Canada 2020 Book

The Canada We Want in 2020Towards a strategic policy roadmap for the federal governmentNOVEMBER 2011

INCREASING INNOVATION AND PRODUCTIVITY DESPERATELY SEEKING A MORE INNOVATIVE CANADA 2 Kevin G. Lynch

AN INNOVATION AGENDA FOR THE PUBLIC SECTOR 11 Lawson Hunter and Peter Nicholson

CANADA’S PRODUCTIVITY AND INNOVATION FAILURES: QUESTIONING THE CONVENTIONAL WISDOM 21 Jim Stanford

REDUCING INCOME DISPARITIES AND POLARIZATION WHY CANADIANS SHOULD CARE ABOUT INCOME INEQUALITY 89 Mark Cameron

INCOME REDISTRIBUTION IN CANADA 95 Andrew Sharpe

INEQUALITY IS NOT INEVITABLE 102 Sherri Torjman and Ken Battle

SECURING OUR HEALTH SYSTEM FOR THE FUTURE LESSONS FROM 2004, PERSPECTIVES FOR 2014 112 Philippe Couillard

FOUR FEDERAL INITIATIVES TO IMPROVE AFFORDABILITY, PRODUCTIVITY AND ACCOUNTABILITY 119 Francesca Grosso and Michael Decter

PAYING FOR THE HEALTHCARE WE WANT 125 Mark Stabile

RISING TO MEET THE ASIA CHALLENGE RISING TO MEET THE ASIA CHALLENGE AND OPPORTUNITY 33 Dominic Barton

A LEAP-FROG STRATEGY FOR RELATIONS WITH ASIA 42 Yuen Pau Woo

THE BIG CHALLENGE: ADJUSTING TO THE ASIA CENTURY 49 Rana Sarkar

SQUARING THE CARBON CIRCLE LOSING THE 2020 BATTLE: WINNING THE 2050 WAR 60 Lorraine Mitchelmore

CANADA’S CARBON CHALLENGE: REDUCING EMISSIONS WHILE MAINTAINING OUR QUALITY OF LIFE 70 Ian Mallory

BUILDING A LOW-CARBON, HIGH-OCTANE CANADIAN ECONOMY 79 Stewart Elgie and Alex Wood

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 in-depth 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 implement-ing 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 oppor-tunities that are quite unprecedented in our recent history, although they may seem rather opaque to most Canadians. Our abil-ity 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 con-fronting the country which require strategic political leadership and policy action from the federal government.

PREFACE

MAKING STRATEGIC CHOICES

1 Increasing innovation and productivity Productivity growth and innovation are the sine qua non for economic prosper-ity. Canada’s lack of productivity growth has been a worrying feature of the econ-omy for decades. Since 1984, relative productivity in Canada’s business sector has fallen from more than 90% of the U.S. level to 76% in 2007. There are no signs of things improving: quite the opposite in fact.

Since the 1990s, the federal govern-ment has been taking steps to try to reverse this trend, primarily by investing in university-based research and devel-opment and by cutting personal income and corporate taxes, the standard policy remedies for dealing with flagging pro-ductivity performance. Yet Canada’s pro-ductivity growth has actually become worse over the past decade.

It is therefore time for a much more aggressive, focused and creative federal policy response to Canada’s productivity growth and innovation challenge. Without this, we risk falling further behind and los-ing the revenues that enable us to sustain our standard of living.

2 Rising to meet the Asia challenge The global centre of economic power is inexorably shifting from the West to the East. This trend has been underway for twenty years, but it is now reaching a cre-scendo, partly as a result of the fiscal and economic problems plaguing Europe and the United States. 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.

Canada has been on a slow boat to China – indeed to Asia, more generally – for many years, notwithstanding the fact that we have some significant advan-tages over other countries in this region of the world. Over the past fifteen years,

successive federal governments have made incremental attempts to broaden and deepen Canada’s trade, investment and economic relationships with Asian economies. Despite such efforts, Canada is not really on the map in China and India today, in stark contrast to many of our major competitors.

It is time for the federal government to take a much bolder, more creative and aggressive approach to help deep-en Canadian ties with Asia and enable Canadian businesses to take advantage of unprecedented market opportuni-ties in the region. We must leverage our unique strengths and advantages and become an indispensible part of the new Asian century.

3 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). High Canadian emissions are due in part to our unique geography and harsh climate, but also to a weak culture of conservation and inadequate policy and regulatory regimes.

Modest measures to reduce emis-sions have been implemented over the past decade. But these initiatives have been neither significant nor strategic; as a result they have had little to no effect on Canada’s overall GHG emissions.

Canada is also fast becoming one of the world’s leading fossil fuel producers and exporters. It has even been suggest-ed that Canada is “an energy superpow-er”, or at least can realistically aspire to that goal. With that title are likely to come increased emissions, at least in the absence of meaningful measures to com-bat these.

As a G8 country, an original signatory to the Kyoto Protocol on climate change, and one of the world’s largest per capita

carbon emitters, Canada has a moral responsibility to make progress on limit-ing GHG emissions (if for no other rea-son than to set an example for the big emitting countries). We are also at seri-ous risk of missing opportunities in the low-carbon economy of the future and of becoming increasingly marginalized economically if we fail to act. It is there-fore time for a serious, strategic effort, led by the federal government, to square Canada’s carbon circle and put in place policies that will significantly decrease our GHG emissions.

4 Reducing income disparities and polar-ization Income inequality has been a creeping problem in Canada and other advanced economies for many years now. The bottom two quintiles of the income scale have seen their market incomes decline, in real terms, since the early 1980s (though transfers have resulted in some degree of after tax and transfer growth). At the same time, the top 1% of economic families have accu-mulated an ever-increasing share of Canada’s wealth.

Income inequality, a feature of all market economies, is now giving way to income polarization. While this phenom-enon is still more acute in the US than in Canada, 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.

Income polarization can have serious-ly perverse effects on the economy and on society. At an extreme, it can undermine social cohesion, unravelling the fabric of a country. The Occupy Wall Street protests, and their analogue in other countries, including Canada, are one early sign of the social discontent that can arise from income polarization and a growing per-ception that the economy is not working for most people.

Income polarization has not, up until now, been a big issue on the federal agen-da. Various reforms to federal income security programs and the tax-transfer system have been put in place over the past twenty years, but these have not been aimed at dealing with income polar-ization. It is time for the federal govern-ment to analyze and consider the longer term effects of income polarization, and to consider strategic policy reforms to head off a looming problem.

5 Securing our health system for the future Universal, high-quality healthcare has been a defining feature of Canada and Canadian citizenship for 40 years. It is the public service Canadians value most. Yet the general consensus among experts is that if we stick with the current funding/administrative models and tax structure, Medicare as we know it is not financially sustainable.

Healthcare costs have been rising sig-nificantly as a fraction of our national income and as a share of government budgets (especially provincial budgets) for a generation now. The basic causes of healthcare inflation are well-known: expensive new technologies, procedures and drugs that permit us to live longer, coupled with an aging society.

While healthcare delivery is a pro-vincial responsibility, healthcare financ-ing – paying for the system – has been a dual responsibility, shared by fed-eral and provincial governments, since the beginning of Medicare. In 2004, in response to rising costs and pressures on provincial treasuries, the federal gov-ernment announced a major increase in federal fiscal transfers to the provinces for healthcare. With some $41 billion in transfers for health over ten years, the 2004 Health Accord was billed “a fix for a generation”. Unfortunately, it has proven to be little more than a stop-gap for a decade.

As we approach the end of the Health Accord in three years’ time, innovative, strategic policy approaches on health-care financing are urgently required. We also need the federal government to provide leadership on the organizational and accountability issues that underpin our health system in Canada.

The scope of federal government activity clearly extends well beyond these five issues. But our belief is that informed, strategic decision-making in these areas will go a long way towards securing the Canada We Want in 2020.

Our choice to address all the issues together has two implications. First, we will, as we move on, have an opportunity to exam-ine the links between areas (for example, the effect carbon policy will have on our trad-ing relations or the links between income inequality and productivity). Second, the broad scope of issues will give us a chance to reflect more critically on the role of the state, and the effectiveness of policy in general in addressing the key issues of our time.

KICK-STARTING THE CONVERSATIONThis volume contains 15 papers, three in each of the five areas identified above. We have brought together a group of authors, all experts in their respective areas, and asked them to approach the issues from a strategic policy standpoint.

For this is what has been missing. The areas have all received attention in the past, but often not in a truly strategic way. Perhaps this lack of policy strategy and priority attention is due to the fact the tipping point has not yet been reached in any given area (although it is looming large in some, notably healthcare financing). Perhaps it is because

governments and politicians lack the ideas to address these issues. Perhaps it is because of scepticism that the federal government can really make a difference. Perhaps we have reached the limits of innovative public policy and governance. 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.

Whatever the cause, it is time for Canada to break out of this mindset. Many elements of Canadian society – the business com-munity, NGOs, governments at all levels, educational institutions, and Canadian citizens generally – must work to address the challenges. No single entity has the solution. A collective effort is required.

Our goal is to kick-start a strategic policy conversation throughout the country about The Canada We Want in (or by) 2020. Such a conversation has not been evident to date in Parliament, in general elections, in political party platforms, or in the media – indeed in any of the places you would usually expect to see it. The time for that conversation is now. Perhaps it will lead to a consensus among political, business, 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. We present this volume as a starting point.

THIS VOLUME MARKS the culmination of Phase 1 of our project: The Canada We Want in 2020.

The overall aim of the project is to launch a debate about the role of the federal govern-ment in Canada. 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. It is, in this sense, a starting point.

Canada 2020 has called on fifteen authors to share their wide-ranging views in the five areas. Sometimes they agree on policy prescriptions, sometimes they disagree. 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.

In Phase 2 of the project we will stimulate further conversations in each of our five chosen areas. We will host a series of panel discussions and web-based exchanges that draw on the papers in this volume. These discussions will tease out areas of agreement and disagreement and begin to focus on implementation challenges. We expect to conclude this phase by mid 2012.

Phase 3 will see us narrowing back down and reaching conclusions. Drawing on the materials from the previous phases, Canada 2020 will produce a final, consolidated publication towards the end of 2012. This document will summarize our conclusions in each of the five areas. It will take into account recent changes and lay out proposed future strategies.

INTRODUCTION TO OUR PROJECT

WHAT YOU CAN DOOur aim is to draw as many viewpoints as possible into this project.

There are several ways you can get involved:

// Attend our series of panel discussions in 2012

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

// Contact us directly to arrange joint presentations or discussions

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

Diana CarneyProject Coordinator

[email protected]

THE CANADA WE WANT IN 2020

CANADA’S INNOVATION AND productivity performance ! both of which are central to economic growth, competitiveness and our standard of living ! have been stagnant for years. This is particularly problematic in light of Canada’s low levels of labour-force growth and the competitive challenges from emerging economies.

Contributors to this section approach the problem from quite different perspectives, and propose sometimes conflicting solu-tions. Lawson Hunter and Peter Nicholson focus on the public sector itself, calling for governments to take urgent steps to put their houses in order on the innovation side. This is important in and of itself. But increased public sector innovation also has demonstra-tion and knock-on effects for the rest of the economy. The authors highlight four critical areas in which there are particular opportu-nities – and needs – for increased innovation, with federal government leadership: health-care services; kindergarten to grade 12 edu-cation; public infrastructure; and regulation.

In healthcare, the authors highlight the need for better cross-country dissemina-tion of locally-relevant best practices (a call echoed in the healthcare section of this report, albeit with a different proposed solu-tion). In education they are looking for radical new approaches that will hold the attention and nurture the talents of the “digital natives” of today. In infrastructure they call for

renewal to meet current demands (including extending access to new, high-growth mar-kets, a key concern in the Asia section of this publication) but also innovation in materials and standards. Innovation within the policy function of the federal government should, according to the authors, take the form of a move towards standards-based regulation. This would bring greater clarity, give market forces more play and provide a framework through which to question the efficacy of entire regulatory regimes.

Kevin Lynch’s paper, by contrast, places responsibility for innovation squarely on the shoulders of the corporate sector. Governments have a role to play, but they can only go so far. Indeed, Lynch’s view is that many of the piec-es are already in place from the government side due to substantial investment in univer-sity research capacity and innovation-specific organizations, such as the Canada Foundation for Innovation, in the 1990s. Nonetheless, Lynch, like Hunter and Nicholson, does not think governments should rest on their laurels. He exhorts the federal government to devote

INCREASING INNOVATION AND PRODUCTIVITY

Canada’s innovation and productivity performance has been stagnant for years

more effort to this area, especially to ensuring that technology, once developed, actually gets commercialized.

Federal efforts should be informed by existing resources and proposals, such as the 2008 Competition Policy Review Panel report. To add to this, 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. 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, while mak-ing better use of government procurement to reinforce corporate innovation.

In making this last point, Lynch nods in the direction proposed by Jim Stanford: that is, away from simply creating an enabling environment and towards much more deliberate measures to secure productivity

improvements in Canada. This is the overall thesis of Stanford’s paper. He presents data that show that Canada’s productivity began to dive just at the point at which we moved into full “liberalization mode”. And the further we have moved down this path, the worse our productivity performance has become.

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 interven-tionist approach to industrial development. He terms this “sectoral development policy” (rejecting the “industrial policy” label which conjures images of old-style support to old style industries).

Sectoral development policy should, in Stanford’s view, be a highly strategic and dis-ciplined effort that draws on every available tool to support chosen sectors. The vision is of a federal government that would actively strive to ensure particular outcomes, instead of relying on the vagaries of trade agree-ments, open regulations on foreign invest-ment, and market allocations more broadly, to secure this country’s future.

Canada’s trade volumes are shifting away from the U.S. and towards Asia (though at nothing like the pace that the authors in the subsequent section of this volume would like to see); perhaps it is time that our policies moved in a similar direction, away from the US model and towards a more interventionist Asian-style solution?


The vision is of a federal government that would actively strive to ensure

particular outcomes

2

INTRODUCTIONWe are entering a new global normal. Things will not be as they were.

The international economic geography is shifting to Asia and other dynamic emerging economies. The demographics of aging are creating a global talent hunt. The digital universe is transforming what markets mean and how social interaction and communica-tion take place. There has been a dramatic decline of trust in leadership – whether political, corporate, regulatory or moral – due to the cumulative impact of financial, environmental, corporate governance and regulatory crises. What is emerging is a new multi-polar world: economic power is being dramatically redistributed; political, military and intellectual power will follow.

There are large risks associated with this new global normal. Countries such as the US seem politically unable to deal with their fiscal problems. Europe seems unwilling to confront its policy incon-sistencies, and China and other Asian countries are reluctant to address their consumption-saving-export imbalances.

They have relatively stable financial systems and fiscal positions yet inflationary pres-sures and income inequality challenges threaten. They must also secure the natural resources to satisfy their increasingly affluent citizens and feed their economies.

In such a world, the drivers of success are a global perspective, the capacity to realize economies of scale that transcend traditional markets, and the ability to sustain produc-tivity growth, typically through innovation. Competitive firms are increasingly defined by their ability to shape market tastes and create innovative products that disrupt markets.

How is Canada placed in this new global normal? With our myriad advantages, our biggest risk may be complacency. It is time to acknowledge, in both our public policy and private sector strategy, that the status quo is no longer viable. We need to build on our many strengths, not rest on them. And we need to tackle our weaknesses, two of the most pressing and pervasive of which are our under-performance in productivity and innovation.

The Honourable Kevin G. Lynch, P.C. is Vice Chair of the BMO Financial Group. He was

appointed the 20th Clerk of the Privy Council, Secretary to

the Cabinet and Head of the Public Service of Canada in

2006, a position he held until 2009. Prior to that he served

as both Deputy Minister of Industry and Deputy Minister

of Finance, as well as Executive Director at the International

Monetary Fund. He was made a Member of the Queen’s Privy

Council for Canada in 2009.

DESPERATELY SEEKING A MORE

INNOVATIVE CANADA KEVIN G. LYNCH

3 THE CANADA WE WANT IN 2020

WHAT IS INNOVATION AND WHY DOES IT MATTER?Innovation is our ability to create new products and services, to produce existing products in different ways, or to develop new markets. It lies at the heart of modern competitiveness. It drives growth. It improves productivity. It raises our living standards. It gives consumers new choices, as users of the BlackBerry, GPS, the iPod, the iPad, digital photography, ATMs and on-line shopping will attest. It is also incredibly important to an economy. As The Economist observed, “America gets more than half its economic growth from industries that barely existed a decade ago – such is the power of innovation.”1

Overall, innovation increases the value of the output produced by a worker – a firm’s productivity. This improves the firm’s competitiveness and increases what it can pay its workers and earn as its profits. 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. 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. As Paul Krugman, the Nobel Prize winner, wrote recently in the New York Times: “Productivity isn’t everything, but in the long-run, it is almost everything.”

Consider what innovation and productivity mean at the level of an individual firm. A typical business thinks about the products it has to sell, the potential customers that will buy them, and whether it can make a profit and grow by selling them. Once it decides on its products and markets, it has to decide on how to organize efficiently. It has to hire, train and compensate workers, and decide what kind of human resource management policies it needs. It has to choose the best possible production and distribution processes. Then it has to consider whether

and how to fine-tune its products, processes and markets according to what competi-tors are doing and how consumer tastes are shifting. This is where innovation enters the picture.

As this typical Canadian firm goes about its planning, the world around it is not static, it is constantly evolving. Consumer tastes are changing. Technology is changing. Markets are changing. Competitors are shifting. The firm has to make decisions about how to cope with this dynamic environment amidst much uncertainty. How well it does depends upon how focussed and disciplined it is in seek-ing continual innovation and productivity enhancement. Innovation is the essence of how a dynamically successful firm “stays ahead of the competitive curve”.

Corporate innovation does not happen in the abstract; there are four distinct areas of possible innovation in firms:

// Product Innovation this is the techno-logical and planning capacity of a firm to introduce new products and services ahead of competitors, to anticipate consumer wants and needs, or even to create them. New products typically carry higher profit margins and encounter less cost competition than established products. Product innovation can be the result of research and development, or the result of integrating existing leading technologies in a new way that better meets consumer demands. It requires a sophisticated understanding of both consumers and technology.

Innovation is the essence of how a dynamically successful firm “stays ahead of the competitive curve”

1 February 18, 1999.


4

// Market Innovation this is the capacity of a firm to alter its market, geographically or virtually (e.g. using the internet to extend reach) or by creating new products, for which there was no previous market.

// Process Innovation this is the capacity to change how goods and services are produced and delivered to reduce cost, improve efficiency and increase convenience for customers. Developing global supply chains and identifying risk-sharing partners in manufacturing are prime examples of process innovation. Internet shopping and online banking are two service sector examples. 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.

// Organizational Innovation this is the strategic capacity to convert creativity, market and customer knowledge and technology into marketable innova-tions. It requires active disruption of the status quo and the natural tendency towards incremental improvements. Innovative corporations have business structures that accommodate dedicated innovation teams, working separately to develop new products and processes, but still hard-wired into the corpora-tion. Management creates “innovation supportive” structures that fight the tyranny of short-termism.

In a market-driven economy, innovation essentially has to happen at the corporate level, through one or more of these four channels. Public educational and research policies are vital to nurture it, as are an adequately risk-taking venture capital system and an effective financial system. But innovation itself is largely a corporate responsibility.

HOW IS CANADA DOING?Innovation is vital to our future, yet we are simply not doing well enough. The private sector in Canada has not kept pace with many other countries when it comes to investing in innovation. In the past this problem was essentially counter-balanced by a low Canadian dollar. This is no longer the case. If unaddressed, our poor private sector innovation and productivity performance will increasingly constrain our options for the future. 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.

The usual starting point for analysis of innovation is investments in research and development (R&D), by both the public sector and the private sector.

Public sector innovation policy In the public sector, a compelling public narrative about the risks to the nation from a perceived brain drain, together with clear evidence that our university research capacity had deteriorated led, in the 1990s, to a fundamental policy rethink. There was a refocusing on global excellence in higher education to be achieved through a more strategic approach to research prioritiza-tion, greater competition among research institutions and far more investment by the government. The imperative of commercial-ization of research was recognized and strong links between publicly-funded research and the private sector were promoted.

The choice for Canadians is whether our innovation approach needs some restyling or whether it requires a complete makeover


This renewal went well beyond dollars and cents. Independent institutions, princi-pally the Canada Foundation for Innovation, were created at arm’s length from govern-ment to build strategic research excellence. The Canada Research Chairs were created, two thousand of them, geared to attracting and retaining world-class researchers to our universities. Major new funding was provided for the Granting Councils and an indirect costs-of-research support program. Dynamic new engines of research such as the Canada Global Excellence Chairs, Centres of Excellence and Genome Canada were established. New excellence-based graduate scholarships (the Vanier Scholarships and the Canada Graduate Scholarships) were introduced. Major tax changes were imple-mented to put charitable giving to Canadian universities and research hospitals on a par with the US.

In not much more than a decade, there has been remarkable progress in rebuilding the higher education research infrastructure in Canada. University research investments as a proportion of GDP are now higher in Canada than in all other G7 countries, including the US. 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.

However, more remains to be done. Spending is not the only measure of univer-sity research success. Commercialization still lags significantly, resulting in fewer new firms and jobs and less new wealth than should be the case. 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.

Private sector innovation performance University research is on a decided upswing; private-sector innovation is another matter. A recent report by the Council of Canadian

Academies makes a compelling case that Canada has a real business innovation prob-lem.2 This can be appreciated by looking at the international comparisons in Figure 1. In 2008, Canada ranked 15th among all OECD countries in terms of business R&D expendi-tures as a % of GDP.

Canadian business spending on R&D was only 1% of GDP. This is well below the OECD average of 1.6% of GDP, roughly half of what the US spends and almost as low as a third of what the leaders, Sweden, Finland and Korea, spend. Moreover, Canada’s R&D spending is highly concentrated in a few sectors. The service sector accounts for 70% of Canadian GDP. It spends only 0.6% of its sectoral GDP on R&D. The natural resource, utilities and construction sectors together represent over 16% of Canadian GDP and spend barely 0.3% of sectoral GDP on R&D.

It is not just R&D expenditures that are low. The 2011 Report of the Federal Science, 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), with rates in some sectors being less than half those in the US (though there are some “star performers” such as the construction industry). Canadian business invests only about 75% as much as US business in leading-edge machinery and equipment and a shockingly low 47.9% as much as American firms in information and communications technologies (ICT). In short, there is a real and present innova-tion and productivity problem in Canadian business.

Commercialization still lags significantly, resulting in fewer new firms and jobs and less new wealth than should be the case

2 Council of Canadian

Academies (2009)

Innovation and Business

Strategy: Why Canada

Falls Short. (http://www.

scienceadvice.ca/en/

assessments/completed/

innovation.aspx)


6

HOW DO WE TACKLE OUR INNOVATION DEFICIT?Given the magnitude of our problem, a “busi-ness-as-usual” approach to innovation will not be enough. Tweaking existing programs and incentives will not turn things around. We need instead a broad public discussion

about what it will take to maintain our com-petitiveness, growth and standard of living. Productivity and innovation should not be feared but tackled: they are not about work-ing more for less; quite the opposite, they are essential for raising our living standards.

The federal government is not the main driver of private sector productivity and innovation in Canada. That is the responsibil-ity of business itself. It does, however, have a clear role to play both in framing the required public discussion and in ensuring that busi-ness in Canada is underpinned by effective economic measures and an enabling policy environment.

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Figure 1

Productivity and innovation lie at the intersection between

public policy and private sector behaviour

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

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


Leadership is neededIt will take leadership – in government, business, universities and labour – to focus attention on the new global normal and how a mature economy such as our own should respond to this. Simply put, productivity and innovation lie at the intersection between public policy and private sector behaviour.

The leaders of both need to be involved in crafting an effective national response.

Below are eight concrete steps the fed-eral government should take to substantially improve our innovation and productivity performance. Those in which it plays a lead role are presented first, followed by those in which its role is more supportive.

Canada–US labour productivity and selected capital intensities (US = 100)

SECTOR

LABOUR PRODUCTIVITY

(2007)

MACHINERY & EQUIPMENT*

(2000-07 avg.)ICT

(2000-07 avg.)AGRICULTURE, FORESTRY, FISHING AND HUNTING 86.4 70.5 79.1

MINING 88.0 80.0 31.2

Mining except oil and gas 47.3 57.0 35.1Oil and gas extraction 81.6 100.5 25.6

UTILITIES 62.7 51.0 73.6

CONSTRUCTION 192.5 79.2 14.7

MANUFACTURING 73.2 91.1 36.6

SERVICES SECTOR

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

AVERAGE FOR ALL SECTORS AND INDUSTRIES 72.1 74.5 47.9

* includes information and communications technology (ICT)

Figure 2

SOURCE: Science, Technology and Innovation Council (2010) State of the Nation 2010 Report.


8

GOVERNMENT TO LEAD1 Competition matters to corporate

behaviour. Governments – both federal and provincial – need to change regula-tion to increase market competition in Canada, particularly in more protected sectors where productivity and inno-vation gaps are largest. As Tom Jenkins recently argued: “The motivation to be productive and to innovate is a pri-mal 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. Instead, we must “force” their firms to change and become more productive by increasing the competitive intensity.”3 A starting point would be for the govern-ment to revisit the competition policy proposals of the Canadian Competition Policy Review (2008).

2 Information matters to corporate behaviour. By creating a national Productivity and Innovation Council the federal government could intro-duce more ‘information-driven competition’ into Canadian business decision-making. Such a Council should produce global productiv-ity and innovation benchmarks for key sectors. It should research what firms in each sector in the top five competitor countries are doing to excel

in innovation and productivity. These benchmarks would be made available to the public, and both markets and boards of directors would be encour-aged to take these into account in evaluating corporate performance. Market discipline should drive more corporate management focus on innovation.

3 Trade agreements with dynamic emerging economies help reinforce a global mindset and orientation amongst Canadian business, and also contribute to increased competition. We need to complement NAFTA by negotiating new economic arrange-ments with a range of countries, includ-ing: Brazil, a country of 200 million people that will soon be the sixth largest economy in the world; China, the second largest global economy; India, the dynamic emerging economy with which we share much, but not trade and investment; and with South Korea and Japan. We need to be more strategic, more focussed and to proceed with a greater sense of urgency.

4 In Canada, government support for business innovation is predominately delivered through the tax system. Indeed, we have one of the most generous research and development tax credits in the world. Unfortunately, judging by corporate R&D levels, this mechanism is not working as intended. Consideration should therefore be given to redirecting some of these innovation tax expenditures to direct support for innovation (which is more the norm, amongst OECD countries, including the US).

3 Jenkins, T. (2011) “A simple

solution to Canada’s

innovation problem”. Policy

Options. 32 (8), 12-21.

We have one of the most generous research and

development tax credits in the world. Unfortunately this

mechanism is not working as intended


This could be channelled through a revamped and expanded IRAP (Industrial Research Assistance Program) that has a greater focus on helping small- and medium-sized enterprises adopt lead-ing edge technologies and best manage-ment practices. Other possibilities include creating a Canadian equivalent of DARPA (the US Defense Advanced Research Projects Agency, one the most successful US government agencies) and providing more direct support for developing new, common purpose technologies in key sectors. Opportunities for such technology development exist in many areas, including: agriculture, to meet the emerging demands of new middle class consumers in Asia; the oil sands, for water and soil remediation; medicine and medical devices; information technology; and renewable energy. In addition, the Government of Canada could be much more aggressive as a purchaser of innovative goods and services, reducing the risk faced by innovative Canadian companies and helping them build market share.

GOVERNMENT PLAYS A SUPPORTING ROLE 1 Financing is crucial, both for innovative

start-ups and established firms looking to invest more in innovation and pro-ductivity. The venture capital industry in Canada is simply not functioning in the way it should. We seriously lag other countries as diverse as the US, Israel, Singapore and the UK in this key sup-porting element for increased innova-tion. 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, examples from countries such as the US and Israel show the potential impact this industry can have in creating technology champions. Unfortunately, Canada is ‘punching below its weight’.”4 As a way

to catalyze renewal in this area, the federal government should consider establishing a Venture Capital Industry Review Panel.

2 Education clearly matters in a knowl-edge-based economy. It is essential for our education systems to be geared to the needs of a globally-oriented, knowledge-based economy. Graduates need to emerge with multiple language skills and with meaningful knowledge of other countries, their cultures and markets. Managers and business graduates need to be experts in global marketing, to understand the core technologies for their sectors and to be comfortable in risk assessment of product innovation. If they are not, 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. One way to achieve this is to design incentives to increase the interactions between research universities and businesses.

3 Research excellence in our universities is the backbone of an effective innovation system. We need to continue to fund this public good, building on the innovative re-investments of the last decade. But we also need to insist on accountability from the institutions to ensure that they are focussed on global excellence in their research. And, we have to become better at commercializing the fruits of this research. This will help create a virtuous circle of research leading to innovative ideas, new products, more competitive firms, jobs and growth, and ultimately the capacity continually to re-invest. An examination of the role of intellectual property (IP) rights and whether certain IP regimes provide better incentives to commercialization would be timely.

4 BDC (2011) Venture

Capital Industry Review.

Ottawa: BDC. (http://www.

bdc.ca/EN/Documents/

other/VC_Industry_

Review_EN.pdf)


10

4 Public-private partnerships can be an effective way of diffusing research and supporting innovation. More leading edge technology demonstration projects, focussed in sectors where Canada has inherent comparative advantages, are one route (carbon capture and storage pilot projects in Saskatchewan and Alberta would be one example). Another way for the government to promote innovation would be to support the establishment of more cooperative technology development centres, which would bring together university researchers and private sector busi-nesses and give all partners the right to use and customise common intellectual property.

CONCLUSIONCanada is blessed with much, and yet there is much we need to do. First and foremost, we must avoid complacency.

Today, we have a strong dollar and weak productivity. We have strong public research capacity in our universities, and weak private sector innovation and commercialization. We have deep trade links with the US, and weak linkages with the dynamic emerg-ing economies. Canada is in an excellent position to prosper, provided we tackle our weaknesses, with productivity and inno-vation being front and centre. We should be desperately seeking a more innovative Canada well before 2020.


Innovation is the principal driver of pro-ductivity growth and economic prosperity. Contemporary discussion focuses almost exclusively on innovation by businesses and on what governments can do to support this. While this emphasis is appropriate up to a point, it ignores the elephant in the room: the public sector itself, 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 thesis of this paper is that government can make a greater contribution to Canada’s innovation performance by putting its own house in order, than by focusing almost exclusively on the acknowledged innovation short-comings of businesses. To illustrate the possibilities, we cite some major challenges and opportunities in four broad domains: healthcare services, K-12 education, public infrastructure and regulatory policy. The pro-posals are necessarily high-level but they dem-onstrate the relevance of the thesis and help prompt a new focus for innovation policy on the public sector itself, where opportunities for creativity abound and where the power of governments to effect change is greatest.

THE CASE FOR PUBLIC SECTOR INNOVATIONGovernments need to do much more to promote innovation in their own domains for the following reasons.

1 The government sector of Canada’s economy currently accounts directly for about 26% of GDP (up from 23% pre-downturn, due to a significant tem-porary increase in capital spending), comprising $367 billion in expen-ditures on goods and services and $72 billion in capital spending.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. Canada’s economic performance is therefore heavily and directly influ-enced by the productive efficiency of the public sector. The more efficiently the public sector does its job, the better the value for the taxpayer.

[It should be noted that there is a structural tendency for the cost of public services to grow faster than overall GDP. This is because public services

Lawson Hunter is head of the Competition/Antitrust Group at law firm Stikeman Elliott, where he has had a long career as a regulatory and government relations counsel. Formerly Canada’s senior civil servant in charge of competition policy and enforcement, Mr. Hunter played a key role in drafting the federal Competition Act. From 2003 – 2008, he served as executive vice-president and chief corporate officer of Bell Canada and BCE Inc., where he was responsible for overseeing regulatory, governmental relations and corporate affairs.

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

1 Estimates in current

dollars based on Q2 2011

GDP at annual rates

(Statistics Canada).


12

Dr. Peter Nicholson was the inaugural Chief Executive

Officer of the Council of Canadian Academies from

2006 – 2009. Prior to this he was the Deputy Chief of Staff for Policy in the Office of the

Prime Minister of Canada and, between 2002 – 2003, Special

Advisor to the Secretary General of the OECD. From 1995 – 2002

he was Chief Strategy Officer of BCE Inc. He holds a BSc. and MSc. in physics from Dalhousie

University and a PhD in operations research from

Stanford University. Dr. Nicholson is a Member

of the Order of Canada.

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. They therefore benefit less from the progressive reduction in capital costs due to technological innovation. Productivity-increasing innovation is the only way to mitigate this tendency without reducing the level/quality of the services.]

2 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, accessi-bility, and cost-effectiveness of public goods and services are improved to meet people’s evolving needs and expectations. Innovation can be “internally generated” but it often results from adopting and adapting appropriate innovations that originate elsewhere. Unfortunately, incentives and cultures in public service organisa-tions are too often hostile to innovation and discourage the experimentation and calculated risk-taking required to achieve it.

3 Many of the biggest challenges and opportunities facing Canada today lie squarely within the domain of the public sector. They include:

// delivery, in a fiscally-sustainable way, of high-quality, universal healthcare to an aging population;

// discovery and implementation of effective methods to educate new generations of “digital natives”;

// investment in a new generation of public infrastructure that incorporates the information and communications technology (ICT) revolution, addresses the challenge of environmental sustainability, and provides more efficient access to growth markets beyond North America; and

// design of smarter regulation that identifies, and regularly re-calibrates, the balance between what markets can be trusted to sort out, and what they cannot.

These challenges call for radically innovative approaches.

4 A more innovative public sector will be a better enabler of business innovation and productivity. Innovative competi-tion policy, in particular, is needed to spur businesses to be more innovative themselves.

This is not to say that governments’ efforts to support innovation by businesses (for example R&D subsidies and tax breaks, incentives for venture capital, programs to promote collaboration with university researchers) are not important – but their effects are indirect. We are arguing that much greater attention needs to be paid to direct actions that the public sector in general, and the federal government in particular, can take to improve overall Canadian innovation and productivity.

Incentives and cultures in public service organizations

are too often hostile to innovation

2 Simply coming up with a

bright new idea or invention

is not sufficient to qualify as

innovation. The new ideas

must eventually “work” – i.e.

result in improvements in

the efficiency, effectiveness

or quality of outcomes.


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. And productivity growth – that is, the annual percentage change in output per hour worked – has, indeed, been very weak. Between 1984 and 2009, productivity in the business sector grew at an average of only 1.1% per annum, or half the rate in the US. Between 2005 and 2009 it did not grow at all.

Cynical interpretations aside, there are more fundamental reasons why the innova-tion/productivity agenda has not resonated inside the public sector.

Foremost, perhaps, is a philosophical (or ideological) view that the public sector is simply not about productivity or the kind of innovation that is directed toward improv-ing efficiency. While this is patently untrue, the priorities and incentives in most public sector entities do not, in practice, promote innovation. Most public sector entities have highly risk-averse cultures and disincentives to match. This is due in part to the dispropor-tionate emphasis that the media and political opposition place on “failures”, coupled with public resignation in the face of services that are merely “good enough”.

More rationally, 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. The gross imbalance between risks and rewards thus inhibits the managed risk-taking on which innovation depends. The current emphasis on accountability in the public sector has only exacerbated this tendency and further discourages innovation.

There is also a more technical factor at play. A fundamental difference between the business and public sectors is that most public goods and services are provided free at the point of consumption. There are no competitive markets to gauge their value via

prices.3 When computing their contribution to GDP, statistical agencies, essentially by default, define the output value of most pub-lic services as equal to the monetary value of the wages, capital and other purchased inputs that go into their production. With output thus defined as equal to input, total productivity – which is the ratio of output to input – is always equal to one. Thus measured (multifactor) productivity does not grow.

There is an old adage that “what gets measured gets done”. Without available measures of productivity improvement, it is much harder to design incentives to stimulate the kind of innovation that yields productivity growth. Considerable effort is nevertheless underway in some countries – for example the UK, 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). The 2008 UK government White Paper, Innovation Nation, stated that: “The Government is uniquely placed to drive innovation in public services, through allocating resources and structuring incen-tives. Major forces such as attitudes to risk, budgeting, audit, performance measurement and recruitment must be aligned to support innovation”. Governments in Canada should be playing a greater role in this innovative movement.

OPPORTUNITIES FOR PUBLIC SECTOR INNOVATIONBelow we highlight four key areas that would benefit enormously from greater public sector innovation. While these involve all jurisdictions, and often the provinces or

The current emphasis on accountability in the public sector further discourages innovation

3 Commercial crown

corporations are a partial

exception. User fees have

some of the characteristics

of prices but they are

generally not determined

via competitive market

processes.


14

municipalities are most directly responsible, we highlight the specific role of the federal government.

1. Healthcare services In 2009 Canadians spent $175 billion on

healthcare, an amount equivalent to 11.4% of GDP. Despite some modest efforts to bend the cost curve, healthcare spending – driven by technology, demographics and public expectations – continues to outpace by some margin the growth of both the economy and government revenue. Overall it increased by 90% between 2000 and 2009 and it now con-sumes, on average, about a third of provin-cial budgets. The situation is insidious: the current fiscal trajectory is unsustainable in the long run but the “crisis” is unfolding only gradually. The urgency of day-to-day pres-sures trumps the major behavioural changes required.

There is no silver bullet to solve this complex problem. Canada should, though, 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. What is needed is innovation on many fronts, some technical, many behavioural and systemic. Fortunately, we do not need to reinvent the wheel. We can benefit from the experiments of others. The challenge is to channel the mounting global torrent of data and experi-ence in healthcare innovation into locally-relevant best practices that will actually be

embraced by the multitude of stakeholders in Canada’s various healthcare systems.

One especially puzzling feature of our present system illustrates the difficulty we have in doing this (and the clear need for an innovative approach). In spite of readily available evidence and best practice guide-lines, treatment approaches for virtually every medical condition vary widely even within small geographic regions (e.g. among neighbouring hospitals in a city). Several factors contribute to this paradox: physicians are heavily influenced by the treatments in vogue when they were first trained; the supply of treatment facilities (e.g. beds, diag-nostic services) affects treatment choice as do implicit financial incentives (e.g. physician-owned services); busy doctors may simply be unaware of current best practice or there may not be a solid consensus as to what is “best”; and of course patient variability militates against a formulaic, textbook approach.

To address this problem the federal government could establish a system loosely modelled on the “Ag. Reps” employed to disseminate science-based best practices to family farms in the early 20th century. With the support of the provinces, a cadre of phy-sicians (“Med. Reps”) could disseminate detailed, location-specific and individualized data on treatment practices, outcomes and costs. (These data are already being collected in most cases.) Small teams would go from hospital to hospital, and from service to service, meeting face-to-face with doctors, administrators and other health profes-sionals to discuss variances between their particular practices/results and those of comparable facilities and to talk about accepted best practice.

Although such comparative informa-tion can readily and confidentially be made available on-line, this is no substitute for at least some face-to-face dialogue with well-informed peers (the Med. Reps), in the presence of one’s colleagues. Over time, such evidence-based discussions should

The challenge is to channel the mounting global torrent

of data and experience in healthcare innovation into

locally-relevant best practices


lead to much greater efficiency, a tighter variance around best practices and a more nuanced and circumstantial interpretation of such practices. Systems of compensation and other incentives could also be adapted to reflect best practice, further affecting behavioural change.

The federal government is best placed to lead this initiative in view of the broad national benefit. It is also the agent that is best able to draw on data and expertise from across the country and to disseminate the lessons learned most widely. The federal government should provide the majority of funding, with some cost-sharing from provinces as they decide to opt in.

2. K-12 educationUnless it is crowded out by health spending,

the cost of K-12 education in Canada – $51 billion in 2009, or a little less than 10% of total provincial and federal government program spending, is fiscally manageable, thanks in part to moderating demographic pressure. The overwhelming issue is there-fore not financial, but finding the best way to educate successive generations of digital natives. 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. The base of skills and cultural preparation that we instil today – in schools, at home and in the community – will substantially shape Canada’s stock of human capital, and thus our capacity for innovation and responsible citizenship, for the next four to five decades.

The traditional teacher-centric, lock-step classroom paradigm is no longer appropriate. 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 acqui-sition: from storage in one’s own memory

(“just in case” one might need it), to storage in external memory and online search (that can be accessed “just in time”). Information technology creates, finally, a realistic option of individually-paced, student-centric learn-ing. The genie cannot be put back in the bottle. Radically new approaches to mass education are needed.

But which approaches are likely to work, and what do we mean by “work” in this context? There are theories, and plenty of passionate advocates on all sides, but the inconvenient truth is that we simply don’t know. So the field of education cries out for realistic experimentation and open-mindedness. Nowhere is there a greater need, and more exciting opportunity, for public sector innovation.

Some of this has been happening from the ground up, thanks to the commitment and ingenuity of individuals and small groups of teachers. But the inertia and inherent conservatism of the education establishment will not yield to isolated grassroots innovation. Top-down, determined leadership is needed to discover and eventually to implement a new education paradigm. While we cannot move too quickly, because we do not yet know what is appropriate, we must not con-tinue to plod along with traditional models. We require a sense of urgency.

A major commitment to focused and practical research is called for. All govern-ments in Canada have roles to play but the federal government, in collaboration with the provinces, is best positioned to lead a national research strategy toward a new education paradigm appropriate for the digital age. This might begin with the creation of a “Canada

How do we inculcate the critical faculties appropriate for an information-besotted culture?


16

Foundation for Innovation and Research in Education” (C-FIRE), analogous in concept (but not necessarily in modus operandi) to the Canada Foundation for Innovation.

As in the case of healthcare, Canada is well-placed to be a global leader in education innovation by virtue of our multiple jurisdic-tions (which create opportunities for realistic experimentation); our cultural and linguis-tic diversity; and our ICT-savvy population. The great benefit of being in the vanguard of education innovation would be: (i) a head-start in building, from a Canadian perspective, the appropriate skills for the future, 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).

3. Public infrastructureIn 2007, 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, inadequate investment in public infrastructure has very significant economic consequences.

In 2009, Wulong Gu and Ryan Macdonald of Statistics Canada analysed the impact on business productivity of government investment in infrastructure. They concluded that over the period 1962 – 2006, this accounted, on average, for 9% of labour productivity growth in the business sector, and that the contribution was much greater in the early

years of heaviest infrastructure invest-ment (1962 – 1973). Professor James Brox of the University of Waterloo has mod-elled the impact of public infrastructure on manufacturing productivity and come to broadly similar conclusions.

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, and (ii) that the hiatus in investment since the 1970s has left an infrastructure defi-cit that needs to be addressed systematically. (While the recent economic stimulus mea-sures were a good start, their main objective was to “make work” and they were designed to be temporary).

A new, long-term infrastructure invest-ment strategy must encompass the municipal, provincial and federal governments.5 It should be undertaken with the promotion of productivity growth as a principal objec-tive. Thus it should focus on issues such as how to facilitate the movement of Canadian products to new high-growth markets. And it should be innovative. For example, we should strive to develop and use new high-performance construction materials and methods (building codes must become more innovation-tolerant), to incorporate ICTs to create “smarter” infrastructure and to be more energy-efficient.

In almost every case there will be oppor-tunities for public–private partnerships, the optimal structuring of which will also require innovative approaches. 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, engineering and construction.

4. RegulationThe examples thus far have focussed on

the public sector as the delivery agent. But the innovation agenda must also encompass the public policy function itself. The exercise

Investments in public infrastructure need to be given

greater priority in the innovation/productivity agendas

of governments in Canada

4 Brox, J. (2008)

“Infrastructure

Investment: The

Foundation of Canadian

Competitiveness”. IRPP

Policy Matters. Vol. 9, no.2.

5 Approximately 55%

(by value) of public

infrastructure in Canada

is within municipal

jurisdiction, 45% is

under the provinces,

and only about 5% is

federally owned. The

federal contribution to

infrastructure investment

is now largely through

shared-cost transfers.


of this has stagnated over the past 25 years, at least relative to the remarkably innovative decades after World War II. New thinking – including a fundamental reappraisal of our approach to regulation – is badly needed. [As a starting point, 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.]

Despite some deregulation in the last 25 years – principally in the areas of trans-portation, energy and, to some extent, telecommunications – Canada still has a significant regulatory burden. Much of this is federally mandated. A 2006 multi-country OECD study estimated that if Canada were to have adopted, in each sector of the economy, the least restrictive regulations among the countries surveyed, the nation’s average annual productivity growth would have been 0.75% higher every year over the period 1985–2003.6 Even allowing for uncertainties in these econometric estimates, this is an extremely large effect that demonstrates the very substantial impact that regulation can have on productivity.

Supply management in the agricultural area provides a good example of regulation that inhibits productivity and innovation. By inhibiting the ability to exploit economies of scale and scope, supply management results in higher prices for consumers and adversely affects the ability of food proces-sors to compete with imported product. Another example of negative fallout from regulation comes from foreign ownership restrictions that deter innovation by prevent-ing Canadian firms from reaching interna-tional scale. The airline industry in Canada is a case in point.

In facing up to this problem, a number of immediate issues arise. First, regulators regulate: regulatory bodies are focused

on regulating, rather than deregulating. Second, regulation begets regulation. This is particularly true for attempts to restrain market behaviour, such as supply manage-ment in the agricultural sector. Competition inevitably keeps breaking out in unregulated areas, begetting new regulations to fill the gaps. There is rarely any fundamental reas-sessment as to whether the entire regulatory scheme remains appropriate for the purpose for which it was first enacted.

Forward-looking, 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 objec-tives with a lesser impact on innovation and productivity. Such policy should be based on three pillars:

Standards-based regulationMost regulations are imposed under stat-utes that delegate to the executive branch the authority to determine what is in the public interest. In effect, they create an unconstrained discretionary model of inter-vention. Our belief is that that discretion should be limited. All regulation, whether economic or social, should instead be subject to a rigorous, standards-based test to ensure that it is efficient and minimally intrusive in achieving its objectives.

One way to do this would be to rely on the test developed by the Supreme Court in R vs. Oakes (the “Oakes test”). This sets out five conditions that must be met before

Forward-looking, innovative regulatory policy should seek to identify the many valid public policy purposes served by regulation

6 Conway, P., de Rosa, D.,

Nicoletti, G. & Steiner,

F. (2006) “Regulation,

Competition and

Productivity Convergence”.

OECD Economics Dept.

Working Paper No. 509.

Paris: OECD.


18

governments can be justified in encroaching on fundamental rights and freedoms under the Charter (the criteria could apply equally in the regulatory context). 1. The intrusion or limit must have a

pressing and substantial objective.2. The limit must be proportionate

to the objective.3. The limit must be rationally

connected to the objective (i.e. the government must demonstrate how the objective would be advanced).

4. The limit must be minimally impairing (i.e. it must interfere to the minimum extent with normal activity).

5. The positive outcomes of the intrusion must outweigh its negative effects.

Applying the Oakes test broadly to all policy and regulations would bring much needed discipline and rigour to the regulatory process.

An example of the approach would be the government’s 2006 policy direc-tive to the Canadian Radio-televison and Telecommunications Commission (CRTC). In setting telecommunications regulation, the CRTC was required to: (a) rely on market forces to the maximum extent feasible; (b) adopt regulation that was efficient and pro-portionate; (c) interfere with the operation of competitive market forces to the minimum extent necessary; and (d) ensure regulation did not deter efficient entry or encourage economically inefficient entry.

AccountabilityStandards-based regulation is effective only if complemented by an objective accountability regime for governments and regulators. Two things are required. First, the Oakes test must be legally binding on all regulatory agencies. Second, affected parties must be permit-ted to challenge an agency’s compliance with the test and there must be an effective legal review mechanism. In principle, the review function might be handled by the courts were it not for the fact that courts in Canada – as contrasted, for example, with the US – have adopted an extreme curial deference when reviewing activities of all specialized regulatory agencies.

An appropriate alternative review body for federal regulatory initiatives would be the Competition Tribunal. The Tribunal has a number of advantages: // it comprises judges and non-judges,

so specialized sectoral expertise can be readily brought in;

// its expertise in developing competition policy links well to the objective of identifying minimally-intrusive regulatory measures; and

// because of its Federal Court members, it would likely act with a high degree of fairness and rigour in the application of legal tests and standards.

Periodic reviewsThe increased speed of technological and other change means that regulatory adjust-ment must accelerate. There is no evidence in Canada that it has, perhaps not surprising given the powerful bias towards continued regulation and incremental change.

Regulatory regimes therefore require objective and regular review to determine whether they remain effective in achieving their intended policy objectives. 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, covering

It is time for the federal government to

step forward to reset the regulatory agenda


all manner of regulation, and should be con-ducted by objective third parties to avoid the dangers of regulatory capture (a symbiotic relationship developing between regulator and regulatee). Because part of the objec-tive is to ensure that regulation does not stand in the way of market forces, it may be appropriate to involve the Commissioner of Competition (either as an advocate or “friend of the court”, or, possibly, as the lead reviewer).

It is time for the federal government to step forward to reset the regulatory agenda. An aggressive, forward-looking approach, as outlined above, would have a meaningful impact on business sector productivity. It would limit non-market distortion to the minimum needed to achieve regulatory objectives and, by vigorously promoting competition, it would spur businesses in Canada to be more innovative and thus more productive.

A CONCLUDING OBSERVATIONThe objective of this paper has been to build the case for a powerful commitment to inno-vation across the public sector in Canada. Throughout our nation’s history there have been epochs of spectacular public sector creativity (for example opening the West, binding the country together with crown initiatives in transportation and communi-cations, creating Canada’s unique model of the modern welfare state, defining our citi-zenship through the Charter of Rights and Freedoms, and establishing a confident role in the North American economy through the Auto Pact and the FTA, then NAFTA).

Today, the opportunities and challenges are different but, as this paper has sought to illustrate, no less in need of imagination and commitment. The public sector needs to get its “mojo” back. It needs to harness the talent and idealism of a new generation. The agenda is there. All that’s needed is leadership.


20

SOURCES AND REFERENCESAustralian 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.


Traditional economists believe that unreg-ulated, 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 self-interest 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 regula-tions 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 coun-tries 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 econ-omists 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 mem-ber of CBC TV’s regular National News economics panel. His book, Economics for Everyone, was published in 2008.

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

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 publicly-

owned mortgage insurer are

acknowledged to be crucial

factors in explaining that

success.


22

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 increas-ingly 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 sub-stantially (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 lev-els. 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 coin-cides with a landmark exercise in Canadian economic policy-making that played a sig-nificant role in ushering in a more “rational,” market-oriented approach to most policy matters: the Macdonald Commission.4 Its core recommendations – to enter a compre-hensive 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 mar-ket-centred lens used by traditional econo-mists. 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, dereg-ulation, privatization, cutbacks in income security programs, and government downsiz-ing have not done the trick either.

2 How Canada Performs,

September 2011. (http://

www.conferernceboard.

ca/hcp)

3 Sharpe, A. (2010) “The

Paradox Of Market-

Oriented 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.

What if markets work more productively and creatively when

they are guided, supported, and constrained?


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

The laissez faire policies advocated inter-nationally under the so-called Washington

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

KoreaUS

SwedenFinland

JapanUK

NetherlandsAustralia

SpainFrance

DenmarkGermanyBelgiumCanada

Italy

Figure 1

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

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


24

Consensus (and aped in Canada through the pursuit of free trade agreements, business and personal income tax cuts, the weakening of income security policies, etc.) have in fact been associated with weakness in growth, economic structure, and productivity. Countries which have more successfully transformed their role in global markets, developed innovative indus-tries and expanded productivity (from South Korea to Brazil to Finland) have generally done so on the strength of conscious, interventionist strategies.

From this perspective, there is no contra-diction between the overwhelmingly market-friendly orientation of Canadian economic

policy over the last quarter-century and the simultaneous decline in our absolute and relative productivity performance. Our poor performance, from this viewpoint, is a conse-quence of our liberalization – not a paradox.

Consider Canada’s dismal ranking among OECD countries according to average produc-tivity growth over the last decade (discussed above and illustrated in Figure 1). Most of the countries that did better than Canada on that criterion demonstrate larger government, higher taxes, and more intrusive regulations than Canada. Indeed, the only countries that did worse than Canada in this period were New Zealand, Luxembourg, Mexico and Italy – three of which are marked by even smaller, less intrusive government than Canada. Of course, large government by itself is no more a guarantee of productivity success than small government (as evidenced by the case of Italy). Interventions must be smart, efficient, and disciplined. But both the international and the Canadian experience suggest clearly that

60 %

70 %

80 %

90 %

100 %

1945 1950 1960 1970 1980 1990 2000 2010

Cana

da (%

of U

S le

vels

)

Macdonald Commission Reports

Figure 2

Interventions must be smart, efficient,

and disciplined

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

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


market forces on their own cannot be counted on to guide the economy toward its innovative, efficient potential.

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 most vibrant sector in Canada’s economy in the past decade has been resource extraction – especially minerals, and above all petroleum. Immense profits have been enjoyed by some stakeholders from this resource boom. But in terms of inno-vation, productivity and sustainability, the growing resource-dependence of Canada’s economy leaves much to be desired.

Resource firms invest far less in research and other innovation than manufacturing firms generally do. Productivity in resource extraction trends downward over time, as the most acces-sible deposits of resources are exhausted and more difficult and costly reserves have to be tapped. (For example, 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.6) The more our economy specializes in resources (with declining productivity), the more our average productivity performance is pulled down. The long-run economic and environ-mental sustainability of our dependence on non-renewable resource extraction also raises fundamental questions about our future prosperity and well-being.7

// Deindustrialization The flip side of Canada’s emerging resource-dependence has been a dramatic erosion of our manufacturing base, experienced over the same period. Indeed, 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. That appre-ciation, in turn, 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.”8

Some “tough-love” economists pre-dicted that an appreciating currency would foster productivity growth (by preventing exporters from relying on an “undervalued” currency to remain competitive, and also by reducing the cost in Canadian dollars of imported capital equipment). Real-world experience has not borne out this hopeful judg-ment: as a soaring currency undermines Canadian competitiveness, investment, employment and exports in all cost-sensitive industries (including tourism and tradable services, as well as manu-factures) have declined, reinforcing our one-note dependence on resources.

Manufacturing is a source of higher- productivity, higher-income employment and accounts for a vastly disproportionate share of total business innovation activity. In 2010 manufacturing accounted for almost half of all business R&D spending in Canada, even though manufacturing accounted for just 12% of GDP.9 The decline of manufacturing, therefore, has been a key factor behind Canada’s poor performance on both counts. Since 2000, manufacturing has shrunk by over one-third as a share of total GDP in Canada, from 19% to 12%.10

6 Author’s calculations from

Statistics Canada, CANSIM

Table 3830011.

7 See Stanford, J.

(2008) “Staples,

Deindustrialization, and

Foreign Investment:

Canada’s Economic

Journey Back to the

Future”. Studies in Political

Economy 82, 7-34.

8 That perception may

not be justified. After all,

despite the energy boom of

the last decade, 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?



Table 3580024.



Table 3790027.


26

// The impact of NAFTA-style trade agree-ments Orthodox economic theories of free trade focus on the purported benefits to a country available from trade-driven specialization in the industries corresponding to its so-called “compar-ative advantage.” Canada’s comparative advantage in the eyes of global markets is clearly in the production and export of non-renewable resources. The effect of laissez faire trade deals has clearly been to accentuate this pigeon-hole. As illustrated in Figure 3, the proportion

of Canadian merchandise exports con-sisting of value-added manufacturing products (such as automotive products, machinery, and consumer goods) grew during the post-era, peaking at close to 60% of all exports by the late 1990s. At that point Canada could claim to have largely escaped the status of “hewer of wood, drawer of water” that marked our tradi-tional, subordinate role in global trade.

That progress has been reversed, and quickly, in the past decade. Value-added products now account for less than 40% of total exports; the bulk of our export portfolio is once again made up of unpro-cessed or barely processed resources (agriculture, forestry products, energy, minerals, bulk ores, etc.). 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.

40 %

45 %

30 %

35 %

50 %

55 %

60 %

1985 1990 1995 2000 2005 2010

% of

tota

l mer

chan

dise

exp

orts

Figure 3

Other successful exporters pro-actively seek

to build advantage in key desirable sectors

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

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


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). Subsequent trade deals have clearly reinforced the grow-ing reliance of our foreign trade on the extraction and export of non-renewable resources – not to mention constraining (to some extent, but not totally) the abil-ity of government to moderate or reverse that dependence.

I stress that it is not international trade per se which is the source of this weakness: China, Korea, Brazil, and other successful industrializers all rely heavily on exports as an outlet for the production of targeted high-value sec-tors. However, while these countries have exploited trade opportunities as part of their broader industrial strategy, I would argue that none has practiced “free trade” in the laissez faire spirit of the NAFTA. 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. By contrast, they pro-actively seek to build advantage in key desirable sectors – namely, those characterized by increasing returns, technology-intensity, trade-intensity, and positive regional externalities.

// Foreign investment and the dearth of Canadian-based multinationals Foreign investment has complex effects on productivity. Economic evidence suggests that, other things being equal, 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). On the other hand, foreign investment may also alter the industrial structure of

the host economy in unpredictable (and undesirable) ways; in Canada’s case, this is manifested in the clear and growing concentration of foreign investment in resource industries.

Canada’s recent relaxation of regula-tion on incoming foreign investment has been associated with a large inflow of such investment, aimed particularly at the resource extraction and bulk com-modity sectors.11 On balance, how-ever, despite high-profile takeovers of resource companies, more capital has left Canada than entered it during the post-free-trade era (with the result that Canada’s net foreign investment posi-tion has shifted more toward surplus than deficit). A disproportionate share of that outflow of capital from Canada to other countries has been associated with offshore investments by Canadian banks.

In general, Canada possesses less than a proportionate share of successful, globally-engaged multinational firms. The very few exceptions (RIM, Magna, Bombardier) tend to prove the rule. This dearth of home-grown, globally-success-ful firms, which I argue is the flip side of unregulated inflows of foreign invest-ment (and the resulting unhelpful impact on our overall industrial structure), undermines our innovation, productivity and trade performance. 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, one of our

11 Since the Investment

Canada Act was

implemented in 1984,

only two foreign takeovers

have been turned down

(out of 1650 reviewed

applications, and over

14,000 acquisitions in

total).

How do you support “national champion” companies? Using every policy lever in the toolkit


28

rare productivity success stories… and 100% foreign-owned!). But it is equally clear that we need to be deliberate and active in assisting promising Canadian-based firms to succeed on the global stage – the same way that other small countries (such as Korea, Netherlands, Sweden, and Finland) have done, and in regulating incoming foreign investment to maximize its productivity upside.

How do you support “national champion” companies? Using every policy lever in the toolkit: favourable access to capital and technology; close alignment with public training and technology programs; leveraging public procurement to give these firms a head start in their home market; strategic pro-motion of their interests through trade policy (rather than continuing to believe like Boy Scouts, on faith, that simply “following the rules” will help our firms succeed). That’s how other exporters, even small countries, have built and expanded their foothold in high-value global markets.

// 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. There are very few innovations that can be accessed or implemented without investing in new machinery.

Unfortunately, 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 taxa-tion: pre-tax corporate profits have increased as a share of GDP, and that trend has been reinforced by a decline in business taxation (producing a two-fold improvement in after-tax profitability of Canadian businesses).12 Business profits in Canada are higher than in the US (per-haps partly due to the ready abundance of lucrative resource opportunities), yet Canadian firms consistently invest less in real capital (not to mention innova-tion and intangible capital) than their US counterparts.

Explaining the weakness of business investment in Canada, despite strong profitability and a very stable, business-friendly macroeconomic and policy cli-mate, is a challenge for economists. What is undeniable, however, is that by this metric (as well as others), merely striving to construct an amenable economic and social context for private business, and then waiting for the private sector to lead the way to an innovative and productive future, has simply not worked.

// Lack of sector-focused development strat-egies In earlier decades, Canadian governments – keen to escape the resource dependence which was the legacy of our earlier “staples-based” economy – would intervene proactively to foster investment, production and export opportunities in targeted high-value industrial sectors. These policy efforts, often referred to as “industrial policy,”13 took many forms and utilized many different policy levers: national preferences in trade deals (such as the Canada-US Auto Pact), the leveraging of

Merely striving to construct an amenable

economic and social context for private business has

simply not worked

12 See Stanford, J. (2011)

Having Their Cake and

Eating It Too: Business

Profits, Taxes, and

Investment in Canada,

1961 Through 2010.

Ottawa: Canadian Centre

for Policy Alternatives.

