s largest non-profit environmental law organization. the shift to cleaner technologies and energy. Canada’s leading green economy think tank and policy-research network. and most of the world’s major economies are shifting their spending and policies to prepare for it. 2010 also saw an unprecedented number of countries (141: including the US. These events underscore two important realities for Canada. to reach a total of US$ 2. This record-high heat has spawned record-low Arctic sea ice levels and other catastrophic effects. but the shift is unmistakable. peak oil – as did domestic production in Canada (the bulk of it coming from oil sands). Third.3 trillion. or near.2 Second.

natural resources and other manufactured products. How to do so is the vital question. which could make market access to the EU a real issue for Canadian oil sands producers. or go smart. incentives. Canada’s leading green economy think tank and policy research network. the two realities can – and must – be reconciled. 3 BP Statistical Review of World Energy (2011). not a threat – including for its oil and resource industries. The most important (but not the only) policy needed to drive this change is to put a meaningful price on carbon emissions. Policy and Markets at Sustainable Prosperity. Alex started his career with the World Wildlife Fund in Washington. these twin realities seem to point in opposite directions – with the implication that we must choose between supporting the “new economy” or the “current economy”. there are of course very compelling scientific and moral arguments for acting. which have been well canvassed elsewhere. // Go fast countries are betting that the shift to a low carbon economy will be faster than most expect. All are moving aggressively to accelerate clean energy and technology development through green taxes. 80 . In fact. gas. Corporate Environmental Affairs at TD Bank Financial Group and Acting Chief Executive Officer and President of the National Round Table on the Environment and the Economy. What policies will enable Canada to capitalize on its strengths in the economy of today while also preparing the country for success in the low-carbon economy of tomorrow? The answer. Canada must view the low carbon economy as an opportunity. Their approaches generally fall into one of three groups: go fast.. early mover countries such as Norway – which aims to be carbon neutral by 2030 (despite the fact that it is a major oil exporter) – South Korea. These countries are generally reluctant to impose additional costs on domestic industries and consumers in order to address a global problem (climate change) or prepare for a new economic reality that is just starting to unfold. but believe that traditional sectors will remain Alex Wood is Senior Director. Germany and Denmark stand to benefit. but will also position Canada as the world’s most environmentally sustainable producer of oil. cost effective policies that will not only encourage clean energy and technology growth. Canada should move aggressively to adopt smart. where he developed a national program examining the role of fiscal policy in promoting the long-term reduction of carbon dioxide emissions. While this paper focuses mainly on the economic dimensions of the issue. it has refused to regulate carbon emissions (nationally) and has abandoned its Kyoto target (although it is ramping up spending on clean energy). The US is a prime example. // Go slow countries are betting that the low carbon economy will emerge more slowly than expected. Indeed. 2 Pew Charitable Trusts (2010) Global Clean Power: A $2. is that Canada must view the low carbon economy as an opportunity. And Canada is a major producer of both. we argue. If this happens. targeted spending and other polices. failure to respond to the demands of an ever-greening global marketplace will pose a growing threat to Canadian exporters – as we see with Europe’s proposed low-carbon fuel standard. D. not a threat To some.C. go slow. with profound implications for Canada’s future prosperity. Countries in this group assume that the low carbon transition will happen. Prior to this he worked as Special Advisor.SQUARING THE CARBON CIRCLE standard of living (especially in developing countries) will mean that demand for fossil fuels and other natural resources will remain strong. There are plausible arguments to support each approach.3 Trillion Opportunity. // Go smart is a middle path. THE PACE OF OUR TRANSFORMATION Countries around the world are wrestling with the same issues as Canada. Effective carbon policies will also enable Canada to do its part to address the critical problem of global climate change.

it is not even clear that this strategy heads off short-term pain. Growing pressure from carbon-conscious consumers. and China (which is rapidly building coal power plants.5 For Canada. Australia (its carbon tax exempts motor fuels and provides major support for carbon-intensive resource sectors). being a green economic leader does not mean just building more windmills. 81 THE CANADA WE WANT IN 2020 . Canada generally falls into the “go slow” camp. at least nationally. by failing to spur necessary innovation and efficiencies. and our green economic spending lags behind that of most competitor nations. Rather. nor in Canada’s overall economic – let alone environmental – interest. They are hedging their bets. Ontario and Quebec – are in the “go fast” or “go smart” camps.4 We are one of the few developed countries still without a national carbon pricing scheme or a plan to introduce one. This may be why powerful industry voices such as the Canadian Council of Chief Executives. and resisting change. In the medium-term. but they positioned Canada to prosper in the shifting global economic reality of the time. low polluting. and use scarce natural resources efficiently. These far-sighted government actions both involved some short-term pain. We have abandoned our Kyoto target. Ontario and Quebec) may be positioned to pursue a more aggressive low-carbon policy path. putting in place modest. Germany or Denmark. By following the US we also run the risk that an American policy – when it does come – will put domestic interests first. have begun publicly to push for national carbon pricing regulations. To be clear. including a rich endowment of natural resources and related know-how. So which of the three approaches is best for Canada? “Go slow” may seem the safest. while raising fossil fuel taxes and becoming a leader in clean energy production and low carbon transportation). electric cars and other clean technology products (though these are likely to be of growing importance). a country on the trailing edge of global low-carbon change. environmental NGOs and investors is increasingly threatening Canadian oil and gas exports (the high-powered US campaign to block the Keystone pipeline is the latest example). may well hamper the future competitiveness of many Canadian industry sectors. Canada should view it as an opportunity. and slashed our fiscal deficit in the early 1990s. It also means becoming the world’s most 4 Several provinces – such as BC. along the lines of Australia – through cost-effective policies that foster eco-innovation but also reflect its inherent economic strengths. A “go slow” (or “go with the US”) carbon strategy is therefore neither safe. cost-effective policies to foster low carbon options while still supporting the growth of traditional industry and energy sectors. and beginning to tarnish other sectors as well. solar panels. Pegging ourselves to the US. in the short-run: it avoids imposing costs on our industries and consumers that are not faced by our major competitor. Examples include. the US. The economy of the future is likely to reward companies (and countries) that are energy efficient.important for many years. and others. That means putting in place policies to get ahead of the wave of change – in the same way that we did when we negotiated one of the world’s first continental free trade agreements in the late 1980s. whose economies are quite different from ours. and similarly prescient policies are needed to prepare Canada for it. however. this may leave us dangerously ill-prepared. parts of Europe. to our detriment (think: “buy American”). Canada should pursue its own “go smart” path to a low-carbon future. Rather than seeing this shift as a threat. that does not mean simply following the “go fast” climate policy path of countries such as Sweden. Moreover. We now face a new (and potentially greater) economic shift. Moreover Canada’s carbon emissions have risen more than almost any other OECD country since 1992. 5 Certain provinces (such as BC.

SQUARING THE CARBON CIRCLE environmentally responsible producer of oil. since it involves most aspects of our economy and society. not just better communications. we may not be quite as far behind as some critics make out. Forestry is a real-life example of how Canadian resource and industry sectors can position themselves to prosper in an ever-greening. Twenty years ago. is investing in carbon capture and storage technology (in partnership with some provinces). has dramatically reduced its carbon emissions. across the economy. vehicles. an overall low-carbon policy package should feature an array of tools. This will be an undoubted challenge. widely and efficiently than could be accomplished by regulating all of these activities separately. as a result of its outdated practices. After a decade of intense conflict. It has adopted world-leading standards for forest certification and practices. low carbon global economy. economic and policy). timber. 82 . Both pricing approaches can achieve reductions at much lower cost than traditional “command and control” regulation. including Europe. The efficacy of a trading approach was demonstrated by the US Acid Rain program – the first large-scale experiment with emissions trading. marked by international boycotts and massive civil disobedience. and other energy intensive. Here we focus on carbon pricing. and motivate behavioural and investment changes – much more quickly. building codes). There are two main ways to price carbon: through a tax or fee on emissions or a capand-trade system. Its success has inspired the creation of carbon trading regimes in a growing number of jurisdictions. // incentives to help strategic clean energy and tech industries get established. and is planning to regulate carbon emissions from coal power. is working hand-in-hand with environmental groups to protect endangered species and spaces. diverse manufacturing base. reaching all producers and consumers. this sector stood in the cross-hairs of global environmental opposition. but with our resource wealth. the single most important measure that Canada can take. “Made in Canada” should become a recognized brand of environmental leadership Our ability to do so is illustrated by the recent history of our forestry sector. etc. However. buildings. not a threat. Moreover. // regulation. “Made in Canada” should become a recognized brand of environmental leadership. and // research support to spur low-carbon innovation (technical. product standards. and is developing innovative new bio-products. where pricing is less effective (e. including: // public investments in green infrastructure (transit. GETTING FROM HERE TO THERE What public policies and investments will best accelerate Canada’s economy-wide shift to a low-carbon future? A full answer to this question is beyond the scope of this paper. A carbon price will ripple through the economy. // carbon pricing. the industry is now embracing sustainability as an economic opportunity. electrical grid.). across all sectors – through real changes to practices and policies. we should rise to meet it.g. The program achieved 25% greater reductions in sulphur dioxide (SO2) at roughly half the cost of a conventional regulatory approach. and highly educated and skilled workforce. minerals. manufactured products. The federal government has already brought in new vehicle fuel efficiency standards (with the US).

just shifted. BC’s per capita fuel use has fallen nearly 3% compared to the rest of Canada. While it is too early to measure cost savings from these programs. and Alberta. (2007).5 0 -6 -8 1994 . positive effect on GDP. making BC the country’s most fuel-efficient province. can increase investment in growing economic sectors such as clean energy). P.7 Since then. Six western-European countries have brought them in since the 1990s.8 The tax has now risen to $25/tonne (higher than Europe’s current carbon market price).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 % difference -4 % difference 1997 2000 2003 2006 2009 2012 0. US government studies indicate that a national carbon trading scheme would generate cost-savings of over 50% compared to more traditional command and control carbon regulations (of the type that Canada is currently considering). yet it appears to have had no adverse effects on the province’s GDP (which is essentially unchanged relative to other provinces) – in large part because all revenues are used to cut other taxes. mainly due to tax shifting which. Overall taxes are not raised. and lower taxes on things we want to encourage (investment and employment). 6 Tax shifting occurs when the revenues from environmental taxes are used to lower other types of taxes.5 1994 1997 2000 2003 2006 2009 2012 Slovenia | UK | Netherlands | Germany | Sweden | Finland | Denmark SOURCE: Ekins. and a major EU-sponsored study found them to have both positive environmental effects (causing emissions reductions of 2–7%) and beneficial economic impacts (a small. The result is higher taxes on things we want to discourage (pollution). the Northeast US states. An assessment of ETR on the competitiveness of selected industrial sectors. Figure 1 New Zealand. 83 THE CANADA WE WANT IN 2020 .6 British Columbia passed North America’s first true carbon tax in 2008. COMETR (Competitiveness Effects of Environmental Tax Reforms).0. particularly on income or labour. amongst other things. Carbon taxes have also proven to be a cost-effective way to meet climate goals.

(http://www. business and environmental experts. They point to several main advantages. allowing firms to pay into a government “technology fund” at $15 for each tonne emitted over their limit (a similar fund was in previous federal policy proposals). for example. it will make (or save) more money. Alberta uses an alternative approach. The reason is that an emissions price creates an economic reward for each additional unit of emission reduction – which simply setting an emission standard does not do. An important feature of carbon pricing is that. 8 Sustainable Prosperity (2011) (unpublished research: report in preparation). If it is to be effective. carbon pricing is also more effective than conventional regulation at stimulating innovation. there is typically strong pressure from firms for governments to allocate most allowances for free – an approach which is rife with potential for backroom manipulation. has identified key principles for effective carbon pricing systems. by contrast. including simplicity (it builds on the existing tax system). Given the manifest benefits of a pricing approach. based 84 . ease of establishment (BC’s tax was developed in just a few months). includes overly broad exemptions) or emissions trading schemes (e. With a tax. the EU system over-allocated allowances in its first phase) and we must learn from these.10 Of the two carbon pricing approaches – a tax on emissions. and most economists argue they should also be made to pay for every tonne emitted – which is typically done by selling or auctioning allowances to emit. are transparent and generate funds that can be used to buffer the impacts of climate policy on vulnerable groups or sectors. working with a group of economic. With cap-and-trade it is less clear: certainly firms must pay for all emissions over their assigned cap level. firms pay for every ton of carbon emitted. based on existing emissions. the federal government issued a series of plans for carbon capand-trade systems. If a company can find innovative ways to reduce emissions below the targeted level. But its recently-released regulations for power plant emissions follow a command and control approach.ca/ article11) 11 The EU trading system currently charges for less than 10% of allowances (slated to rise to over 50% by 2013). Auctions.11 It is estimated that a national Canadian carbon-pricing scheme would initially generate about $5 – 15bn annually (for a tax. this would be a huge missed opportunity. the systems should be: (i) comprehensive. carbon pricing must be well designed. to allow firms time to plan and adjust. There are examples of poorly designed carbon taxes (Norway’s. Sustainable Prosperity. can be almost as effective and comprehensive. If such allowances are allocated without payment.SQUARING THE CARBON CIRCLE 7 Quebec brought in a climate levy in 2007. sustainableprosperity. (ii) simple. At the very least we could incorporate some elements of pricing by building trading and offset options into intensity-based emission standards (as Alberta has done). 9 OECD (2010) Taxation. Nevertheless.9 Similar results can normally be obtained from emissions trading. or cap-and-trade with full auctioning. but it is too small to have any real effect on emissions. comprehensive coverage (across the whole economy). and greater price certainty – ideally by starting with a modest price that ramps up steadily over time (as BC’s does). For example. In addition to lowering costs. and a cap-and-trade system – most economists prefer a tax (as do a growing number of Canadian industries and environmental groups). however. it generates revenues. What is clear is that either type of carbon pricing system is preferable to command and control regulation. or for other important economic or environmental goals (discussed below). and brings the added benefit of certainty of emissions reductions. and (v) have a price sufficient to achieve environmental targets. the government has indicated that it may follow this same path when extending carbon controls to other sectors. While it is perhaps understandable that trading would be excluded from regulations that deal only with power plants (a very limited trading market). (iii) predictable. A recent OECD study documents the innovation-inducing effects achieved by various green taxes. From 2005 – 2010. Innovation and the Environment. Australia’s new carbon pricing system requires firms to pay a fixed price of $23/tonne for all of their allowed emissions. Paris: OECD. by definition. (iv) adaptable. 10 Sustainable Prosperity (2009) Eight Principles for Carbon Pricing. Yet there is growing concern that Canada may choose this inferior route.g. low transaction costs (no trading fees). this effectively rewards those who are already emitting the most. A welldesigned cap-and-trade system.

energy-intensive sectors. in Canada’s present economic circumstances. clean power. the main function of carbon revenues might be to fund critical public investments without the need for tax increases. with time-limited tax breaks or refunds for tradeexposed.1% of GDP annually through 2020). carbon capture. Considerations of intergenerational equity also support such a reinvestment. Ottawa: NRTEE. or iv) fund low-carbon public infrastructure or clean technology research and development. energy efficient public buildings and housing. and enable clean power producers to feed in). Indeed. clean energy generating facilities. The list of key investments includes: a smart electrical grid (to boost energy efficiency. investment or labour. The question then becomes: how best to use these carbon revenues? Options include deploying them to: i) reduce distortions in the broader tax system – by cutting taxes on income. by future generations. Thus.). etc. at a time of record deficits. The effects of climate change will be felt. Each option has some merit.on a carbon price of $15 – $20/tonne). energyefficient plant and equipment. to spur investment. most deeply. as well as research to advance low carbon technology and innovation. The transformation to a low-carbon economy will also require major private investments in infrastructure and technology (in electric cars. when it may be hard to justify further tax cuts. we would argue that a large portion of potential carbon revenues should be used to support low-carbon infrastructure and clean technology development.g. public transit. It is only fair that much of the rent from depleting this nonrenewable resource (in the form of carbon revenues) be reinvested in building a low carbon economy that will enrich future Canadians. Therefore. and many EU countries). The most economically efficient option is to channel most or all of the revenues into cutting taxes on labour or income. carbon capture and storage distribution capacity. regions or industry sectors. employment and growth (as was done in BC. for the following reasons: A large portion of potential carbon revenues should be used to support low-carbon infrastructure and clean technology development 1 We need major investment in public infrastructure to support a low carbon economy. iii) offset the proportionally greater impact of a carbon price on vulnerable regions or low-income households – with targeted tax refunds (as was done in BC). 2 3 12 National Roundtable on the Environment and Economy (2009) Achieving 2050: A Carbon Pricing Policy for Canada. biofuels. Even a more limited technology fund approach (like the Alberta model) could generate revenues of close to $1 billion per annum. it has been estimated that recycling all revenues into tax cuts would reduce the impact of a carbon price on Canada’s economy to negligible levels (roughly 0. ii) address competitiveness issues arising from the carbon price – e. Certainly government should use a portion of the revenues to buffer the adverse effects of carbon pricing on vulnerable groups. 85 THE CANADA WE WANT IN 2020 . public incentives will be needed to kick-start the necessary private investments. rising thereafter with the price of carbon. Expected short-term carbon prices (in the range of $15 – $30/tonne) are far too low to drive the scale of investment and change needed.12 However.

It is not an either/or choice. can be better maintained. while bolstering the economy of today. especially healthcare. but we will also play our due part in lessening the massive costs of climate change. and paints a false dichotomy: moving forward with effective climate policy is as important to the economic success and security of Canada’s energy and resource sectors as it is to the clean technology sector. that policies to reduce GHGs and build a low carbon economy will hamper Canada’s competitiveness and. buffering vulnerable constituencies. that Canada must choose between developing its fossil fuel and energy-intensive industries or building a low-carbon economy. The second premise is also flawed. As regards the first one. biofuels and BlackBerries. trains and chemicals. the focus should shift more towards tax cuts. CONCLUSION The debate around carbon policy in Canada is often clouded by two major misconceptions: first. Canada should strive to become the world’s most environmentally responsible producer of natural resource and manufactured products – an increasingly important market advantage – while also growing its clean energy and technology sectors. timber and minerals. By shifting taxes more towards consumption and pollution (which will normally fall more slowly than aggregate income as the population ages) the level of public revenues. Over time. As an aging nation. stimulating low carbon investment with less need for public support. And the benefits are enormous: not only will Canada be well-positioned to prosper in a future lowcarbon world. and investing in clean technology and infrastructure. 86 . second. This is particularly important in view of Canada’s aging population. Substituting pollution taxes for income taxes has a further benefit in that it decouples overall tax revenues from labour income. as well as cars. The carbon tax has given it fiscal space to significantly reduce income taxes. the short-term costs associated with a welldesigned carbon pricing policy will be minimal – roughly 0. as deficits start to fall and carbon prices rise. BC now boasts the lowest rates in Canada for both corporate and personal income taxes. we will be working less (so paying less income taxes) but demanding more services.1% of GDP annually.SQUARING THE CARBON CIRCLE The best approach to revenue recycling is likely to be some combination of tax cuts. and the sooner we get past that misconception the sooner we can get on with developing smart climate policies – starting with federal carbon pricing – that will position Canada to prosper in the economy of tomorrow. The emerging low-carbon economy will require not only windmills. and thus the capacity to provide services. This approach is the one that British Columbia has utilized to great effect. but also oil. Both premises are largely false.

The remaining two papers in this section argue that these measures are – or could be – effective on their own. Mark Cameron’s paper also . in which greater efforts are made to smooth out both financial and human capital starting points. as would continued public spending on services such as health and education: Sharpe’s own research shows these to have an important equalizing effect. A key change under such a system would be the imposition of an inheritance tax. Since technological advances and globalization both tend to increase inequalities as returns to unskilled labour decline. though recent increases in income inequality in Canada are towards the high end of the spectrum. they assert. over and above its relationship with poverty. rather than moving beyond these. This is a problem that will not go away in the absence of significant policy action All authors are at pains to stress the critical role that government taxes and transfers play in mitigating inequality. either in terms of rationale or actual measures. matters in its own right. Income polarization is also increasing steadily. this is a problem that will not go away in the absence of significant policy action. that is shared with many other developed countries. This move would bring Canada in line with almost all other developed countries. Sharpe argues that our system should be underpinned by an equality of opportunity agenda. Sharpe does not advocate abolishing the existing system of taxes and transfers. by contrast. we have a system that takes unequal starting points as a given. Yet he would like to move beyond these. as our contributors stress. At present. Thus. These would remain a vital pillar.REDUCING INCOME DISPARITIES AND POLARIZATION POVERTY REMAINS A SIGNIFICANT and growing problem in Canada. for more than 20 years. Sherri Torjman and Ken Battle are highly concerned with the dynamics of poverty and inequality which. He believes that the federal government should capitalize on the current heightened public concern about inequality – as evidenced by global protests – and take this opportunity to enact bold new measures in favour of the less well-off. Of the papers in this section. It is also a problem. the federal government simply needs to increase the magnitude of the transfers it makes and/or to extend the number of people who are eligible. focussing instead on correcting the subsequent excesses of market allocations. only one – that by Andrew Sharpe – suggests a significant rethink of the income support system that has been in place. with little change. to a degree that could threaten social cohesion.

increased government engagement is likely to be required. who believe in smaller government and less intervention. He also highlights the value of those institutions in our country that foster “civic equality” (for example. but it is (almost) universal. over and above its relationship with poverty notes the importance that we. on the other hand. His paper makes the case that even those on the right of the political spectrum. the federal government should therefore pre-emptively increase its redistributive efforts. Not only is this already in place. attribute to fairness. Cameron. favours the WITB over the CCTB. In short. should be ready to do more to counter inequality. This is partly because in societies that begin to unravel due to social tensions arising from inequality.THE CANADA WE WANT IN 2020 Inequality matters in its own right. and to cater to our sense of fairness. They also discuss the Working Income Tax Benefit (WITB) and call for this to be extended further upwards (in income terms). though their starting points are diverse. all the contributors call for the federal government to take deliberate steps to counter soaring inequality and ensure that the Canada we want in 2020 is the Canada that less advantaged groups might want too. the health system and public schools) and cautions against piecemeal privatization of these which could dangerously undermine equality of access. All authors are at pains to stress the critical role that government taxes and transfers play in mitigating inequality . To head this off. Torjman and Battle’s preferred vehicle for increasing federal government support to low and low-middle income Canadians is the Canada Child Tax Benefit (CCTB). though recognizes the value of both. as humans.

Extreme income inequality. can undermine the sense of social cohesion necessary for a democratic society. Global Public Policy. at the outset.000 than one in which they make $110. why governments should concern themselves with inequality at all. He has worked for several MPs and Ministers. Schmittberger. 1 Güth. W. He later worked for Ontario Power Generation and recently joined Research In Motion as Director.WHY CANADIANS SHOULD CARE ABOUT INCOME INEQUALITY MARK CAMERON Mark Cameron has over 15 years’ experience working in government. We know from experiments in psychology and behavioural economics. even when it is clearly explained that they will have higher purchasing 89 .000 while everybody else makes $85. should it then matter if wealth and income at the top of the socioeconomic ladder increases dramatically. Mark was educated at McGill University and the University of British Columbia. for several reasons. although the extent and effects of this widening inequality have become most apparent in the past several years. R. is income inequality an issue that could or should be on the short. The 2008 financial crisis. it is not only traditional voices on the left that are expressing alarm about widening inequality: centrist and conservative voices from business leaders to the Conference Board of Canada have also joined the conversation. Journal of Economic Behavior and Organization 3 (4). 367–388. that most people will reject an apparently “unfair” distribution of rewards. He has also worked as a consultant on environmental and energy policy. W. Human nature is acutely sensitive to relative fairness and positional status. even where the least well off are still making economic gains. Obviously. Theoretically. and in the Privy Council Office.. consulting and industry. a primary objective for governments is securing economic growth and ensuring that the whole of society benefits from such growth.000 while everybody else makes $200. led to job and asset losses. From 2006 – 2009 he served as Director of Policy and Research and Senior Policy Advisor to the Prime Minister of Canada. (1982) “An Experimental Analysis of Ultimatum Bargaining”. even if rejecting it will make them personally worse off.000. Many people became rapidly and abruptly aware of the precariousness of their financial position. 1 Similarly. Income inequality in Canada has increased over the past two decades. Today. & Schwarze. surveys show that most people would rather live in a society where they make $100. as long as those at the middle or lower rungs are benefiting at least to a modest extent? Is relative inequality of income a problem if everybody’s lot is improving at least somewhat? Yes. It is worth asking. with a focus on public policy.or medium-term federal agenda? I would argue that it is. especially among those in lower income groups. such as the Ultimatum Game developed by Werner Güth and others. and the recession which followed it. relative inequality does matter. But with a majority Conservative federal government that is pursuing an agenda of fiscal retrenchment.

(1998) “Is More Always Better?: A Survey about Positional Concerns”.05 . limited government and national unity. etc. in turn. 37. This. or where there are wide gaps between social and economic classes. Inequality in market income has been growing in almost all advanced economies for the past several decades as a consequence of economic globalization. technological change.0. New York Times Magazine. reduced progressivity in taxation. 90 THE CANADA WE WANT IN 2020 .”3 So. but also conservatives who are concerned about maintaining public support for free markets and limited government. what do we know about the state of income inequality in Canada and its underlying causes? And what can we do to address this? Choosing the right policy prescription requires an accurate diagnosis. But inequality taken to extremes can overwhelm conservative ideals of selfreliance. J.Changes in Gini coefficients from mid 1980s to mid-2000s 0. Increased integration of the global economy 2 Solnick. if there are ample philosophical and practical grounds for both left and right to be concerned about income inequality.2 A society in which a small group is perceived to be benefiting unfairly. and the shift from an industrial to a service-based economy.05 Australia Ireland France Greece Turkey Spain 0. It can delegitimize commerce and business and invite destructive protectionism and overregulation. loss of participation in social and charitable organizations. 373-383.00 Finland Sweden Italy Hungary Japan United States New Zealand Germany Czech Republic Belgium United Kingdom Mexico Netherlands Austria Denmark Portugal Canada Luxembourg Norway OECD . can lead to increases in crime. & Hemenway. Inequality.10 0. Figure 1 power. in the second scenario. “Equality in itself never can be or should be a conservative goal. a larger house size. as compared to the first. jealousy and anti-social behavior. and greater demands for government intervention to help deal with these social tensions. is a conservative issue too. D.0. D. Only then will we be able to identify measures that are likely to be successful in addressing it. 2008. September 5. S. Vol. even if the less well-off are still making material gains. Such a scenario should concern not only social democrats or liberals who see equality as an important social goal in its own right. can lead to dissension. As conservative commentator David Frum has written.10 SOURCE: OECD (2008) Growing Unequal?: Income Distribution and Poverty in OECD Countries. 3 Frum. (2008) “The Vanishing Republican Voter”. in short. so it is important to understand what has caused increases to inequality in Canada and elsewhere. Journal of Economic Behavior and Organization.

ca/hcp/hot-topics/canInequality.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. Figure 3 shows that while government policies became gradually more redistributive from about 1980 through the mid 1990s (so the difference between the Gini coefficient for market income distribution and that for post tax and transfer income distribution grew larger).35 0. it is very difficult for any government to affect the broader shifts in the global economy that affect market incomes. Lower-skilled workers. However.50 0. http://www. affect final income distribution.45 0. Focusing specifically on Canada. have been forced to compete with workers in developing economies and have seen far smaller gains. it is import to note that inequality can be measured both in terms of market incomes (before taxes and transfers) and disposable incomes (after taxes and transfers).conferenceboard. While domestic policy can certainly address tax and transfer issues which. Government policies have therefore had some effect in dampening the increase in post-tax and transfer disposable incomes. during the late 1990s there was a considerable reduction in the level of redistribution. Figure 1 shows changes in Gini coefficients (essentially the measure of what percentage of income redistribution would be necessary to eliminate all income inequality) in OECD countries between the mid-1980s and mid-2000s. but most OECD countries have seen inequality increase. When looking at inequality data.REDUCING INCOME DISPARITIES AND POLARIZATION Gini indexes using three measures of adjusted income 0. as did inequality in disposable incomes to a lesser extent. Taxes and transfers have 91 .30 0. by contrast. Income inequality has grown in the United States and Canada more quickly than the OECD average. we see from Figure 2 that inequalities in market income grew rapidly in the 1990s.40 0.aspx Figure 2 and rapid technological change have brought greater rewards for highly-skilled workers and managers. in turn.

and the Goods and Services Tax (GST) was reduced – all measures that benefited low-income households (even if many critics argued that the UCCB and GST cut should have been designed more progressively).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.0. Figure 3 reduced inequality.0. put in place modest measures that reduce income inequality. the Universal Child Care Benefit (UCCB) and Working Income Tax Benefit (WITB) have been brought in.08 . 92 THE CANADA WE WANT IN 2020 .0.10 . Since 2006.ca/hcp/hot-topics/canInequality. But. in fact.14 .0.0.06 . as in the US. the trend to greater inequality remains clear. The current government has.conferenceboard. As a result of these measures. HOW SHOULD GOVERNMENTS RESPOND? The broad international trend to increased inequality of market incomes in advanced economies is likely beyond the capacity of federal and provincial governments to address. This is likely the result of the reduction of federal transfer payments and the subsequent reduction in provincial welfare programs (motivated by the desire for cost savings. the basic personal exemption has been increased. but the impact is now smaller. as we have already seen.aspx Income Equality.12 . governments are in a position to address inequality in disposable income. especially through the tax and transfer system. but also a philosophical choice in some provinces. Canadian http://www. Redistribution through tax and transfers has leveled off since 2000 and both market income and disposable income inequality have remained relatively stable. Nonetheless. at least in the short term. for welfare reform).Difference between the Gini index using adjusted market income and adjusted after-tax income . Statistics Canada data shows that even while the market income of households in the lowest income WITH THE SITUATION BECOMING WORSE.

and provinces should integrate their income support programs with Ottawa to increase its impact. the government should continue to enhance the WITB. as economic disparities become harder to overcome with conventional policy measures. However. analogous to the old Family Allowance. which was implemented in 2007 and expanded in 2009. even if significant income disparities exist. however.and middle-income households through the Canada Child Tax Benefit (CCTB) and National Child Benefit Supplement. As the American writer Mickey Kaus has argued. Some social policy critics have argued that these measures. remaining cognizant of the impact of The government should continue to enhance the Working Income Tax Benefit tax and transfer changes on lower income groups. The WITB. But governments should also keep in mind other means of ensuring social cohesion by ensuring that people are treated as equals and feel respected as equals. While enhancing existing programs such as WITB and the CCTB are admittedly incremental measures that will only have a modest impact on income inequality. The current government brought in the Universal Child Care Benefit. As initially designed. The government should be encouraged to continue in the directions it has set for itself.REDUCING INCOME DISPARITIES AND POLARIZATION quintile dropped between 2005 and 2009. Enhancements brought in in Budget 2009 will ensure that it will at least benefit anybody working full-time at minimum wage. are regressive. post tax and transfer disposable income for this group grew. I believe this course of action makes the most sense at the present time. such as the WITB and the CCTB. and their relative share of disposable income remained constant. As the government seeks to eliminate the large fiscal deficit run up in response to the recent recession – and with the recovery still slow and uncertain – it is unlikely that any government would want to increase taxes dramatically in order to fund greater benefit increases. It supplements the incomes of low earners and helps remove disincentives to seeking paid work instead of remaining on social assistance programs. Instead. which are not targeted to lower income households. Changes to taxes and benefits alone will not be able to turn around a 30-year international trend towards income inequality in advanced economies – although they can perhaps arrest the increase in inequality in disposable incomes. WITB was brought in at such a low level that it excluded many of the working poor. and restored a per child tax deduction. governments should move from policies that simply try to achieve more equal distribution of income towards policies that seek to enhance civic equality by 93 . the federal government should continue to extend Governments should seek to enhance civic equality by emphasizing common institutions WITB further up the income ladder. The government should also continue to enhance child benefits. is one of the most important poverty reduction measures taken in recent years. Over time. the government should ensure that future increases are targeted more towards lower. governments are more likely to be persuaded to build on programs they have already initiated or enhanced. In particular. restoring some form of universal recognition of the social value of child-raising was an important – and politically popular – objective of the current government which it will be loath to give up. But having restored a degree of universality to the child benefit system.

(1992) The End of Equality. and marketoriented reforms to education and healthcare should be structured in ways that do not allow the better-off simply to buy superior services or exempt themselves from these important social institutions.4 In Canada. policy makers should keep in mind that these are institutions that help preserve social cohesion and social equality. Just as extreme income equality can undermine social cohesion. the government should pursue a mix of strategies. regardless of income. New York: Basic Books. we are fortunate to have many of these public institutions – such as public schools and a universal health care system. M. While many have proposed reforms to healthcare and education to reduce costs or improve efficiency. Governments can also pursue other means of promoting social cohesion and civic engagement. or greater knowledge of and pride in Canadian history and culture. Through these measures Canada can ensure that the broader global trends driving income inequalities do not undermine Canada’s social compact and the sense of civic equality that a free and democratic society requires. It should also keep in mind that promoting the common values of citizenship represents an important component of social equality. significant enough to ensure that the lowest income quintile continues to increase its level of disposable income in both absolute and relative terms. measures aimed at improving civic engagement can help citizens to interact as equals in key areas of public life and social services. It should increase benefits directed to the working poor and low income families. The current government has taken some steps in these areas. 4 Kaus.emphasizing common institutions where citizens meet as equals. 94 THE CANADA WE WANT IN 2020 . while also undertaking measures to enhance civic equality by protecting important public institutions and enhancing a common sense of citizenship. As the economy recovers. whether through voluntary or military service.

(ii) total income. disadvantaging the worst paid workers. the income group that has been driving. The decline in unionization has meant that fewer workers enjoy the benefits of collective bargaining. This decreases the bargaining power of workers and so reduces their incomes further. almost single-handedly. Overly generous compensation practices in the financial sector have also contributed to the large increases in the incomes of top earners. At the other end of the spectrum. skill-biased technological change. Prior to this he was Head of Research at the Canadian Labour Market and Productivity Centre and Chief. He received a PhD in economics from McGill University in 1982. related to the information technology revolution. At a household level. Business Sector Analysis. Deregulation has often hurt certain groups of workers such as truck drivers and air flight attendants. defined as earnings plus net investment income and private retirement income. Most developed countries have experienced increased market income inequalities in recent decades. At the same time. has led to the rise in the number of high income two-earner households. and (iii) after-tax income (which includes all taxes and transfers). A large number of factors have been identified as contributing to this development. an equalizing force in income distribution. Governments in many instances have failed to raise minimum wages in line with overall wage gains. a non-profit research organization he founded in 1995. at the Department of Finance. Statistics Canada produces estimates of income distribution based on three different measures: (i) market income. which includes transfer payments. and globalization has meant that employers can now outsource production to low-cost countries. defined as the tendency for persons with similar education and qualifications to marry one another (a male doctor who in the past married a nurse now marries another doctor). He is also founder and Editor of the International Productivity Monitor and Executive Director of the International Association for Research in Income and Wealth.INCOME REDISTRIBUTION IN CANADA ANDREW SHARPE Andrew Sharpe is Executive Director of the Ottawa-based Centre for the Study of Living Standards. increased assortative mating. the recent rise in inequality. This has hugely boosted the income of the top 1%. THE IMPACT OF INCOME TRANSFERS AND TAXES ON INEQUALITY IN CANADA The distribution of income in this country is greatly affected by government policy. has reduced the overall demand for the services of the poorly educated. as has privatization of public services. It is the after-tax distribution 95 . faulty corporate governance oversight procedures have resulted in a massive rise in CEO compensation relative to the average worker.

9 0.57 5. adjusted for family size Market income 1981 1989 2000 2009 Point change 1981–1989 1989–2000 1981–2000 1981–2009 Total Growth % 1981–2009 47.1 0.28 Total income 5.69 5. and its value ranges from zero to one.1 -0.06 to 1.9%).3 1.60 6.7 18.66 5.78 4. Figure 1 that is the most relevant from the perspective of private consumption.26 13.70 10. a value of one would mean that a single household receives all the income in the economy. The quintile distribution takes into account only economic families (not unattached individuals) and is adjusted for changes in family size over time. a person in the top quintile received $14.Ratio of top to bottom quintile income in Canada.0% of adjusted total income of this quintile) compared to the highest quintile (2. as it reflects the inequality in access to marketed output. the Gini coefficient goes up and vice versa. It does not. To track broad trends in income inequality. Therefore. Figure 2 shows the absolute figures for the various measures of income for the year 2009.28 (Figure 1).0 9.2 1. when income inequality increases.6 1. 96 THE CANADA WE WANT IN 2020 . Once this is factored in. While a value of zero would indicate that income is equally divided among Canadians. reflect access to public services.9 4. the ratio of the market income of the top quintile to the bottom quintile was 14. however.64 SOURCE: Statistics Canada (2011) Income in Canada 2009.13 14.1 0. the Gini coefficient is a well-accepted indicator.4 0.06 After-tax income 4.64 to 1 or 40% of the market income ratio.95 7. we see a slightly different picture. The top quintile represents the average adjusted income of the 20% of all economic families who recorded the highest income.1 For every dollar of market income earned by a person in the bottom quintile.1 -0. the bottom quintile is the same for those with the lowest income. Income transfers greatly boosted the total income of those in the bottom quintile and reduced the top/bottom income ratio by one half to 7. after-tax ratio between the top and bottom quintiles was lower still at 5. as I explain below. The Gini coefficient tells the same story about the impact of transfers and taxes 1 A quintile is a portion of a frequency distribution containing one-fifth of the total sample. The final.6 2. It reflects the dispersion of the income distribution.2 24.28 to 1. This is the result of the high government transfer rate for the lowest quintile (amounting to 52.1 1. In 2009.

036 points lower at 0.0% decline.900 26.394. By 2009 these figures had switched to 5. a further 7. it dropped by 16. after-tax income inequality rose by 18. while that of the top quintile rose by 43.5%) of the level of inequality for market income.64 (after taxes and transfers) and 14. When taxes and transfers are taken into account the incomes of both the bottom 97 .2%.430.700 28.200 105.900 82.000 $40. Income inequality as expressed by the after-tax Gini coefficient was thus roughly three quarters (76.000 $80. With taxes factored in.900 20.800 52.085 points) to 0.2%.REDUCING INCOME DISPARITIES AND POLARIZATION Adjusted income by quintile for economic families. Redistribution measures had more of an effect on the lowest quintile in 2009 than they did in 1981.515. HOW HAVE REDISTRIBUTIVE MEASURES CHANGED OVER TIME? Between 1981 and 2009 inequality in Canada grew.28 (market). it was an additional 0. 2009 $120. the income of the middle quintiles grew by around 25%.000 102. Figure 3 shows that the real market incomes of the bottom two quintiles actually fell over this period.800 Third quintile 36.800 57.500 35. quintiles grew by around 18%.800 Fourth quintile 48.7).000 0 7. then.78.600 15.1% over this period while market income inequality rose by 47. In 1981 the low to high quintile ratio of income after taxes and transfers was 4. or about half what it would have been for market income (9. according to both measures (top to bottom quintile ratio and the Gini coefficient). Figure 1 shows the extent to which taxes and transfers have reduced market income inequality over the period 1981 to 2009. In 2009.000 $60.600 41. but the incomes of the top quintile grew by close to 40%. When income transfers were included. Figure 2 on income inequality.000 14.5% (0. In simple terms. But such measures were not strong enough fully to offset the sharp increase in market inequality that took place over this period.800 Top quintile Market income Total income After-tax income SOURCE: Statistics Canada (2011) Income in Canada 2009.000 $20. the Gini coefficient for market income was 0.400 Bottom quintile Second quintile $100.

5 Bottom quintile 43. 2008).9 percentage points from 7. the top 1% of earners have accumulated massive sums in recent years.7 Second quintile -3. A BROADER APPROACH TO REDISTRIBUTION Discussions of redistribution are generally framed in terms of government taxes and transfer payments and the effect of these on various income groups.2 Top quintile Market income Total income After-tax income SOURCE: Statistics Canada (2011) Income in Canada 2009.7% in 1982 to 13. a trend towards income polarization that is at once alarming and very public.5 10 % 0% -10 % 12.9 38. The market income share of the top 1% of super-rich households increased 5. but it would have been far more unequal without the greater redistributive role of the state. there was still a significant increase in after-tax income inequality in this country over the period: government could have done.Percentage change in income for economic families 1981 – 2009 50 % 40 % 30 % 20 % 15. This decline has been largely driven by the declining role of transfers such as welfare payments and employment insurance.8% in 2007. This means that 1% of Canadian households command nearly 10% of our total income. While governments are now doing more on the redistributive front relative to 1981 – as gauged by their impact on after-tax income relative to market income – an OECD study found that the extent of this redistribution effort has diminished since 1994 (OECD. more to offset rising market inequalities.3 17. The discussion can be extended 98 THE CANADA WE WANT IN 2020 . and could be doing. Such accumulation at the top has almost certainly contributed to the perception that overall inequality has risen more than is in fact the case.4 17.2 Third quintile Fourth quintile 19. This is something that needs to be accorded special attention in the development of future federal government redistributive policies.5% to 9. accounting for the entire increased income share for the top quintile as a whole.9 -2.9 25. Figure 3 Gini coefficients for the time tell a similar tale.3 The after-tax income share of the top 1% increased 3. But the issues are much broader.8 23. As noted.9% between 1982 and 2007.4 points from 6.1 23. 2 Heisz (2007) reached a similar conclusion for the 1981 – 2004 period.2 Nonetheless.2 19. Canada was a more unequal society in terms of income distribution in 2009 than it was in 1981.6 11.4 43.

Working Paper Department of Economics. However. This generational redistribution is a normal part of the implicit contract between the state and the population. (2010) “Top Income Shares in Canada: Updates and Extension”. and region. something that is not often at the forefront of discussion when cuts are proposed. 99 . B. Different types of government expenditure programs have different redistributive impacts. CSLS Research Report 2011-09.065.306 in public consumption (e. on average.557 (2000 US dollars) per household. when in fact they mostly favour the old (there is of course some overlap between these two groups). (2011) “The Levy Institute Measure of Economic Well-being: Estimates for Canada. in terms of net government expenditure. net government expenditures in Canada were $2. this aspect of overall redistribution can easily be forgotten. In contrast. A. and was much weaker in the bottom quintile. E. income support programs. education spending was concentrated in the 3 Veall. not the bottom quintile. This situation reflects the Old Age Security and Guaranteed Income Supplement payments made to seniors. It is notable that it is the middle quintile.245 in net government expenditure. 2000 and 2005”. not income groups. educational attainment level. largely due to differential rates of enrollment in postsecondary education. and how this is distributed between groups. in fourth quintile $4. Another interesting fact that comes to light when taking a broader view of distribution issues is that the largest redistribution in Canada. top four income quintiles. absolute spending on healthcare was found to be similar across income groups. given that this spending represents a much greater share of the broadly-defined income of the poor than of the rich. $9. households headed by a person 65 or over received.. compared to $-2. com/veall. health).821. in the second lowest quintile $6.452 for households with a head aged below 65. For example. Erosion of public services will thus tend to increase inequality. reflecting lower income. In 2005. & Hazell. Public services are therefore an essential element of the redistributive effort of government. actually takes place across generations. such as education and health. the higher healthcare expenditures for this group.653 in government transfers i. and the lower taxes paid. and -$18.588. This broader approach to redistribution highlights the important redistributive role played by government spending on goods and services such as health and education. and in the top quintile -$9. whereby persons pay taxes during their working lives and then receive significant income support and health benefits during the latter part of their lives. A. M. implying an equalizing effect on the overall income distribution.4 It found that in 2005.g. Murray. education. (http://worthwhile. It can also take in other breakdowns of the population such as by age group. A household in the bottom income quintile received $4.091. McMaster University..REDUCING INCOME DISPARITIES AND POLARIZATION to include government spending on public goods.pdf) 4 Sharpe.e. Erosion of public services will tend to increase inequality The Centre for the Study of Living Standards (CSLS) has recently released a report that provides such a broader analysis of the net redistributive effects of government taxation and total spending. the latest year for which data are available. in the middle quintile $7. Evans. net government spending of $24.707. There is a tendency for people to believe that most of the contributions they are paying to redistributive efforts favour the poorest income groups. consisting of $11.401 in taxes. that benefits the most from net government spending and that it is the top quintile that benefits the least (largely because of the higher taxes paid by households in this quintile).typepad.

In a recent paper Robin Boadway from Queen’s University has cogently argued that the redistributive role of the tax/transfer system in Canada is inadequate and needs rethinking. This would. especially at the provincial level. // Intergenerational inequality Unlike most other developed countries. and that transfers to the least advantaged. Critical implementation issues include the income threshold at which the tax kicks in (people with relatively modest estates should not be affected) and how to minimize tax avoidance possibilities for the rich. R. such as those on welfare. 100 THE CANADA WE WANT IN 2020 . an equitable tax transfer system should redistribute so as to compensate for the (dis) advantages with which people are endowed “through the luck of birth” (page 176). Canada does not have an inheritance tax in place. (2011) “Rethinking Tax-Transfer Policy for 21st Century Canada” in Gorbet. However.) New Directions for Intelligent Government in Canada: Papers in Honour of Ian Stewart. (eds. 5 Boadway. have worsened significantly over the last 30 years. The introduction of such a tax could contribute significantly to greater equality of opportunity in this country and should have a moderating effect on market income inequalities down the line. redistribution policies have played a key role in reducing income inequality in Canada. Boadway argues for an equality of opportunity agenda. Education is a particularly risky form of investment: low income individuals are subject to liquidity constraints because of the difficulty of borrowing against future human capital. a fully-funded income-contingent student loan system. a wider range of deductions for expenditures linked to education). During this time. the tax/transfer system should do still more to ensure that the after-tax distribution of income in this country remains within a socially acceptable range. Government policies are needed to address these market failures. Potential policies in this areas include greater sheltering of investment in human capital through the tax system (for example. In his view. which is largely focused on outcomes and smoothing the excesses of market allocations. and in society in general. and persons from disadvantaged backgrounds are poorly prepared to succeed. Ottawa: CSLS. & Sharpe. // Post-secondary education There are a number of market failures associated with post-secondary education. Boadway focuses particularly on intergenerational inequality and access to postsecondary education. in turn. with relatively little regard for starting points. A. and more grants to students from low income families. The system must evolve to keep up with the changing economic environment. in recent decades due to globalization and technological change. F.POLICY RESPONSES Fundamental changes have occurred in the Canadian labour market. This would be a significant modification of the system that we currently have in place.5 He points out that the rate structure of the tax system as a whole has considerably flattened. help reduce inequality as more people from lower quintiles would be able to access the type of education that enables them to move up the income ladder. including the United States.

Many political leaders. CSLS Research Report 2011-15. such as public transit. (2011) “The Living Standards Domain of the Canadian Index of Well-being: An Update”. C. These policies take three forms. 101 . This situation provides an historic opportunity for Canadians to rethink our approach to addressing inequality. First. including the Governor of the Bank of Canada and the Minister of Finance. Public services that benefit all citizens. government spending on public goods and public services such as education and health is profoundly equalizing (something that needs to be clearly recognized as we plan for the future of such services). The Occupy Wall Street movement has focused the attention of the world on growing inequality. equality of opportunity can temper the growth of market inequalities in the first place. Sharpe. Measures that promote equality of opportunity. Paris: OECD. should also be implemented. A national debate on how governments in Canada can most effectively redistribute income to prevent growing inequalities is urgently needed. Statistics Canada Analytical Studies Research Paper 298. have expressed sympathy with the issues identified by this movement. Second. Programs that are effective in assisting disadvantaged groups should be expanded and the contribution that the rich make to achieving greater equality of outcomes should be increased. it is important that government intervene through redistributive policies to offset market forces and ensure that income inequalities remain within socially acceptable limits. Third. A. The way forward for Canada to become a more equal society must include all three policy approaches. (2007) “Income Inequality and Redistribution in Canada: 1976 to 2004”. such as inheritance taxes and better access to postsecondary education for the poor. Given the inherent tendencies of the market to generate inequality. OECD (2008) Growing Unequal: Income Distribution and Poverty in OECD Countries. A.REDUCING INCOME DISPARITIES AND POLARIZATION A reasonable degree of equality is widely regarded as a key societal goal. & Ross. tax/transfer policies drive a wedge between market and post-tax income shares. REFERENCES Heisz. should be further developed.

close to 3. an equally bright image emerges. Unfortunately. the poverty rate rises and falls with the economic tides. customized training. as illustrated by Figure 1. at least that is the conclusion of a burgeoning body of international evidence. the kids and paying the rent.2 million – one in 10 Canadians – lived on a low income. which shows the close correspondence between the low income and unemployment rates.INEQUALITY IS NOT INEVITABLE SHERRI TORJMAN AND KEN BATTLE Here’s the bottom line: // Poverty and inequality matter. Inside our borders. // Governments play a vital role in tackling poverty and inequality.csls. thereby raising parents’ and children’s susceptibility to a Sherri Torjman is VicePresident of the Caledon Institute of Social Policy. disability income and supports. The undulating ups and downs of the poverty waves are enough to make you sick. In 2006 she authored the book Shared Space: The POVERTY MATTERS Canada has established a reputation throughout the world as a peace-loving and stable nation. // The federal government holds the key levers.1 On July 1 this year. in 2009. She has written in the areas of welfare reform.2 At last count. She has advised the government on tax measures for people with disabilities as well as on childcare and disabilities more generally. in the trenchant words of Mel Hurtig. The struggle to live on an inadequate income increases the scope. Maclean’s released an article on why it is a great time to be living in Canada. These are the families that live in poverty. A recent survey by the Centre for the Study of Living Standards (CSLS) found that most Canadians consider themselves happy – or very happy – with their lot in life. This national average masks the fact that certain groups (including aboriginal people. (http://www. Not surprisingly. They choose between feeding Communities Agenda. People living on low incomes have a shorter average lifespan and run a greater risk of illness and disability than those with more money. none so dramatically separates low-income Canadians from the rest of society as the health gap.pdf) 102 THE CANADA WE WANT IN 2020 . which are already in place. clothing and shelter. recent immigrants and persons with disabilities) face an even greater risk of poverty. In 2010 Sherri was a recipient of the Top 25 Canadians Award from the Canadian Association of Retired Persons. frequency and severity of stress for families. all this sunshine fails to cast light on a serious problem lurking just below the sparkling surface. Of all the hazards of life below the poverty line. the social dimension of sustainable development and community-based poverty reduction. Far too many Canadians do not count themselves among the happy campers. Every day is a struggle just to get by. 1 CSLS (2011) “Happiness as a Goal for Public Policy: Ready for Primetime?” CSLS Research Note 2011-1.ca/notes/ Note2011-1. These are the households that spend higher than average proportions of their income on food.

reduced productivity and poor health. He has advised the federal government on key issues of social policy. psychological and social problems. and progressive taxes and benefits. 2 Hurtig. wide range of physical. 3 All these studies are cited in Ontario Association of Food Banks (2008) The Cost of Poverty: An Analysis of the Economic Cost of Poverty in Ontario (see pages 7 and 17).3 INEQUALITY IS DIFFERENT FROM POVERTY: IT MATTERS TOO Poverty is not. he was Director of the National Council of Welfare. earnings of the wealthy in Canada grew by 16% while those of the poor actually dropped by 21%. Ken was awarded the Order of Canada in 2000 and the Saskatchewan Distinguished Service Award in 2004. The effects of poverty are felt very early in life. But poor means more than just poor health. and has taught at both Queen’s and Carleton. economic and personal costs that affect all Canadians. Here at home. The odds of never seeing a first birthday are worse for low-income babies in general and aboriginal infants in particular. federal and provincial governments across Canada lose between $8. It is closely linked to – but remains separate and distinct from – the related problem of inequality: the gap in the average incomes of rich and poor households. Low incomes lead to lost opportunities for individuals. Ken was educated at Queen’s University and the University of Oxford. however. the only concern. M.6 billion and $13 billion in income tax revenue to poverty every year. The numbers tell a powerful story. a citizens’ advisory body to the Minister of National Health and Welfare.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 Figure 1 Ken Battle is President of the Caledon Institute of Social Policy. A US report estimated that child poverty in that country costs $500 billion a year – or 4% of GDP – in increased crime. Research on health inequalities and the social determinants of health has found that 103 . A similar study in Britain put its price tag at an annual £25 billion or 2% of GDP. The only positive note in this story is that inequality would be much worse in the absence of government measures in the form of redistributive social programs. The persistence of low incomes means that governments are called on for higher social spending while the tax revenue that is needed to fund the very programs that are aimed at preventing and reducing low income is foregone. Poverty is a serious and stubborn problem. (2000) Pay the Rent or Feed the Kids? Toronto: McClelland & Stewart. Low birth weight is an important predictive indicator of troubled childhood development and poor adult health. Over the past quartercentury. the economy and society. Before founding Caledon in 1992. imposing heavy social. An exhaustive body of evidence from around the world shows the wide-ranging negative impact of extreme inequality. The relationship between income level and all these types of risk is typically strong and inverse.

mainly women. While a substantial segment of the population has low income at some point. recent immigrants and persons with disabilities – run a higher risk of persistent poverty. more unequal nations. Social factors are also major contributors to poverty. in labour markets and in society.5%.social status has a powerful effect on health. to be more healthy and happy than richer. these are deeply rooted in the economy. most poverty is not an inherited condition of a small. But unemployment is not the only feature of the economy that contributes to poverty. certain groups – notably single parents. They tend to be poor longer. respectively (2009 figures). VARIOUS FACTORS CONTRIBUTE TO POVERTY AND INEQUALITY There are strong forces that fuel persistent low income. When unemployment rises. due to growth in mothers’ employment rates and improvements to child benefits. those with low education. Bearing and raising children play an important part in making women vulnerable to low income. Fortunately. 104 THE CANADA WE WANT IN 2020 . Regardless of a nation’s wealth. there has been considerable progress against poverty among single-parent families over the years. including middle management positions and well-paid bluecollar jobs in traditional industries. An increasing number of families with children are headed by single parents. prisingly.5% compared to 9. raise the risk of falling below the low income line. More than half of low-income households in Canada can be classified as “working poor”. not sur- More than half of low-income households in Canada can be classified as “working poor” The problem is partly due to the growth of “nonstandard” work. seasonal and temporary work. People in these households work full time in the labour market but do not earn enough money to lift them out of poverty. it will be more dysfunctional. There has been a corresponding erosion of middle-wage employment. Unfortunately. hard-core group that passes its “affliction” from one generation to another. more widespread and deeper low income is sure to follow. on the basis of wide-ranging indicators. poverty is a motherhood issue − literally. Societies marked by substantial inequality sooner or later pay the price. especially if they are raising children on their own. suffer more frequent bouts of low income and face diminishing chances of escaping poverty the longer they remain below the poverty line. such as manufacturing and transportation. visible minorities. which includes part-time. Poorer countries with less unequal wealth distribution have been found. Most of the poor escape poverty and their risk of falling back declines over time. However. as it did in the recessions of the past few decades. Bouts of unemployment and underemployment. Children raised by single mothers run a much higher risk of poverty than those in two-parent families − 21. The labour market itself is a prime driver of low income. Most Canadians rely on employment as their chief source of income. unattached individuals. poverty is usually a transitory rather than persistent problem. Contrary to public perception. A groundbreaking study of UK civil servants found that those in the junior ranks were three times more likely to die in a year than colleagues from senior ranks. with a sliding gradation from top to bottom. violent and unhealthy from both physical and emotional perspectives if the gap between income groups grows too wide. The psychological damage resulting from being at the bottom of the socioeconomic ladder can be devastating.

Moreover. Its actions can help offset the strong economic and social forces that contribute to poverty. It can theoretically range from zero (every family unit would have the same share of income) to one (one family unit would have all the income and the others would have none). THE FEDERAL GOVERNMENT HOLDS THE KEY LEVERS Poverty and inequality matter – and so do governments.5%.451 in 2009. This is where government is uniquely placed to intervene. The higher the Gini coefficient.5% increase.306 in 1976 to . But while such remedies will prevent poverty for some Canadians. seniors and the unemployed pay money directly to individuals and families. weak job skills and lack of education. Its measures can reduce the growing gap between those with high incomes and those who are poor. Equally important. 105 . But not all governments are created equal. We need to have more good jobs. an increase of only 7. Trends and patterns in income inequality are tracked by a statistical measure known as the Gini coefficient. the federal level is the only government with the ability to ensure the equitable treatment of citizens in all parts of the country. The bottom blue line shows the trend in inequality after both income taxes and transfers from income security programs are taken into account. investment in workers through education and training leading to higher knowledge and skill levels. which includes both market income and transfers from government income security programs. Figure 2 tracks inequality in Canadian families since 1976. There are two main instruments that governments can employ to bridge the widening gulf between the poor and the well-off: income security programs and measures within the income tax system. The income tax system redistributes income and thus is another powerful and progressive instrument for tackling inequality.329 in 2009. equal pay for work of equal value. In the case of poverty and income inequality. Canada has a progressive income tax system. The top purple line in Figure 2 represents market inequality. they cannot reduce poverty for others. The three lines add up to one bottom line: Government interventions in the form of transfer payments and progressive income taxes reduce market income inequality derived from employment earnings and investment. certain groups typically experience poverty regardless of the state of the economy – the result of such problems as employment discrimination (especially for new immigrants). a sizable 16. which means that taxes paid increase with rising income.REDUCING INCOME DISPARITIES AND POLARIZATION GOVERNMENTS PLAY A VITAL ROLE IN TACKLING POVERTY AND INEQUALITY Tackling poverty means countering these powerful forces. especially as the bar for a decent job has effectively been raised to postsecondary graduation. the federal government already has the key levers – income security programs and a progressive income tax system – at its disposal to combat poverty throughout Canada.387 in 1976 to . The Gini coefficient for after-tax income rose from . which has increased overall since the mid-1970s – from . In recent years. both provincial/ territorial governments and the federal government have made increasing use of the income tax system to deliver cash payments to lower-income Canadians through refundable tax credits. Income security programs for children. Recessions continue to take their toll and so-called “bad jobs” are now a permanent feature of the labour market. and enforcement of child support agreements – to name just a few vital actions. the greater the degree of income inequality. The middle orange line shows the trend in the Gini coefficient for total family income.

One crucial way for governments to help the working poor is to top up their low earnings. Here’s how. Right now. Improvements in income supplementation measures offer the greatest prospects for making a real difference to both poverty and income inequality. In its 2007 Budget.15 0. New Brunswick and Saskatchewan offer earnings supplements to their low earners. respectively. by contrast. disability and retirement.35 0. this paper focuses exclusively on the income supplementation function. Income supplementation programs bolster low incomes. Québec. While income replacement programs in Canada are far from perfect. Provinces and territories operate another major income replacement program: social assistance (welfare). Old Age Security/ Guaranteed Income Supplement and the Canada/Québec Pension Plan are the core income replacement programs in Canada. They boost low earnings and low income.25 0.45 0.20 0. it is income security programs that do the heavy lifting in terms of redistribution. Income security programs fall into two categories: income supplementation and income replacement.10 0. though government reduces market inequality 0.Gini coefficients indicate increasing inequality among Canadian families.40 0. This is the problem of the working poor.50 0. Employment Insurance. Income replacement programs. The Working Income Tax Benefit and Canada Child Tax Benefit are the two major income supplementation programs operated by the federal government. Most provinces and territories also supplement low income through their own child benefits and refundable tax credits. one in four workers makes just $10 an hour or less and close to half of all lowincome households include at least one working adult.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 tax system. the federal government introduced its own earnings 106 THE CANADA WE WANT IN 2020 .30 0. replace income which has been lost due to such commonplace conditions as unemployment.

It is progressive in that its benefits decline as incomes increase.485. and $3.004 ($26.and middle-income majority of families. We praised this first step and then advised the government to take more action: raise the value of the WITB and extend it higher up the earnings scale in order to help more of the working poor. It is also a powerful tool that the federal government can wield to tackle poverty and inequality. Under the current system. the combined benefits pay low-income families an annual maximum of $3. This national measure has a number of strong points. But at least the foundation is in place. the WITB was carried forward by his Conservative successor. Ottawa responded in 2009 by enhancing the benefit and expanding its reach.149 for the third and each additional child.240 for the second child. inclusive program that delivers monthly cash benefits to the large majority of Canadian households with children. While promising in theory.000 per child − $1. the Working Income Tax Benefit (popularly known as WITB).000 for single parents and couples. If there were no federal child benefits. A sole focus upon the lowest-income families would widen the gap between poor households and those with incomes above the poverty line but below average income. However. Together. Because the recommended increase to the CCTB would be achieved by boosting the base benefit and not the National Child Benefit Supplement. the WITB in its first year provided a meagre payment of up to $500 annually for single workers and $1. more can be done to assist families. it would increase benefits not only for low-income families. The CCTB is also pan-Canadian. Jim Flaherty.714 for a family) and cuts out at a low net income of $17. The base benefit goes to almost all families. The program delivers cash payments to more than 90% of families with children. We have proposed that Ottawa raise the CCTB to a maximum annual $5. in the 2006 Budget and launched in 2007. It is bolstered by an additional amount – the National Child Benefit Supplement – for low. It pays the same amount to all families with the same level of income. This measure needs a healthy. However.3% and would lift an estimated 40.and modest-income families. Child benefits make a real difference The Canada Child Tax Benefit (CCTB) is the most substantial income supplementation program in the country. the low-income rate for families with children was 9. the WITB still sits at a modest maximum $944 for a single worker per year ($1.000 families above the poverty line. multi-year injection of funds before it becomes a major weapon in the war on poverty and inequality. $3. Child benefits make a real difference.515 more than the current $3. It provides a stable and assured income supplement no matter where families live or work. the lowincome rate for families with children would have been 15% in 2008. The latter modest-income families also struggle with constrained budgets and could certainly use additional cash for their children. It is a non-stigmatizing. The program was targeted so far down the income scale that it excluded many of the working poor. regardless of source or family type. Our proposal would reduce that figure further to 8.REDUCING INCOME DISPARITIES AND POLARIZATION supplementation program.3%.485 for the first child. It would also provide a sizable rise in child benefits for the modest. The CCTB has a two-tier design. Proposed by Liberal Finance Minister Goodale in his government’s 2005 Economic Statement.218 for a family). 107 .

E. the foundations to help slay the poverty and inequality dragons are already in place in this country. Battle. K. the Canada Child Tax Benefit and the Working Income Tax Benefit. 108 THE CANADA WE WANT IN 2020 . But. 4 Mendelson. Proponents of a guaranteed income argue that it could be delivered as a form of negative income tax. Ottawa: Caledon Institute of Social Policy. M. 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.4 A NOTE ON GUARANTEED ANNUAL INCOME Some people argue in favour of a “start-fromscratch” approach to tackling poverty and inequality. the federal government could draw on the estimated $3. using the income tax system to deliver cash to the poor. The new Basic Income would remove people with severe and prolonged disabilities from provincial/ territorial welfare rolls and provide a more adequate payment that would be equivalent to seniors’ benefits currently in place. S. confusing and wasteful and contribute little to the war on poverty and inequality. Fortunately. Torjman. Poverty is a complex multi-dimensional issue that cannot be vanquished with a silver bullet. & Lightman. including the Guaranteed Income Supplement. The federal government needs to step up to the plate.To help pay for a stronger CCTB. The Caledon Institute has also proposed a new disability benefit that would be delivered by the federal government.. If we were to abolish these important measures and replace them with a guaranteed income. They would prefer to scrap the existing array of income security programs and replace them with some form of single “guaranteed annual income” that would raise all poor Canadians up to the poverty line. we would only end up reinventing the current benefits to meet the needs of specific groups in Canadian society. in fact.. It already has both the levers and the leverage to land a solid punch on poverty and inequality. They do not have to be built − merely built upon − in order to stem poverty and reduce the growing gap between rich and poor. Canada already makes extensive use of the negative income tax concept in the design of a range of income-tested programs for various groups. These poorly designed measures are inequitable.5 billion it now spends on the Universal Child Care Benefit and the non-refundable child tax credit. It requires a variety of strong programs and a range of effective services. (2010) A Basic Income Plan for Canadians with Severe Disabilities.

Ottawa: Caledon Institute of Social Policy. Wilkinson.000 Canada Child Tax Benefit. Ottawa: Caledon Institute of Social Policy. & Mendelson. . Ottawa: Caledon Institute of Social Policy. M. Ottawa. (2006) Towards a New Architecture of Canada’s Adult Benefits. & Pickett. Battle. 2006 Census.. Oxford: OUP.) (1999) The Social Determinants of Health. Torjman. S. Statistics Canada (2008) Earnings and Incomes of Canadians over the Past Quarter Century. (2010) The Spirit Level: Why Equality Is Better for Everyone. K. Battle. (eds. S. & Mendelson. K. (2008) A Bigger and Better Child Benefit: A $5. K. R.REFERENCES Battle. K. (2009) The Red-Ink Budget. Torjman. Marmot. M. & Wilkinson. R. M. London: Penguin Books.

Such problems are not unique to Canada. Our existing health coverage is both unsuited to our country’s current health needs (focused on acute rather than chronic care) and uneven across the country. Recognizing this we must make decisions that make it more relevant to the challenges of today. Our health system was designed for earlier times. Healthcare costs are rising faster than GDP in all developed countries Change is needed in our health system not only because of financing issues. the papers in this section lay out clear options for moving forward in a way that will ensure that Canadians in 2020 and beyond will have access to the healthcare services they need and want. Today. but also because of the unevenness of coverage between provinces and groups. those with significant pharma costs and no private drug coverage. and the victims of lapses in medical safety – are particularly ill-served. older people with chronic conditions. Several groups – First Nations. While healthcare delivery remains a provincial responsibility. The federal government has a key function in focusing constructive public attention and debate on healthcare . too many healthcare decisions are played out in the public arena and taken in response to public pressure. Nevertheless. our authors are of the view that the federal government has a key function in focusing constructive public attention and debate on healthcare and in projecting a vision of a better health system for Canada.SECURING OUR HEALTH SYSTEM FOR THE FUTURE CANADA’S UNIVERSAL HEALTHCARE system is putting enormous pressure on provincial and federal treasuries at a time of fiscal deficits. which certainly suggests that there will be no easy solutions in this area. rather than being based on critical evaluation of need. Healthcare costs are rising as a percentage of GDP due to our aging society and healthcare inflation. the efficacy of treatments and an appropriate strategic direction for a system that will always be financially constrained. All of our healthcare contributors are firmly in support of a continued universal public healthcare system for Canada and all highlight the leadership role that the federal government must play in healthcare. Healthcare costs are rising faster than GDP in all developed countries. most notably chronic illness and the high cost of outpatient drugs (and variability of coverage across the country).

we will have to pay for it. The two papers that address the issue of funding both reject user fees and argue in favour of new. better evidence-based decision-making and a systems approach that allows health personnel to move seamlessly between care settings. but if we want to maintain a world-class system. Mark Stabile focuses on the requirement for better evaluation of which medical procedures we will fund. but a truly regenerated system that is well-positioned to adapt as we advance. we will have to pay for it. Raising more money for healthcare will certainly be controversial. This will take a societal consensus that can only be achieved with federal government leadership. Raising more money for healthcare will certainly be controversial. would be a missed opportunity for all Canadians. Allowing the negotiations to get bogged down in discussion of the minutiae. or hijacked by those who would prefer accountability to be clouded. Philippe Couillard is concerned with bringing physicians into the management of the system and ensuring that innovation in health provision is both effectively analyzed and rewarded. but if we want to maintain a world-class system. but not on their own sufficient to carry our health system into the future. . real explanation of the options and costs and much better accountability to the public. All authors identify the need for concrete change in the way our public health system operates. Efficiencies are important. Francesca Grosso and Michael Decter focus on the need for simple indicators.THE CANADA WE WANT IN 2020 The 2014 federal-provincial healthcare negotiations should focus on real health outcomes and finding ways to develop a patient-centred network of providers that is truly accountable to patients. health-specific social insurance premiums. For in 2020 we hope to have in place not just a patched-up healthcare service.

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

THE ROLE OF THE FEDERAL GOVERNMENT
Since most healthcare responsibilities lie at provincial/territorial level, the federal government is one step removed from the immediate delivery of services. In spite of this, the federal government can – and should – assume a position of leadership, leveraging its financial contribution to become an influential agent for change and focusing the entire country’s attention on healthcare (still most Canadians’ number one priority). My first piece of advice follows from Hippocrates’ aphorism: “First do no harm…” The federal government should be a facilitator and a collaborator, not a self-appointed policeman in this very complex sector. There is much that is good in our healthcare system and it could easily be destabilized by succumbing to the temptation of a scorched earth policy. Change, in order to be long lasting, has to be incremental and feasible: services are delivered as we deliberate, 24 hours a day, 7 days a week, thanks to the efforts of some of the best teams in the world. Having said that, the key areas that require attention are as follows. Securing better value for money It is difficult to argue that Canada’s healthcare sector is not well-funded. In 2009 we ranked 6th among OECD countries in both per capita healthcare spending and health spending as a % of GDP. Since the budgetary drought of the mid-nineties, healthcare costs have increased rapidly. Globally, all developed countries face the same decoupling of healthcare expenses and GDP growth. Variations in funding mechanisms across countries – subsidized private insurance, social insurance, tax-based funding with or without user fees – have limited impact on countries’ ability either to “bend the cost curve” or to improve performance (with the exception of the poor performance and equity of the very few systems that are based purely on private, unsubsidized insurance).

The reality is that healthcare is a “luxury good” accessible to affluent societies such as Canada. As such, it is unlikely that the annual rate of increase in expenses can be brought down to less than 4-5% without adverse consequences, followed by rebound overspending. So, the focus should not only be on mitigating costs but also on pursuing better value for money. This is particularly important for Canada. Over the past two decades we have slipped backwards in performance relative to our peers. This has not escaped notice: the OECD estimates that by increasing our efficiency in healthcare we could save (or reallocate) up to 2.5 % of our GDP by 2017.1 We are not facing a black hole, nor are we likely to see the apocalyptic downfall of our healthcare system. However, if we do not make improvements, we will see a growing gap between supply and demand and an increasing level of dissatisfaction leading to “default” and anarchic privatization of the financing of services, instead of a harmonized and regulated integration of providers, for the benefit of patients.

Payment reform should stand as the cornerstone of the next wave of healthcare reform
Rather than seeking to change the way we fund the current basket of publicly insured services, we should look to reform our payment models. How we pay providers and institutions has a profound impact on the choices they make (or do not make) and on the performance of the overall healthcare system. Thus, payment reform should stand as the cornerstone of the next wave of healthcare reform. The key is to reward the creation of real value (high quality outcomes for patients) rather than only volumes of procedures or interventions.

1

OECD (2011) Economic Policy Reforms: Going for Growth 2011. Paris: OECD. Chapter 6, p.229.

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SECURING THE HEALTH SYSTEM FOR THE FUTURE

Practically speaking, the value of reducing the wait-time for knee replacement surgery to less than six months is much reduced if the patient does not also have good access to better integrated care (including seamless transition between outpatient treatment and hospital, home care and rehabilitation, followed by preventative measures aimed at avoiding other similar ailments). Such a scenario is not a fantasy. It is a concept elegantly described by Michael Porter,2 amongst others, and one that is being implemented in many of the foremost managed care organizations around the world. In such a system, value is defined and measured from the perspective of users rather than system managers. Evaluation focuses on high quality outcomes rather than the number of procedures performed in defined clinical situations.

We need physicians to participate in the management of the system
In helping to define – not implement, that is a provincial responsibility – such changes, and ensure that they are adapted to the varying realities of our system (rural, urban, teaching, etc.), the federal government has an opportunity to spell out what a “patient centered system” really means. The current block funding of institutions, with annual indexation, provides little or no incentive to innovate or improve efficiency (and if efficiency gains are made, savings cannot easily be identified, captured and reallocated to other parts of the healthcare network, such as primary care). Savings on paper fail to materialize in reality, more money is requested the following year and another circle of virtual savings – and very real expenses – begins. Many argue that the best way to address this problem is with activity-based funding

(ABF) for our hospitals, the equivalent of fee-for-service for physicians. While this would be a move in the right direction, ABF is not the whole answer. Isolated ABF risks being inflationary and putting too much emphasis on hospital care in the continuum of services. A better response would be to base a substantial portion of payment on outcomes (assessed from the perspective of the patient) rather than solely on the number/type of procedures performed. Timely access then becomes an important, but not unique, determinant. Employing, once again, the example of knee replacement surgery, the desired outcome would be an integrated, timely, safe and patient-centered management of the condition: osteoarthritis of the knee. When it comes to physicians, we should move in the opposite direction. Rather than the current fee-for-service model, new models combining some form of capitation (being paid for keeping a defined population healthy), with incentives for productivity, good practices and outcomes should be identified and promoted. Fixing the dysfunctional relationship between physicians and healthcare institutions At the birth of our public healthcare system, a Faustian bargain was struck. Many medical organizations opposed Medicare and physicians in both Saskatchewan and Quebec went on strike, in the middle of the October crisis. In response, governments allowed physicians to retain a free entrepreneur status within publicly-funded hospitals, a feature unique in the OECD and, to this day, the source of constant tension between managers and professionals. The other promise of 1970, that a competitive level of compensation for physicians would be maintained, has been honoured, despite bumps along the way. It is now time for a “new deal” to be struck between the medical profession and public organizations. Most importantly, we need physicians to participate in the management

2

Porter, M.E. & Teisberg, E.O. (2006) Redefining Health Care: Creating value-based competition on results. Boston: Harvard Business School Press.

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of the system (with adequate compensation for doing so). The best healthcare institutions have strong physician leaders who collaborate with administrators. Under such a model, physicians and other health professionals (including nurses) would play a pivotal role in identifying best practices and making decisions about optimal resource use. I observed, first hand, enormous benefits from the active involvement of physicians in dealing with a major epidemic of C. Difficile in 2004. Based on this and other experiences, I truly hope to see the emergence of a new generation of physician/leader/managers collaborating with administrators and other health professionals, to the benefit of patients. Adapting the system to meet our changing needs At its inception, Canada’s Medicare was narrowly defined as covering services provided by physicians, especially in hospitals. This made sense at the time. In the second half of the 20th century Canada’s population was young and acute health issues were the major concern. This is no longer the case. We therefore need to adapt our system to meet our country’s changing demographics and needs. Canadians too often face a “disease lottery”. In acute situations patients receive excellent care and incur few out-of-pocket expenses, apart from prescription drugs, coverage of which varies considerably by province. But the system’s response to more contemporary challenges (such as Alzheimer’s disease) is highly deficient. Only rudimentary home care is provided and families and caregivers are left facing significant financial challenges. Overall, Canadians pay more privately and out-of-pocket for healthcare than most of our western European counterparts: in 2009 Canada ranked 22nd among OECD members in terms of the percentage of total healthcare spending that is publicly funded

(70.6%). This is a direct consequence of the exclusion from the initial definition of Medicare of many of the services required to meet our current challenges (an aging population with chronic health issues).

Canadians too often face a “disease lottery”
The solution seems obvious: extend public coverage of non-core services. But this raises funding issues. Unless we choose to modify physician-hospital coverage to balance this extended basket of services (which would be very difficult, politically), we would need to find extra funds. Efficiencies deriving from reform of payment models should yield some money, but there is no escaping the fact that if new services are to be covered, new money will be required. In the world of healthcare, money always comes from citizens’ pockets, one way or another, so a form of co-payment (or social insurance model) would need to be introduced, or else taxes would need to be significantly increased. It is the responsibility of all governments to present these choices to the electorate, clearly and with their respective costs and benefits explained. Finding better ways to manage demand Historically, our system has managed to control costs only by reducing supply. This led to one of the worst decisions of the nineties: cutting medical school enrolment without increasing the supply and influence of allied professionals, such as nurse practitioners. The irony is that today the shortage of professionals (a selfinflicted wound) is invoked as a key argument against proposed changes… the typical story of the dog biting its own tail. Managing demand does not necessarily mean introducing user fees or other forms of co-payment. Although there is nothing inherently wrong with these widely-used methods, my view is that they would simply waste

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an experiment worth studying. both unnecessary and necessary. part of our conversation on healthcare. an open discussion of the merits of these funding options should be part of our political debate. though. On the budgetary side money should flow to integrated primary care organizations that purchase specialised services “upstream” in tion among providers who vie for public payment. The social problem associated with the presence of private providers in our healthcare environment is not their existence. In my view. based on outcomes and documented needs. there remains a powerful role for the federal government in signalling the type of system that is mostly likely to be able to meet the needs of Canadians in 2020 and beyond. Once more. opponents see it as the devil incarnate. the capacity of informed citizens to engage in a meaningful conversation on the question. underestimating. There is also evidence to show that. Proponents present the private sector as a panacea.SECURING THE HEALTH SYSTEM FOR THE FUTURE energy and resources and yield little positive impact.g. (The National Health Service in the UK is presently moving in this direction. employing the services of private providers. Likewise. leading to a decreasing number of payers supplying an increasingly marginal amount of money. Their hybrid nature has not. So. users reduce their utilization of all services. there have been constant demands for exclusion. most observers agree that family medicine groups in Ontario and Quebec have improved primary care delivery and that they demonstrate the public sector’s capacity to innovate. for example). which can cause problems down the line. there are more equitable ways to control demand. Across the political spectrum. Public funding of privately-delivered services is a simple concept that overcomes this problem. negotiating prices and encouraging competition just as the private sector would. efforts should be made to induce competi- 116 . where there is sufficient density to ensure competition. Such groups are essentially a form of partnership between the public system and a private (often for-profit) corporation. as it does. when the state acts as an insurer (in the context of workers’ compensation. Supporting a more meaningful discussion of private vs. when faced with fees. at the provincial/territorial level. high volume. Where such revenue models are in place. sometimes obsessive. of course. Both sides are wrong. stood in their way. While such implementation decisions take place.) Lastly. But bring the discussion round to other types of services (e. works to the advantage of all and is entirely compatible with the Canada Health Act. Nevertheless. though. Taking refuge in the “prohibition” of user fees in the Canada Health Act is not an adequate response. it makes every sense that the state should determine the price of An evidence-based process should be put in place to establish optimal use of new technologies and pharmaceuticals the system. but the fact that their resources are not accessible to all. an evidence-based process should be put in place to establish optimal use of new technologies and pharmaceuticals. First. the focus should be on outcomes: it is not so much the number of MRI machines that matters (above a certain minimum) but how they are used. public This is the most difficult. it loses its statist inhibitions. low intensity procedures such as minor surgery and diagnostic procedures) and endless objections are raised. at considerable administrative cost.

a provincial responsibility and. in large part. at least at the new “baseline” level reached in 2014. In 2004. the last days of the conference were spent discussing the merits of asymmetric federalism. that while such competition is feasible in our main cities. coupled with the absence of elected officials on the Council. as the federal government insisted that provinces should be held accountable for their use of federal transfers. so long as universal coverage and equity are preserved. This mode of reporting. It is important to note. make them visible and promote their adoption. federal-provincial conversations on healthcare end up as power and visibility struggles The Health Council should present an annual report directly to the federal-provincial-territorial assembly of Health Ministers. It can state unequivocally that nothing in the Canada Health Act prevents competition among providers. federal-provincial conversations on healthcare end up as power and visibility struggles. Each provincial/territorial government’s response to its recommendations would be evaluated by their respective Quality Council. Healthcare systems cannot be dislocated from their social-historical context. sustainable patient care into a constitutional battle. A starting point would be for the federal government to state that change and experimentation (including in coverage and funding methods) are welcome. there is little doubt that arrangements will be renewed. Within the existing constitutional framework. But the 6% escalator 117 THE CANADA WE WANT IN 2020 . and ultimately sanctioned – or rewarded – by the electorate. rather than health outcomes. But we can observe lessons from elsewhere and adapt them to our reality. We need a renewed Health Council. be established.selected procedures and that all providers – public and private – should compete for the privilege of serving patients. with representatives from the health professions and the public. where many providers coexist. by insisting on being visible and in control. Ottawa runs the risk of transforming the debate on improved. Healthcare is. It could also facilitate the creation of an explicit and credible mechanism for ensuring accountability. Another is the larger number of (often less well-compensated) physicians in such countries. competition between providers has little practical meaning in our remote and sparsely-populated communities where there is only one regional provider. It can be open about the fact that extending health coverage to new areas will require new funding from governments and citizens. would ensure its credibility and independence from political/electoral cycles. It can acknowledge that there are significant gaps in coverage and a high degree of inequality across the country. composed of existing provincial Quality Councils or Commissioners. under public funding. nor can they be transferred as blueprints between societies. Defining and promoting accountability in healthcare Too often. credible and visible accountability must. Too often. The role of this jointly-funded but independently-governed “Institute for Innovation in Healthcare” (which would subsume our existing Canadian Institute for Health Information as a data provider) would be to research best practices around the country. This is one of the factors that sets us apart from western European countries. There is no need to go down that path again. though. however. When it comes to federal funding levels. It is legitimate for the federal government to use its spending power to initiate change and then to receive credit for it.

Results would be assessed through an arm’s length process (for example by an academic review or the Quality Councils themselves) and the findings would be tabled and debated in the provincial legislature. and a new society with its specific needs. it should act accordingly and ensure that the 2014 discussions live up to their potential as a formidable lever for change. But. Access to the fund would be dependent on initiatives being approved by the relevant provincial Quality Council (with input from the public and health professionals).3 CONCLUSION Our healthcare system is not in crisis. The present federal government has one strategic decision to take: does it want 2014 to be a low-profile. accessible to any province or territory willing to implement changes that result in increased performance from the patient’s point of view.SECURING THE HEALTH SYSTEM FOR THE FUTURE The present federal government has one strategic decision to take: does it want 2014 to be a low-profile. One option would be to place all new funds (beyond the 2014 baseline) in a dedicated “fund for innovation”. All of us – citizens and governments alike – have a role to play and bear a share of the responsibility. like other publicly-funded systems. or does it want renewal of our ailing healthcare system to be part of its legacy? should remain open for discussion and its continuation linked to substantial progress in performance. Our responsibility is to take a step forward and to use the 2014 horizon as a catalyst for change and improved patient care. rubber-stamping event. which would then be accountable for results. 118 . this tension will still be there. or does it want renewal of our ailing healthcare system to be part of its legacy? If the latter. Thirty years from now. it is suffering from the classic tension between needs and resources. rubber-stamping event. challenges and unpredictable technological advances will have emerged.

a consulting firm specializing in health care strategy and policy. The Government of Canada has an important leadership role to play in ensuring a sustainable. Francesca served as Director of Policy to the Ontario Minister of Health and Long Term Care from 2001 – 2003. Health Canada. both diagnostic and in treatment. The information they provided was often up to three or four years out of date. It is not aging per se that is the problem but aging in the context of increased healthcare options. This paper describes four key initiatives that would help it build on past successes and provide more dynamic and substantive leadership at this critical time. Prior to this she was Vice President of Healthcare at Environics Research Group. Francesca worked with Michael Decter to establish the Health Council of Canada and has been involved in the establishment of several other federal healthcare agencies. Prior to this.FOUR FEDERAL INITIATIVES TO IMPROVE AFFORDABILITY. the Hospital Medical Records Institute (HMRI) in Ontario and MIS in the rest of Canada. Navigating Canada’s Health Care: A User Guide to the Canadian Health Care System. 119 THE CANADA WE WANT IN 2020 . Health Canada transferred much of its health statistics activity to the new organization and a strong bond was built between CIHI and Statistics Canada as the Chief Statistician serves as Vice Chair Francesca Grosso is a Principal at Grosso McCarthy. PRODUCTIVITY AND ACCOUNTABILITY FRANCESCA GROSSO AND MICHAEL DECTER INTRODUCTION Maintaining a high quality healthcare system in the current era of slower economic growth and greater healthcare demand will be a huge challenge for Canada. was first proposed in the early 1990s by then federal Deputy Minister of Health Margaret Catley-Carlson to consolidate. Each initiative has the potential to drive both an improvement in delivery and an increase in the affordability of healthcare. The task of addressing and managing this challenge falls largely to public sector decision makers (since the public sector currently provides 70% of Canadian health services financing). with Michael Decter. rationalize and improve the collection of health information. She co-authored. // Health information The Canadian Institute for Health Information (CIHI). HMRI and MIS were therefore merged into CIHI. Such decision makers must cope with the combined effects of two key factors: (i) an aging population and higher dependency ratios but also (ii) the vast number of new healthcare interventions. BACKGROUND: CHANGES ALREADY MADE Beginning in the early 1990s. and the seemingly boundless public appetite for these. high quality healthcare system into Canada’s future. the 2006 book. health research and health informatics. the federal government made significant changes and invested substantial sums in the areas of health information. four separate taxpayer-funded bodies were engaged in the collection of information: Statistics Canada.

// Health research In 2000 Dr Henry Friesen. all available data supports the view that we are over-medicated. on issues such as waiting times. in partnership with the provinces and territories. it provides critical data on issues such as hospital admissions. LDIC Inc. He currently serves as President and Chief Executive Officer of the investment management firm.1 billion in financing provided to date has all come from federal coffers. including being the Founding Chair of the Health Council of Canada. became different indicators in different 1 Improve accountability 120 . What were supposed to be “comparable indicators”. many health funding decisions are still driven by vested interests advocating for their particular causes. In order to capitalize on existing investments and achieve an effective and affordable health system for the future. Chair of Canada’s federally-funded Medical Research Council (MRC). Michael was awarded The Order of Canada in 2004. Its mandate is to “promote the use of evidence to strengthen health service delivery in Canada”. Individual patient cases land on the front page of our daily newspapers and cause public opinion and politicians to swing in favour of new treatments. Funds now flow to thirteen virtual health research institutes which are much better linked to clinical decisions and health policy. yet payments to pharmacists for reviewing patient medications are only gradually being introduced. the Government of Canada must move to put in place an evidence-based set of strategies: it needs to provide very specific leadership. CIHI’s budget – which is drawn from both federal and provincial sources – has increased from about $10 million a year to over $40 million.SECURING THE HEALTH SYSTEM FOR THE FUTURE of the CIHI Board. At the same time the Canadian Health Services Research Foundation. Michael Decter is a Harvard-trained economist and leading Canadian expert on health systems. The Institute now stands as an important cornerstone of health information in Canada. What we have ended up with instead is too much measurement and too little management. Although the provinces worked with the federal government on this initiative and are represented on its governing board. the $2. to one with broader linkages to the health system as a whole. Below we outline four key initiatives that we believe would help it do so. This important federallyled initiative has resulted in both an increase in and a diversification of federal health research dollars. rather than by hard evidence as to the efficacy of treatment. // Health informatics Canada Health Infoway was created to lead the development of electronic health records. With significant analytical capacity. to drive quality improvement One of the key thrusts of the 2004 Healthcare Accord was an improvement in accountability. He has published several books on healthcare and has held many senior positions in health management and health-focused organizations. Public fears rather than medical evidence drive many decisions. to achieve concrete goals in health services performance. discharges and lengths of stay in a timely manner. The aim was to move away from a research agenda driven largely by the MRC and its staff. However this fell short due to a failure of political will and problems with the detail of the accountability. convinced the federal government to transform the organization into the Canadian Institutes of Health Research (CIHR). As an example. He served as Deputy Minister of Health for Ontario and as Cabinet Secretary in the Government of Manitoba. (CHSRF) was established to link the health information and research areas. But are these initiatives bearing fruit? Is the sizable federal investment that has already been made making a difference to Canadian healthcare? WHAT NEEDS TO BE DONE Despite all the investments. These key investments have positioned Canada to be much more effective in applying evidence both at the point of patient care and in the management of healthcare services.

timeliness. What we have ended up with is too much measurement and too little management 2 Tackle safety in health delivery The Baker Norton study. The aim should be to make the system more accountable (but accountable to the public – who can draw their own conclusions about performance – as opposed to the provinces being more accountable to the federal government). through the institutions mentioned above. jointly commissioned by CIHI and CIHR and released in 2004. Fortunately we already have the health services data gathering and analysis capacity in place. This provides both public and private sector decision makers with a great deal of information on how the economy is doing and on unemployment rates province-byprovince. each with 200 beds. are utilized just for “repair” work. they are sufficient to preclude any sensible national comparison or overview. Canadians have much to gain and nothing to lose from having a more accountable healthcare system. The Baker Norton report led to the creation of the Patient Safety Institute (PSI) headquartered in Edmonton and funded by the federal government. They have used legislation and a number of other tools. A much more forceful national effort is required to solve it. The federal government needs to show courage and leadership in the next round of health negotiations with the provinces and insist on a limited set of relevant indicators across the country. Despite the excellent efforts of this organization. While the differences in indicators are slight. including American states such as Minnesota. have been grappling with this problem. affordability and access. as a result of avoidable errors within the health system. When it comes to healthcare indicators. Since then. more is not better: what is required is a simple set of easily understood indicators that measure quality. The authors calculated that between 9. the safety problem in Canadian healthcare (and in the healthcare systems of other nations) remains both large and intractable. What is needed now is political will. Such obfuscation has meant that it is hard to hold the provinces to account. The PSI’s budget is a paltry $10 million a year against a total Canadian healthcare budget of over $140 billion. If provinces were to set different measures for unemployment (as they do for healthcare) then most of this value would be lost. Consider the analogy of the labour force survey. These take an enormous toll both in terms of human suffering and financial cost to the system. to address it. such as mandatory public reporting of adverse events. Such information enables targeting of remedial efforts: the labour force survey provides an effective framework for decision making about employment and economic policy. others have looked at the burden that avoidable injuries pose to the healthcare system. Another problem has been the massive number of indicators developed. relying on the PSI and somewhat strengthened health facility and health services accreditation through Accreditation Canada (even this is voluntary in some parts of the country). 121 THE CANADA WE WANT IN 2020 .provinces. Other jurisdictions. documented huge safety issues in the Canadian healthcare system. It is estimated by Baker and Norton that the equivalent of nine hospitals.000 and 23. within various age groups and across gender lines.000 Canadians die unnecessarily each year. as well as a host of provincial health services organizations (such as the Institute for Clinical Evaluative Sciences in Ontario) that can contribute. Meanwhile. Canada has stuck with a largely voluntary approach.

The parameters were realistic and included there being no commitment to increase healthcare staffing levels in areas that cannot attract such resources under normal conditions. The First Nations and Inuit Health Envelope was introduced by the federal government in 1994. and foot amputations as a result of diabetic foot ulcers (18 – 22% higher). The continuing huge difference in health outcomes between First Nations/ Inuit and other Canadians begs the question: is this money being well spent? The federal government has made some progress in shifting responsibility and dollars to aboriginal organizations and provincial governments. aboriginal communities saw increased rates in: infant mortality (22% higher). a tripartite agreement between the federal government. The pilot project built capacity and care pathways that assisted health care staff to utilize prevention strategies. looking at specific indicators across the country.1 million to a partnership struck between Saint Elizabeth Health Care. run overwhelmingly by the healthcare professionals themselves. These are dismal statistics. Each plane crash in Canada is thoroughly investigated to determine the cause and indicate remedial actions. the province and aboriginal authorities has resulted in placing $318 million in the hands of a new BC First Nations Health Council. The healthcare system tends to run on the basis that regulatory colleges. but a much more rapid transfer is needed. The result was embraced by the Assembly of The safety problem in Canadian healthcare remains both large and intractable One way for the federal government to change this would be for it to commission a smaller-scale Baker Norton review. // In BC. Other ways of addressing the problem include increasing the PSI’s funding and insisting on mandatory review and accreditation of hospitals and staff. today it amounts to about $2 billion per annum.SECURING THE HEALTH SYSTEM FOR THE FUTURE Contrast this with the enormous mandatory efforts undertaken in civil aviation. Healthcare providers. // In 2006 the federal government provided $3. 3 Transfer healthcare delivery for First Nations and Inuit Statistics Canada reported in 2000 that life expectancy for aboriginal people was markedly shorter than the Canadian average: 7. There is no focus on systemic aspects of the lack of safety in healthcare. In addition. and the Assembly of Manitoba Chiefs. on an annual basis. by contrast. an NGO with expertise in nursing care. The aim was to map ways to manage diabetic foot ulcers and avoid amputations. It would be nice to think that hospital stays could be made as safe as flying. diabetes (almost 20% higher). rather than having to abide by decisions made in Ottawa or by an ineffective system of regional offices run from Ottawa.1 billion for all health programs. tuberculosis (6. This has given tribal councils greater power to solve issues within their own communities.4 years shorter for men and 5. Fortunately there are some models of successful practice from which to learn.2 times higher).2 years for women. Pilots are tested and recertified frequently. will deal with outlier behaviour. and then provide treatment and quick access to specialists as required. At that time it totaled more than $1. undertake early detection. This would keep the safety issue front and centre. 122 . can often practice for an entire career without formal recertification or assessment of their competency.

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

There will. for safety and for affordability. also shareholders. However. be howls of jurisdictional protest from the provincial premiers but if the federal government sticks to specific and public performance goals. health research and evidence gathering. Negotiations should have very specific goals in place for performance. effecting such a switch would require changes in Canada Revenue Agency (CRA) legislation. With a focused and strategic approach the Government of Canada can assist provinces in modernizing Canadian health services. Canadians will be better off. Negotiations for renewed health funding for the provinces post the expiry of the current Health Accord in 2014 should have very specific goals in place for performance. These should be set out in advance by the Government of Canada. health informatics. for productivity. Medical corporations do not meet CRA rules for inclusion because their physician employees. they are certainly not insurmountable.SECURING THE HEALTH SYSTEM FOR THE FUTURE premiums.1 A similar 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. 1 Under CRA rules employers can be pension plan sponsors provided they have workers who qualify as employees. At least some of this increase in the pension envelope could be funded by the federal government. This would help keep costs in check as many physicians would consider trading pay increases for the ability to belong to a DB plan. are not classified as employees. as always. It can also realize a return on the significant investments it has made over two decades in improved health information. for safety and for affordability The biggest direct contribution the federal government could make to reforming healthcare pensions would be to enable physicians to belong to DB pension plans. The actual move would be funded not by the taxpayer. CONCLUSIONS The federal government has a crucial role to play in achieving sustainable and high quality healthcare services in Canada. This move helped physicians immeasurably and provided the provinces with significant leverage in negotiations with medical associations. 124 . While the required changes are of some complexity. but by participating physicians through their medical corporations. for productivity.

and policy decisions on spending for other things. some of the care may be excessive or of marginal benefit. there are many good reasons for this. Cambridge Massachusetts and a fellow at the Rimini Centre for Economic Analysis. universally-accessible healthcare system that provides high quality care based on need. and medications that have helped many people. this is certainly a good thing. This increase is a function of many things: shares consist of both a numerator (healthcare spending) and a denominator (all public spending) and these are subject to changes in economic growth. an expensive proposition. Canada’s healthcare system was sending out signals that it had a financing problem. tax policy. governments have increased the proportion of their budgets that they spend on healthcare. Over this same period. Indeed. He is also a Research Associate at the National Bureau of Economic Research. healthcare has become the most significant item of public spending by provinces. education. overall. The average annualized growth in GDP over that same period was 6. The Ontario government spends approximately 40% of its total budget on health: in 1980 this figure was less than 30%. both in absolute terms and as a percentage of GDP than we did in 1980. This is. Healthcare costs in Canada have outpaced growth in tax revenue and gross domestic product (GDP) for much of the past few decades. healthcare costs are growing faster than GDP. The result is that we now spend considerably more on healthcare.PAYING FOR THE HEALTHCARE WE WANT MARK STABILE 1 THE PROBLEM Well before the great recession of 2008. 125 THE CANADA WE WANT IN 2020 . and Canadians have indicated time and again that they prefer a majority publicly-financed. but the overall story is one of success. From 2003 – 2005 he was the Senior Policy Advisor to the Ontario Minister of Finance where he worked on health. however.5%. He has also advised the Governments of both Canada and Ontario on health care reform. healthcare cost growth slowed significantly). Most of us would not want to return to the healthcare system we had in 1980. procedures. some of the spending increase has been wasteful. on average between 1980 and 2006 the annualized growth in healthcare expenditures was 7. in countries with systems that are similar to ours. Healthcare has improved tremendously over this time period with new technologies. Across the OECD. when one looks at the countries that we typically Mark Stabile is Founding Director of the School of Public Policy and Governance at the University of Toronto and Professor of Economics and Public Policy at the Rotman School of Management. On the whole. . While there have been times of faster and slower growth (during the 1990s while the federal government balanced the budget. and in countries with systems that are quite different. Italy. No doubt. Again.1%. hence the financing problem described above. But. It is important to note that this problem is in no way unique to Canada. and some may even be harmful. and tax policy.

but the public resistance to tax increases remains. Most wealthy countries spend around the same as Canada. Rich nations have the luxury of spending on things they value and if Canadians are getting valuable care from their healthcare system. 126 . deductibles. Note that none of these options preclude finding more efficiencies. and with better quality – while clearly important and necessary. The options for increasing revenue fall into four broad categories: 1 2 3 4 Increase the taxes we already have in place. Diversify public funding streams with new public revenue models. are not on their own likely not solve our financing problem. Cost-share with patients in the form of user charges. etc. so I will not spend time on them here. Once again. So where should the money come from? Public or private sources? OPTIONS FOR REFORM Given that we will almost certainly be spending more on healthcare tomorrow than today (forecasts across the OECD are in agreement that healthcare costs in the developed world are going up. It is also worth noting that the financing problem I have described does not suggest that the healthcare system is not economically sustainable. Cost-sharing There have been several proposals over the years to increase cost sharing with patients. we will almost certainly need to pay more for it. Sevil Marandi. This is both comforting and concerning. none have succeeded in getting healthcare costs to grow more slowly than GDP . along with all other public expenditures. Many are far ahead of Canada in terms of important reforms to payment and delivery within the public system. over the next 50 years). etc. Most provinces are in significant deficit. and Carolyn Tuohy. What is clear is that. we need to decide how we will pay for it. there is no reason why we should not spend more on health and less on other goods. and improving quality in the system – we need continually to do all of these as well! Raise taxes Option one. Jacuqeline Greenblatt. But we do need to figure out how we are going to pay for it. compare ourselves to in terms of economic development – including the UK. Some efficiencies are certainly possible. There is no single right answer to the question “how much of our GDP should we spend on healthcare?”. All of the healthcare systems in the developed world are trying to make their systems more efficient.SECURING THE HEALTH SYSTEM FOR THE FUTURE 1 I would like to thank my co-authors for work that I draw on for this article: Irfan Dhalla. A few spend a little more. Taxes as a share of GDP have come down in Canada over the last decade. so there is an argument to be made for raising certain taxes again. Allow for more private financing/ insurance. Economic sustainability is not the same as fiscal sustainability. All have seen growth in the amount spent on healthcare. more equitably. It is comforting because it suggests that it is not the Canadian Medicare model that is at the root of the problem. is certainly a possibility. reducing waste. across Canada. The problem is universal. and the broader commonwealth – there is no country in which healthcare costs have grow more slowly than the overall economy. not down. It is concerning because it suggests that efforts to make our system work better – more efficiently. All are dependent on large transfers from the federal government continuing past 2014. less wasteful. continental Western Europe. governments cannot afford to pay for the healthcare system we have now. but if we want more healthcare in the future. raising taxes. I would also like to extend a special additional thank you to Carolyn Tuohy for an ongoing collaboration and exchange of ideas that has significantly influenced my thinking. The benefits of general taxation are well established. employing only the current revenue base. Colleen Flood.

Second. often at only around 1%. while it is fair to say that countries can have private supplemental insurance and remain committed to public. Some have suggested this option as a solution to Canada’s public healthcare financing problems. Individuals choose private coverage because it offers some amenities not provided publicly.Most recently. For example. In WHO parlance. There are several reasons for this. eliminate financing problems. First. covering around 10% of individuals. Increased private funding Canada’s public-private spending mix has hovered around 70% public. have argued that using cost sharing to raise revenue is not likely to be a particularly fruitful policy option. we mostly agree that any system of cost sharing should exempt the poor and people who are very sick and need to make heavy use of healthcare services. Second. what evidence there is on the relationship between public and private supplemental systems suggests that private insurance does not decrease costs in the public system. though. Therefore. Second. public expenditure often increases through complementary utilization. in and of itself. cost sharing has the potential to raise revenue. countries that have such systems in place still have the same financing issues that Canada has: public healthcare costs are growing faster than GDP. 30% private for several years. Third. it should not be surprising that Canada’s private share of financing is relatively high. cost-sharing systems are expensive to set up and administer. Given the large role that pharma plays in modern medicine. opt out of paying for Private supplemental insurance does not offer a ready solution to the problem of increasing public healthcare costs public care through general taxation). This is on the low side of public financing compared to many OECD countries. There are two main arguments in favour of such a proposal. given our values in Canada. Jurisdictions such as the UK and Sweden have supplementary private insurance systems in which private insurance is available to cover items that are also covered by the public system. Canada has complementary private insurance: private insurers cover items/sectors of health that are not covered publicly. If anything. these countries generally have a higher share of public health spending (usually above 80%) and broader public coverage than Canada does. 127 THE CANADA WE WANT IN 2020 . the existence of this type of private insurance does not. First. a large share of Canadians have private insurance to cover such expenses. Therefore. Private systems there are generally small. if one believes that there is inefficient use of healthcare services that is patient driven. One reason for this is the nature of the public-private mix in Canada. Their share of total health expenditure is even smaller. Economists. since the poor and sick are the biggest users of healthcare (the two often go together) exempting them from user charges (which I agree is a good idea) significantly reduces the revenue that can be raised by such a system. then imposing some price on care will increase efficiency. increased overall utilization. However. (they cannot. and the fact that tax subsidies for private insurance are built into many tax codes (including ours: employer contributions to employee health insurance are not taxable). Quebec proposed a healthcare deductible on doctor visits. etc. These two points together mean that cost sharing is unlikely to solve our revenue problem. A few points are worth noting here. since pharmaceuticals outside the hospital are not covered publicly for many Canadians. such as shorter waiting times. First. nicer facilities. including myself.

across sectors and types of providers. outweighs. MRI scans for minor headaches and back pain). It must be coupled with a strong movement towards evaluation of what should and should not be publicly funded. Public finance theory suggests that earmarking funds in this way is not optimal and can create inefficient restrictions in public allocations. 2. A national body that evaluates both medical technologies and best practices. (eds.SECURING THE HEALTH SYSTEM FOR THE FUTURE universal and accessible insurance (both the UK and Sweden would be good examples of this). across sectors and types of providers. and of potentially increasing the redistribution of risks and income among Canadians through a broader Medicare basket. In many European systems employers are also required to contribute on behalf of their employees.2 A national body that evaluates both medical technologies and best practices. be sufficient to sustain the healthcare system over the long run. the benefits of providing increased public funding to sustain and extend public coverage (funding prescription drugs through a social insurance pool might be the ideal place to begin). and to meet with (limited) public approval. When a drug provides significant benefit at a modest cost (e. & Tuohy.) (2008) Exploring Social Insurance: Can a Dose of Europe Cure Canadian Health Care Finance? McGill-Queen’s University Press. (2010) “To Prefund Pharmacare for Canadian Seniors… or Not?” IRPP Study No. M. New public revenue models The final option for increasing revenues available for healthcare is to diversify the public financing stream. J. Often collection systems are arm’s length from the government.. and a rebalancing of the role of the private sector to cover care that does not meet the criteria for public funding. Individuals are required to pay a monthly amount that is scaled to earnings. Given the limitations of the other possibilities for increasing revenue.g. this final option has the greatest potential both to improve the scope and quality of the healthcare system. C. & Greenblatt. of tapping into willingness to pay for increased healthcare costs among Canadians. The experience in such countries suggests an increased willingness to pay on the part of citizens if they clearly perceive the connection between premiums and benefits. it would be covered for all who stand to benefit. and Stabile. in my view. is a key element in making sure that public revenues are allocated to the most effective forms of medical treatment. they would not be reimbursed (e. it is reasonable to expect that individuals who still choose 2 See Flood. private supplemental insurance does not offer a ready solution to the problem of increasing public healthcare costs. 128 . although in some jurisdictions. along with colleagues from the University of Toronto. Stabile. that one possible expansion would be to incorporate more social insurance funding into the Canadian healthcare system. the costs of such a scheme. C. M. which is used to cover the cost of the health services provided. general taxes are used to augment the fund where necessary. However. I have argued elsewhere. on its own. When practice decisions by physicians result in high costs and little benefit. The fund is usually kept separate from general tax revenues. insulin for diabetics).g. Where the potential benefits of diagnostic testing/treatment do not merit public funding. WHAT SHOULD BE COVERED BY PUBLIC FINANCE? Raising more revenue will not. Canadians will have to recognize that the public sector cannot cover all tests and treatments regardless of how minimally effective they may be. is a key element Many European countries use social insurance funding – characterized by a clearer link between funds collected and benefits received – to finance parts of their system.

simultaneously phasing in drug coverage through social insurance premiums. have to act as the collection agent. it could also phase in tax point transfers to the provinces to increase the overall amount of funding available while keeping its revenue share about the same. for example. such as Quebec and BC. there is scope to address the growing perception among the young of intergenerational inequities (in financing and care) by gradually shifting the nature of public coverage. the National Institute for Health and Clinical Excellence in the UK). All of these changes are possible without undoing any of the current structure of Canadian Medicare. using personal resources. the coverage budget could be more explicitly linked to social insurance premiums and phased in over time. a national evaluative body (it need not be a federal body). If the federal government were to take on collection. thereby improving intergenerational equity. or require the establishment of. The remaining challenge is getting from here to there. This body could build on the experience and expertise of existing provincial bodies (although thus far the existing provincial bodies have not reached the scale that would be required to properly evaluate technology and best practice at the level of. including any changes to the Canada Health Act. The following steps could be part such a transformation: Use the 2014 negotiation to agree on a framework for diversified public funding 3 In those provinces with more general drug coverage.to pursue such care should be free to do so outside the public system. though. The 2014 negotiations offer the opportunity for the federal government to foster coordination on both evaluation and on diversifying funding streams. It could promote this change while taking a back seat in terms of implementation. while 4 2 A benefit of a national organization for evaluation is that there would be greater consistency in coverage across Canada 129 THE CANADA WE WANT IN 2020 . Along the way. The federal government does not. The federal government could establish. In those provinces where drugs are covered for the elderly but not the general population. Options here include having the federal government act as the collection and redistribution agent for social insurance premiums and using these funds to replace some or all of the current Canada Health Transfer. This would leave coverage for the current elderly in place but reduce the claim of the baby boom on a drug plan funded by younger generations. A ROADMAP FOR CHANGE There is a role for strong federal leadership in moving towards these changes in Canadian Medicare. eligibility by age could be gradually phased out by raising the eligibility age over time. Buy-in to the recommendations 1 Use the 2014 negotiation to agree on a framework for diversified public funding.

effective evaluation of technologies and practices.. A benefit of a national organization for evaluation is that there would be greater consistency in coverage across Canada. There are many items/treatments which are unlikely to yield sufficient benefit to secure public subsidy. the role of private insurance would change. not just those we deem important today. Perhaps most important of all. The private market for this care and coverage would likely be small but sustainable. provinces that deem technologies ineffective are often pressured into reversing decision because the same technology is offered elsewhere in Canada. uhce. it would put in place sufficient revenue to fund broad-based public healthcare. A good review of the question can be found at http://phi. particularly in the context of chronic diseases.ac. 130 . 3 Measurement of patients’ satisfaction and of subjective quality of experience has been extensively studied. and built in elements – diversified public funding. 5 As public coverage for all truly medically necessary services increases. but for which there is significant consumer demand.uk/home. but those that will emerge going forward. with complementary insurance covering those items deemed insufficiently costeffective for public coverage. It would allow all Canadians access to those services most essential for improved health.php. If these changes were adopted. the Canadian healthcare system in 2020 would have kept the best of what we have. Currently.SECURING THE HEALTH SYSTEM FOR THE FUTURE of this body could be required for receipt of federal transfers through both the Canada Health Transfer and any future social insurance framework. and universal access to important medical care regardless of type – that other successful societies have adopted and tested.ox. alongside structures to ensure that we only fund those services that are the most valuable.

PARTNERS This project would not be possible without the generous support of our partners: Alterra Power Amgen AstraZeneca Bluesky Strategy Group Bombardier Building and Construction Trades Department AFL-CIO Canadian Wireless Telecommunications Association CN CIBC Manulife Nexen Pickworth Investments LP Power Corporation of Canada Suncor Energy TELUS Xerox And the individual members of the Canada 2020 Founders’ Circle .

For Canada.As we approach 2020. ABOUT CANADA 2020 Canada 2020 is a non-partisan. This is the starting point of a year-long project that will culminate in Fall 2012.canada2020. there are many opportunities. The Canada We Want in 2020 launches a debate about the role of the federal government in Canada in meeting those challenges.ca . but also fundamental and inter-related challenges. Join the conversation at www. progressive centre working to create an environment of social and economic prosperity for Canada and all Canadians. the world around us is changing rapidly.

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