In The Media

Canada’s political leaders need a prosperity agenda

by Neil Desai

The Globe and Mail
September 12, 2015

The recent Statistics Canada announcement about Canada slipping into a technical recession, as defined by two consecutive quarters of economic contraction, sparked the obvious political responses from the major political parties vying to win the upcoming federal election.

The Conservatives touted June’s uptick in gross domestic product as well as the government’s strong, surprising surplus in the first quarter of 2015 as reason for optimism.

Most economists have pointed out that while Canada has technically slipped into recession, it has been directly attributed to the drop in global oil prices and that growth will return, albeit at low rates. Despite this, the Liberals and New Democrats used the nomenclature of a technical recession as an opportunity to score political points.

For the Liberals, a massive stimulus in the form of an infrastructure commitment fuelled by budget deficits needed justification, and a recession, short-term or not, seems to be it. The NDP and Conservatives seem to be counting on the lost oil revenue being filled in by manufacturing revenue spurred as a result of low commodity prices and a devalued Canadian dollar.

But banking on a massive stimulus program to jolt the economy or hoping that traditional manufacturing comes back to Canada at this lower-cost juncture does not address the fundamental challenge facing our economy today and in the years ahead.

Upgrades to roads, bridges and other traditional forms of infrastructure may be needed. However, would accelerating these investments ultimately lead Canada to become more competitive with low-cost manufacturing countries, such as Mexico and China? Unlikely. Nor will they make our energy products as competitive as other global sources.

Canada’s current economic reality is a pendulum going back and forth between a western-led resource economy (during times of high commodity prices) and a Central Canada-led manufacturing economy (during low-dollar periods). This is neither sustainable nor a self-determined strategy.

Given our aging demographics, our expected standard of living and the input costs required to realize it, Canadians should be expecting more of their leadership candidates than plans to maintain this meagre economic growth. We should expect a prosperity agenda at the top of each party’s platform.

Instead of speculating about whether the Canadian economy will contract again or experience nominal growth in the next quarter, a good starting point for these candidates would be to acknowledge the stagnation we face and make a commitment to putting a prosperity agenda at the top of their plans should they form the next government.

An excellent place for a new government to start would be understanding why innovative Canadian startups have not scaled into globally competitive firms employing thousands of workers in high-paying, value-added jobs.

Over the past decade, the government has committed significant funding to the financing of basic and applied research, creating networks of startups through various incubators and accelerators and supplementary financing to the venture capital industry.

This has resulted in a burgeoning community of young, innovative companies in Ottawa, Vancouver and the Toronto-Waterloo corridor. However, starting a myriad of companies, with a handful of employees, based on innovative technologies won’t address the growth challenge. We need these companies to break out of the SME category into globally relevant size – last seen in Canada when RIM/BlackBerry and Nortel were at their peaks – in order to realize a return on our vast public investments.

This is no small task for any government to tackle, and an even greater task for one under fiscal constraints. However, there are some cost-effective measures that could be taken to stimulate short-term economic growth that helps promising mid-sized companies, that have shown commercial viability, to get over the hump.

Given the propensity of all of the political parties to use infrastructure as a short- to medium-term economic lever, the strategic procurement of public-sector IT infrastructure is one simple, short-term, cost-effective policy prescription.

Another area a new government could focus on is the reform of the Scientific Research and Experimental Development tax-incentive program. This tax credit is the government of Canada’s largest investment by far in the commercialization of innovation, costing taxpayers $4-billion a year. In recent years, small but growing innovative companies have struggled to successfully navigate the program once they become profitable. Addressing this issue, along with broadening the eligible costs for SMEs to include such activities as legal costs for patent protection, would improve the competitiveness of emerging companies.

Human-capital policies also warrant some consideration. Canadian colleges and universities are producing some of the top technical talent in the world. However, they’re not producing enough talent to keep up with domestic market demand. This issue, coupled with attractive job offers from Silicon Valley to top Canadian talent, is leading innovative SMEs to set up development offices, or moving their whole operations, overseas to lower-cost jurisdictions with available human capital. Policy responses to this challenge would be a short-term political and economic boon for a new government.

These are by no means the only policies worth considering for a prosperity agenda. As long as the parties acknowledge this challenge and face it head-on, Canadians will be well served.

Prosperity is not beholden to any given ideology. But without strong, sustainable economic growth, whoever forms the next government won’t be in a position to deliver on meaningful policy commitments or keep Canada in a strong fiscal position.

 

 

 

 

Neil Desai is an executive with Magnet Forensics, a technology company based in Waterloo, Ont. He is a fellow with the Munk School of Global Affairs at the University of Toronto and the Canadian Global Affairs Institute. He formerly served in senior roles with the government of Canada.


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