The gap between corporate

cash flow and investment

spending is reflected in

deleveraging and the

accumulation of liquid

assets by Canadian

business.

13 “Industrial policy” is a

misnomer for modern

strategic development

efforts, many of which

target sectors of the

economy very different

from traditional

“smokestack” industries.

I prefer the term “sectoral

development policy.”


public procurement (as in the Defence Production Sharing Agreement and similar initiatives), direct public equity ownership (in the aerospace sector and elsewhere), 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).

Since the 1980s, these sector-focused strategies have fallen by the wayside. Canada’s one and only industrial strategy, in the wake of free trade, became (by default) promoting and leveraging our convenient access to the US market. Of course, that’s hardly enough to attract mobile, innovative industries here: many other jurisdictions make the same claim (including, of course, the US itself!).

The demise of Canadian sector strategizing in the 1990s reflected a combination of ideology and fiscal constraint. But abandoning these proac-tive efforts ran counter to the practice of virtually all other advanced jurisdic-tions (including, notably, the US, which has effectively used defence, energy, and other departmental resources to foster US industrial investment and innovation). A recent review of innovation activity by Canadian businesses concluded that policy-makers should “support areas of particular Canadian strength and oppor-tunity through focused, sector-oriented strategies,” following the experience of past success stories in this regard (such as automotive, aerospace, and telecom-munications).14 Sector development interventions must be modern, creative, disciplined, and flexible.

The sectors targeted will differ from those in the past: we must pursue invest-ment and production opportunities in sectors like biotech, green energy, telecom equipment, public transit equipment, and other modern, growing, technology-intensive sectors. 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, as the interventionists in China, Brazil, Korea, and elsewhere readily prove). The overall goal is more invest-ment, innovation, production and exports in key tradeable sectors. The specific tools to be used (investment policy, technology policy, training policy, procurement policy, trade policy, even environmental policy) are limitless, so long as a government has a commitment to apply them creatively.

This depiction of Canada’s loss of innova-tive leadership as the result of competitive market forces (rather than their inhibition) runs contrary to the conventional wisdom in my profession. However, it is consistent, I argue, with the experience of most of the countries (both developing and advanced) that have successfully achieved structural change, export success in innovative sectors, and a consequent boost in living standards and economic opportunity for their citizens. 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. We must set aside our expectation that private market forces will produce an optimal, innovative development trajectory.

Instead, we should view effective public interventions and leadership as a key asset

Sector development interventions must be modern, creative, disciplined, and flexible

14 Council of Canadian

Academies (2009)

Innovation and Business

Strategy: Why Canada Falls

Short, p. 211.


30

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. This will require a longer-term, deliberate effort to rebuild the capacities of federal and provincial agencies in this regard (which have atrophied after decades of ideological and fiscal neglect). 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. Some examples already exist: the government of Newfoundland and Labrador has creatively fostered provincial investment and value-added capabilities in the mining and energy sectors, through the use of public equity and in other ways; the Ontario government has stimulated a provincial green energy industry, supported by pro-active measures in energy supply, pricing, and domestic content.

We must continue to make world-class investments in public education, training, and research (Canada’s record on this score is quite positive). 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.

We should abandon the faith that NAFTA-style trade deals will boost innovation-intensive industries here; quite to the contrary, these agreements are clearly reinforcing the deindustrialization and emerging resource-dependence of the national economy (and future potential agreements, such as with the EU and Korea, would clearly have the same effect). Instead, Canadian trade officials should take a page from Chinese and Brazilian strategists, to maximize the opportunities for domestic exporters through reciprocal trade and export-oriented development plans, rather than blithely assuming that “free” trade will lift all boats.

Finally, government should work with all stakeholders (business, labour, 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.

All these strategies have been derided as “picking winners” by a generation of market-worshipping economists, who believe that only the private sector can pick winners. (In fact, 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, diversified manner. If we want to maximize Canadians’ potential for innovation and productivity, we will have to collectively step into the fray and make it happen.

We should abandon the faith that NAFTA-style

trade deals will boost innovation-intensive industries

THE CONTRIBUTORS IN this section all share the view that Asia is central to Canada’s prosper-ity and economic future. The challenge is how to accelerate development of the economic, 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. These are not old-style, bilateral relationships. They are dynamic, multi-stranded ties: Canada needs to establish itself at the heart of Asia as a hub nation, a facilitator and a source of new ideas, not just a traditional trading partner or resource provider.

Despite being a Pacific nation, Canada is a late arrival on the Asia scene. We must there-fore apply ourselves, strategically, to leapfrog competitors, gain “mindshare” and build up the very visible brand that will be required to expand our presence in this highly competi-tive arena.

Rana Sarkar espouses a path of “frugal commercial diplomacy” with leadership by the federal government. This would fol-low the “frugal innovation” model for which Indian companies are becoming known (and which is referenced in Kevin Lynch’s paper in this volume). Sarkar’s view is that the more useful Canada can make itself in addressing the problems with which Asian leaders are grappling (including resource, population and climate concerns) and the better the Canadian government is able to “curate” the diverse groups involved in developing webs

of relationships, the more success we will have. 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, and the diversified approach that is required for Canada to get ahead.

All contributors stress the importance not only of economic, but also of cultural, and particularly educational, links between Canada and Asian countries. Dominic Barton reflects on Australian success in building education as a major export industry and a cornerstone of brand-Australia in Asia. Canada should be able to replicate this suc-cess on several fronts, but it will succeed only of there is bold, co-ordinated action, led by the federal government (with a dedicated Minister for Asia at the helm). Barton also proposes that our government should iden-tify strategic sectors for support: this is not a question of picking champions, but rather of understanding where the real opportunities

RISING TO MEET THE ASIA CHALLENGE

Canada needs to establish itself at the heart of Asia as a hub nation, a facilitator and a source of new ideas

for Canada lie, and putting concerted sup-port behind them. Such a strategy may run counter to recent Canadian political inclina-tions, but it is the way that Asian countries themselves conduct business.

Our natural resources are clearly one of our great advantages. How can we make best use of them in the Asian context? Nobody wants Canada to become Asia’s forest, quar-ry or well. Yet they can open doors. What is required is a smart natural resources policy that goes beyond the resources themselves to encompass technology transfers and human resource exchanges. Such a strat-egy 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.

Yuen Pau Woo focuses on Canada-Asia energy relations as a core aspect of his pro-posed “leap-frog strategy”. 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 sees progress on developing the Asia Pacific Gateway, includ-ing energy pipelines to the West Coast, as essential to ensure that Canada does not lose out to emerging alternative sources of ener-gy supply (such as US shale gas). Pau also calls for broad human capital agreements between Canada and Asia; such agreements would have at their base the large and grow-ing communities that are truly “at home” in either Canada or Asia. Finally, he envisions a future in which the city of Vancouver stands as the undisputed Asia gateway for north America.

These are bold visions, but visions that are clearly warranted by the unprecedented change that we are currently witnessing in global economic relations. Although there are differences in detail between the papers, the clear message conveyed by all three is that this is not a time for incrementalism or restraint. If it is to maintain its relevance in the global economic order, Canada must find its place at the heart of Asia.


All contributors stress the importance not only of

economic, but also of cultural, and particularly educational,

links between Canada and Asian countries

33

THE CHALLENGE SHIFTING CANADA’S ECONOMY TOWARDS ASIAFor the past 250 years, 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. While the US will continue to be a major economic partner and critical ally for Canada, its hegemonic days are likely over. Over the decades to come, real growth rates in the west (with its aging populations, high debt, and slowing productivity growth) will continue to lag the east. 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.

The size of the Chinese economy is expected to rival that of the American economy by 2020 – 2030. That gives Canada only a decade or two to accomplish a major re-orientation of its economy. Doing this will require a significant shift, as Figure 1 shows.

The economic links Canada has con-structed with the US are broad as well as deep. There is a web of “connective tissue”that binds the two countries, not just economically, but also socially, culturally and politically. We share a border, a language and

much of our history and culture. In addition to trade and investment flows, there are flows of students and tourists, partnerships between businesses, links across civil society and flows across media, culture and sports. These connections are mutually supporting: former students become business and political leaders, shared cultural references smooth business relationships, and flows of people and ideas create the mutual under-standing and trust that is fundamental to economic collaboration.

Asia, on the other hand, feels geographi-cally and culturally distant, despite the fact that Canada is a Pacific nation. 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. For the average Canadian executive, continu-ing 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.

According to a 2011 opinion poll by the Asia Pacific Foundation of Canada, 62% of Canadians think that Asia will be vital to the well-being of our country. However, recent

Dominic Barton is the Global Managing Director of

McKinsey & Company. He was McKinsey’s Chairman of Asia from 2004 – 2009,

based in Shanghai, and he led McKinsey’s office in Korea from

2000 – 2004. He is a widely published author and active participant in many interna-

tional fora. Dominic is a Trustee of the Brookings Institution,

Chairman of the International Advisory Committee to the

President of South Korea on National Future and Vision,

and recently became a member of the Singapore Economic

Development Board’s International Advisory Council.

RISING TO MEET THE ASIA CHALLENGE AND

OPPORTUNITY DOMINIC BARTON


consumer research conducted by McKinsey & Company found that not only did Chinese consumers not know where Canada was, but that the only reference they had for the country was that it was the “place to go for clean air”. The story is similar amongst Asian business leaders. In a recent set of interviews we conducted with prominent businesspeople from China, India, South Korea, Indonesia, etc. we found that Canada was barely visible. Canada is seen primarily as a link to the US and has less “brand visibility” than small countries such as Switzerland or the Netherlands. Asian executives were confused

as to why Canada has not done more to capitalize on its strengths.

Australia, with a similar size population and economy, has far deeper links with Asia than Canada does. Australia’s trade with Asia grew from 19% in 1990 to 50% today (22% with China alone). 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). In 2010, Australia issued 159,000 visas to Asian students compared to Canada’s 47,000, thus investing in personal links that will pay off well into the future.

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

Asia1

1 Includes Australia

US

Europe

Other

Asia1

US

Europe

Other6 %

7 %7 %

23 %

26 %

44 %

35 %52 %

Figure 1

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

SOURCE: Asia Pacific Foundation, McKinsey analysis.

RISING TO THE ASIA CHALLENGE

35

These differences are not due to physical proximity. It takes 14 hours to fly from Sydney to Beijing – the exact same time as from Toronto. And it takes 16 days for a container ship to travel from Sydney to Shanghai – the exact same time as from Vancouver. And of course email travels instantly from both countries.

It is not just OECD countries that are overtaking Canada. In 1990 Brazil’s trade with Asia accounted for 5% of its total; today it accounts for 26% (15% with China alone).

THE ASIAN OPPORTUNITY FROM URBANIZATION TO INNOVATIONIn order to identify opportunities for Canada in Asia, it is important to understand the forces shaping the region. While Asia is incredibly diverse, with a bewildering array of languages, cultures and systems of govern-ment, seven major trends can be identified:

1 Rapid large-scale urbanization The urbanization that is underway in Asia, and especially in China and India, is unprecedented. By 2025, almost 2.5 billion Asians will live in cities and more than 220 Chinese cities will have over 1 million inhabitants (Europe has 35 such cities today). Many global companies (e.g. GE, Siemens, UTC, Bechtel) are supporting this massive urban infrastructure development.

Question Canada has some of the most admired cities in the world and some terrific infrastructure businesses – what opportunities are there for

Canada to participate in Asia’s urban infrastructure build-out?

2 The emergence of 900 million new middle class consumersBy 2015, over 900 million new consum-ers will join the middle class in Asia (mostly in India, China and Indonesia). In urban China, discretionary spending is expected to constitute 45% of a household’s total spend by 2025, up from 34% in 2000. Consumer products companies around the world (e.g. P&G, Unilever, Nestle, VW, GM) see this as an historic opportunity.

Question What products and services could Canada sell to Asia’s exploding consumer market?

3 Shifts in global trade routes and centres Asian countries are developing a broad range of important trading relation-ships, especially with other Asian countries, but also with the Middle East, Africa and Latin America. For example, exports from Asia to Latin America grew 25% per year from 2003 to 2008 (versus 11% to the EU and 6% to NAFTA).

Question What possibilities are there for Canada to be an Asian trading hub?

4 The increasing success of Asian companiesAsia is home to a growing number of the world’s top companies. From 2005 to 2010 the number of Asian compa-nies in the Fortune 500 list more than doubled from 37 to 76.

Question How can Canada attract more inward investment from Asia and become the location of choice for the Americas headquarters of top Asian companies?

Asian executives were confused as to why Canada has

not done more to capitalize on its strengths


5 The world’s fastest growing talent poolChina and India graduate over 8 million new college, masters and doctoral students annually. But this is not nearly enough to support Asia’s continued growth. For example, it is estimated that Asia needs roughly 1,500 more polytechnic schools.

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?

6 Insatiable resource demandAsia’s dramatic growth is putting strong pressure on natural resources especially land, energy and water. By 2020, 40% of the world’s arable land may be needed to feed China alone. Between 2010 and 2030, China’s natural gas usage is expected to quadruple. By 2014, Asia’s demand for pulp and paper products is estimated to be more than double North America’s demand.

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?

7 From low cost to high innovationWith its very large and demanding consumer base, massively increased government and corporate R&D investments and an ability to build new industries from scratch, Asia is becom-ing a global source of innovation.

Question How can Canadian companies be innovators in Asia, as well as benefit from Asian innovations?

A CANADIAN NATIONAL ECONOMIC STRATEGY FOR ASIA The rapid re-orientation of Canada’s econo-my towards Asia must be a strategic act, led by the federal government and strongly sup-ported by Canada’s provincial governments, its business leaders and its civil society.

The re-orientation of Canada’s economy towards Asia is unlikely to happen organical-ly – and certainly not at the speed required. The kind of strategic thinking, action and coordination required to achieve this will be a challenge in Canada’s decentralized system of governance. But previous challenges have brought Canada’s government, business and civil society communities together to act jointly to address major issues. We must do it again. For without such strategic action, Canada’s future prosperity and political power and relevance are at risk.

In essence, Canada must become more of an Asian-facing nation. In doing so, we must move beyond our current trading pattern with Asia: exporting natural resources and import-ing manufactured goods. There must be more value added to the relationship. Australia is also resource-rich, but is taking steps to avoid becoming merely a “quarrying nation” for China. Canada must do the same. We have many assets to deploy: our long history as a trading nation, a multicultural popula-tion, vibrant cities, natural resources, our high quality of life, a successful education system and a strong business community.

We need to act quickly and aggressively to develop a robust national economic strategy for Asia. While developing and executing

The re-orientation of Canada’s economy towards Asia is unlikely to happen organically


37

such a strategy will be a complex process over several years, there are five steps the government might consider to get started:

1 Establish an Asia Advisory Council to provide advice on key opportunities and challengesThe Prime Minister of Canada should establish an Asia Advisory Council made up of 15-20 influential Asia-based politi-cians and business people (along the lines of the International Advisory Council to the Economic Development Board of Singapore). The group should meet for roughly 1.5 days each year with senior government officials, including the Prime Minster and Finance Minister. A support system for the Council is critical to ensure that initiatives are pursued and delivered. The Council must also be established as a long-term body with terms that exceed the electoral cycle.

2 Re-weight diplomatic activities towards AsiaIn addition, the federal government should strengthen diplomatic ties between Canada and Asia, as these are critical to opening other opportunities in Asia. 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), increasing the tempo and seniority of official trips to Asia, encouraging prominent Asian government officials to visit Canada and re-allocating diplomat-

ic budgets. The UK, for example, recently re-oriented the budgets and priorities of its Foreign and Commonwealth Office away from Western developed countries and towards Asia.

3 Actively pursue strategies to increase cultural and educational ties with AsiaEconomic ties are not built by promoting trade and investment alone; they rest on a broader base of social and cultural links. Canada currently has no mechanism or institution to provide a centre of gravity for such efforts. The National Centre on Contemporary Asia, as proposed by the Asia Pacific Foundation, could play such a role. Such a centre, with a sufficiently ambitious mandate and budget, could act as a prominent force for increasing the cultural and educational links between Canada and Asia. For example, it could: // Promote Asian experiences (exchanges,

hosting, language immersion, co-op terms, internships) for a dramatically increased number of Canadian high school and university students.

// Encourage a major increase in Asian content in our education systems especially for kindergarten through grade twelve.

// Increase access to Asian language studies in schools and universities.

// Sponsor a national Asia speaker series that would bring prominent Asian businesspeople, politicians, artists and thinkers to Canada and give them exposure in Canadian media.

// Partner with prominent Canadian business leaders to develop a biennial Canadian-Asian CEO conference.

// Encourage the CBC and other cultural and media organizations to develop more Asia content.

// Encourage more Canada-Asia linkages through the arts and sports.

We need to act quickly and aggressively to develop a robust national economic

strategy for Asia


4 Select five to seven key sectors for focused support to help Canada develop ”global champions” that can compete successfully in AsiaI would not encourage the government to “pick winners” or provide direct support to individual companies. However, the government could, in conjunction with provincial governments and, ideally, the Asia Advisory Council, identify and actively support strategic sectors that can help drive the re-orientation of Canada’s economy towards Asia. This is, in fact, a very Asian approach – Asian governments are often mystified that Western governments do not do this more generally.

Selecting the specific sectors would require further analysis and a fair, transparent process by the Canadian government. But based on the trends outlined above, there are six that I would highlight:

A) INFRASTRUCTURE Canada has some of the most admired infrastructure in the world. Our cities have consistently been recognized as being amongst the best by The Economist’s Most Liveable Cities Index (Vancouver, Toronto and Calgary were all listed in the top five this year) and we have developed some very successful infrastructure models and companies (e.g. SNC-Lavalin, Infrastructure Ontario and TransCanada Corporation).

Federal government officials should help in introducing Canadian infra-structure companies to senior officials in the largest Chinese cities. They could also encourage partnerships between Canadian resource companies and infrastructure firms to build and operate ports, railways, airports and toll roads in Asian countries.

B) FINANCIAL SERVICES Canada’s financial system came through the 2008 crisis in stronger shape than those of other devel-oped economies. Our regulatory system and banks are globally recognized as role models for effective governance and risk management. Canada should leverage that recognition to establish closer financial ties to Asia. This should be a two-way street, 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. At the governmental level, ways should be sought to help support Asian economies apply Canadian finan-cial best practices. Efforts should also be made to link and harmonize financial policies and systems, in particular with China, India and Indonesia.

C) AEROSPACE Canada has much to offer in terms of know-how, products and services in aerospace. Montreal’s Bombardier is the third largest civil aircraft manufacturer in the world and we have many successful suppliers to the industry as well. China and other Asian countries are keen to develop aerospace industries. The Canadian government could have significant impact by facili-tating the development of business relationships between Canadian and Asian firms in this strategic industry.

The government could actively support strategic sectors that can help drive the re-orientation of Canada’s economy towards Asia


39

D) EDUCATION 97% of urban Chinese parents expect their children to go to university. In 2000, Australia adopted an ambitious strategy to take advantage of that opportunity. Today, education is Australia’s third largest export, repre-senting $18.6 billion for the economy and 125,000 jobs in 2009. By comparison, Canada’s global education exports were only $6.5 billion in 2009, despite the fact that Canada is seen in Asia as one of the most desirable places to receive an education.

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. In addition to helping to attract Asian students to Canada, the government should also encourage strong universities and technical schools (such as the British Colombia Institute of Technology) to build campuses in Asia.

But Canada will only succeed in these areas with support at the highest level. For example, State Councillor Liu Yandong, the highest-ranking woman in China, recently met with US Secretary of State Hillary Clinton to discuss educational ties with the US. 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 pro-vide 10,000 new scholarships for Chinese students to study in the US. Canada needs its senior leaders to promote

educational partnerships with Asia just as strongly.

E) TOURISM By 2020 it is expected that there will be over 400 million annual tourist trips coming from Asia to desti-nations globally. Many businesses and communities in Canada depend on tour-ism. For example, 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.g. language translations, familiar food options). Canada could also look at establishing companies focused on the “start-to-finish” experience of Asian tourists.

F) NATURAL RESOURCES The federal gov-ernment 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.

Canada is the world’s largest producer of potash, the second largest exporter of wheat and the third largest producer and exporter of natural gas. 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. Growing Asian interest in both consuming and owning Canadian resources is inevitable.

This presents both opportunities and risks for Canada. Overseas investment could help bring down the cost of devel-opment, expand and modernize our resource infrastructure and create more jobs for Canadians. It could also allow us to encourage a hub of resource com-panies to set up in Canada. For example, Calgary could become a place where most major oil and gas companies, including Asian ones, have important

Canada must proactively invest in its resource infrastructure


parts of their headquarters (e.g. R&D, financing) offices. Canada should also be a hub for major agribusinesses.

To take full advantage of this oppor-tunity Canada must proactively invest in its resource infrastructure. For example, we cannot build an energy link to Asia, nor become an energy superpower, unless pipelines to the West Coast are built and the necessary export facilities/ shipping lanes authorized. As the cre-ation of such infrastructure would cross provincial lines and involve a variety of stakeholders, the federal government can play a significant role in leading and facilitating discussions.

At the same time, it is imperative that Canada has a long-term plan for manag-ing its resource endowment.

Such a plan must address three questions:

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. Canada has historically allowed the sale of many of our natural resource companies to foreign ownership (e.g. Imperial Oil to ExxonMobil, Stelco to US Steel, Alcan to Rio Tinto). Yet the recent takeover bid for Saskatchewan’s Potash Corp. was blocked by the federal government. 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). Despite being a natural resource and agri-food super-power, Canada has surprisingly few

natural resource and food companies that are global leaders. Changing this is key to ensuring that the benefits from knowledge, technology and value-added in the natural resources industries flow to Canada.

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. As Asia and the world demand more of Canada’s resources, we must ensure that we are not simply spending the wealth of future genera-tions. Norway provides an example. In 1991 it established a national fund to hold and invest the profits from its oil resources. To date, Norway has put over $560 billion in this fund – over $100,000 per person in the country. Only the inter-est is spent so the capital remains intact.

Although Alberta inaugurated a similar fund in 1976, oil revenues ceased flowing to it in 1987. Today, Alberta’s oil revenue (and the income from the remaining fund) is funneled into the government operating budget. 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. Some portion of interest income from the fund income could be used to support the broader re-alignment of Canada’s economy towards Asia.

The Prime Minister has made, and must continue to make, Asia a priority


41

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, environmental groups, indigenous peoples’ groups and local communities to ensure that Canada supplies Asia’s growing resource needs in a sustainable and responsible way.

5 Appoint a Minister for Asia and create a Cabinet Committee on Asia to drive and take accountability for this agendaNothing gets done in government without leadership. The Prime Minister has made, and must con-tinue to make, Asia a priority. But there must also be focused lead-ership within the Ministry on this issue. While some cabinet ministers have elements of the Asia agenda in their portfolio (e.g. the Minister of International Trade also has the title of Minister of the Asia-Pacific Gateway), Asia is just one amongst many issues. In the past there was a Secretary of State for Asia within Foreign Affairs, along with other regionally focused Secretaries of State. However, what I am proposing is something different: a minister with

cabinet rank responsible for the whole of the Asia agenda, cutting across ministries and departments. The Minister for Asia would be a key contact point for Canadian businesses, civil society and Asian governments.

In making such an appointment, the Prime Minister would send an unmistak-able signal that Canada is fundamentally shifting its economic orientation.

––––––––

The world is re-balancing towards Asia; Canada must re-balance with it. Canada has benefited greatly from two centuries of deep links with other Western nations, in particular the US. Those links will continue to be important, but Canada must now rapidly build links with Asia that are at least as deep, broad and strong. This will not happen without strong federal government leadership. 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. We must act quickly and decisively to ensure our place at the table. Canada’s own Asia century must start now.


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 fami-lies. Chinese-made goods dominate our stores and the fact that China is the world’s second largest economy is now widely recognized by Canadians.

During the global recession of 2008 – 2009, it was continued Chinese demand for com-modities that helped moderate the economic downturn in Canada. While Canadian exports to every other major market fell in 2009, sales to China rose by 7%. An unprecedented surge in Chinese demand for lumber took place just as the US housing market was collapsing, saving the wood industry in British Columbia industry from what would have been catastrophic loss-es. By May 2011, BC was exporting more wood products to China than to the US.

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. Indeed, it is likely the case that in a number of key industries, “tipping points” have been crossed which will result in sustained corporate attention to China, leading to even stronger

growth. For some, this shift in focus has already occurred: in a 2010 Asia Pacific Foundation survey of Canadian businesses in China, 20% of respondents reported that more than half of their global revenues already came from the People’s Republic.

Canadians too are starting to take note. In a speech delivered shortly before his first visit to Beijing as Minister of Foreign Affairs, John Baird said: “China is incredibly important to our future prosperity. My government gets it and as Canada’s new minister of foreign affairs, I get it.”

But what is it that Canadians “get” about the rise of China, and of Asia more broadly? And what are they going to do about it? Not enough, I fear.

There is no doubt that China looms large in the minds of Canadians. The Asia Pacific Foundation of Canada’s 2011 national opin-ion 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). 62% of respondents agreed that Asia is vital to the well-being of Canada, and China ranked second to the US in terms of importance for Canada’s prosperity.

Yuen Pau Woo is President and CEO of the Asia Pacific Foundation of Canada. Pau is an advisor to the Shanghai WTO Affairs Consultation Centre and the Canadian Ditchley Foundation. He is on the Global Council of the Asia Society in New York and is a board member of the Mosaic Institute. Since 2006, Pau has been coordinator of the State of the Region Report, the flagship publication of the Pacific Economic Cooperation Council. He is also on the edito-rial board of Pacific Affairs.

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


43

But there are no prizes for recognizing the obvious. 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. Canada’s recognition of Asia’s importance has come belatedly. If some of our industries have just now reached the tipping point and are beginning to place serious emphasis on Asian markets, they are doing so at least ten years after their counterparts in comparable economies such as Australia. In the same way, the federal government may now “get it”, but Ottawa has come late to a party where most of the guests have already arrived.

The challenge for government policy, therefore, is not just to “get it”, but to “get ahead of it”. For the federal government, a three-year program of policy catch-up should be combined with an ambitious longer-term program of policy leap-frog. The goal should be no less than for Canada to be the most Asia-engaged country in the western world.

POLICY CATCH-UPTrade and investment agreementsCanada has no trade agreements with Asian countries. Worse, Ottawa has developed a reputation for not being able to close trade deals with Asian partners. Despite starting negotiations with Singapore more than a decade ago, a deal has yet to be reached. In the interim, Singapore concluded twelve agreements with other trading partners, including the United States, Australia, China, India, Japan and Korea. Likewise, the proposed Canada–Korea Free Trade Agreement is unfulfilled even after six years of negotia-

tions, in part because of opposition from the Canadian automobile industry. The Americans started their own negotiations with Korea more than a year after Canada did, and came to an agreement in 2009 – overcom-ing the objections of their own, much larger, 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. If these negotiations end up languishing as the Singapore and Korea deals have, Canada’s image in Asia will be further tarnished.

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, including nascent groups such as the Trans-Pacific Partnership (TPP).1 Pursuing trade agreements with Asian countries will mean confronting protectionist measures at home, some of which are deeply entrenched. If nothing else, 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. There is an urgent need to:// bring trade negotiations with

Singapore and Korea to a successful conclusion;

// actively seek membership in the Trans-Pacific Partnership; and

// investigate trade and investment agreements with other Asian partners, on a bilateral or sub-regional basis, for example with the Association of Southeast Asian Nations (ASEAN).

Political EngagementThere has been no shortage of ministerial visits to Asian countries since 2009. 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. Political engagement with

1 The Trans-Pacific

Partnership (TPP) is an

Asia-Pacific regional trade

agreement currently being

negotiated between the US

and eight other partners

(Australia, Brunei, Chile,

Malaysia, New Zealand,

Peru, Singapore, and

Vietnam).

The challenge for government policy is not just to “get it”

but to “get ahead of it”


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 ter-ritorial 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 gov-ernment should act swiftly on this pro-posal, 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, engage-ment 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 counter-parts, as part of a broad-based effort to engage with Asian leaders across indus-try, civil society, and the think-tank community.2

Regional strategyCanada 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 includ-ed all dialogue partners, but not Canada.

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 concom-itant 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 “private-

citizen 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-beng-

phar)

Purely bilateral strategies are an incomplete and potentially misleading approach to crafting an Asia strategy


45

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 (ema-nating not least from the growing economic, political and military power of China and India).

// Increase the bureaucratic resources dedicated to working on Asian coun-tries and on Asia as a region.

// Develop metrics for Canada’s perfor-mance in Asia that take into account the nature of regional production networks and the growing integration of Asian markets.

POLICY LEAP-FROGIf 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

strategy that is supported at the highest levels of government and the private sector. 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.

Canada-Asia energy relationsPrime Minister Harper has described Canada as an energy superpower, but abun-dance 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


// 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 broad-gauge 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.

Capacity building: education and human capital cooperationCanadians may now understand the impor-tance 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 post- secondary level. Foreign student recruitment, curriculum development, overseas intern-ships, 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

Canada’s people-to-people ties with China are arguably longer, deeper, and more profound than those of any other Western country


47

Canadian and Asian interests in a way that goes well beyond the narrow lens of “dias-pora politics”. As an example, over 70 schools across China already offer Canadian high school curriculum to mostly native Chinese students. Building on such existing links, the federal government should:

// Engage in a strategic dialogue with key Asian countries (starting with China) on human capital cooperation. This initiative should involve not only schools, universities and colleges, but also research councils, professional organizations, industry, etc., and include within its scope objectives such as: joint training of officials, collaboration among research councils, facilitation of two-way flows of highly-skilled workers, and mutual recognition of credentials.

// Promote teaching about Asia and Asian languages in schools by funding national programs that can be an adjunct to provincial education cur-ricula and which incentivize schools, colleges and universities to sharply increase their Asia-related content.

// Launch a major Asian scholarship initiative, in conjunction with the provinces and the private sector, to provide opportunities for 50,000 Canadians to study in Asia over the next five years, and for a similar number of Asians to come to Canada.

From gateway to gateway economyThe federal government’s Asia Pacific Gateway and Corridors Initiative (APCGI), which kicked off in 2006, signalled Ottawa’s commitment to improve the port, road, and rail infrastructure of western Canada, in order to capture a larger share of in-bound trans-Pacific shipments. 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. Throughput at these ports has increased and better handling capacity has accelerated delivery times to (mostly US) destinations. The transportation sector has grown and thousands of jobs have been created.

If competitiveness is to be maintained, the federal government must continue to monitor – and where necessary intervene in – regulatory impediments, labour disputes, environmental issues, trade actions, and other challenges that affect these trade routes. For the APGCI to be the flagship Asia initiative that it was intended to be, however, 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. Examples include business and professional services, supply chain management, maritime services, green transportation, education and training, and the establishment of Asian regional head offices for North America.

The focal point for development of an Asia Pacific gateway economy should be the city of Vancouver. As the most Asian city outside of Asia, Vancouver occupies a special position in the western world. It is not simply that ethnic Asians make up about 40% of the population; 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 busi-ness, cultural, government and scholarly links with Asian countries. Positioned in this way,

Vancouver has the potential to be a powerful asset in Canada’s

relations with Asia


Vancouver has the potential to be a powerful asset in Canada’s relations with Asia.

In practical terms, this will mean investing in expertise, cultural institutions, trade and investment promotion, and convening capabilities in Vancouver that connect Canada and Asia. It will mean mobilizing a critical mass of people, knowledge, and networks that establish the city as the go-to place for Asia connections in North America and indeed across the western world. While this idea of concentrating resources in one location may be politically difficult, the case for Vancouver – in geographic, demographic, historical, and political terms – is compelling.

The federal government should therefore:

// (Re)locate to Vancouver those government agencies that have a significant Asia focus. Such units should be given high levels of autonomy and should be treated as top-level bureaus rather than outposts of Ottawa departments. A newly-established federal “Agency for Canadians Abroad” could, for example, be located in Vancouver, with principal responsibility for establishing connections with the estimated 600,000 Canadian citizens living in Asia.

// Focus on attracting Asian regional head offices to Vancouver, in conjunc-tion with provincial and municipal authorities.

// Establish Vancouver as the preferred (but by no means exclusive) venue for Asia-focused events. This is not simply about conferencing facilities, which are already in place, but has to do with programming high-level visits to the city, attracting major conventions and festivals, and investing in supporting “soft infrastructure” such as scholarship and business and think-tank networks. 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.

Together, 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. Most components of the strategy will require co-operation with other levels of government, with the private sector and with civil society. However, federal lead-ership is critical, and it has to come from the very top. The Prime Minister should signal a national commitment to Asia by way of a major policy statement that is directed not only to Canadians, but also to Asian leaders. More than a speech about the need to increase business with Asia, 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.

49

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. The vertiginous numbers accompanying Asia’s roaring re-emergence inspire mixed reac-tions in the West: mostly fear and greed, but occasionally hope.

With burgeoning foreign exchange reserves, high savings rates, active sovereign wealth funds and cash-rich banks and companies, Asia will increasingly displace the West as the world’s provider of capital. Across Asia, trillions are being invested in new infrastructure. Hundreds of new, 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. And as Asian countries shift from export-driven to consumption-driven economies, they are becoming the greatest markets of scale for the 21st century.

Over the coming decades, Asia will become the centre of aspiration, innovation and technology, and it is Asia that will set the standards and norms that will influence us all. Cultural power will follow economic power. There will likely be reverses and stalls

in the decades ahead. Nonetheless, the world we live in, the goods, services and culture we consume, and the way we understand global power, will increasingly be created in and influenced by Asia. This is a sharp departure from the past.

In this new environment, Canada’s long-term 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 also in countries such as Vietnam and Indonesia). The emergence of new, 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, will depend critically on how much we matter in Asia.

ASIA’S WICKED PROBLEMSDespite all this optimism, Asia also faces mounting problems. Asian countries are at the forefront of the biggest collective action challenges of our time, from critical short-ages of water, power and food, to a need to fill education, healthcare and infrastructure gaps. Add to these demographic change, environmental degradation, healthcare and

Rana Sarkar is the President and Chief Executive

Officer of the Canada-India Business Council. 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. Previously, Rana

was a co-founder and director of Rawlings Atlantic Limited, a cross border advisory firm, and

Content Partners, a fast growing media promotions agency. He

is a member of the advisory council of the Literary Review of Canada and the Mowatt Centre

for Policy Innovation.

THE BIG CHALLENGE: ADJUSTING TO

THE ASIA CENTURY RANA SARKAR


climate change and the scope of concern is clear. Finding sustainable solutions for these “wicked problems” is the preoccupation of policy-makers across Asia.

The evolving and complex relationships between Asian companies and countries are also likely to be critical. Over half of Asia’s trade is intraregional. New regional institu-tions – not tied to legacy systems – are being created, and new generations of government and business leaders are taking the helm. Countries and companies are focused on each other as key partners, competitors, threats and sources of opportunity. Security dilemmas abound; China is the elephant in the room.

Asian countries also face uncertainty in their relations with other regions. Asian companies are able to draw on vast pools of savings and have strong competitive advan-tages. However, as new players, they lack experience and sometimes the necessary tools to forge effective relationships. Growing opposition in Africa to Chinese resource investments is but one example.

Outsiders that offer practical, 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.

NEW TERMS OF TRADE AND NEW DIPLOMACYNew companies and new leaders in Asia are without preconceptions about whom they should partner with. Competition for their attention – not to mention their markets, capital and talent – is, and will continue to be, intense. The good news for Canada is that, amidst this historical power shift, anything is possible.

Asia’s reawakening coincides with ongoing change in the nature of international relations, brought on by the rapid growth of transportation and communication

networks. In the new global economy, ideas equate to value. Ideas are mobile, so for countries and companies, being “top of mind” is an increasingly important part of being competitive.

Diplomacy has also changed. The growing influence of non-state actors, such as NGOs and business leaders, and private events such as the World Economic Forum (WEF), continue to undermine traditional, hierarchical forms of organization. Countries must therefore reach far broader and ever-changing constituencies in order to get things done. The new role of states is to co-ordinate the energy and efforts of these “wise crowds” in the pursuit of national interests.

Dense global networks may democratize diplomacy, but they also lead to the emer-gence of dominant nodes or hubs through which information, culture, goods, capital and people flow. These hubs do not correspond to the traditional distribution of power. Cities such as Dubai and Singapore have catapulted onto the world stage despite their size. Successful diplomacy requires understanding and targeting key hubs, as well as identifying and promoting new ones.

Countries that fail to understand and adjust to these new patterns of business and diplomacy will fall behind. The key tools in this environment are being visible, useful

Asian countries are at the forefront of the biggest collective action challenges of our time, from critical shortages of water, power and food, to a need to fill education, healthcare and infrastructure gaps


51

and getting connected. Additional resources will help, but it is more important to be strategic and clever with how they are used. Done right, countries can punch well above their weight.

WHAT SHOULD THE FEDERAL GOVERNMENT DO?In Canada, governments and big business are coming late to the party; Canada is falling behind its global competitors. By now most leaders, if not the public, are getting quietly worried about global economic realignment and looking to get their Asian game on. But how? And what can and should the federal government do to help, particularly in these lean economic times?

Competition for Asia’s attention is intense. Despite Canada being a Pacific Rim nation, with long-established Asian Canadian dias-poras (at 3.5 million total, Asian diasporas in Canada make up a larger percentage of the population than in any other G7 country), Canada’s understanding of the “new Asia” is partial, at best. Given the mismatch between our strategic need to be in Asia, our domestic understanding of the market, and the market’s understanding of us, there is need for a strong federal leadership role.

Canada must develop a coherent and consistent strategy, complete with guide posts and assessment measures, to move forward in an Asia-centric world. Shifting

gears in our existing approach towards Asia is a start. But we need to go further.

Canada’s reputation as a gateway to natural resources may open the door to trade and investment with Asia, but it is our ability to be resourceful that will keep that door open. We must be responsive to Asia’s crisis needs and recognize where we can play additional roles, be it in education, healthcare, environ-mental stewardship or elsewhere.

Likewise, we must be resourceful in the tools we use. 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. Designed properly, such investments and strategies offer high rewards for little money down; something that we may term as “frugal commercial diplomacy”.

1 Double down on existing policy A good starting point for Canada is to redouble its efforts and add more resourc-es to our existing policy of commercial engagement with Asia, as outlined in the Department of Foreign Affairs and International Trade’s (DFAIT’s) Global Commerce Strategy. It is a given that we need to pursue more bilateral trade and investment protection agreements and rapidly conclude current negotia-tions (particularly the Comprehensive Economic Partnership agreement with India and our free trade agreement with Korea). These agreements will serve as symbols of Canada’s interest in Asia and as templates for further deals.

More trade offices should be estab-lished in key regional centres as well as second and third tier cities, particularly in China and India. We should also step up engagement with regional inter-govern-mental forums, such as the Trans-Pacific Partnership and Association of South East Asian Nations (ASEAN), and continue to develop the Pacific Gateway initiative. 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, but it is our

ability to be resourceful that will keep that door open


be pursued and education and research partnerships should be increased dramati-cally, fulfilling pledges already made.

We should also continue to make our trade and investment rules more transparent and to reform our immigra-tion system so that it encourages talent circulation to Canada. Demographic changes in western countries are fuelling increased competition for qualified immigrants from Asian and elsewhere. Canada has a long-standing tradition of immigration but it cannot afford to be complacent; systems need to be in place that encourage the best to come here.

2 Lead from the topAny new strategy for Asia must be led, and be seen to be led, from the top. This is expected by countries such as China, Korea and Singapore, where the state still plays a major role in the economy. To focus attention, two Cabinet ministers with economic portfolios should be appointed, one for India and one for China. Co-ordination between ministers and portfolios is also essential: we must seek synergies between our efforts in different Asian countries, as well as other parts of the world.

Our Prime Minister must be visible in the region, travelling – strategically and predictably, rather than episodically – with thematically (or sectorally) selected versions of Team Canada. Such an effort will be highly symbolic. 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.

To be most effective, we should coor-dinate Asian visits, and exploit synergies between all levels of government. Currently, visits to Asia by federal, provincial and other public officials are uncoordinated and often confusing for our hosts. Coordination does not mean losing our

regional differentiation: each region has a compelling story to tell, but it should tell it under the Canadian umbrella.

In the coming years, as fiscal and program crises crowd the agenda, there is a very real danger that high-level engage-ment with Asia will fall by the wayside. We should do everything we can to guard against this danger: with our major trading partners facing a protracted period of slow growth, an effective Asia strategy is ever more essential for our economic health.

3 Create occasions and support iconic projectsTo ensure consistency and visibility, the federal government should focus on creating or joining regular forums of interaction in target Asian countries. We should look to anchor our efforts around these. For the past five years, the Canada China Business Council has run a successful week of activities every November to engage top government and business leaders. Similarly, the Canada-India 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). The federal government should look to support and curate similar annual occasions in all regional centres to galvanize senior busi-ness leaders and focus media attention.

To be most effective, we should co-ordinate Asian visits and exploit synergies between all levels of government


53

Canada’s brand can also be enhanced by strategically associating with iconic, highly-visible projects in Asian countries. For instance, we should look to co-ordi-nate Canadian participation in high-profile efforts such as the Delhi–Mumbai Industrial Corridor, Asia’s largest building project. Equally, we might consider working with Chinese regions to target a smart city project in which Canadian investors and companies can take a leadership role, or, perhaps, develop a joint program with the Indian Space Research Agency. Engaging in such projects would focus the bilateral relationship and bring together top talent and com-panies, leading to further collaboration and thicker networks.

Canada should also look to maximize the value of its home-grown events and icons to build visibility in Asia. For example, the Toronto International Film Festival could be used as an anchor for our Asia digital media strategy, and become a key bridge to inserting more Canada into Asian popular culture.

4 Develop Brand CanadaTo succeed in this competition for attention, Canada needs to command a higher “mindshare” of its would-be part-ners in Asia. The federal government has a major leadership and co-ordinating role to play in developing and promoting a strong brand. This brand can be inserted

into elite and popular imaginations through smart, strategic investments. These might include:

// Canada Brand Equity FoundationSmart countries, from Singapore to Qatar, aggressively manage their brands abroad. Borrowing from similar institutions worldwide, a Canada Brand Equity Foundation should be established, co-funded by the provinces and industry and operated at arm’s length from government. This body should be tasked with managing and measuring the perception of Canada in key hubs, cities and regions of Asia. Its initial goal could be to map and engage 10,000 key leaders, influencers, entrepreneurs, academics and journalists. It should partner with polling and citizen engagement experts and engage top private sector talent and digital entrepreneurs as advi-sors and contributors, showcasing their work in the process. Such a foundation could achieve sig-nificant results with modest seed investment through an incentiv-ized partnership model.

// Digital CBC Asia Broadcast and digital content still matters. Canada is absent from the airwaves and digital commons of Asia. Other countries, such as Russia, France, the UAE and the UK, have established broadcast brands in Asia which help shape the tastes, preference and the worldviews of millions. Even smaller countries from Latin America and the Middle East are entering the fray. 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, highly-visible projects

in Asian countries


ulations). It should use these to create an expanded service in Asia with a strong emphasis on creating relevant digital content for local markets.

5 Target the hubsSince we cannot be everywhere at the same time, we need to prioritize specific locations for engagement. By identifying and targeting key trade hubs and nodes connecting Asian business networks, Canada can reach more actors and countries while limiting our costs. This is a departure from traditional bilateral commercial diplomacy.

Two types of hubs should be focal points for Canada’s commercial diplo-macy in Asia. First, there are intra-Asian hubs. Places like Dubai, Kuala Lumpur, Singapore and even tax-haven Mauritius are becoming indispensible conduits for business with China and India. Second are the critical non-Asian hubs. London, New York and San Francisco are important global gateways. Not only are they key sources of investment into Asia, they also house the foreign headquarters of a growing number of Asian firms looking to expand their global operations. In many cases, Canada has a better chance of attracting investment and trade by targeting these offices than by targeting their home bases.

We should also promote Canada as a conduit for the international strategies of Asian businesses. For instance, we should help address India’s resource requirements, not just by selling resources to India, but by using our global resource finance and services leadership to help India access Brazil. Equally, Canadians can be useful to Japanese and Korean companies hoping to build their markets in India. Canada must promote itself as a connector nation and build the connect-ing infrastructure to support this.

6 Go to the head of the parade: be proactive with regional and global institutionsThe post-war multilateral institutions, in which Canada was prominent, are now in a state of atrophy. In newer institutions, such as the G20, our role is precarious. While we should remain engaged in these forums, for added clout we should create or take leadership in new institutions with growth potential. Canada needs to get ahead of the curve: we should pinpoint where the action is, identify gaps, and join or create insti-tutions to fill these voids. To be most effective, such institutions should relate to Canada’s core advantages.

We have a history in this. In 1991, 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, the organization’s membership covered 60% of the western world’s metal production. More recently, NRCan took on the role of secretariat (and major financier) for the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development.

Canada should aggressively expand this type of institutional leadership to other crisis needs. We should leverage our expertise to create regional institutions focused on water management, pandem-ics and air pollution, for example.

Canada must promote itself as a connector nation and build the connecting infrastructure to support this


55

7 Establish a Canadian “Open University” in AsiaEducation is the gateway to our economic relationship with emerging Asia. This is particularly true in markets such as India where, to meet current demand, over 1,000 new universities would need to be built in the coming decade. Since nowhere near this number will be built, other means of delivering education will be found. To help fill the gap, a con-sortium of Canadian universities could offer programs online (predominantly) and also on physical campuses in Asia, through partnerships. This calls for a co-ordinated national approach, 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.

Engaging Asia is critical for all Canadian universities. Many already have advanced strategies in place and are set to attract more students, establish more research and commercial partnerships and develop more faculty exchanges. However, 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 ban-ner, again, using mostly digital delivery. 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.

8 Curate wise crowds and empower them to work on Canada’s behalfA challenge for the federal government is that most economic activity and new diplomacy happens outside of its sightlines. Canada’s businesses, academic institutions, NGOs, provincial govern-ments and private citizens are already active in Asia and are important faces for Canada.

Any exclusively top-down or overly-bureaucratic approach runs up against the “distributed power” grain of our networked world. It risks missing important initiatives and failing to capitalize on effective approaches that are run outside government. In this context, the federal government needs to help source and coordinate leadership from below, acting as a facilitator, enabler and information provider and making available open-source tools that enable others to lead. 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.

In addition, we need to create bottom-up incentives for participation using contests and challenges to get Canadians to promote Canada’s brand overseas. For instance, we could build on DFAIT’s Investment Champions program, which currently recruits Canadian business leaders to offer opportunities to foreign investors. We should push it one step further by offering a special desig-nation or monetary prizes to companies, academics or civil society organizations that go global under the Canadian banner. 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


tunities, skills and connections between their old and new worlds.

But our open-source strategy should not be limited to Canadians. For a small sum, we can offer a “Canadian X-Prize” to motivate smart crowds outside Canada to work on our behalf, particularly in Asia. This means picking a country and a specific problem (e.g. rural electrification in a given Indian region) and offering a prize in conjunction with Canadian and local universities, as well as leading Canadian companies. This would be a cost-effective, high-profile way to build perception of Canada as a useful and innovative nation with which it is worth doing business.

Private equity and venture funds are another way to get Canada more involved. For instance, the federal gov-ernment could incentivize Canadian pension funds and capital providers, through lead organizations such as Export Development Canada, to work with Canadian universities and local venture partners to invest in high-growth sectors. With the right partners, these seed investments would be highly visible and get Canadian talent engaged in Asian innovation and help resolve our commercialization challenge. On a larger scale, 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. 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.

9 Engage in serial experimentation and measure resultsAn overarching part of Canada’s Asia (and global) strategy should be serial experimentation. Not all the ideas out-lined above will work, but we need to experiment to see what gains traction. 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.

But Canada cannot experiment effectively without proper benchmarks and means of assessment that rapidly and accurately evaluate the impact of policies and programs. For instance, the Canada-India Business Council has found that official bilateral trade and investment figures dramatically under-estimate 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).

Canada must collect better trade and investment data that truly reflects how the global economy works

We must identify new ways to make ourselves useful in Asia and to bring Canada to the top of the Asian mind


57

Canada must collect better trade and investment data that truly reflects how the global economy works. Organizations such as Statistics Canada should be encouraged to improve their measure-ment of Canada’s economic relationship with Asia, capturing more of our services trade and trans-shipments through other countries. The Canada Brand Equity Foundation would also have a role to play in this respect, providing time series data on Canada’s profile in Asia. This would allow us to evaluate our efforts and add leverage when engaging business and government leaders in the region.

CONCLUSIONThe centre of the global economy is steadily shifting towards Asia; Canada needs to adjust. Our current strategy – pursuing trade agreements with key countries, expanding commercial representation and getting into regional forums – is a great start, and we should double-down on these efforts. But we must do more – much more. We need to be creative and resourceful and take advantage of cutting-edge, cost-effective tools of diplo-macy. Above all we must identify new ways to make ourselves useful in Asia and to bring Canada to the top of the Asian mind.

SQUARING THE CARBON CIRCLEBOTH ADVANCED AND emerging markets are moving inexorably towards a low-carbon future. Yet Canada has no coherent strategy to reduce carbon consumption.

Despite coming from very different perspectives – a global energy company, 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. 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, then, a business versus the environment problem, as it has often been painted. Indeed, all authors are at pains to stress the need for Canada to identify a path that will enable it to continue to prosper eco-nomically, including through exploitation of our natural resources. But, for myriad reasons, 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). 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.

If we fail to do so, we risk marginalization in the global low-carbon economy. Stewart Elgie and Alex Wood stress that Canada should view this nascent economy as an

opportunity, rather than a threat. 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, at least for the next few decades.

Clearly there is a long way to go before we can claim this title. But action must start now. The authors are not, though, in agreement as to the steps that should be taken.

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. This should be part of a comprehensive policy framework that tailors measures for each sector. It should go hand in hand with a variety of “no regrets” measures, such as increases in energy efficiency and technology investment (particularly to push promising technologies through to wide deployment).

In an ideal world (ah, for an ideal world!), Elgie & Wood prefer a broad-based carbon

Canada urgently needs a meaningful national carbon strategy

tax. A portion of the revenues from such a tax should, in their view, be used to offset the need for future personal tax increases. The rest should be reinvested in low-carbon infrastructure and clean technology devel-opment. While favouring a tax, the authors certainly recognize the merits of a cap-and-trade system. For them, what is key is trading; they argue strongly against a “command and control” system for carbon regulation, though this appears to be the direction in which the federal government is currently moving.

For Mallory, this is actually positive: he praises the recently-announced federal gov-ernment regulations to phase out coal-fired power generation (unless carbon sequestration measures are in place), despite the fact that he is generally opposed to increased regulation. He is a strong proponent of natural gas as the

carbon-based fuel that will help move us to a low-carbon future and, like the other authors, he points out the scope for efficiency-based reductions in carbon emissions. Interestingly, he argues that most of these measures can also be justified on a public policy basis, unrelated to carbon.

Together, then, the contributors make a powerful plea for Canada to move forward in the carbon area. Recent events, including protests and proposed legislative bans on our oil, have underscored the fact that the world does care what we do and that failing to act will increase our economic vulnerability immeasurably. For this reason alone, now is the time for federal leadership in the devel-opment of a comprehensive strategy to limit our national emissions.

We should strive to position ourselves as the world’s most environmentally-responsible producer

of all manner of goods and services


60

The dual global challenges of mitigating climate change and supplying the expected surge in global energy demand are formi-dable. The two issues are highly integrated and the policy direction adopted for each will impact the other.

Canada needs effective and innovative federal policies that will enhance our posi-tion as a global energy supplier, broaden our market access to meet global energy demand and at the same time reduce our greenhouse gas (GHG) emissions. We must succeed on both fronts at the same time: as federal and provincial energy ministers tackle the devel-opment of a national energy framework, they must collaborate in the development of cohesive and effective national policies that will enable Canada to become a low carbon economy.

Canada is a major global energy supplier and also one of the world’s highest per capita GHG emitters. 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). The diversity of GHG emissions sources, the long-term transi-

tion associated with technology development, strong growth in the energy sector, and the high costs of emission reduction stand in the way of near-term progress. Offsets could help close the gap, but the magnitude of offsets required, and the time needed to implement an offset program with credibility, reduce the value of this solution.

Overall, it is the absence of a comprehen-sive climate change policy framework, one that takes into account the factors above and starts to put in place the required systems and infrastructure, that is the key impediment to meeting our targets. Developing such a frame-work – which, in our view, should incorporate a carbon pricing mechanism – must therefore become a federal government priority. This is a long-term project and the effort required should not be underestimated.

THE CONTEXTTo its credit, the federal government has already implemented some important GHG reduction initiatives (e.g. vehicle efficiency regulations, ecoACTION), but more needs to be done, especially on the consumer demand side. Programs need to be longer-term and more cost effective, and we need to set more

Lorraine Mitchelmore is President of Shell Canada Ltd.

She also holds the roles of Canada Country Chair and

VP Onshore Exploration & Appraisal for Upstream

Americas. She has over 25 years of experience in the inter-

national oil and gas industry, having started her career on

the exploration and production side. Lorraine is a board mem-

ber of the Canadian Association of Petroleum Producers, the Conference Board of Canada

and a member of the Catalyst Canada Board of Advisors.

She is also a member of the Canadian Council of Chief

Executives.

LOSING THE 2020 BATTLE: WINNING THE 2050 WAR

LORRAINE MITCHELMORE

1 The Conference Board

of Canada, 2011.


ambitious objectives. In the near term there are also a number of regulatory, 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.

As a starting point, we need to understand our current GHG profile and realistically assess our opportunities for GHG reduction. 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 gen-eration and transportation.

Canada is fortunate to have abundant low-GHG power generation capacity (hydro and nuclear). This means that switching from coal-fired power, while important, will not offer the very significant GHG reduction that can be achieved through the same switch in the US. Nevertheless, the ongoing development of renewable and low carbon fuels for power generation remains vitally important. At the

same time, energy efficiency technologies applied to energy production will help offset the projected increase in GHG emissions, but until breakthrough technologies such as carbon capture and storage (CCS) are widely deployed, increased GHG emissions from the Canadian energy sector are forecast.

Widespread non-fossil fuel motive power (i.e. electricity, hydrogen) for the transporta-tion network will ultimately be required, but this solution lies well beyond 2020. The costs of near term transportation technology solutions will be high and, given the rate of fleet turnover, will happen only gradually. The federal govern-ment has recently implemented a biofuels regulation that could provide a more immedi-ate reduction of transportation emissions, but this regulation is focused on biofuel volume targets. 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.

600

680

700

720

740

640

660

Meg

aton

nes

620

2005baseline

2005–9recession

etc.

Coal retirement

CAFE*standards

More biofuels

Industrial gasses

CCS Oil sands expansion

Natural gas for power

Possible 2020

scenario* Corporate Average Fuel Economy – regulations improving vehicle fuel economy

Assumes 7 GW (nearly half) of the coal generation capacity closes

There is almost no possibility of meeting the 2020 targetwithout significant supplementary action

2020 target 2005 less 17%

Possible post recessionemissions bounce back

Figure 1

Possible 2020 outlook for Canada

SOURCE: Shell

SQUARING THE CARBON CIRCLE

62

Demand-side management holds consider-able promise for GHG reductions in both trans-portation and power generation, but resistance will be strong from a society that highly values mobility and a quality of life enhanced by modern technological conveniences.

Looking beyond these three highest emitting areas to other energy intensive industries, we see continued efforts to implement efficiency measures to help offset growth-linked increases in GHG emissions. This process could be made more effective through trading and the purchase of domes-tic offsets from non-regulated sectors (such as agriculture, forestry and waste). However, this cannot happen until a robust and cred-ible trading infrastructure is in place.

The one untested opportunity of note for Canada might be the GHG offset associated with Reducing Emissions from Deforestation and Forest Degradation (REDD). Deforestation currently accounts for about 18% of global GHGs. Reducing deforestation and thus emis-

sions from tropical and other forests offers an immediate option for GHG reduction at relatively low cost.

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. For example, Canada has not only adopted the identical Copenhagen 2020 reduction target, but also plans to adopt “equivalent” regulations to the highly prescriptive equipment regulations the US Environmental Protection Agency will place on US industry. Given the economic and trade ties between the two countries, this alignment of policy may seem to make sense politically and economically. However, there are significant GHG-related differences between the US and Canada that make US policies less well-suited for Canada. For example:// Coal power fuel-switching may reduce

US GHG emissions close to the target: this is not the case in Canada.

Transportation164 Mt

Electricity126 Mt

Buildings80 Mt

Agriculture74 Mt

Waste and others54 Mt

Oil and Gas153 Mt

Emission-intensivetrade-exposed industries

80 Mt

22%

17%

21%

11%

11%

10%8%

*Mt = Megatonnes

*

Figure 2

Sources of Canada’s GHG emissions (2005)

SOURCE: Environment Canada (2011) Canada’s Emissions Trends.


// 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.

The challenge for Canada is, then, to develop a coherent and harmonized long-term policy framework that is broad-based and addresses all sectors of the economy. A hybrid of different policy approaches must be adopted to gain maximum value in emissions reductions, while also ensuring we enhance our position as a global energy supplier. This challenge should be addressed through the development of a co-ordinated national climate change policy framework, rather than through the piecemeal adoption of various individual measures.

A CLIMATE CHANGE POLICY FRAMEWORK FOR CANADAIn the quest for such a framework, a variety of policy initiatives have been proposed. These include:// implementing a market-based carbon

price with trading and offsets for large industrial stationary sources;

// accelerating strategic advanced technologies (such as CCS, advanced biofuels, power storage, etc);

// regulating GHG emissions in the transportation and buildings sectors;

// acting to reduce energy consumption in the power and transportation sectors;

// acting now on “no regret’ GHG reduc-tion measures that avoid competitive disadvantage and kick-start emissions reductions; and

// developing a comprehensive Canadian Energy Framework that works in tandem with a long-term Canadian Climate Change Framework.

Given the scope and complexity of the climate change challenge, federal authorities will have to draw on the full suite of policy options. Some will work better, or be more appropriate for particular sectors, than oth-ers. 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. But all must be part of the mix.

At the same time as working on climate change policies, we must also develop a Canadian energy strategy (which will inter-twine with our climate strategy). If we do not, we will miss out on opportunities to expand our natural resources development

and enhance our access to growing global energy (and other) markets. Under “business as usual” we remain trapped in a regulatory quagmire. First Nations relationships and regulatory assessment and approvals around resource extraction remain unpredictable and we do not have the enabling environ-ment and certainty that we require for future growth in the energy sector, based on a skilled labour force and enhanced innovation.

If we fail to develop an effective energy strategy, GHG emissions may initially go down as we flounder in our efforts to become a major global energy supplier. But this is no solution: if Canada’s prosperity is damaged, this will actually impair our ability to tackle GHG emissions as we will not have the eco-nomic capacity to fund further emissions-reduction measures.

In developing our climate change policy framework, a single, economy-wide carbon price is, theoretically, the most efficient

At the same time as working on climate change policies, we must also develop a Canadian energy strategy


64

approach. However, this solution may not catalyze the early technological change and initial deployment of technology required in each and every sector. This is because the price response varies from sector to sector due to differences in behavior, infrastructure turnover rates, and the utility value of exist-ing assets. In some sectors a relatively low carbon price would stimulate immediate changes as equipment is replaced. In others, the costs would remain too high meaning that changes might not occur and advanced technology would not be developed within an acceptable timeframe. For this reason, each major sector will require its own tar-geted policy approach.

TECHNOLOGY AS A SOLUTIONTechnology remains a key consider-ation. There is a need both to increase the speed with which existing technologies are deployed and to develop and bring to market new technologies. Shell favours a

technology pathway model which recog-nizes three clear phases: (i) Discover and Develop (ii) Demonstrate and (iii) Deploy (Figure 3).

The three stages allow technology to progress down the cost curve. 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, such as car-bon pricing, are not on their own sufficient to enable change. As costs become lower, and with the adoption of a carbon price, this equation should change (as shown by the intersection between the green ovals and the orange bar in the figure above). The Demonstrate phase is key in terms of encouraging learning-by-doing and delivering essential cost reductions for the Deployment phase. It is the Demonstrate phase that demands the greatest funding because it requires multiple facilities to learn the key efficiencies to reduce costs.

