Four pillars to build Canada’s prosperity

Four pillars to build Canada’s prosperity

An excerpt from Everybody’s Business: How to ensure Canadian prosperity through the twenty-first century

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The following is an excerpt from Everybody’s Business: How to Ensure Canadian Prosperity Through the Twenty-First Century, written by Dany Assaf, Walid Hejazi and Joe Manget and published in 2023 by Sutherland House.

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We live in turbulent times. There is a global shift towards populism. Protectionism is on the rise. Trade discussions are heated, and full-blown war has returned to Europe. For the first time in decades, Canadians, and even Americans, are grappling with the fear that the next generation will be worse off than the last.

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But beyond the dark clouds, reasons for optimism remain. In fact, we believe we are on the cusp of the greatest potential for individual opportunity and wealth creation in human history. Thanks to modern technology, the barriers to prosperity have never been lower, nor markets so connected. And remote collaboration may actually increase innovation by tapping into what has been called “the collective brain.” There is opportunity for literally everyone to unleash their energy, ideas, passion and productivity and do business directly with almost anyone else globally. And there is the potential for this wealth to be shared more broadly than it is now.

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Our collective responsibility is to ensure that every Canadian is able to tap into these opportunities. Unfortunately, there is a sense of complacency in our country — a sense that, ‘Things have always been good here, and somehow, they will remain that way’. But make no mistake: Like a hockey player skating with his head down, blind to the perils of the game, Canada risks being levelled by bigger and stronger players in an increasingly aggressive and competitive global arena. In this article we will present a holistic framework that we believe can enable Canada to achieve its true potential.

A holistic framework

No matter when or where, the basic ingredients for prosperity are the same: healthy and educated people with access to tools to do productive things; the ability to obtain the materials and capital to produce something useful to offer others; and access to markets to sell them into. Let’s take a closer look at each.

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Pillar 1: People

People are the engines of prosperity, and societies need to remain open to attracting a pool of new and diverse players. We have no idea where the next generation of history-altering innovations will come from, and as a result, we close our doors at our own peril. Immigration is absolutely critical to supporting this pillar and ensuring a strong and innovative economy. Not only does immigration increase Canada’s numbers, and hence the size of its GDP, but diversity itself is beneficial to the economy as an engine of entrepreneurship. Canada needs to send a clear message to the global talent pool: If you have the energy and ideas, come to Canada and put yourself, and us, to work. There must also be a serious effort to engage with Canada’s Indigenous communities — a significant source of additional prosperity.

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This pillar includes ensuring people are healthy enough to work and posses the skills, education and knowledge to be relevant and productive in the 21st century. Currently there are significant gaps in terms of the skills needed to succeed, including critical thinking and coding, and how well our students are prepared for the transition to post-secondary education and in-demand skills training. If Canadian youth are to be prepared for the future, these gaps in our education system must be addressed.

Lastly, our people must embrace more risk. The American dream is known worldwide; but what about the Canadian dream? The argument has been made for decades that Canadians are risk-averse. Perhaps this was acceptable in 1967 on Canada’s 100th birthday, but it cannot continue if we intend to be prosperous on our 200th.

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Pillar 2: Tools

The second pillar in our framework is access to the tools needed to succeed in an innovation-based economy. Without these tools, Canada will not attract the best global talent and domestic talent will be unable to achieve its potential. Policies must be put in place now to ensure these tools are ubiquitous across the economy, without artificial and bureaucratic obstacles.

In the past, it was Canada’s railways, waterways and highways that moved valuable goods. Today we must add the digital highway to the list, ensuring high-speed broadband and wireless access and digitally-literate individuals and businesses. Ubiquitous mobile internet access and the tools to access it have become the basic building blocks for many businesses like Uber, which operates one of the largest global transportation networks without owning a single car. All it needed were computers, software and mobile internet access.

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The world continues to invest trillions of dollars in public transportation to ensure workers can physically get to their job site. The logic must be the same in a digital economy, where we log in, rather than drive in, to work. The tools required include meaningful and focused investments in the right classes of infrastructure to support an innovative economy.

Currently our three critical infrastructure sectors, which all other sectors interact with — telecommunications, finance and air transport — are highly protected and have inhibited innovation across the economy. While protection of the banking and finance sector can be justified in exchange for the stability the sector provides, such is not the case for the other protected sectors. This protection constitutes the largest impediment to Canada’s ability to overcome the significant headwinds the economy faces — and it is inconceivable that innovation can rise to the levels required without policy changes that eliminate it.

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Pillar 3: Materials and resources

The third pillar is ensuring ready access to resources and materials within the economy. But it’s not just about access: Canada must efficiently and responsibly develop its natural resources and at the same time preserve, repair and sustain the environment. While this is no small feat, the evidence is clear: being environmentally conscious can create wealth. For example, recycling and reusing are some of the most effective cost-cutting measures available to any business that is willing to take the time and effort to implement them. Empirical evidence shows companies that deploy sustainable strategies and are committed to achieving the world’s ambitious climate goals outperform those that do not.

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Our resources and materials must be made available globally, and as the war in Ukraine has highlighted, Canada can have a major role to play in ensuring global energy security to our key trading partners. With a more innovative mindset, our resources can be used to undertake more processing within Canada. This is not a call for government intervention to make this happen; rather, increased domestic processing of our vast natural resources would be the natural outcome of the required policy recommendations to make the Canadian economy more innovative.

As new industries such as electric cars emerge — including many that we may not be able to predict — our businesses must have access to both natural resources and high-tech material inputs. The facilities needed to produce these are incredibly capital intensive. If the Canadian ecosystem is not conducive to innovation, these new companies and facilities will locate in the U.S. or elsewhere. And as these industries of the future develop and new suppliers emerge, there will be a first mover advantage.

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Countries such as Japan, Korea and Singapore had no resources to speak of and were forced to move up the value chain in order to survive. