Five years later, we’re drifting away from our new North Star

As published in The Hub

“A competitive economy is a productive one. More productivity leads to greater prosperity, opportunity and higher living standards. This point cannot be overstated. Competitiveness matters because it contributes to greater productivity, and greater productivity drives economic growth and rising incomes, which in turn allows for higher living standards, more sustainable social programs and greater social mobility.” – A New North Star, April 2019

Five years ago today, the Public Policy Forum released the first of three installments of A New North Star, an ambitious and comprehensive economic roadmap for Canada. 

As former economic advisors to Liberal and Conservative governments, we came together to write this series of policy papers because we were both worried about the lack of attention on both sides of the aisle to economic policy in general and major geopolitical and technological changes that were reshaping the dynamics and sources of economic growth in particular. We were pleased that the papers received considerable attention and reaction from columnists, economists, and policymakers. Yet five years later, there’s been little tangible progress towards a comprehensive economic agenda that’s responsive to the paradigmatic developments we documented. 

Our first installment sought to draw attention to the rise of intangible assets—including data, intellectual capital (R&D), and intellectual property (IP)—as a major, new driver of competitiveness. We argued that their unique particularities (such as zero marginal costs) relative to physical assets required rethinking various policy areas including R&D investments, IP protection, foreign direct investment, regulation, and procurement. Recent research has confirmed our key assumption: large firms with higher intangible intensity are more profitable in the global economy.

In our second installment, we argued that the “Washington Consensus” that emerged in the post-Cold War era was being challenged by the interplay between growing geopolitical rivalries and an economy increasingly driven by intangibles. The rise of “geoeconomics” required a more hard-headed economic strategy for Canada. The past half-decade has only reinforced this point: it is now widely accepted that technological innovation and national security are inextricably linked. 

The policy debate in most Western countries is now less about whether there’s a role for an industrial strategy—particularly for technologies that have dual economic and security implications—but rather how to design and implement such policies in a way that minimizes distortions and produces spillover benefits. 

In this vein, we urged policymakers to adopt a modern industrial policy based on industrial R&D challenges (such as decarbonization or a biomedical breakthrough) for our domestic firms—in contrast to the status quo of large corporate subsidies and branch-plant economics. 

In our third and final installment, we made the case for a Canadian Advanced Research Projects Agency to support the development of breakthrough ideas and technologies that could grant Canada a global advantage in “an economy fueled by invention, innovation, and intangibles.” The proposal (which was partly inspired by the highly successful DARPA model in the U.S.) was endorsed by both Liberals and Conservatives in the 2021 federal election but has yet to be implemented. 

The common insight across these papers is that Canada needs a renewed economic agenda that reflects these fast-evolving geopolitical and technological trends. Our analysis showed that we were eroding the country’s pre-existing advantage by failing to reckon with how the interaction of the intangibles economy and the so-called New Cold War was reshaping economic policy, global supply chains, and even the concept of comparative advantage itself elsewhere in the world. 

Many of these assumptions have not only proven correct, but they’ve been further reinforced since. Economic growth is stagnant, business investment and labour productivity are declining, and Canada’s GDP per capita growth is the lowest among the G-7 coming out of the pandemic (see chart below). In the race to gain a stronghold advance in the new intangibles-driven economy, Canada is at risk of falling permanently behind. 

On industrial composition, 84 percent of Canada’s GDP is now represented by housing, consumer spending, and current government spending. That is a lot of capital and labour diverted away from more productive parts of the economy. An economy of our size that produces a small share of goods and services that can be exported into global markets will necessarily have a difficult time becoming more productive. 

As necessary as it may be, the current policy focus on boosting housing supply, including through more government spending, will only in the short term reinforce this diversion of attention and resources from productive to unproductive sectors. 

Productive investments are badly needed, both from the public and private sectors. But because both the federal and provincial governments have failed to show restraint on spending, fiscal capacity has been gravely handicapped going forward.

Furthermore, inflation is still not back at target, and interest rates are likely to remain elevated for longer as a “new normal.” As a result, many of the daily goods and services that Canadian consumers buy will similarly be subjected to higher prices. 

Against this economic and fiscal backdrop, the only way forward is to adopt a pro-growth agenda that aims to boost business investment and labour productivity. Evidence tells us that they are ultimately the best means to generate higher wages and higher living standards. 

Such an economic agenda, however, cannot take for granted that our past policy assumptions are fully responsive to today’s geopolitical and technological realities. It requires a careful balance between traditional competitiveness policies and new ones in light of emerging issues flowing from the intangibles paradigm in the form of a modern industrial strategy. 

As we did five years ago, we urge policymakers to resist short-termism. More than ever, we need to chart an ambitious path forward that will allow our country to prosper in the coming decades. We can’t borrow our way to prosperity and ask future generations to pick up the bill. 

Progress is a choice. We must agree on it moving forward.