01000100101

20

40

60

80

100

Tech

nolo

gy co

st

Number of installations

CO2 price

Higher emittingalternative

DeploymentInitial deploymentthrough demonstration

Discover & Develop

Demonstration

Expected technology costFigure 3

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

SOURCE: Shell


The pathway to deployment of CCS, one of the few technologies that is entirely climate-driven and therefore dependent upon policy intervention, can be better understood by reference to this technology pathway model.

1 Although a set of CCS technologies exists (has been discovered and developed), there is still vast room for improvement. Advances are essen-tial to improve the efficiency of this important mitigation option prior to commercialization.

2 CCS is presently stuck at the Demonstration phase. This phase is critical to the longer-term deployment of CCS in that it both proves the com-mercial application of the technology in a given location and establishes early infrastructure to support deployment growth. 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, more must be done to push CCS through to the Deployment phase.

3 An important step is to put in place an emissions trading system that includes a price-signal which will support long-term CCS deployment.

The need to develop novel renewable technology and advanced biofuel technolo-gies from waste feedstocks also underscores the importance of having in place an enabling structure to help push the technologies down the cost curve. Public funding is likely to be critical in the early Demonstrate phase to enable later deployment of large-scale renewable projects.

DEVELOPING A POLICY FRAMEWORKBuilding on this understanding of the devel-opment and deployment of technology, a

policy framework, such as that presented in Figure 4, can be established. The figure shows a potential policy framework struc-ture and provides some generic examples of policy approaches within each sector. Our federal government will have to develop its own policy framework, tailored to the needs of the country. Regulation will play a key role, as will market-based mechanisms.

Regulation is required to initiate technol-ogy development in areas where mitigation measures are very costly and therefore unre-sponsive to a carbon price. Regulation can provide incentives for technology develop-ment that might otherwise remain stagnant for many years. Examples are regulation on improved vehicle efficiency and the develop-ment of advanced low-carbon intensive bio-fuel technologies to reduce transportation emissions, as well as more efficient building standards.

In designing a “fit-for-purpose” policy framework, the government must be sensitive to policy overlap which can have unintended, adverse consequences. As an example, refin-ery GHG emissions are regulated under con-trols on facility-based GHG emissions, but some jurisdictions also include these emis-sions in the lifecycle regulations of blended biofuels. Double regulation can send mixed signals about appropriate reduction strate-gies and, in the worst cases, lead to failure to recognize reductions.

OPTIONS FOR THE DEPLOYMENT PHASE: CARBON PRICINGIn this section we expand upon one “box” (highlighted) in Figure 4: proposed carbon pricing for the Deployment phase for power generation and industry/manufacturing.

The implementation of an effective carbon price at the federal level should be a critical part of Canada’s GHG reduction policy framework. Market-based mecha-nisms and the application of a carbon price to sectors that are highly responsive to price signals (generally large stationary sources

2 This funding is provided

through a number of

federal and provincial

programs, such as the

Government of Canada’s

recently created Clean

Energy Fund. 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.


66

such as power generation and large industrial facilities) are an effective means of reducing emissions. Our recommendation would be to introduce a carbon price, initially, only to large, stationary point sources. This will pro-vide a sound basis on which to add sectors over time.

Figure 5 gives a brief overview of the vari-ous options for implementing a carbon price

A quick review of the current state of carbon pricing in Canada clearly demon-strates the lack of a harmonized Canadian approach. British Colombia and Quebec have implemented carbon taxes that put a price on GHG emissions through a tax on fuels or utility services. Alberta, by contrast, has a baseline-and-credit system in place to reduce the carbon intensity of large industrial facilities. Companies can supplement their own reductions in facility GHG emissions by purchasing offsets within the province, or

paying a penalty into a technology fund. In addition, several Canadian provinces have cap-and-trade regulations ready, 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. The carbon price, initially felt by the emitter (for example, by paying a tax or by purchasing allowances from the government), is ultimately passed through to the consumer. The result is that the cost of most goods and services will increase, but a new cost ranking will emerge that will alter the purchasing patterns of consum-ers. High carbon products will become less competitive; they will either be removed from the market or reengineered to reduce their carbon footprint. The additional costs borne by the consumer (paid to the govern-

Example of a generic policy framework Power generation / Industry & Manufacturing Transport

Commercial & domestic (buildings)

Land use / Agriculture

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

Demonstrate

Large-scale first-generation CCS demonstration projects

Large-scale advanced biofuel technology production

Encourage step-out design of efficient building construction

Encourage early adoption of new techniques

Deploy

Carbon price legal framework

Vehicle efficiency/low-carbon fuel incentives

More advanced efficiency standards

Best practice sharing

Figure 4


ment in the form of a carbon tax or the purchase of allowances) must then be offset, either through personal tax reductions or a decrease in sales tax.

Additionally, emissions-intensive domes-tic 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.e. moving facilities across borders to jurisdictions with no carbon price).

In an ideal world, policy measures should be as consistent as possible across as wide a range as possible. They should start between states and provinces and extend over time across free trade zones, leading ultimately to global consistency.

Options for implementing a carbon price

Implementation Option Description

Cap-and-Trade System

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

Carbon Tax

A carbon tax operates in much the same way as a cap-and-trade approach, although is arguably less efficient in delivering a clear environmental outcome. There is no cap, 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

Baseline-and-Credit Approach

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

Project Mechanism

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

Figure 5


68

The carbon price can reasonably be set by only one mechanism in a given jurisdic-tion. Shell believes that cap-and-trade is the preferred carbon pricing approach as it offers certainty in emissions reductions, the greatest compliance flexibility, and the lowest cost of compliance through market mechanisms such as trading and offsets. However, we also recognize that greater flexibility and efficien-cy comes at the cost of greater complexity. While a global cap-and-trade system may be the ultimate long-term goal, simpler carbon pricing approaches – such as a carbon tax

or baseline-and-credit approach – may be important forerunners.

AN IMPLEMENTATION ROADMAPThe first step for Canada is to assess what the current federal regulatory and policy landscape looks like, including the parameters set by any emergent Canadian energy strategy.

Figure 6 takes the previous generic policy framework and applies it to Canada. While not exhaustive, it illustrates the many gaps that need to be filled in order to develop an integrated and coordinated national policy framework.

The second step is to develop policy approaches that fit within this framework, cover all sectors of the economy and are based on long-term (i.e. 20+ years) environmental objectives. By 2020, 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).

Draft Canadian climate change policy framework Power generation / Industry & Manufacturing Transport

Commercial & domestic (buildings)

Land use / Agriculture

Discover / Develop Clean Energy Fund and ecoENERGY Initiatives

DemonstrateCCS demonstration (e.g. Alberta)

Biofuels fromwaste feedstock

Innovative step change in building design

REDD credits

Deploy

Energy Efficiency Act Regulation on coal-fired electricity regulation (in development)Alberta SGERWestern Climate Initiative

Renewable fuel content (Biofuel Bill)Passenger automobile and light truck GHG emission regulationsBC Carbon Tax

Improved buildingstandards

Low till agriculture

SGER – Specified Gas Emitters Regulation

Figure 6

Shell believes that cap-and-trade is the preferred carbon pricing approach as it offers certainty

in emissions reductions


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, such as natural gas, will significantly reduce GHG emissions. However, to live up to the Government of Canada’s commitment that 90% of electricity should be gen-erated from non-emitting sources by 2020, there must be clarity on the role of renewables. A carbon price would be the most effective stimulant to renew-able power.

// Industry, in general, is at present largely unregulated, though the fed-eral government has announced plans to change this. The problem is that a prescriptive, regulatory approach without a carbon price and market mechanisms is likely to be extremely costly and inefficient. Furthermore, it will not stimulate trading across sectors (such as between agriculture and forestry and industry). If the gov-ernment is determined to implement prescriptive, performance-based regu-lation to align with the US, we urge the incorporation of market mechanisms (such as trading and domestic offsets) as well as funding for technology, so these regimes can readily transform into more efficient carbon pricing approaches in years to come.

// Biofuels regulation must evolve from a volume-based, agriculturally-driven policy to one which focuses on reduced carbon intensity and better technologies.

// Opportunities abound to reduce demand for transportation (e.g. bet-ter urban planning and lower GHG transportation options for both public and commercial uses). A carbon tax on transportation fuels is, on the other hand, likely to be relatively ineffective as it will not be high enough to stimu-late either changes in behaviour or the very expensive technological measures that are required.

// Proposed measures in the area of commercial building are relatively short term and limited in their reach. Establishing longer-term policy frame-works with ambitious but achievable goals that are tailored to Canada’s needs, must be a priority. A facilitating framework to enhance and encourage more public and private R&D and innovation will be an essential compo-nent.

–––––––– There are clearly great challenges that must be overcome in the years ahead. While long-term actions are being designed we should not lose the ability or will to act. There are a multitude of short-term “no regret” steps in areas such as energy efficiency, transporta-tion demand management, renewables and innovation that can be taken today that will move Canada forward without impairing the competitiveness of Canadian businesses. These should not be ignored. 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.

70

As the world struggles to implement an effective regime to restrict carbon emissions into the atmosphere, Canada’s situation sticks out prominently – and often awk-wardly. Although many other countries emit much greater volumes of carbon than we do, Canada enjoys two special distinctions: (i) we are the second largest per capita emitter of carbon in the world (after Australia); and (ii) as we expand our production from the oil sands and increase exports to the United States and other countries, we appear to be ever more hooked on carbon.

Our efforts to manage carbon emissions will therefore remain firmly in the interna-tional spotlight. Institutions in most of our key markets in the US, Europe and Japan will be looking to see Canada manage our carbon emissions in a way that is respon-sible and commensurate with our level of social development and international standing. If we do not assume a leader-ship position on this issue, our economy will attract negative attention, including, possibly, foreign taxes and sanctions on our products and services, as well as lost opportunities within the future “carbon-lite” economy.

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. The project has become a lightning rod in certain quarters of the US for allegedly abetting a huge increase in greenhouse gases. Approval could well be denied by the US authorities. If the project does not proceed, it would have a significant impact on the oil sands, an industry that, if well managed, can help maintain our national level of prosperity for the next 50 years.

This is not to suggest that Canada should make its policy merely to please our part-ners. There has been lots of independent, innovative and positive policy discussion in Canada on global climate change. The point is rather that whether or not Canada wants to do the “right thing” for the global climate, we should certainly do the “smart thing” and work to manage our carbon in our own self-interest.

We need to recognize that fossil fuels will drive our economy for the next 25 years, whether we like it or not. Renewable energy is a wonderful source – and should be brought on stream as fast as practicable

Ian Mallory is President of Pickworth Investments LP,

a Calgary-based venture development firm focused

on natural resources in the Americas. He has been an

executive at three major Canadian power and gas

utilities. Prior to that he was Counsel to the Treasury of the World Bank. Ian is a graduate

of Harvard, the University of Toronto, and Cambridge, and

was called to the bar of Ontario in 1986. 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.

CANADA’S CARBON CHALLENGE:REDUCING EMISSIONS

WHILE MAINTAINING OUR QUALITY OF LIFE

IAN MALLORY

This paper is dedicated

to the memory of Ken

McCready, one of Canada’s

pioneers in thinking about

sustainable development

as it pertains to carbon

emissions.


to replace oil and gas – but we are two or three major technical breakthroughs away from that happening. While we are working on those breakthroughs, the question is: how do we manage our production and consumption of carbon most intelligently?

GOVERNMENTAL HOT AIR In the past, the Government of Canada’s (and some provinces’) emission manage-ment policies have seemed to be predicated largely on hope and mass ascetic denial. Grand gestures were made, and ambitious targets set, without sufficient thought being given to how they would be attained. Canada agreed to extremely challenging goals for carbon reduction – in the Kyoto Protocol in 1998 to 6% below our 1990 levels by 2012, and in the Copenhagen Accord in 2009 to 17% below our 2005 levels by 2020 – without any clear plan of how to get there. Sure, Rick Mercer implored each of us to save a tonne of air by staying at home (or something). 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.

With that kind of kick-off “action plan”, it should be no surprise that in 2011 Canada remains far from meeting the targets to which we have committed. We have not made any progress at all on a total basis, although our national carbon-intensiveness (per-unit-of-GDP) has declined somewhat over the past six years. Most of this decline, however, is due to the efforts of those prov-inces and private sector companies that adopted a proactive approach for their own political or business reasons.

The Hon. Rona Ambrose, a federal gov-ernment minister, admitted (with refreshing candour) as early as 2006 that we were not going to be close to meeting our targets on the original schedule. We need more of that type of objectivity, if we are to understand exactly where we are and what we need to

do. And if we are to meet our Copenhagen target – even at a later date, say by 2030 – we will have to implement an ambitious national program of carbon efficiency that will affect the lives of every Canadian.

WHEREIN LIES CANADA’S CARBON PROBLEM?Before we consider the solution, it is imperative that we be clear on the dimen-sions of the problem. The principal sources of carbon emissions in Canada are:

// thermal power plants that burn fossil fuels (so, ultimately, consumers of electricity);

// road transportation, particularly automobiles and commercial fleets;

// heating of buildings; and// the production of oil, gas and

chemicals.

Among fossil fuels, the hierarchy of car-bon emissions is very clear: coal is the worst, followed by fuel oil and gasoline. Natural gas is the least carbon-emitting fossil fuel, although unconventional sources (shale gas, coal-bed methane) can be less good than their conventional cousin.

Whether or not Canada wants to do the “right thing” for the global climate, we should certainly do the “smart thing”

We need more objectivity if we are to understand exactly where we are and what we need to do


72

POLICY GOALS AND CONSTRAINTSFacing this problem, what should be our policy goals? There are four key ones:

1 Reduce significantly carbon emissions on a gross and per capita basis.

2 Maintain economic growth.

3 Secure an economic and political leadership role in the new carbon-lite economy.

4 Minimize taxes and government regulation.

As is usually the case for big problems, there is tension between the goals: finding the best solutions will be an exercise in creativity and optimization.

There are four key considerations in policy development:

1 Carbon is an essential driver of our economy today. Blunt reductions will impose costs that will reduce economic growth and (initially anyway) impair our international competitiveness.

2 To the extent that big carbon emitters such as China, India and Russia are not with the global carbon-reduction program, Canada’s gross reductions will be ineffectual on a global basis. We therefore run the risk of impos-ing sacrifices on our economy to no significant benefit for anyone.

3 Regulatory schemes are complicated and expensive to administer.

4 Renewable energy – solar, wind, small hydro, tidal, etc. – can help but, technologically and developmentally, they will not come close to filling the carbon space for the next 20 years.

CURRENT SOLUTIONSIn Canada, six specific solutions to the carbon problem have been promulgated and to various – often nominal – degrees implemented.

1 Carbon tax A broad-based tax on the consumption of carbon is an economist’s dream, for its apparent even-handedness, relative ease of application and alleged effective-ness. In reality, a broad application of a carbon tax – in the short term, anyway – is as likely to hurt as much as help. In order to pack the desired transformational punch, the tax will have to be so high as to impair our economic growth. (The British Columbia carbon tax, slated to rise to 6.67 cents per litre of gasoline in 2012, is way too low to stop SUV-lovers from turning the ignition.) Further, a broad tax also does not adequately promote the desirability of moving people en masse to the “second best” solution, fossil fuels with lower carbon counts.

2 “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). For CO2 emis-sions – which are not “pollutants” but an inert by-product that is in global, not local, over-abundance – in a huge, growing, regionalized country such as

A broad application of a carbon tax is as likely

to hurt as much as help


Canada, the challenges of using such a mechanism would be enormous. Cap-and-trade might help keep the lid on CO2, but in an inclusive system there would likely be significant leakage and constant attempts to recalibrate. (“What if I can buy a carbon offset from offshore Norway, or plant some trees in Niger, 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, there would not be enough liquidity to establish a proper market. Accordingly, let’s not go there – yet anyway.

3 Prohibition of carbon emissions in the absence of sequestration This instru-ment, under which big point sources of carbon would be required to shut down (or not start up) unless they could sequester their carbon emis-sions in underground storage reser-voirs, has been derided as clumsy, anti-economic and a prime example of over-regulation. A number of ambi-tious carbon capture and sequestra-tion (CCS) projects are currently being piloted, mainly in Alberta. In the long run, some configuration of these is likely to be highly effective in reducing carbon emissions. As CCS is expensive, it raises the cost of the car-bon-emitting activity (and therefore tends to reduce its incidence) much more than a broad-based carbon tax would – and in a directed manner, with little collateral economic dam-age. We should therefore double-up on the development and evaluation of these CCS projects.

4 Investment in energy efficiency This seems to be the “also-ran” of carbon management policy, but it remains one of the most cost-effective options.

If we can squeeze more energy-value per unit of carbon emitted, both our gross and per capita emissions will fall. There are dozens of ways that we can increase energy efficiency and, with the help of recent technological improvements, we should be able to do this without sacrificing economic growth. Indeed, there has been more profound progress in energy efficiency technology over the past five years than there has in renewable energy generation. In the electricity sector alone, a combination of LED lighting, “smart grid” distribution systems, and upgrades to modern machinery and appliances can reduce consumption of electricity for urban areas by over 20%.

5 Investment in renewables A quick switch from fossil fuels to renew-able energy is the pet policy of many climate activists. It is a laudable and essential goal. We will get there even-tually: with continued improvements in technology, the price of power from wind, small hydro (including promis-ing new “very-low-head” turbines), solar, tidal, hydrogen and bio-mass generation will become sufficiently competitive to meet base-load demand. But probably not for another 25 years.

To accelerate this transition to renewables, more help from govern-ments will be required. Additional

1 We have world-class

expertise in energy

innovation in Canada,

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.

There has been more progress in energy efficiency technology over the past five years than there has in renewable energy generation


74

support for research and development would be very welcome.1 However, the real challenges lie in commercializa-tion and finding ways to support new technologies through the “valley of death” between perfecting the tech-nology and securing the first pilot projects and commercial contracts.

Government can help, facilitating initial commercial contracts through: (i) setting up “feed-in tariff” arrange-ments (as in Ontario); (ii) using their own procurement programs (as with the City of Calgary); or (iii) offering specific project subsidies, such as the federal Wind Power Production Incentive (WPPI) program. Needless to say, such catalytic programs for the private sector need to be carefully designed to ensure that they are open to all comers, have tough performance standards in place and taper off over time.

6 Expansion of nuclear power Switching to nuclear power is another “good idea” that is highly problematic in imple-mentation. While nuclear can be safe in well-controlled circumstances, the disasters at Fukushima and Chernobyl have demonstrated that conditions in the real world conspire to make this a risky, and ultimately expensive, fuel source. With so many other energy options available, Canada should “just say no” to new nuclear power, for the best practical reasons.

NOW WHAT? THE SMART, CRASH ANTI-CARBON PROGRAMIf we want to meet our carbon targets in the next 20 years, we need to engineer a massive shift in the profile of our national energy consumption and production. We must attack the point-sources of carbon with as much vigour and precision as possible, trying very hard to avoid collateral damage to other economic activities in the process. Regrettably, this means a greater number of regulations – but more specific and directed ones.

In order to get public buy-in for this massive shift, and to ensure that we do not hobble our economy with constraints that many other larger countries are eschewing, we need to subject each of our main anti-carbon programs to a second test: is there sufficient public policy rationale to adopt this measure for reasons unrelated to car-bon? Fortunately, with the exception of tar-geted CCS projects in the highest-emissions situations, the answer for all the measures recommended below should be “yes”.

The list below provides details. It should be noted that natural gas features promi-nently as a solution rather than a problem. This might sound counter-intuitive, as natural gas is a fossil fuel that emits carbon. However, as it emits much less carbon per unit of energy generated than other fossil fuels, a quick switch to natural gas will have a huge and early impact on both total and per capita carbon emissions in Canada.

That is not to say that natural gas is with-out its own complications.2 Certainly the development of “unconventional” natural gas (shale gas and coal-based methane) has its own environmental challenges (land-use, water contamination, etc.) that must be carefully managed. David Suzuki and the Pembina Institute also caution against a massive expansion in natural gas infra-structure because they think this could lock the country into fossil fuels for many years and impede the shift to renewables. On that

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.davidsuzuki.

org/publications/

reports/2011/)


point, we should remember that natural gas can act as an “enabler” of renewable energy. The biggest problem with wind, small hydro, and solar energy is that their production depends entirely on the vagaries of the ele-ments: natural gas (with turbine and smart grid technology) can provide the background “swing-supply” that will actually allow more renewables to be deployed.

These are the recommended measures:

1 Reduce emissions from electricity// Action: Require the conversion of all

coal and fuel-oil fired power plants to natural gas, unless CCS systems are in place. a. Non-carbon justification: This will

have a major positive impact on local levels of various kinds of pollution.

b. Federal role: Set tough emissions standards.

// Action: Improve the efficiency of elec-tricity consumption. With the instal-lation of new, efficient technologies, Canadians can readily reduce their consumption of electricity by 15% or more within five years.a. Non-carbon justification: As many

of these technologies have short pay-back periods under current energy prices, there will be an ongo-ing economic benefit to making the switch.

b. Federal role: Swing both stick and carrot. Ban the least-efficient technologies (bye bye, higher wattage incandescent bulb!), and provide limited-time incentives (tax and grants) for installation of newer technologies. Expand informational programs on energy efficiencies to assist consumers.

// Action: Stimulate more renewable energy projects.a. Non-carbon justification: This will

reduce all kinds of pollution (other than visual) and help grow new, criti-cal industries in Canada.

b. Federal role: Expand WPPI-type pro-grams that provide temporary grants to newer technologies, including tidal power. Direct federal procurement to include the purchase of new green power, including by making available commercial test sites on suitable federal properties. Tidal power, in particular, could benefit enormously from a range of initial test sites with government as the customer.

2 Get vehicles, especially big and gasoline-burning cars, off the road

// Action: Encourage smaller cars.a. Non-carbon justification: Having less

metal per capita on the roads and in the garages of our cities brings obvi-ous and numerous benefits to all.

b. Federal role: Raise taxes on bigger cars, eliminate them on the smallest cars.

// Action: Promote “congestion charges” in the cores of our biggest cities, as has been done in central London (where a collateral benefit of the charge is said to be a 12% reduction in carbon emissions). a. Non-carbon justification: Same

benefit as in a) above.b. 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, reducing to one million after 2020.

Natural gas can provide the background “swing-supply” that will allow more renewables to be deployed


76

// Action: Expand public transit, especially rail (or light rail), in all urban areas. a. Non-carbon justification: This is a

public good that brings numerous benefits to the community.

b. Federal role: Provide grants for a portion of capital costs to encourage new construction (not operation). Provide generous tax credits for a portion of annual commuter passes.

// Action: Promote the use of biodiesel, especially in fleets. Biodiesel is a more environmentally friendly fuel than ethanol and it can be produced in abundance in Canada. a. Non-carbon justification: This will

help develop a major new industry, with significant export potential.

b. Federal role: Reduce taxes on biodiesel.

3 Reduce carbon emissions from buildings // Action: Invest in insulation retrofits.

This could reduce emissions in cities by more than 10%. a. Non-carbon justification: This will

also reduce energy bills.b. Federal role: Provide limited-time

enhanced tax credits and grants for retrofit to encourage quick conver-sion. (This is already being promoted through the “ecoEnergy” program, but should be expanded.)

// Action: Switch to natural gas heating from fuel oil or electricity. Natural gas is usually more efficient for heating than electricity (even natural gas fired electricity) and is cheaper than fuel oil. a. Non-carbon justification: Same ben-

efit as in a) above. Also supports the Canadian natural gas industry which is experiencing a cyclical downturn.

b. Federal role: Give natural gas a ten-year exemption from any increase in federal energy taxes (including any carbon tax).

4 Demand carbon-efficient production from oil and gas and chemical industriesThis is the newest frontier in anti-carbon policy, and the one that is prompting industry and government (both provincial and federal) to come together to establish a mutually accept-able framework.

The desired policy actions will include: i) eliminating existing waste that emanates from flaring and inef-ficient machinery and/or recovering waste heat for usage; ii) deploying technologies that will produce more oil and gas for less energy input, particularly in the oil sands; and iii) establishing CCS projects to neutralize emissions from the most significant point-sources.

Unfortunately, apart from the eco-nomic benefits associated with more efficient production, these actions cannot be as well justified for reason of collateral public benefits as the other actions above. (Production of oil and gas is usually located in rural or remote locations and presents less scope for switching and optimization). However, many companies are now displaying a positive attitude towards these chal-lenges, as is illustrated by various CCS projects being launched in Alberta.

With the installation of new efficient technologies, Canadians can

readily reduce their consumption of electricity by 15% or more

within five years


An excellent example is Shell’s Quest Project, which will capture, transport and store more than one million tonnes of CO2 per year from Shell’s Scotford Upgrader starting 2015. This project which will cost $1.3 billion, has received a grant of $745 million (over 15 years) from the Government of Alberta, and $120 million from the Government of Canada’s fund for research and develop-ment of clean energy.

In addition to providing such cata-lytic grants, alongside the provinces, for the first CCS projects, the federal govern-ment can also play a very important role in reducing carbon emissions in oil and gas by: (i) setting reasonable emissions standards for carbon producing point-sources, including fossil fuel extraction, processing and transportation; and (ii) using tax policy to encourage the adop-tion of new technologies for efficient production and reduction of waste. Significant additional discussion will be required between government and industry to find the right framework. Needless to say, however, government should take a proactive stance to ensure that such a framework gets implement-ed within a reasonable time.

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, hope-fully, also maintain our economic growth and quality of life. Nonetheless, after years of disappointment, and underperformance compared to many provincial counterparts, there is now cause for optimism.

The federal government is finally assum-ing a leadership stance. It has eschewed a national carbon tax and a cap-and-trade system – which are the right moves at this time, as explained above. And it has recently demonstrated that it might indeed be seri-

ous about implementing the type of solu-tions 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.

In its proposed Reduction of Carbon Dioxide Emissions from Coal-Fired Generation of Electricity Regulations pub-lished for comment on August 27, 2011, the federal government made two very impor-tant declarations: (i) that coal-fired power plants without a CCS system will effectively be phased out; and (ii) that the target emis-sions standards for power plants (and by implication, eventually other heavy indus-tries) will be set by high-efficiency natural gas. The first declaration is important as it demonstrates the determination to make an immediate and significant impact on point sources of carbon, while limiting col-lateral damage to the economy as a whole. The second declaration properly highlights the critical role of natural gas as the “good carbon emitter” that will, if properly encour-aged, allow us fully to face up to our current carbon challenge.

It is hoped that these regulations will recognize that if CCS systems are shown to be effective in reducing net coal-fired atmo-spheric emissions to at or below natural gas levels, coal-fired plants deserve a carefully monitored new lease on life.

We will see in the months ahead whether this initiative is followed up with equally bold and well-targeted federal measures.

After years of disappointment there is now cause for optimism


78

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. However compel-ling this might sound, it is probably not worth the effort. First, any bureaucratic ini-tiative whose moniker contains words that sound anything like “national”, “energy” and “program” will create bad harmonics in corners of the country that are particularly important for the resolution of this chal-

lenge. Second, the diversity and complex-ity of the proposed targeted point source and alternative-development approach is likely to be more effective in a decentralized administrative environment.

This approach will require detailed regu-lation and enforcement, well-directed fund-ing and uncommon co-operation between all levels of government and the private sector. 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 appropri-ate funding and legislative support to make them stick. Any high profile, unified admin-istration for national carbon action would perhaps best be deployed as a monitoring agency and external information bureau, to tell the world how – in the words of the song from a durable Canadian rock band – we can get there if we try.

If CCS systems are shown to be effective in reducing emissions,

coal fired plants deserve a carefully monitored new lease on life


1 UNEP & Frankfurt School

(2011) Global Trends

in Renewable Energy

Investment.

The year 2010 witnessed several his-toric events, with profound implications for Canada’s economic and environmental future.

First, global investment in clean energy capacity surpassed investment in fossil fuel-based capacity for the first time. Overall spending on clean energy has risen by over 500% from 2004 – 2010, to $211 billion.1 It is projected to grow a further ten-fold by 2020, to reach a total of US$ 2.3 trillion.2

Second, 2010 was tied for the warmest year in the Earth’s recorded history. This record-high heat has spawned record-low Arctic sea ice levels and other catastrophic effects, such as BC’s devastating mountain pine beetle outbreak (which continues to spread eastwards).

Third, global oil production hit record lev-els in 2010 – despite growing concerns that we are at, or near, peak oil – as did domestic production in Canada (the bulk of it coming from oil sands).3 Demand for timber, miner-als and other resource products (which tend to be energy intensive) also continued to grow.

2010 also saw an unprecedented number of countries (141: including the US, EU,

China and Canada) sign on to binding targets for greenhouse gas (GHG) emissions reduc-tions as part of the Copenhagen Accord. At the same time, Canada’s oil sands became a prime target of global environmental protest – a trend which has intensified in 2011.

These events underscore two important realities for Canada. One is that the world is shifting to a low carbon economic future. One can debate the pace, but the shift is unmistakable. This low carbon transforma-tion will affect most aspects of our economy and lives: the buildings we inhabit, the trans-portation we use, the products we make, and the energy that powers us. Many are labelling it “the next industrial revolution”, and most of the world’s major economies are shifting their spending and policies to prepare for it.

The second reality is that, despite this low carbon trend, fossil fuels and energy intensive industries are likely to remain a major part of the global economy for decades to come. Absent unforeseen technological breakthroughs or ecological catastrophe, the shift to cleaner technologies and energy, and the replacement of global capital stocks, can only happen so quickly. In the meantime, a growing global population and rising

Stewart Elgie is the founder and chair of Sustainable Prosperity, Canada’s leading green economy think tank and policy-research network. He is also a professor of law and economics at the University of Ottawa and director of the university’s interdisciplinary Environment Institute. In 1991 he founded Ecojustice, now Canada’s largest non-profit environmental law organization, and between 2001 and 2003 was the founding executive director of the multi-stakeholder Canadian Boreal Initiative. In 2001 Stewart was awarded the Law Society of Upper Canada medal for exceptional lifetime contributions to law, its highest honour.

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


80

Alex Wood is Senior Director, Policy and Markets at

Sustainable Prosperity, Canada’s leading green economy think tank and policy research net-work. Prior to this he worked as Special Advisor, 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, where he devel-

oped a national program exam-ining the role of fiscal policy in

promoting the long-term reduc-tion of carbon dioxide emis-

sions. Alex started his career with the World Wildlife Fund in

Washington, D.C..

standard of living (especially in developing countries) will mean that demand for fossil fuels and other natural resources will remain strong. And Canada is a major producer of both.

To some, 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”. In fact, the two realities can – and must – be reconciled. How to do so is the vital question, with profound implications for Canada’s future prosperity. 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, we argue, is that Canada must view the low carbon economy as an opportunity, not a threat – including for its oil and resource industries. Canada should move aggressively to adopt smart, cost effec-tive policies that will not only encourage clean energy and technology growth, but will also position Canada as the world’s most environmentally sustainable producer of oil, gas, natural resources and other manufac-tured products. Indeed, 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, which could make market access to the EU a real issue for Canadian oil sands producers. The most important (but not the only) policy needed to drive this change is to put a mean-ingful price on carbon emissions.

Effective carbon policies will also enable Canada to do its part to address the critical

problem of global climate change. While this paper focuses mainly on the economic dimensions of the issue, there are of course very compelling scientific and moral argu-ments for acting, which have been well canvassed elsewhere.

THE PACE OF OUR TRANSFORMATIONCountries around the world are wrestling with the same issues as Canada. Their approaches generally fall into one of three groups: go fast, go slow, or go smart. There are plausible arguments to support each approach.

// Go fast countries are betting that the shift to a low carbon economy will be faster than most expect. If this hap-pens, 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, Germany and Denmark stand to benefit. All are moving aggressively to accelerate clean energy and technol-ogy development through green taxes, incentives, targeted spending and other polices.

// Go slow countries are betting that the low carbon economy will emerge more slowly than expected. These countries are generally reluctant to impose addi-tional 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 start-ing to unfold. The US is a prime example; it has refused to regulate carbon emis-sions (nationally) and has abandoned its Kyoto target (although it is ramping up spending on clean energy).

// Go smart is a middle path. Countries in this group assume that the low carbon transition will happen, but believe that traditional sectors will remain

2 Pew Charitable Trusts

(2010) Global Clean Power:

A $2.3 Trillion Opportunity.

3 BP Statistical Review of

World Energy (2011).

Canada must view the low carbon economy as an

opportunity, not a threat


important for many years. They are hedging their bets, putting in place modest, cost-effective policies to foster low carbon options while still support-ing the growth of traditional industry and energy sectors. Examples include, Australia (its carbon tax exempts motor fuels and provides major sup-port for carbon-intensive resource sectors), parts of Europe, and China (which is rapidly building coal power plants, while raising fossil fuel taxes and becoming a leader in clean energy production and low carbon transpor-tation).

Canada generally falls into the “go slow” camp, at least nationally.4 We are one of the few developed countries still without a national carbon pricing scheme or a plan to introduce one. Moreover Canada’s carbon emissions have risen more than almost any other OECD country since 1992. We have abandoned our Kyoto target, and our green economic spending lags behind that of most competitor nations.

So which of the three approaches is best for Canada? “Go slow” may seem the safest, in the short-run: it avoids imposing costs on our industries and consumers that are not faced by our major competitor, the US. In the medium-term, however, this may leave us dangerously ill-prepared. Pegging ourselves to the US, a country on the trailing edge of global low-carbon change, may well hamper the future competitiveness of many Canadian industry sectors, by failing to spur necessary innovation and efficiencies. By following the US we also run the risk that an American policy – when it does come – will put domestic interests first, to our detriment (think: “buy American”).

Moreover, it is not even clear that this strategy heads off short-term pain. Growing pressure from carbon-conscious consumers, environmental NGOs and investors is increas-ingly threatening Canadian oil and gas exports

(the high-powered US campaign to block the Keystone pipeline is the latest example), and beginning to tarnish other sectors as well. This may be why powerful industry voices such as the Canadian Council of Chief Executives, and others, have begun publicly to push for national carbon pricing regulations.

A “go slow” (or “go with the US”) carbon strategy is therefore neither safe, nor in Canada’s overall economic – let alone envi-ronmental – interest.

The economy of the future is likely to reward companies (and countries) that are energy efficient, low polluting, and use scarce natural resources efficiently. Rather than see-ing this shift as a threat, and resisting change, Canada should view it as an opportunity. 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 agree-ments in the late 1980s, and slashed our fiscal deficit in the early 1990s. These far-sighted government actions both involved some short-term pain, but they positioned Canada to prosper in the shifting global economic reality of the time.

We now face a new (and potentially greater) economic shift, and similarly pre-scient policies are needed to prepare Canada for it. To be clear, that does not mean simply following the “go fast” climate policy path of countries such as Sweden, Germany or Denmark, whose economies are quite differ-ent from ours. Rather, Canada should pursue its own “go smart” path to a low-carbon future, along the lines of Australia – through cost-effective policies that foster eco-inno-vation but also reflect its inherent economic strengths, including a rich endowment of natural resources and related know-how.5

For Canada, being a green economic leader does not mean just building more windmills, solar panels, electric cars and other clean technology products (though these are likely to be of growing importance). It also means becoming the world’s most

4 Several provinces – such as

BC, Ontario and Quebec –

are in the “go fast” or “go

smart” camps.

5 Certain provinces (such as

BC, Ontario and Quebec)

may be positioned to

pursue a more aggressive

low-carbon policy path.


82

environmentally responsible producer of oil, timber, minerals, vehicles, and other energy intensive, manufactured products. “Made in Canada” should become a recognized brand of environmental leadership, across all sec-tors – through real changes to practices and policies, not just better communications. This will be an undoubted challenge, but with our resource wealth, diverse manufac-turing base, and highly educated and skilled workforce, we should rise to meet it.

Our ability to do so is illustrated by the recent history of our forestry sector. Twenty years ago, this sector stood in the cross-hairs of global environmental opposition, as a result of its outdated practices. After a decade of intense conflict, marked by international boycotts and massive civil disobedience, the industry is now embracing sustainability as an economic opportunity, not a threat. It has adopted world-leading standards for forest certification and practices, is working hand-in-hand with environmental groups to protect endangered species and spaces, has dramatically reduced its carbon emis-sions, and is developing innovative new bio-products. Forestry is a real-life example of how Canadian resource and industry sec-tors can position themselves to prosper in an ever-greening, low carbon global economy.

Moreover, we may not be quite as far behind as some critics make out. The federal government has already brought in new vehicle fuel efficiency standards (with the US), is investing in carbon capture and storage technology (in partnership with some provinces), and is planning to regulate carbon emissions from coal power.

GETTING FROM HERE TO THEREWhat 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, since it involves most aspects of our economy and society. However, an overall low-carbon policy package should feature an array of tools, including:// public investments in green

infrastructure (transit, buildings, electrical grid, etc.);

// incentives to help strategic clean energy and tech industries get established;

// carbon pricing, across the economy;// regulation, where pricing is less

effective (e.g. product standards, building codes); and

// research support to spur low-carbon innovation (technical, economic and policy).

Here we focus on carbon pricing, the single most important measure that Canada can take. A carbon price will ripple through the economy, reaching all producers and consumers, and motivate behavioural and investment changes – much more quickly, widely and efficiently than could be accom-plished by regulating all of these activities separately.

There are two main ways to price carbon: through a tax or fee on emissions or a cap-and-trade system. Both pricing approaches can achieve reductions at much lower cost than traditional “command and control” regulation.

The efficacy of a trading approach was demonstrated by the US Acid Rain program – the first large-scale experiment with emis-sions trading. The program achieved 25% greater reductions in sulphur dioxide (SO2) at roughly half the cost of a conventional regula-tory approach. Its success has inspired the creation of carbon trading regimes in a grow-ing number of jurisdictions, including Europe,

“Made in Canada” should become a recognized brand of

environmental leadership


New Zealand, the Northeast US states, and Alberta. While it is too early to measure cost savings from these programs, 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).

Carbon taxes have also proven to be a cost-effective way to meet climate goals. Six western-European countries have brought them in since the 1990s, 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, positive effect

on GDP, mainly due to tax shifting which, amongst other things, can increase invest-ment in growing economic sectors such as clean energy).6

British Columbia passed North America’s first true carbon tax in 2008.7 Since then, BC’s per capita fuel use has fallen nearly 3% compared to the rest of Canada, making BC the country’s most fuel-efficient province.8 The tax has now risen to $25/tonne (higher than Europe’s current carbon market price), 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.

6 Tax shifting occurs

when the revenues from

environmental taxes are

used to lower other types

of taxes, particularly on

income or labour. Overall

taxes are not raised, just

shifted. The result is

higher taxes on things

we want to discourage

(pollution), and lower

taxes on things we want

to encourage (investment

and employment).

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

% di

ffere

nce

% di

ffere

nce

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

- 6

- 4

- 2

0

- 0.5

0

0.5

1

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

Figure 1

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

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


84

In addition to lowering costs, carbon pric-ing is also more effective than conventional regulation at stimulating innovation. 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. If a company can find innovative ways to reduce emis-sions below the targeted level, it will make (or save) more money. A recent OECD study documents the innovation-inducing effects achieved by various green taxes.9 Similar results can normally be obtained from emis-sions trading.

If it is to be effective, carbon pricing must be well designed. There are examples of poorly designed carbon taxes (Norway’s, for example, includes overly broad exemp-tions) or emissions trading schemes (e.g. the EU system over-allocated allowances in its first phase) and we must learn from these. Sustainable Prosperity, working with a group of economic, business and environ-mental experts, has identified key principles for effective carbon pricing systems. For example, the systems should be: (i) com-prehensive; (ii) simple; (iii) predictable; (iv) adaptable; and (v) have a price sufficient to achieve environmental targets.10

Of the two carbon pricing approaches – a tax on emissions, and a cap-and-trade sys-tem – most economists prefer a tax (as do a growing number of Canadian industries and environmental groups). They point to several main advantages, including simplicity (it builds on the existing tax system), compre-hensive coverage (across the whole economy), ease of establishment (BC’s tax was developed in just a few months), low transaction costs (no trading fees), and greater price certainty – ideally by starting with a modest price that ramps up steadily over time (as BC’s does), to allow firms time to plan and adjust. A well-designed cap-and-trade system, however, can be almost as effective and comprehensive, and brings the added benefit of certainty of emissions reductions.

What is clear is that either type of carbon pricing system is preferable to command and control regulation. Yet there is growing con-cern that Canada may choose this inferior route. From 2005 – 2010, the federal govern-ment issued a series of plans for carbon cap-and-trade systems. But its recently-released regulations for power plant emissions follow a command and control approach. While it is perhaps understandable that trading would be excluded from regulations that deal only with power plants (a very limited trading market), the government has indicated that it may follow this same path when extend-ing carbon controls to other sectors. Given the manifest benefits of a pricing approach, this would be a huge missed opportunity. 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).

An important feature of carbon pricing is that, by definition, it generates revenues. With a tax, firms pay for every ton of carbon emitted. With cap-and-trade it is less clear: certainly firms must pay for all emissions over their assigned cap level, and most econ-omists argue they should also be made to pay for every tonne emitted – which is typically done by selling or auctioning allowances to emit. If such allowances are allocated with-out payment, based on existing emissions, this effectively rewards those who are already emitting the most. Nevertheless, there is typically strong pressure from firms for gov-ernments to allocate most allowances for free – an approach which is rife with potential for backroom manipulation. Auctions, by con-trast, are transparent and generate funds that can be used to buffer the impacts of climate policy on vulnerable groups or sectors, or for other important economic or environmental goals (discussed below).11

It is estimated that a national Canadian carbon-pricing scheme would initially gen-erate about $5 – 15bn annually (for a tax, or cap-and-trade with full auctioning, based

7 Quebec brought in a

climate levy in 2007, but

it is too small to have any

real effect on emissions.

8 Sustainable Prosperity

(2011) (unpublished

research: report in

preparation).

9 OECD (2010) Taxation,

Innovation and the

Environment. Paris: OECD.

10 Sustainable Prosperity

(2009) Eight Principles

for Carbon Pricing.

(http://www.

sustainableprosperity.ca/

article11)

11 The EU trading system

currently charges for less

than 10% of allowances

(slated to rise to over 50%

by 2013). Australia’s new

carbon pricing system

requires firms to pay a

fixed price of $23/tonne

for all of their allowed

emissions. Alberta uses

an alternative approach,

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).


on a carbon price of $15 – $20/tonne), rising thereafter with the price of carbon. Even a more limited technology fund approach (like the Alberta model) could generate revenues of close to $1 billion per annum.

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, invest-ment or labour;

ii) address competitiveness issues arising from the carbon price – e.g. with time-limited tax breaks or refunds for trade-exposed, energy-intensive sectors;

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); or

iv) fund low-carbon public infrastructure or clean technology research and development.

Each option has some merit. Certainly government should use a portion of the revenues to buffer the adverse effects of carbon pricing on vulnerable groups, regions or industry sectors. The most economically efficient option is to channel most or all of the revenues into cutting taxes on labour or income, to spur investment, employment and growth (as was done in BC, and many EU countries). Indeed, 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 0.1% of GDP annually through 2020).12 However, at a time of record deficits, when it may be hard to justify further tax cuts, the main function of carbon revenues might be to fund critical public investments without the need for tax increases.

Thus, in Canada’s present economic circumstances, we would argue that a large portion of potential carbon revenues should be used to support low-carbon infrastructure and clean technology development, for the following reasons:

1 We need major investment in public infrastructure to support a low carbon economy. The list of key investments includes: a smart electrical grid (to boost energy efficiency, and enable clean power producers to feed in); public transit; clean energy generating facilities; carbon capture and storage distribution capacity; energy efficient public buildings and housing; as well as research to advance low carbon technology and innovation.

2 The transformation to a low-carbon economy will also require major private investments in infrastructure and technology (in electric cars, carbon capture, biofuels, clean power, energy-efficient plant and equipment, etc.). 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. Therefore, public incentives will be needed to kick-start the necessary private investments.

3 Considerations of intergenerational equity also support such a reinvest-ment. The effects of climate change will be felt, most deeply, by future generations. It is only fair that much of the rent from depleting this non-renewable resource (in the form of carbon revenues) be reinvested in building a low carbon economy that will enrich future Canadians.

12 National Roundtable on

the Environment and

Economy (2009) Achieving

2050: A Carbon Pricing

Policy for Canada. Ottawa:

NRTEE.

A large portion of potential carbon revenues should be used to support low-carbon infrastructure and clean technology development


86

The best approach to revenue recycling is likely to be some combination of tax cuts, buffering vulnerable constituencies, and investing in clean technology and infrastruc-ture. Over time, the focus should shift more towards tax cuts, as deficits start to fall and carbon prices rise, stimulating low carbon investment with less need for public support.

Substituting pollution taxes for income taxes has a further benefit in that it decouples overall tax revenues from labour income. This is particularly important in view of Canada’s aging population. As an aging nation, we will be working less (so paying less income taxes) but demanding more services, especially healthcare. 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, and thus the capacity to provide services, can be better maintained.

This approach is the one that British Columbia has utilized to great effect. The carbon tax has given it fiscal space to signifi-cantly reduce income taxes. BC now boasts the lowest rates in Canada for both corporate and personal income taxes.

CONCLUSIONThe debate around carbon policy in Canada is often clouded by two major misconcep-tions: first, that policies to reduce GHGs and build a low carbon economy will hamper Canada’s competitiveness and, second, that Canada must choose between developing its

fossil fuel and energy-intensive industries or building a low-carbon economy. Both prem-ises are largely false. As regards the first one, the short-term costs associated with a well-designed carbon pricing policy will be mini-mal – roughly 0.1% of GDP annually. And the benefits are enormous: not only will Canada be well-positioned to prosper in a future low-carbon world, but we will also play our due part in lessening the massive costs of climate change.

The second premise is also flawed, 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. The emerging low-carbon economy will require not only windmills, biofuels and BlackBerries, but also oil, timber and minerals, as well as cars, trains and chemicals. Canada should strive to become the world’s most environmentally responsible producer of natural resource and manufactured products – an increas-ingly important market advantage – while also growing its clean energy and technology sectors.

It is not an either/or choice, and the soon-er 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, while bolstering the economy of today.

POVERTY REMAINS A SIGNIFICANT and grow-ing problem in Canada. Income polarization is also increasing steadily, to a degree that could threaten social cohesion. Since tech-nological advances and globalization both tend to increase inequalities as returns to unskilled labour decline, this is a problem that will not go away in the absence of signifi-cant policy action. It is also a problem, as our contributors stress, that is shared with many other developed countries, though recent increases in income inequality in Canada are towards the high end of the spectrum.

Of the papers in this section, only one – that by Andrew Sharpe – suggests a signifi-cant rethink of the income support system that has been in place, with little change, for more than 20 years. Sharpe argues that our system should be underpinned by an equal-ity of opportunity agenda, in which greater efforts are made to smooth out both financial and human capital starting points. At pres-ent, by contrast, we have a system that takes unequal starting points as a given, focussing instead on correcting the subsequent excess-es of market allocations.

A key change under such a system would be the imposition of an inheritance tax. This move would bring Canada in line with almost all other developed countries. Sharpe does not advocate abolishing the existing system of taxes and transfers. These would remain a vital pillar, as would continued public spend-

ing on services such as health and education: Sharpe’s own research shows these to have an important equalizing effect. Yet he would like to move beyond these. 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.

All authors are at pains to stress the criti-cal role that government taxes and transfers play in mitigating inequality. The remaining two papers in this section argue that these measures are – or could be – effective on their own. Thus, rather than moving beyond these, either in terms of rationale or actual mea-sures, the federal government simply needs to increase the magnitude of the transfers it makes and/or to extend the number of peo-ple who are eligible.

Sherri Torjman and Ken Battle are highly concerned with the dynamics of poverty and inequality which, they assert, matters in its own right, over and above its relationship with poverty. Mark Cameron’s paper also

REDUCING INCOME DISPARITIES AND POLARIZATION

This is a problem that will not go away in the absence of significant policy action


notes the importance that we, as humans, attribute to fairness. His paper makes the case that even those on the right of the politi-cal spectrum, who believe in smaller govern-ment and less intervention, should be ready to do more to counter inequality. This is part-ly because in societies that begin to unravel due to social tensions arising from inequal-ity, increased government engagement is likely to be required. To head this off, and to cater to our sense of fairness, the federal government should therefore pre-emptively increase its redistributive efforts.

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). Not only is this already in place, but it is (almost) universal. They also discuss the Working Income Tax Benefit (WITB) and call for this to be extended further upwards (in income terms). Cameron, on the other hand, favours the WITB over the CCTB, though recognizes the value of both. He also highlights the value of those institutions in our country that foster “civic equality” (for example, the health sys-tem and public schools) and cautions against piecemeal privatization of these which could dangerously undermine equality of access.

In short, though their starting points are diverse, all the contributors call for the federal government to take deliberate steps to coun-ter soaring inequality and ensure that the Canada we want in 2020 is the Canada that less advantaged groups might want too.

All authors are at pains to stress the critical role that government taxes and transfers

play in mitigating inequality

Inequality matters in its own right, over and above

its relationship with poverty


89

WHY CANADIANS SHOULD CARE ABOUT INCOME INEQUALITY

MARK CAMERON

Mark Cameron has over 15 years’ experience working

in government, consulting and industry, with a focus on public policy. He has worked for several

MPs and Ministers, and in the Privy Council Office. He has

also worked as a consultant on environmental and energy policy. From 2006 – 2009 he

served as Director of Policy and Research and Senior Policy

Advisor to the Prime Minister of Canada. He later worked

for Ontario Power Generation and recently joined Research In Motion as Director, Global

Public Policy. Mark was educated at McGill University and the

University of British Columbia.

Income inequality in Canada has increased over the past two decades, although the extent and effects of this widening inequality have become most apparent in the past several years. The 2008 financial crisis, and the recession which followed it, led to job and asset losses, especially among those in lower income groups. Many people became rapidly and abruptly aware of the precari-ousness of their financial position.

Today, it is not only traditional voices on the left that are expressing alarm about widening inequality: centrist and conser-vative voices from business leaders to the Conference Board of Canada have also joined the conversation. But with a majority Conservative federal government that is pursuing an agenda of fiscal retrenchment, is income inequality an issue that could or should be on the short- or medium-term federal agenda? I would argue that it is.

It is worth asking, at the outset, why governments should concern themselves with inequality at all. Obviously, a primary objective for governments is securing eco-nomic growth and ensuring that the whole of society benefits from such growth. Theoretically, should it then matter if

wealth and income at the top of the socio-economic ladder increases dramatically, 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, relative inequality does matter, for several reasons. Extreme income inequality, even where the least well off are still making economic gains, can undermine the sense of social cohesion necessary for a democratic society. Human nature is acutely sensitive to relative fairness and positional status. We know from experi-ments in psychology and behavioural economics, such as the Ultimatum Game developed by Werner Güth and others, that most people will reject an apparently “unfair” distribution of rewards, even if rejecting it will make them personally worse off.1 Similarly, surveys show that most people would rather live in a society where they make $100,000 while everybody else makes $85,000 than one in which they make $110,000 while everybody else makes $200,000, even when it is clearly explained that they will have higher purchasing

1 Güth, W., Schmittberger,

W. & Schwarze, R. (1982)

“An Experimental Analysis

of Ultimatum Bargaining”.

Journal of Economic Behavior

and Organization 3 (4),

367–388.


power, a larger house size, etc. in the second scenario, as compared to the first.2

A society in which a small group is perceived to be benefiting unfairly, or where there are wide gaps between social and economic classes, can lead to dissension, jealousy and anti-social behavior, even if the less well-off are still making material gains. This, in turn, can lead to increas-es in crime, loss of participation in social and charitable organizations, and greater demands for government intervention to help deal with these social tensions. Such a scenario should concern not only social democrats or liberals who see equality as an important social goal in its own right, but also conservatives who are concerned about maintaining public support for free markets and limited government.

As conservative commentator David Frum has written, “Equality in itself never can be or should be a conservative goal. But inequality taken to extremes can overwhelm conservative ideals of self- reliance, limited government and national

unity. It can delegitimize commerce and business and invite destructive protectionism and overregulation. Inequality, in short, is a con-servative issue too.”3

So, if there are ample philosophical and practical grounds for both left and right to be concerned about income inequality, 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, so it is important to understand what has caused increases to inequality in Canada and elsewhere. Only then will we be able to identify measures that are like-ly to be successful in addressing it.

Inequality in market income has been grow-ing in almost all advanced economies for the past several decades as a consequence of eco-nomic globalization, technological change, reduced progressivity in taxation, and the shift from an industrial to a service-based economy. Increased integration of the global economy

2 Solnick, S. J. & Hemenway,

D. (1998) “Is More Always

Better?: A Survey about

Positional Concerns”.

Journal of Economic

Behavior and Organization,

Vol. 37, 373-383.

3 Frum, D. (2008) “The

Vanishing Republican

Voter”. New York Times

Magazine, September 5,

2008.

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Figure 1

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

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


91

and rapid technological change have brought greater rewards for highly-skilled workers and managers. Lower-skilled workers, by contrast, have been forced to compete with workers in developing economies and have seen far smaller gains. While domestic policy can cer-tainly address tax and transfer issues which, in turn, affect final income distribution, it is very difficult for any government to affect the broad-er shifts in the global economy that affect mar-ket incomes.

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 coun-tries between the mid-1980s and mid-2000s. Income inequality has grown in the United States and Canada more quickly than the OECD average, but most OECD countries have seen inequality increase.

When looking at inequality data, 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). Focusing specifically on Canada, we see from Figure 2 that inequalities in market income grew rapidly in the 1990s, as did inequality in disposable incomes to a lesser extent. Government policies have therefore had some effect in dampening the increase in post-tax and transfer disposable incomes.

However, 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 dis-tribution grew larger), during the late 1990s there was a considerable reduction in the level of redistribution. Taxes and transfers have

Market income Total income After-tax income

0.25

0.45

0.50

0.35

0.40

0.30

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

Figure 2

Gini indexes using three measures of adjusted income

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


reduced inequality, but the impact is now smaller. This is likely the result of the reduc-tion of federal transfer payments and the subsequent reduction in provincial welfare programs (motivated by the desire for cost savings, but also a philosophical choice in some provinces, as in the US, for welfare reform). Redistribution through tax and transfers has leveled off since 2000 and both market income and disposable income inequality have remained relatively stable. Nonetheless, the trend to greater inequality remains clear.

WITH THE SITUATION BECOMING WORSE, 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,

at least in the short term. But, as we have already seen, governments are in a position to address inequality in disposable income, especially through the tax and transfer system.

The current government has, in fact, put in place modest measures that reduce income inequality. Since 2006, the basic per-sonal exemption has been increased, the Universal Child Care Benefit (UCCB) and Working Income Tax Benefit (WITB) have been brought in, 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 progres-sively). As a result of these measures, Statistics Canada data shows that even while the market income of households in the lowest income

- 0.16

- 0.08

- 0.06

- 0.12

- 0.10

- 0.14

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

Canadian Income Equality.

Figure 3

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

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


93

quintile dropped between 2005 and 2009, post tax and transfer disposable income for this group grew, and their relative share of disposable income remained constant.

The government should be encouraged to continue in the directions it has set for itself, remaining cognizant of the impact of

tax and transfer changes on lower income groups. In particular, the government should continue to enhance the WITB.

The WITB, which was implement-ed in 2007 and expanded in 2009, is one of the most important poverty reduction measures taken in recent years. It supple-ments the incomes of low earners and helps remove disincentives to seeking paid work instead of remaining on social assistance programs. As initially designed, however, WITB was brought in at such a low level that it excluded many of the working poor. Enhancements brought in in Budget 2009 will ensure that it will at least benefit anybody working full-time at minimum wage. Over time, the federal government should continue to extend

WITB further up the income ladder, and prov-inces should integrate their income support programs with Ottawa to increase its impact.

The government should also continue to enhance child benefits. The current government

brought in the Universal Child Care Benefit, analogous to the old Family Allowance, and restored a per child tax deduction. Some social policy critics have argued that these measures, which are not targeted to lower income house-holds, are regressive. However, 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, the government should ensure that future increases are targeted more towards lower- and middle-income households through the Canada Child Tax Benefit (CCTB)and National Child Benefit Supplement.

While enhancing existing programs such as WITB and the CCTB are admittedly incremental measures that will only have a modest impact on income inequality, I believe this course of action makes the most sense at the present time. 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. Instead, governments are more likely to be persuaded to build on programs they have already initiated or enhanced, such as the WITB and the CCTB.

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. 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, even if significant income disparities exist. As the American writer Mickey Kaus has argued, as economic dispari-ties become harder to overcome with conven-tional policy measures, governments should move from policies that simply try to achieve more equal distribution of income towards policies that seek to enhance civic equality by

The government should continue to enhance the Working

Income Tax Benefit

Governments should seek to enhance civic equality

by emphasizing common institutions


emphasizing common institutions where citi-zens meet as equals, regardless of income.4

In Canada, we are fortunate to have many of these public institutions – such as public schools and a universal health care system. While many have proposed reforms to health-care and education to reduce costs or improve efficiency, policy makers should keep in mind that these are institutions that help preserve social cohesion and social equality, and market- oriented 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.

Governments can also pursue other means of promoting social cohesion and civic engage-ment, whether through voluntary or military service, or greater knowledge of and pride in Canadian history and culture. The current government has taken some steps in these areas. It should also keep in mind that pro-moting the common values of citizenship

represents an important component of social equality. Just as extreme income equality can undermine social cohesion, measures aimed at improving civic engagement can help citizens to interact as equals in key areas of public life and social services.

As the economy recovers, the government should pursue a mix of strategies. It should increase benefits directed to the working poor and low income families, significant enough to ensure that the lowest income quintile continues to increase its level of disposable income in both absolute and relative terms, while also undertaking measures to enhance civic equality by protecting important public institutions and enhancing a common sense of citizenship. Through these measures Canada can ensure that the broader global trends driving income inequalities do not under-mine Canada’s social compact and the sense of civic equality that a free and democratic society requires.

4 Kaus, M. (1992) The End

of Equality. New York: Basic

Books.

95

INCOME REDISTRIBUTION IN CANADA

ANDREW SHARPE

Andrew Sharpe is Executive Director of the

Ottawa-based Centre for the Study of Living Standards,

a non-profit research organization he founded in

1995. Prior to this he was Head of Research at the

Canadian Labour Market and Productivity Centre and Chief,

Business Sector Analysis, at the Department of Finance. He

is also founder and Editor of the International Productivity

Monitor and Executive Director of the International

Association for Research in Income and Wealth.

He received a PhD in economics from McGill

University in 1982.

Most developed countries have experienced increased market income inequalities in recent decades. A large number of factors have been identified as contributing to this development. The decline in unionization has meant that fewer workers enjoy the ben-efits of collective bargaining, an equalizing force in income distribution. Governments in many instances have failed to raise mini-mum wages in line with overall wage gains, disadvantaging the worst paid workers. Deregulation has often hurt certain groups of workers such as truck drivers and air flight attendants, as has privatization of public ser-vices.

At the same time, skill-biased techno-logical change, related to the information technology revolution, has reduced the overall demand for the services of the poor-ly educated, and globalization has meant that employers can now outsource produc-tion to low-cost countries. This decreases the bargaining power of workers and so reduces their incomes further.

At the other end of the spectrum, faulty corporate governance oversight procedures have resulted in a massive rise in CEO com-pensation relative to the average worker.

This has hugely boosted the income of the top 1%, the income group that has been driving, almost single-handedly, the recent rise in inequality. Overly generous com-pensation practices in the financial sector have also contributed to the large increases in the incomes of top earners.

At a household level, increased assor-tative mating, defined as the tendency for persons with similar education and qualifi-cations to marry one another (a male doc-tor who in the past married a nurse now marries another doctor), has led to the rise in the number of high income two-earner households.

THE IMPACT OF INCOME TRANSFERS AND TAXES ON INEQUALITY IN CANADA The distribution of income in this country is greatly affected by government policy. Statistics Canada produces estimates of income distribution based on three differ-ent measures: (i) market income, defined as earnings plus net investment income and private retirement income; (ii) total income, which includes transfer payments; and (iii) after-tax income (which includes all taxes and transfers). It is the after-tax distribution


that is the most relevant from the perspective of private consumption, as it reflects the inequality in access to marketed output. It does not, however, reflect access to public services. Once this is factored in, we see a slightly different picture, as I explain below.

In 2009, the ratio of the market income of the top quintile to the bottom quintile was 14.28 to 1.1 For every dollar of market income earned by a person in the bottom quintile, a person in the top quintile received $14.28 (Figure 1). Income trans-fers greatly boosted the total income of those in the bottom quintile and reduced the top/bottom income ratio by one half to 7.06 to 1. This is the result of the high government transfer rate for the lowest quintile (amounting to 52.0% of adjusted total income of this quintile) compared to

the highest quintile (2.9%). The final, after-tax ratio between the top and bottom quintiles was lower still at 5.64 to 1 or 40% of the market income ratio. Figure 2 shows the absolute figures for the various measures of income for the year 2009.

To track broad trends in income inequality, the Gini coefficient is a well-accepted indica-tor. It reflects the dispersion of the income distribution, and its value ranges from zero to one. While a value of zero would indicate that income is equally divided among Canadians, a value of one would mean that a single household receives all the income in the economy. Therefore, when income inequality increases, the Gini coefficient goes up and vice versa.

The Gini coefficient tells the same story about the impact of transfers and taxes

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

Market income Total income After-tax income1981 9.70 5.66 4.781989 10.26 5.60 4.572000 13.13 6.95 5.692009 14.28 7.06 5.64

Point change1981–1989 0.6 -0.1 -0.21989–2000 2.9 1.3 1.11981–2000 4.6 1.4 0.91981–2009 1.1 0.1 0.0

Total Growth %1981–2009 47.2 24.7 18.1

Figure 1

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

1 A quintile is a portion of

a frequency distribution

containing one-fifth of

the total sample. The top

quintile represents the

average adjusted income

of the 20% of all economic

families who recorded the

highest income; the bottom

quintile is the same for those

with the lowest income. The

quintile distribution takes

into account only economic

families (not unattached

individuals) and is adjusted

for changes in family size

over time.


97

on income inequality. In 2009, the Gini coefficient for market income was 0.515. When income transfers were included, it dropped by 16.5% (0.085 points) to 0.430. With taxes factored in, it was an additional 0.036 points lower at 0.394, a further 7.0% decline. Income inequality as expressed by the after-tax Gini coefficient was thus roughly three quarters (76.5%) of the level of inequality for market income.

HOW HAVE REDISTRIBUTIVE MEASURES CHANGED OVER TIME?Between 1981 and 2009 inequality in Canada grew, according to both measures (top to bottom quintile ratio and the Gini coefficient). Figure 3 shows that the real market incomes of the bottom two quintiles actually fell over this period, while that of the top quintile rose by 43.2%. When taxes and transfers are taken into account the incomes of both the bottom

quintiles grew by around 18%, the income of the middle quintiles grew by around 25%, but the incomes of the top quintile grew by close to 40%.

Figure 1 shows the extent to which taxes and transfers have reduced market income inequality over the period 1981 to 2009. In 1981 the low to high quintile ratio of income after taxes and transfers was 4.78, or about half what it would have been for market income (9.7). By 2009 these figures had switched to 5.64 (after taxes and trans-fers) and 14.28 (market). In simple terms, then, after-tax income inequality rose by 18.1% over this period while market income inequality rose by 47.2%. Redistribution measures had more of an effect on the lowest quintile in 2009 than they did in 1981. But such measures were not strong enough fully to offset the sharp increase in market inequality that took place over this period.

Bottom quintile Second quintile Third quintile Fourth quintile Top quintile

28,40

026

,500

20,90

015,00

014

,700

$20,000

0

$40,000

$60,000

$80,000

$100,000

$120,000

7,200

41,60

036

,800

35,80

0

57,60

048

,800

52,80

0

105,9

0082

,90010

2,800


Figure 2

Adjusted income by quintile for economic families, 2009



Gini coefficients for the time tell a similar tale. Canada was a more unequal society in terms of income distribution in 2009 than it was in 1981, but it would have been far more unequal without the greater redistrib-utive role of the state.2 Nonetheless, there was still a significant increase in after-tax income inequality in this country over the period: government could have done, and could be doing, more to offset rising mar-ket inequalities.

As noted, the top 1% of earners have accumulated massive sums in recent years. The market income share of the top 1% of super-rich households increased 5.9 percentage points from 7.7% in 1982 to 13.8% in 2007, accounting for the entire increased income share for the top quintile as a whole.3 The after-tax income share of the top 1% increased 3.4 points from 6.5%

to 9.9% between 1982 and 2007. This means that 1% of Canadian households command nearly 10% of our total income, a trend towards income polarization that is at once alarming and very public. Such accu-mulation at the top has almost certainly contributed to the perception that overall inequality has risen more than is in fact the case. This is something that needs to be accorded special attention in the development of future federal government redistributive policies.

A BROADER APPROACH TO REDISTRIBUTIONDiscussions of redistribution are generally framed in terms of government taxes and transfer payments and the effect of these on various income groups. But the issues are much broader. The discussion can be extended

Bottom quintile Second quintile Third quintile Fourth quintile Top quintile

12.3 17

.8

-3.2

15.4 17

.6

0 %

-10 %

10 %

20 %

30 %

40 %

50 %

-2.7

19.5 23

.1

11.5

23.9 25.4

19.2

43.9

38.9

43.2


Figure 3

2 Heisz (2007) reached a

similar conclusion for the

1981 – 2004 period. 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, 2008). This decline

has been largely driven

by the declining role of

transfers such as welfare

payments and employment

insurance.

Percentage change in income for economic families 1981 – 2009



99

to include government spending on public goods, such as education and health, and how this is distributed between groups. It can also take in other breakdowns of the population such as by age group, educational attainment level, and region.

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.4 It found that in 2005, the latest year for which data are available, net government expenditures in Canada were $2,557 (2000 US dollars) per household, consisting of $11,653 in government transfers i.e. income support programs, $9,306 in public consumption (e.g. education, health), and -$18,401 in taxes. A household in the bottom income quintile received $4,245 in net government expendi-ture, in the second lowest quintile $6,065, in the middle quintile $7,588, in fourth quintile $4,707, and in the top quintile -$9,821.

It is notable that it is the middle quintile, not the bottom quintile, 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).

Different types of government expenditure programs have different redistributive impacts. For example, absolute spending on healthcare was found to be similar across income groups, implying an equalizing effect on the overall income distribution, given that this spending represents a much greater share of the broadly-defined income of the poor than of the rich. In contrast, education spending was concentrated in the

top four income quintiles, and was much weaker in the bottom quintile, largely due to differential rates of enrollment in post-secondary education.

This broader approach to redistribution highlights the important redistributive role played by government spending on goods and services such as health and education. Public services are therefore an essential element of the redistributive effort of gov-ernment. Erosion of public services will thus tend to increase inequality, something that is not often at the forefront of discussion when cuts are proposed.

Another interesting fact that comes to light when taking a broader view of distribution issues is that the largest redistribution in Canada, in terms of net government expenditure, actually takes place across generations, not income groups. In 2005, households headed by a person 65 or over received, on aver-age, net government spending of $24,091, compared to $-2,452 for households with a head aged below 65. This situation reflects the Old Age Security and Guaranteed Income Supplement payments made to seniors, the higher healthcare expenditures for this group, and the lower taxes paid, reflecting lower income.

This generational redistribution is a normal part of the implicit contract between the state and the population, whereby persons pay taxes during their working lives and then receive significant income support and health benefits during the latter part of their lives. However, this aspect of overall redistribution can easily be forgotten. There is a tendency for people to believe that most of the contributions they are paying to redistributive efforts favour the poorest income groups, when in fact they mostly favour the old (there is of course some overlap between these two groups).

3 Veall, M. (2010) “Top

Income Shares in Canada:

Updates and Extension”.

Working Paper Department

of Economics, McMaster

University.

(http://worthwhile.typepad.

com/veall.pdf)

4 Sharpe, A., Murray, A.,

Evans, B. & Hazell, E. (2011)

“The Levy Institute Measure

of Economic Well-being:

Estimates for Canada, 2000

and 2005”. CSLS Research

Report 2011-09.

Erosion of public services will tend to increase inequality


POLICY RESPONSES Fundamental changes have occurred in the Canadian labour market, and in society in general, in recent decades due to global-ization and technological change. During this time, redistribution policies have played a key role in reducing income inequality in Canada. However, 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.

The system must evolve to keep up with the changing economic environment. 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 rethink-ing.5 He points out that the rate structure of the tax system as a whole has considerably flattened, especially at the provincial level, and that transfers to the least advantaged, such as those on welfare, have worsened significantly over the last 30 years. In his view, 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).

Boadway argues for an equality of opportunity agenda. This would be a sig-nificant modification of the system that we currently have in place, which is largely focused on outcomes and smoothing the excesses of market allocations, with relatively little regard for starting points.

Boadway focuses particularly on inter-generational inequality and access to post-secondary education.

// Intergenerational inequality Unlike most other developed coun-tries, including the United States, Canada does not have an inheritance tax in place. 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. 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.

// Post-secondary educationThere are a number of market fail-ures associated with post-secondary education. 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 capi-tal, and persons from disadvantaged backgrounds are poorly prepared to suc-ceed. Government policies are needed to address these market failures. This would, in turn, help reduce inequality as more people from lower quintiles would be able to access the type of educa-tion that enables them to move up the income ladder. Potential policies in this areas include greater sheltering of investment in human capital through the tax system (for example, a wider range of deductions for expenditures linked to education), a fully-funded income-contingent student loan system, and more grants to students from low income families.

5 Boadway, R. (2011)

“Rethinking Tax-Transfer

Policy for 21st Century

Canada” in Gorbet, F.

& Sharpe, A. (eds.) New

Directions for Intelligent

Government in Canada:

Papers in Honour of Ian

Stewart. Ottawa: CSLS.


101

A reasonable degree of equality is widely regarded as a key societal goal. Given the inherent tendencies of the market to generate inequality, it is important that government intervene through redistribu-tive policies to offset market forces and ensure that income inequalities remain within socially acceptable limits. These policies take three forms. First, tax/transfer policies drive a wedge between market and post-tax income shares. Second, 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). Third, equality of opportunity can temper the growth of market inequalities in the first place.

The way forward for Canada to become a more equal society must include all three policy approaches. Programs that are effective in assisting disadvantaged groups should be

expanded and the contribution that the rich make to achieving greater equality of out-comes should be increased. Public services that benefit all citizens, such as public transit, should be further developed. Measures that promote equality of opportunity, such as inheritance taxes and better access to post-secondary education for the poor, should also be implemented.

The Occupy Wall Street movement has focused the attention of the world on growing inequality. Many political leaders, including the Governor of the Bank of Canada and the Minister of Finance, have expressed sympathy with the issues identi-fied by this movement. This situation provides an historic opportunity for Canadians to rethink our approach to addressing inequality. A national debate on how gov-ernments in Canada can most effectively redistribute income to prevent growing inequalities is urgently needed.

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

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

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


INEQUALITY IS NOT INEVITABLE SHERRI TORJMAN AND KEN BATTLE

Sherri Torjman is Vice-President of the Caledon Institute of Social Policy. She has written in the areas of welfare reform, customized training, disability income and supports, the social dimension of sustainable development and community-based poverty reduction. In 2006 she authored the book Shared Space: The Communities Agenda. She has advised the government on tax measures for people with disabilities as well as on childcare and disabilities more generally. In 2010 Sherri was a recipient of the Top 25 Canadians Award from the Canadian Association of Retired Persons.

Here’s the bottom line:// Poverty and inequality matter.// Governments play a vital role

in tackling poverty and inequality. // The federal government holds the key

levers, which are already in place.

POVERTY MATTERSCanada has established a reputation throughout the world as a peace-loving and stable nation. Inside our borders, an equally bright image emerges. 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.1 On July 1 this year, Maclean’s released an article on why it is a great time to be living in Canada.

Unfortunately, all this sunshine fails to cast light on a serious problem lurking just below the sparkling surface.

Far too many Canadians do not count themselves among the happy campers. These are the families that live in poverty. These are the households that spend higher than aver-age proportions of their income on food, clothing and shelter. Every day is a struggle just to get by. They choose between feeding

the kids and paying the rent, in the trenchant words of Mel Hurtig.2

At last count, in 2009, close to 3.2 million – one in 10 Canadians – lived on a low income. This national average masks the fact that certain groups (including aboriginal people, recent immigrants and persons with dis-abilities) face an even greater risk of poverty. Not surprisingly, the poverty rate rises and falls with the economic tides, as illustrated by Figure 1, which shows the close corre-spondence between the low income and unemployment rates.

The undulating ups and downs of the poverty waves are enough to make you sick; at least that is the conclusion of a burgeoning body of international evidence. Of all the hazards of life below the poverty line, none so dramatically separates low-income Canadians from the rest of society as the health gap. People living on low incomes have a shorter average lifespan and run a greater risk of illness and disability than those with more money.

The struggle to live on an inadequate income increases the scope, frequency and severity of stress for families, thereby raising parents’ and children’s susceptibility to a

1 CSLS (2011) “Happiness

as a Goal for Public Policy:

Ready for Primetime?”

CSLS Research Note 2011-1.

(http://www.csls.ca/notes/

Note2011-1.pdf)


103

wide range of physical, psychological and social problems. The relationship between income level and all these types of risk is typically strong and inverse.

The effects of poverty are felt very early in life. The odds of never seeing a first birthday are worse for low-income babies in general and aboriginal infants in particular. Low birth weight is an important predictive indi-cator of troubled childhood development and poor adult health.

But poor means more than just poor health. Poverty is a serious and stubborn problem, imposing heavy social, economic and personal costs that affect all Canadians. Low incomes lead to lost opportunities for individuals, the economy and society. 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.

A US report estimated that child poverty in that country costs $500 billion a year – or 4% of GDP – in increased crime, reduced productivity and poor health. A similar

study in Britain put its price tag at an annual £25 billion or 2% of GDP. Here at home, federal and provincial governments across Canada lose between $8.6 billion and $13 billion in income tax revenue to poverty every year.3

INEQUALITY IS DIFFERENT FROM POVERTY: IT MATTERS TOOPoverty is not, however, the only concern. 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. Over the past quarter-century, earnings of the wealthy in Canada grew by 16% while those of the poor actually dropped by 21%. 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, and progressive taxes and benefits.

The numbers tell a powerful story. An exhaustive body of evidence from around the world shows the wide-ranging negative impact of extreme inequality.

Research on health inequalities and the social determinants of health has found that

Ken Battle is President of the Caledon Institute of Social Policy. Before founding Caledon in 1992,

he was Director of the National Council of Welfare, a citizens’ advisory body to the Minister

of National Health and Welfare. Ken was educated at Queen’s University and the University of Oxford, and has taught at

both Queen’s and Carleton. He has advised the federal govern-

ment on key issues of social policy. Ken was awarded the

Order of Canada in 2000 and the Saskatchewan Distinguished

Service Award in 2004.

Low income rate Unemployment rate

0 %

8 %

10 %

12 %

14 %

16 %

4 %

6 %

2 %

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

Figure 1

Low income rate and unemployment rate, 1976 – 2009

SOURCE: Statistics Canada

2 Hurtig, M. (2000) Pay the Rent

or Feed the Kids? Toronto:

McClelland & Stewart.

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).


social status has a powerful effect on health. The psychological damage resulting from being at the bottom of the socioeconomic ladder can be devastating. 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.

Societies marked by substantial inequality sooner or later pay the price. Regardless of a nation’s wealth, it will be more dysfunctional, violent and unhealthy from both physical and emotional perspectives if the gap between income groups grows too wide. Poorer coun-tries with less unequal wealth distribution have been found, on the basis of wide-ranging indicators, to be more healthy and happy than richer, more unequal nations.

VARIOUS FACTORS CONTRIBUTE TO POVERTY AND INEQUALITYThere are strong forces that fuel persistent low income; these are deeply rooted in the economy, in labour markets and in society.

Contrary to public perception, most poverty is not an inherited condition of a small, hard-core group that passes its “affliction” from one generation to another. While a substantial segment of the population has low income at some point, poverty is usually a transitory rather than persistent problem. Most of the poor escape poverty and their risk of falling back declines over time.

However, certain groups – notably single parents, unattached individuals, those with low education, visible minorities, recent immigrants and persons with disabilities – run a higher risk of persistent poverty. They tend to be poor longer, suffer more frequent bouts of low income and face diminishing chances of escaping poverty the longer they remain below the poverty line.

Most Canadians rely on employment as their chief source of income. Bouts of unem-ployment and underemployment, not sur-

prisingly, raise the risk of falling below the low income line. When unemployment rises, as it did in the recessions of the past few decades, more widespread and deeper low income is sure to follow.

But unemployment is not the only feature of the economy that contributes to poverty. The labour market itself is a prime driver of low income. More than half of low-income households in Canada can be classified as “working poor”. People in these households work full time in the labour market but do not earn enough money to lift them out of poverty.

The problem is partly due to the growth of “nonstandard” work, which includes part-time, seasonal and temporary work. There has been a corresponding erosion of middle-wage employment, including middle management positions and well-paid blue-collar jobs in traditional industries, such as manufacturing and transportation.

Social factors are also major contributors to poverty. Unfortunately, poverty is a moth-erhood issue ! literally. Bearing and raising children play an important part in making women vulnerable to low income, especially if they are raising children on their own.

An increasing number of families with children are headed by single parents, main-ly women. Children raised by single mothers run a much higher risk of poverty than those in two-parent families ! 21.5% compared to 9.5%, respectively (2009 figures). Fortunately, there has been considerable progress against poverty among single-parent families over the years, due to growth in mothers’ employment rates and improvements to child benefits.

More than half of low-income households in Canada can be classified as “working poor”


105

GOVERNMENTS PLAY A VITAL ROLE IN TACKLING POVERTY AND INEQUALITYTackling poverty means countering these powerful forces. We need to have more good jobs; investment in workers through educa-tion and training leading to higher knowledge and skill levels; equal pay for work of equal value; and enforcement of child support agreements – to name just a few vital actions.

But while such remedies will prevent poverty for some Canadians, they cannot reduce poverty for others. Recessions continue to take their toll and so-called “bad jobs” are now a permanent feature of the labour market. Moreover, certain groups typically experience poverty regardless of the state of the economy – the result of such problems as employment discrimination (especially for new immigrants), weak job skills and lack of education, especially as the bar for a decent job has effectively been raised to post- secondary graduation.

This is where government is uniquely placed to intervene. Its actions can help off-set the strong economic and social forces that contribute to poverty. Its measures can reduce the growing gap between those with high incomes and those who are poor.

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. Income security programs for children, seniors and the unemployed pay money directly to individuals and families. The income tax system redistributes income and thus is another powerful and progressive instrument for tackling inequality. Canada has a progressive income tax system, which means that taxes paid increase with rising income. 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.

Trends and patterns in income inequality are tracked by a statistical measure known as the Gini coefficient. 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 higher the Gini coefficient, the greater the degree of income inequality. Figure 2 tracks inequality in Canadian families since 1976.

The top purple line in Figure 2 represents market inequality, which has increased over-all since the mid-1970s – from .387 in 1976 to .451 in 2009, a sizable 16.5% increase. The middle orange line shows the trend in the Gini coefficient for total family income, which includes both market income and transfers from government income security programs. The bottom blue line shows the trend in inequality after both income taxes and transfers from income security programs are taken into account. The Gini coefficient for after-tax income rose from .306 in 1976 to .329 in 2009, an increase of only 7.5%.

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.

THE FEDERAL GOVERNMENT HOLDS THE KEY LEVERSPoverty and inequality matter – and so do governments. But not all governments are created equal.

In the case of poverty and income inequality, the federal level is the only government with the ability to ensure the equitable treatment of citizens in all parts of the country. Equally important, 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.


Despite the important role of the income tax system, it is income security programs that do the heavy lifting in terms of redistribution. Income security programs fall into two cate-gories: income supplementation and income replacement.

Income supplementation programs bol-ster low incomes. The Working Income Tax Benefit and Canada Child Tax Benefit are the two major income supplementation pro-grams operated by the federal government. They boost low earnings and low income, respectively. Most provinces and territories also supplement low income through their own child benefits and refundable tax credits.

Income replacement programs, by con-trast, replace income which has been lost due to such commonplace conditions as unemployment, disability and retirement. Employment Insurance, Old Age Security/Guaranteed Income Supplement and the Canada/Québec Pension Plan are the core

income replacement programs in Canada. Provinces and territories operate another major income replacement program: social assistance (welfare).

While income replacement programs in Canada are far from perfect, this paper focuses exclusively on the income supplementation function. Improvements in income supple-mentation measures offer the greatest pros-pects for making a real difference to both poverty and income inequality. Here’s how.

Right now, one in four workers makes just $10 an hour or less and close to half of all low-income households include at least one work-ing adult. This is the problem of the working poor.

One crucial way for governments to help the working poor is to top up their low earnings. Québec, New Brunswick and Saskatchewan offer earnings supplements to their low earners. In its 2007 Budget, the fed-eral government introduced its own earnings

0

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.10

0.15

0.05

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


Figure 2

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

SOURCE: Statistics Canada


107

supplementation program, the Working Income Tax Benefit (popularly known as WITB). Proposed by Liberal Finance Minister Goodale in his government’s 2005 Economic Statement, the WITB was carried forward by his Conservative successor, Jim Flaherty, in the 2006 Budget and launched in 2007.

While promising in theory, the WITB in its first year provided a meagre payment of up to $500 annually for single workers and $1,000 for single parents and couples. The program was targeted so far down the income scale that it excluded many of the working poor.

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. Ottawa responded in 2009 by enhancing the benefit and expand-ing its reach.

However, the WITB still sits at a mod-est maximum $944 for a single worker per year ($1,714 for a family) and cuts out at a low net income of $17,004 ($26,218 for a family). This measure needs a healthy, multi-year injection of funds before it becomes a major weapon in the war on poverty and inequality. But at least the foundation is in place.

The Canada Child Tax Benefit (CCTB) is the most substantial income supplemen-tation program in the country. It is also a powerful tool that the federal government can wield to tackle poverty and inequality. The program delivers cash payments to more than 90% of families with children. It is progressive in that its benefits decline as incomes increase.

The CCTB has a two-tier design. The base benefit goes to almost all families. It

is bolstered by an additional amount – the National Child Benefit Supplement – for low- and modest-income families. Together, the combined benefits pay low-income families an annual maximum of $3,485 for the first child, $3,240 for the second child, and $3,149 for the third and each additional child.

This national measure has a number of strong points. It is a non-stigmatizing, inclusive program that delivers monthly cash benefits to the large majority of Canadian households with children. It pays the same amount to all families with the same level of income, regardless of source or family type. The CCTB is also pan-Canadian. It provides a stable and assured income supplement no matter where families live or work.

However, more can be done to assist families. We have proposed that Ottawa raise the CCTB to a maximum annual $5,000 per child ! $1,515 more than the current $3,485.

Child benefits make a real difference. If there were no federal child benefits, the low-income rate for families with children would have been 15% in 2008. Under the current system, the low-income rate for families with children was 9.3%. Our proposal would reduce that figure further to 8.3% and would lift an estimated 40,000 families above the poverty line.

Because the recommended increase to the CCTB would be achieved by boosting the base benefit and not the National Child Benefit Supplement, it would increase benefits not only for low-income families. It would also provide a sizable rise in child benefits for the modest- and middle-income majority of families.

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. The latter modest-income families also struggle with constrained budgets and could certainly use additional cash for their children.

Child benefits make a real difference


To help pay for a stronger CCTB, the federal government could draw on the estimated $3.5 billion it now spends on the Universal Child Care Benefit and the non-refundable child tax credit. These poorly designed measures are inequitable, confusing and wasteful and contribute little to the war on poverty and inequality.

The Caledon Institute has also proposed a new disability benefit that would be delivered by the federal government. 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.4

A NOTE ON GUARANTEED ANNUAL INCOMESome people argue in favour of a “start-from-scratch” approach to tackling poverty and inequality. 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.

The problem with simple solutions such as this is that they are simplistic ! and would do little to get at the root causes and dynamics of poverty and inequality. Poverty is a complex multi-dimensional issue that cannot be vanquished with a silver bullet. It requires a variety of strong programs and a range of effective services.

Proponents of a guaranteed income argue that it could be delivered as a form of negative income tax, using the income tax system to deliver cash to the poor. But, in fact, Canada already makes extensive use of the negative income tax concept in the design of a range of income-tested programs for various groups, including the Guaranteed Income Supplement, the Canada Child Tax Benefit and the Working Income Tax Benefit.

If we were to abolish these important measures and replace them with a guaranteed income, we would only end up reinventing the current benefits to meet the needs of specific groups in Canadian society.

Fortunately, the foundations to help slay the poverty and inequality dragons are already in place in this country. They do not have to be built ! merely built upon ! in order to stem poverty and reduce the growing gap between rich and poor.

The federal government needs to step up to the plate. It already has both the levers and the leverage to land a solid punch on poverty and inequality.

4 Mendelson, M., Battle, K.,

Torjman, S. & Lightman, E.

(2010) A Basic Income Plan

for Canadians with Severe

Disabilities. Ottawa: Caledon

Institute of Social Policy.

REFERENCESBattle, K. (2008) A Bigger and Better Child Benefit: A $5,000 Canada Child Tax Benefit. Ottawa: Caledon Institute of Social Policy.

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

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

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

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

Wilkinson, R. & Pickett, K. (2010) The Spirit Level: Why Equality Is Better for Everyone. London: Penguin Books.

CANADA’S UNIVERSAL HEALTHCARE system is putting enormous pressure on provincial and federal treasuries at a time of fiscal deficits. Healthcare costs are rising as a percentage of GDP due to our aging society and healthcare inflation. 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. Several groups – First Nations, older people with chronic conditions, those with significant pharma costs and no private drug coverage, and the victims of lapses in medical safety – are particularly ill-served.

Such problems are not unique to Canada. Healthcare costs are rising faster than GDP in all developed countries, which certainly suggests that there will be no easy solutions in this area. Nevertheless, the papers in this section lay out clear options for moving for-ward in a way that will ensure that Canadians in 2020 and beyond will have access to the healthcare services they need and want.

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. While healthcare delivery remains a provincial responsibility, our authors are of the view that the federal government has a key func-tion in focusing constructive public attention and debate on healthcare and in projecting a vision of a better health system for Canada.

Change is needed in our health system not only because of financing issues, but also because of the unevenness of coverage between provinces and groups. Our health system was designed for earlier times. Recognizing this we must make decisions that make it more relevant to the challenges of today, most notably chronic illness and the high cost of outpatient drugs (and variability of coverage across the country). Today, too many healthcare decisions are played out in the public arena and taken in response to public pressure, rather than being based on critical evaluation of need, the efficacy of treatments and an appropriate strategic direction for a system that will always be financially constrained.

SECURING OUR HEALTH SYSTEM FOR THE FUTURE

The federal government has a key function in focusing constructive public attention and debate on healthcare

Healthcare costs are rising faster than GDP in all developed countries

SECURING OUR HEALTH SYSTEM FOR THE FUTURE

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. Allowing the negotiations to get bogged down in discussion of the minutiae, or hijacked by those who would prefer accountability to be clouded, would be a missed opportunity for all Canadians.

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

evidence-based decision-making and a sys-tems approach that allows health personnel to move seamlessly between care settings.

The two papers that address the issue of funding both reject user fees and argue in favour of new, health-specific social insur-ance premiums. Raising more money for healthcare will certainly be controversial, but if we want to maintain a world-class system, we will have to pay for it. This will take a societal consensus that can only be achieved with federal government leadership, real explanation of the options and costs and much better accountability to the public.

Efficiencies are important, but not on their own sufficient to carry our health system into the future. For in 2020 we hope to have in place not just a patched-up healthcare service, but a truly regenerated system that is well-positioned to adapt as we advance.

Raising more money for healthcare will certainly be

controversial, but if we want to maintain a world-class system, we

will have to pay for it.


112

LESSONS FROM 2004, PERSPECTIVES FOR 2014

PHILIPPE COUILLARD

Dr. Philippe Couillard, PC, MD

is presently a Strategic Advisor, at SECOR Group.

From 2003 – 2008 he served as Québec’s Minister of

Health and Social Services. He has held many positions

within medicine, 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, a director of two

Canadian biotechnology companies and a partner at

Persistence Capital Partners, a private equity investment

firm. Dr. Couillard is a member of the Queen’s Privy Council

for Canada and sits on the Security and Intelligence

Review Committee.

Seven years ago, our country’s first ministers gathered in Ottawa with the intention of achieving an accord that would fix health-care “for a generation”. Sadly, this ambition remains unrealized.

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). On the negative side, there remain significant cross-country disparities in coverage for prescription drugs, home and long-term care. Attempts to improve accountability have fallen short of expectations.

As 2014 approaches, some would like the existing accord – including the 6% escalator – to be renewed as is. This would be a missed opportunity. 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.

WHAT WAS MISSING IN 2004?Looking back at 2004, what is striking was the lack of detailed and meaningful discussion of healthcare, per se. Most of the discussion centered on funding, volumes and wait-times, leaving quality, performance and most of the core healthcare issues facing Canada on the sidelines. In hindsight, this focus on the production line rather than on the real value delivered to the user was highly predictable, given the often anecdotal level of most media coverage of healthcare and the realities of our modern political world.

This is not to say that reducing wait times is not important. Shorter wait-times help bolster user-confidence in our healthcare system. But even more pressing is the need to improve the performance of overall healthcare networks. Healthcare services should address our soci-ety’s changing needs and the resulting patient experience should be comparable to that of citizens of other affluent countries. The focus should be on delivering high quality, seamless, safe services in a timely fashion.

“There is nothing wrong with change, if it is in the right direction”

Winston Churchill


THE ROLE OF THE FEDERAL GOVERNMENTSince 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 facilita-tor 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 health-care 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 conse-quences, 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.

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 proce-dures or interventions.

1 OECD (2011) Economic

Policy Reforms: Going for

Growth 2011. Paris: OECD.

Chapter 6, p.229.

Payment reform should stand as the cornerstone of the next wave of healthcare reform

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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 pre-ventative 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.

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, deter-minant. 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 phy-sicians 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 main-tained, 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

We need physicians to participate in the management

of the system

2 Porter, M.E. & Teisberg,

E.O. (2006) Redefining

Health Care: Creating

value-based competition

on results. Boston: Harvard

Business School Press.


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 profes-sionals, to the benefit of patients.

Adapting the system to meet our changing needsAt its inception, Canada’s Medicare was nar-rowly 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 lot-tery”. 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 signifi-cant 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).

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 respon-sibility of all governments to present these choices to the electorate, clearly and with their respective costs and benefits explained.

Finding better ways to manage demandHistorically, 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 profession-als, such as nurse practitioners. The irony is that today the shortage of professionals (a self-inflicted 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 inher-ently wrong with these widely-used methods, my view is that they would simply waste

Canadians too often face a “disease lottery”


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energy and resources and yield little positive impact. Where such revenue models are in place, there have been constant demands for exclusion, leading to a decreasing number of payers supplying an increasingly marginal amount of money, at considerable admin-istrative cost. There is also evidence to show that, when faced with fees, users reduce their utilization of all services, both unnecessary and necessary, which can cause problems down the line.

Nevertheless, an open discussion of the merits of these funding options should be part of our political debate. Taking refuge in the “prohibition” of user fees in the Canada Health Act is not an adequate response, underestimating, as it does, the capacity of informed citizens to engage in a meaningful conversation on the question.

In my view, though, there are more equi-table ways to control demand. First, an evi-dence-based process should be put in place to establish optimal use of new technologies and pharmaceuticals. Once more, 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.

On the budgetary side money should flow to integrated primary care organizations that purchase specialised services “upstream” in

the system, based on outcomes and docu-mented needs. (The National Health Service in the UK is presently moving in this direc-tion, an experiment worth studying.) Lastly, efforts should be made to induce competi-

tion among providers who vie for public payment.

While such implementation decisions take place, of course, at the provincial/ter-ritorial level, 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.

Supporting a more meaningful discussion of private vs. publicThis is the most difficult, sometimes obses-sive, part of our conversation on healthcare. Proponents present the private sector as a panacea, opponents see it as the devil incar-nate. Both sides are wrong.

Across the political spectrum, most observ-ers 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. Such groups are essentially a form of partnership between the public system and a private (often for-profit) corporation. Their hybrid nature has not, though, stood in their way. Likewise, when the state acts as an insurer (in the context of workers’ compensation, for example), it loses its statist inhibitions, employing the services of private providers, negotiating prices and encouraging competition just as the private sector would. But bring the discussion round to other types of services (e.g. high volume, low intensity procedures such as minor surgery and diagnostic procedures) and endless objec-tions are raised.

The social problem associated with the presence of private providers in our healthcare environment is not their existence, but the fact that their resources are not accessible to all. Public funding of privately-delivered services is a simple concept that overcomes this problem, works to the advantage of all and is entirely compatible with the Canada Health Act. So, where there is sufficient density to ensure competition, 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


selected procedures and that all providers – public and private – should compete for the privilege of serving patients.

It is important to note, however, that while such competition is feasible in our main cities, where many providers coexist, competition between providers has little practical mean-ing in our remote and sparsely-populated communities where there is only one regional provider. This is one of the factors that sets us apart from western European countries. Another is the larger number of (often less well-compensated) physicians in such coun-tries. Healthcare systems cannot be dislocated from their social-historical context, nor can they be transferred as blueprints between societies. But we can observe lessons from elsewhere and adapt them to our reality.

Defining and promoting accountability in healthcareToo often, federal-provincial conversations on healthcare end up as power and visibility struggles. There is no need to go down that path again. Healthcare is, in large part, a provincial responsibility and, by insisting on being visible and in control, Ottawa runs the risk of transforming the debate on improved, sustainable patient care into a constitu-tional battle. In 2004, as the federal govern-ment insisted that provinces should be held accountable for their use of federal transfers, the last days of the conference were spent discussing the merits of asymmetric federal-ism, rather than health outcomes.

Within the existing constitutional frame-work, credible and visible accountability must, though, be established. It is legitimate for the federal government to use its spending power to initiate change and then to receive credit for it.

A starting point would be for the federal government to state that change and exper-imentation (including in coverage and funding methods) are welcome, so long as universal coverage and equity are preserved. It can acknowledge that there are significant

gaps in coverage and a high degree of inequality across the country. It can be open about the fact that extending health coverage to new areas will require new funding from governments and citizens. It can state unequivocally that nothing in the Canada Health Act prevents competition among providers, under public funding.

It could also facilitate the creation of an explicit and credible mechanism for ensur-ing accountability. We need a renewed Health Council, composed of existing provincial Quality Councils or Commissioners, with representatives from the health professions and the public. 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, make them visible and promote their adoption.

The Health Council should present an annual report directly to the federal-provin-cial-territorial assembly of Health Ministers. Each provincial/territorial government’s response to its recommendations would be evaluated by their respective Quality Council, and ultimately sanctioned – or rewarded – by the electorate. This mode of reporting, coupled with the absence of elected officials on the Council, would ensure its credibility and inde-pendence from political/electoral cycles.

When it comes to federal funding levels, there is little doubt that arrangements will be renewed, at least at the new “baseline” level reached in 2014. But the 6% escalator

Too often, federal-provincial conversations on healthcare end up as power and visibility struggles


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should remain open for discussion and its continuation linked to substantial progress in performance.

One option would be to place all new funds (beyond the 2014 baseline) in a dedicated “fund for innovation”, acces-sible to any province or territory willing to implement changes that result in increased performance from the patient’s point of view. 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). 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, which would then be accountable for results.3

CONCLUSIONOur healthcare system is not in crisis. But, like other publicly-funded systems, it is suffering from the classic tension between needs and resources. Thirty years from now, this tension will still be there, and a new society with its specific needs, challenges and unpredictable technological advances will have emerged.

Our responsibility is to take a step forward and to use the 2014 horizon as a catalyst for change and improved patient care. All of us – citizens and governments alike – have a role to play and bear a share of the responsibility. The present federal government has one stra-tegic decision to take: does it want 2014 to be a low-profile, rubber-stamping event, or does it want renewal of our ailing healthcare system to be part of its legacy? If the latter, it should act accordingly and ensure that the 2014 discussions live up to their potential as a formidable lever for change.

The present federal government has one strategic decision to take:

does it want 2014 to be a low-profile, rubber-stamping event, or does it want renewal

of our ailing healthcare system to be part of its legacy?


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

Francesca Grosso is a Principal at Grosso McCarthy, a consulting firm specializing in health care strategy and policy. Francesca served as Director of Policy to the Ontario Minister of Health and Long Term Care from 2001 – 2003. 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 health-care agencies. She co-authored, with Michael Decter, the 2006 book, Navigating Canada’s Health Care: A User Guide to the Canadian Health Care System.

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. 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). 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, both diagnostic and in treatment, and the seemingly boundless public appetite for these. It is not aging per se that is the problem but aging in the context of increased healthcare options.

The Government of Canada has an important leadership role to play in ensuring a sustainable, high quality healthcare system into Canada’s future. 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. Each initiative has the potential to drive both an improvement in delivery and an increase in the affordability of healthcare.

BACKGROUND: CHANGES ALREADY MADEBeginning in the early 1990s, the federal government made significant changes and invested substantial sums in the areas of health information, health research and health informatics.

// Health information The Canadian Institute for Health Information (CIHI), was first proposed in the early 1990s by then federal Deputy Minister of Health Margaret Catley-Carlson to consolidate, rationalize and improve the collection of health information. Prior to this, four separate taxpayer-funded bodies were engaged in the collection of information: Statistics Canada, Health Canada, the Hospital Medical Records Institute (HMRI) in Ontario and MIS in the rest of Canada. The information they provided was often up to three or four years out of date. HMRI and MIS were therefore merged into CIHI. Health Canada transferred much of its health statistics activity to the new orga-nization and a strong bond was built between CIHI and Statistics Canada as the Chief Statistician serves as Vice Chair


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Michael Decter is a Harvard-trained economist

and leading Canadian expert on health systems. He

served as Deputy Minister of Health for Ontario and

as Cabinet Secretary in the Government of Manitoba. He has published several

books on healthcare and has held many senior positions in health management and

health-focused organizations, including being the Founding Chair of the Health Council of

Canada. He currently serves as President and Chief Executive

Officer of the investment management firm, LDIC Inc.

Michael was awarded The Order of Canada in 2004.

of the CIHI Board. CIHI’s budget – which is drawn from both federal and provincial sources – has increased from about $10 million a year to over $40 million. The Institute now stands as an important cornerstone of health information in Canada. With significant analytical capacity, it provides critical data on issues such as hospital admis-sions, discharges and lengths of stay in a timely manner.

// Health research In 2000 Dr Henry Friesen, Chair of Canada’s federally-funded Medical Research Council (MRC), convinced the federal government to transform the organization into the Canadian Institutes of Health Research (CIHR). The aim was to move away from a research agenda driven largely by the MRC and its staff, to one with broader linkages to the health system as a whole. This important federally-led initiative has resulted in both an increase in and a diversification of federal health research dollars. Funds now flow to thirteen virtual health research institutes which are much better linked to clinical decisions and health policy. At the same time the Canadian Health Services Research Foundation, (CHSRF) was established to link the health information and research areas. Its mandate is to “pro-mote the use of evidence to strengthen health service delivery in Canada”.

// Health informatics Canada Health Infoway was created to lead the devel-opment of electronic health records. Although the provinces worked with the federal government on this initiative and are represented on its governing board, the $2.1 billion in financing provided to date has all come from federal coffers.

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. 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 DONEDespite all the investments, many health funding decisions are still driven by vested interests advocating for their particular causes, rather than by hard evidence as to the efficacy of treatment. 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. Public fears rather than medical evidence drive many decisions. As an example, all available data supports the view that we are over-medicated, yet payments to phar-macists for reviewing patient medications are only gradually being introduced.

In order to capitalize on existing investments and achieve an effective and affordable health system for the future, the Government of Canada must move to put in place an evidence-based set of strategies: it needs to provide very specific leadership, in partnership with the provinces and territories, to achieve concrete goals in health services performance. Below we outline four key initiatives that we believe would help it do so.

1 Improve accountability to drive quality improvement

One of the key thrusts of the 2004 Healthcare Accord was an improvement in accountabil-ity. However this fell short due to a failure of political will and problems with the detail of the accountability. What we have ended up with instead is too much measurement and too little management.

What were supposed to be “comparable indicators”, on issues such as waiting times, became different indicators in different


provinces. Such obfuscation has meant that it is hard to hold the provinces to account. While the differences in indicators are slight, they are sufficient to preclude any sensible national comparison or overview.

Consider the analogy of the labour force survey. 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-by-province, within various age groups and across gender lines. Such information enables targeting of remedial efforts: the labour force survey provides an effective framework for decision making about employment and economic policy. If provinces were to set different measures for unemployment (as they do for healthcare) then most of this value would be lost.

Another problem has been the massive number of indicators developed. When it comes to healthcare indicators, more is not better: what is required is a simple set of easily understood indicators that measure quality, timeliness, affordability and access.

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. The aim should be to make the system more account-able (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). Canadians have much to gain and nothing to lose from having a more accountable healthcare system.

Fortunately we already have the health services data gathering and analysis capacity in place, through the institutions mentioned above, as well as a host of provincial health services organizations (such as the Institute for Clinical Evaluative Sciences in Ontario) that can contribute. What is needed now is political will.

2 Tackle safety in health deliveryThe Baker Norton study, jointly commis-sioned by CIHI and CIHR and released in 2004, documented huge safety issues in the Canadian healthcare system. These take an enormous toll both in terms of human suffering and financial cost to the system. The authors calculated that between 9,000 and 23,000 Canadians die unnecessarily each year, as a result of avoidable errors within the health system. Since then, others have looked at the burden that avoidable injuries pose to the healthcare system. It is estimated by Baker and Norton that the equivalent of nine hospitals, each with 200 beds, are utilized just for “repair” work.

The Baker Norton report led to the creation of the Patient Safety Institute (PSI) head-quartered in Edmonton and funded by the federal government. Despite the excellent efforts of this organization, the safety problem in Canadian healthcare (and in the healthcare systems of other nations) remains both large and intractable. A much more forceful national effort is required to solve it.

Other jurisdictions, including American states such as Minnesota, have been grap-pling with this problem. They have used legislation and a number of other tools, such as mandatory public reporting of adverse events, to address it. Meanwhile, Canada has stuck with a largely voluntary approach, 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). The PSI’s budget is a paltry $10 million a year against a total Canadian healthcare budget of over $140 billion.

What we have ended up with is too much measurement and too little management


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Contrast this with the enormous man-datory efforts undertaken in civil aviation. Each plane crash in Canada is thoroughly investigated to determine the cause and indicate remedial actions. Pilots are tested and recertified frequently. Healthcare providers, by contrast, can often practice for an entire career without formal recertification or assessment of their competency. The health-care system tends to run on the basis that regulatory colleges, run overwhelmingly by the healthcare professionals themselves, will deal with outlier behaviour. There is no focus on systemic aspects of the lack of safety in healthcare.

One way for the federal government to change this would be for it to commission a smaller-scale Baker Norton review, looking at specific indicators across the country, on an annual basis. This would keep the safety issue front and centre. Other ways of address-ing the problem include increasing the PSI’s funding and insisting on mandatory review and accreditation of hospitals and staff. It would be nice to think that hospital stays could be made as safe as flying.

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: 7.4 years shorter for men and 5.2 years for women. In addition, aboriginal communities saw increased rates in: infant mortality (22% higher); tuberculosis (6.2 times higher); diabetes (almost 20% higher); and foot amputations as a result of diabetic foot ulcers (18 – 22% higher). These are dismal statistics.

The First Nations and Inuit Health Envelope was introduced by the federal gov-ernment in 1994. At that time it totaled more than $1.1 billion for all health programs; today it amounts to about $2 billion per annum. 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, but a much more rapid transfer is needed. Fortunately there are some models of successful practice from which to learn.

// In BC, a tripartite agreement between the federal government, the province and aboriginal authorities has resulted in placing $318 million in the hands of a new BC First Nations Health Council. This has given tribal councils greater power to solve issues within their own communities, rather than having to abide by decisions made in Ottawa or by an ineffective system of regional offices run from Ottawa.

// In 2006 the federal government provid-ed $3.1 million to a partnership struck between Saint Elizabeth Health Care, an NGO with expertise in nursing care, and the Assembly of Manitoba Chiefs. The aim was to map ways to manage diabetic foot ulcers and avoid amputa-tions. The parameters were realistic and included there being no commit-ment to increase healthcare staffing levels in areas that cannot attract such resources under normal conditions. The pilot project built capacity and care pathways that assisted health care staff to utilize prevention strategies, undertake early detection, and then provide treatment and quick access to specialists as required. The result was embraced by the Assembly of

The safety problem in Canadian healthcare remains

both large and intractable


Manitoba Chiefs and local communi-ties and has since been expanded.

// In Ontario, Aboriginal Health Access Centres – aboriginal community-led, pri-mary health care organizations – have, since 1994, brought tens of thousands of aboriginal community members into the circle of care and support.

These examples make sense. Provinces and NGOs have expertise in implementing health care delivery and aboriginal com-munities understand their own needs. The federal government, not really an expert in either, provides the financing.

It should therefore move ahead to:// dismantle the inefficient and

ineffective First Nations and Inuit Health Branch (FNHIB) and regional health bureaucracy;

// shift dollars into more agreements such as the tripartite one outlined above;

// promote health among First Nations youth; and

// contract out to NGOs for specialized services such as the non-insured Health Benefits Program, currently run by Health Canada (the manage-ment of which could be akin to the Veterans Affairs drug administration or health delivery for the Canadian Armed Forces).

4 Stabilize human resources in the health system

Canada’s health system has numerous human resources problems that undermine its effectiveness. These include quality con-cerns, chronic shortages and a poor distri-bution of health professionals. In order to address these, the federal government should support the provinces to:// encourage professionals to leave

practice before their skills deteriorate;

// break down the barriers that prevent individuals practicing in the care setting of their choice;

// provide professionals with cost effective, attractive alternatives to higher pay.

All three problems could be at least partially addressed by reform of the pension system for healthcare workers.

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. A community-care setting is not only less costly for the funding government, it can also provide a less stressful work environment and a better quality of life for healthcare professionals. Many such professionals are willing to accept somewhat lower wages in return for these benefits, but the sticking point is that hospital employees cannot take with them their generous defined benefit (DB) pensions. Likewise, community-care organizations (which are also provincially funded) find it hard to attract qualified workers in the first place because of their lower pension offerings.

Extending DB plans to other parts of the health system (beyond acute care settings) would cost money, albeit not a great deal of money. In Ontario, 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

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


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premiums. At least some of this increase in the pension envelope could be funded by the federal government.

The biggest direct contribution the federal government could make to reforming health-care pensions would be to enable physicians to belong to DB pension plans. This would help keep costs in check as many physicians would consider trading pay increases for the ability to belong to a DB plan. The actual move would be funded not by the taxpayer, but by participating physicians through their medical corporations. However, effecting such a switch would require changes in Canada Revenue Agency (CRA) legislation. While the required changes are of some complexity, they are certainly not insurmountable.1 A sim-ilar legislative change was made in 2002 when the federal government revised the law to enable doctors to create medical corporations that would benefit from similar tax regimes to other small businesses. This move helped physicians immeasurably and provided the provinces with significant leverage in negotiations with medical associations.

CONCLUSIONSThe federal government has a crucial role to play in achieving sustainable and high quality healthcare services in Canada. With a focused and strategic approach the Government of Canada can assist provinces in modernizing Canadian health services. It can also realize a return on the significant investments it has made over two decades in improved health information, health informatics, health research and evidence gathering.

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, for productivity, for safety and for affordabil-ity. These should be set out in advance by the Government of Canada. There will, as always, be howls of jurisdictional protest from the provincial premiers but if the federal government sticks to specific and public performance goals, Canadians will be better off.

Negotiations should have very specific goals in place for performance, for productivity,

for safety and for affordability

1 Under CRA rules

employers can be pension

plan sponsors provided

they have workers who

qualify as employees.

Medical corporations do

not meet CRA rules for

inclusion because their

physician employees,

also shareholders, are not

classified as employees.


PAYING FOR THE HEALTHCARE WE WANTMARK STABILE 1

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. He is also a Research Associate at the National Bureau of Economic Research, Cambridge Massachusetts and a fellow at the Rimini Centre for Economic Analysis, Italy. From 2003 – 2005 he was the Senior Policy Advisor to the Ontario Minister of Finance where he worked on health, education, and tax policy. He has also advised the Governments of both Canada and Ontario on health care reform.

THE PROBLEMWell before the great recession of 2008, Canada’s healthcare system was sending out signals that it had a financing problem. Healthcare costs in Canada have outpaced growth in tax revenue and gross domestic product (GDP) for much of the past few decades. While there have been times of faster and slower growth (during the 1990s while the federal government balanced the budget, healthcare cost growth slowed sig-nificantly), on average between 1980 and 2006 the annualized growth in healthcare expendi-tures was 7.5%. The average annualized growth in GDP over that same period was 6.1%. The result is that we now spend considerably more on healthcare, both in absolute terms and as a percentage of GDP, than we did in 1980.

On the whole, this is certainly a good thing. Healthcare has improved tremendously over this time period with new technologies, procedures, and medications that have helped many people. No doubt, some of the spending increase has been wasteful, some of the care may be excessive or of marginal benefit, and some may even be harmful, but the overall story is one of success. Most of us would not want to return to the healthcare system we had in 1980.

Over this same period, governments have increased the proportion of their budgets that they spend on healthcare. The Ontario government spends approximately 40% of its total budget on health: in 1980 this figure was less than 30%. This increase is a function of many things: shares consist of both a numera-tor (healthcare spending) and a denominator (all public spending) and these are subject to changes in economic growth, tax policy, and policy decisions on spending for other things. But, overall, healthcare has become the most significant item of public spending by provinces. Again, there are many good reasons for this, and Canadians have indicated time and again that they prefer a majority publicly-financed, universally-accessible healthcare system that provides high quality care based on need. This is, however, an expensive proposition, hence the financing problem described above.

It is important to note that this problem is in no way unique to Canada. Across the OECD, in countries with systems that are similar to ours, and in countries with systems that are quite different, healthcare costs are growing faster than GDP. Indeed, when one looks at the countries that we typically


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compare ourselves to in terms of economic development – including the UK, continental Western Europe, and the broader com-monwealth – there is no country in which healthcare costs have grow more slowly than the overall economy.

This is both comforting and concerning. It is comforting because it suggests that it is not the Canadian Medicare model that is at the root of the problem. The problem is universal. It is concerning because it suggests that efforts to make our system work better – more efficiently, more equitably, and with better quality – while clearly important and necessary, are not on their own likely not solve our financing problem. All of the healthcare systems in the developed world are trying to make their systems more efficient, less wasteful, etc. Many are far ahead of Canada in terms of important reforms to payment and delivery within the public system. Once again, none have succeeded in getting healthcare costs to grow more slowly than GDP.

It is also worth noting that the financing problem I have described does not suggest that the healthcare system is not economically sustainable. There is no single right answer to the question “how much of our GDP should we spend on healthcare?”. Most wealthy countries spend around the same as Canada. A few spend a little more. All have seen growth in the amount spent on healthcare. Rich nations have the luxury of spending on things they value and if Canadians are getting valuable care from their healthcare system, there is no reason why we should not spend more on health and less on other goods. But we do need to figure out how we are going to pay for it.

Economic sustainability is not the same as fiscal sustainability. What is clear is that, across Canada, governments cannot afford to pay for the healthcare system we have now, along with all other public expenditures, employing only the current revenue base. Most provinces are in significant deficit. All are dependent on large transfers from the

federal government continuing past 2014. Some efficiencies are certainly possible, but if we want more healthcare in the future, we will almost certainly need to pay more for it. So where should the money come from? Public or private sources?

OPTIONS FOR REFORMGiven 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, not down, over the next 50 years), we need to decide how we will pay for it. The options for increasing revenue fall into four broad categories:

1 Increase the taxes we already have in place.

2 Cost-share with patients in the form of user charges, deductibles, etc.

3 Allow for more private financing/insurance.

4 Diversify public funding streams with new public revenue models.

Note that none of these options preclude finding more efficiencies, reducing waste, and improving quality in the system – we need continually to do all of these as well!

Raise taxesOption one, raising taxes, is certainly a possibility. 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. The benefits of general taxation are well established, but the public resistance to tax increases remains, so I will not spend time on them here.

Cost-sharingThere have been several proposals over the years to increase cost sharing with patients.

1 I would like to thank

my co-authors for work

that I draw on for this

article: Irfan Dhalla,

Colleen Flood, Jacuqeline

Greenblatt, Sevil Marandi,

and Carolyn Tuohy.

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.


Most recently, Quebec proposed a healthcare deductible on doctor visits. There are two main arguments in favour of such a proposal. First, if one believes that there is inefficient use of healthcare services that is patient driven, then imposing some price on care will increase efficiency. Second, cost sharing has the potential to raise revenue.

Economists, including myself, have argued that using cost sharing to raise rev-enue is not likely to be a particularly fruitful policy option. There are several reasons for this. First, cost-sharing systems are expen-sive to set up and administer. Second, given our values in Canada, 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. However, 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. These two points together mean that cost sharing is unlikely to solve our revenue problem.

Increased private fundingCanada’s public-private spending mix has hovered around 70% public, 30% private for several years. This is on the low side of public financing compared to many OECD countries. One reason for this is the nature of the public-private mix in Canada. In WHO parlance, Canada has complementary private insurance: private insurers cover items/sectors of health that are not covered publicly. For example, since pharmaceuticals outside the hospital are not covered publicly for many Canadians, a large share of Canadians have private insurance to cover such expenses.

Given the large role that pharma plays in modern medicine, it should not be surprising that Canada’s private share of financing is relatively high. 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. Individuals choose private coverage because it offers some amenities not provided publicly, such as shorter waiting times, nicer facilities, etc. (they cannot, though, opt out of paying for

public care through general taxation). Some have suggested this option as

a solution to Canada’s public healthcare financing problems. A few points are worth noting here. First, countries that have such systems in place still have the same financing issues that Canada has: public healthcare costs are growing faster than GDP. Therefore, the existence of this type of private insurance does not, in and of itself, eliminate financing problems. Second, these countries generally have a higher share of public health spending (usually above 80%) and broader public coverage than Canada does. Private systems there are generally small, covering around 10% of individuals. Their share of total health expenditure is even smaller, often at only around 1%. Third, 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. If anything, public expendi-ture often increases through complementary utilization, increased overall utilization, 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).

Therefore, while it is fair to say that countries can have private supplemental insurance and remain committed to public,

Private supplemental insurance does not offer a ready solution to the problem of increasing public healthcare costs


128

universal and accessible insurance (both the UK and Sweden would be good examples of this), private supplemental insurance does not offer a ready solution to the problem of increasing public healthcare costs.

New public revenue models The final option for increasing revenues available for healthcare is to diversify the public financing stream. I have argued elsewhere, along with colleagues from the University of Toronto, that one possible expansion would be to incorporate more social insurance funding into the Canadian healthcare system.2

Many European countries use social insur-ance funding – characterized by a clearer link between funds collected and benefits received – to finance parts of their system. The experi-ence in such countries suggests an increased willingness to pay on the part of citizens if they clearly perceive the connection between premiums and benefits. Often collection sys-tems are arm’s length from the government. Individuals are required to pay a monthly amount that is scaled to earnings, which is used to cover the cost of the health services provided. In many European systems employ-ers are also required to contribute on behalf of their employees. The fund is usually kept separate from general tax revenues, although in some jurisdictions, general taxes are used to augment the fund where necessary.

Public finance theory suggests that ear-marking funds in this way is not optimal and

can create inefficient restrictions in public allocations. However, 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), of tapping into willingness to pay for increased healthcare costs among Canadians, and of potentially increasing the redistribution of risks and income among Canadians through a broader Medicare basket, outweighs, in my view, the costs of such a scheme. Given the limita-tions of the other possibilities for increasing revenue, this final option has the greatest potential both to improve the scope and quality of the healthcare system, and to meet with (limited) public approval.

WHAT SHOULD BE COVERED BY PUBLIC FINANCE?Raising more revenue will not, on its own, be sufficient to sustain the healthcare system over the long run. It must be coupled with a strong movement towards evaluation of what should and should not be publicly funded, and a rebalancing of the role of the private sector to cover care that does not meet the criteria for public funding. A national body that evaluates both medical technologies and best practices, across sectors and types of providers, is a key element in making sure that public revenues are allocated to the most effective forms of medical treatment. When a drug provides significant benefit at a modest cost (e.g. insulin for diabetics), it would be covered for all who stand to benefit. When practice decisions by physicians result in high costs and little benefit, they would not be reimbursed (e.g. MRI scans for minor headaches and back pain).

Canadians will have to recognize that the public sector cannot cover all tests and treatments regardless of how minimally effective they may be. Where the potential benefits of diagnostic testing/treatment do not merit public funding, it is reasonable to expect that individuals who still choose

2 See Flood, C., Stabile, M.

& Tuohy, C. (eds.) (2008)

Exploring Social Insurance:

Can a Dose of Europe Cure

Canadian Health Care

Finance? McGill-Queen’s

University Press, and

Stabile, M. & Greenblatt, J.

(2010) “To Prefund

Pharmacare for Canadian

Seniors… or Not?” IRPP

Study No. 2.

A national body that evaluates both medical

technologies and best practices, across sectors and types

of providers, is a key element


to pursue such care should be free to do so outside the public system, using personal resources.

All of these changes are possible without undoing any of the current structure of Canadian Medicare, including any changes to the Canada Health Act. The remaining challenge is getting from here to there.

A ROADMAP FOR CHANGEThere is a role for strong federal leadership in moving towards these changes in Canadian Medicare. The 2014 negotiations offer the opportunity for the federal government to foster coordination on both evaluation and on diversifying funding streams. Along the way, there is scope to address the growing perception among the young of intergen-erational inequities (in financing and care) by gradually shifting the nature of public coverage. The following steps could be part such a transformation:

1 Use the 2014 negotiation to agree on a framework for diversified public funding. 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. If the federal government were to take on collection, 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. The federal gov-ernment does not, though, have to act as the collection agent. It could promote this change while taking a back seat in terms of implementation.

2 In those provinces where drugs are covered for the elderly but not the general population, eligibility by age could be gradually phased out by raising the eligibility age over time, while

simultaneously phasing in drug coverage through social insurance premiums. 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, thereby improving intergenerational equity.

3 In those provinces with more general drug coverage, such as Quebec and BC, the coverage budget could be more explicitly linked to social insurance premiums and phased in over time.

4 The federal government could establish, or require the establishment of, a national evaluative body (it need not be a federal body). 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 tech-nology and best practice at the level of, for example, the National Institute for Health and Clinical Excellence in the UK). Buy-in to the recommendations

Use the 2014 negotiation to agree on a framework for diversified public funding

A benefit of a national organization for evaluation is that there would be greater consistency in coverage across Canada


130

of this body could be required for receipt of federal transfers through both the Canada Health Transfer and any future social insurance framework. A benefit of a national organization for evaluation is that there would be greater consistency in coverage across Canada. Currently, provinces that deem technologies ineffective are often pressured into reversing decision because the same technology is offered elsewhere in Canada.

5 As public coverage for all truly medically necessary services increases, the role of private insurance would change, with complementary insurance covering those items deemed insufficiently cost-effective for public coverage. The private market for this care and coverage would likely be small but sustainable. There are many items/treatments which are unlikely to yield sufficient benefit to secure public subsidy, but for which there is significant consumer demand.

If these changes were adopted, the Canadian healthcare system in 2020 would have kept the best of what we have, and built in elements – diversified public funding, effective evaluation of technologies and practices, and universal access to important medical care regardless of type – that other successful societies have adopted and tested. It would allow all Canadians access to those services most essential for improved health, not just those we deem important today, but those that will emerge going forward. Perhaps most important of all, it would put in place sufficient revenue to fund broad-based public healthcare, alongside structures to ensure that we only fund those services that are the most valuable.

3 Measurement of patients’

satisfaction and of

subjective quality of

experience has been

extensively studied,

particularly in the context

of chronic diseases. A good

review of the question can

be found at http://phi.

uhce.ox.ac.uk/home.php..

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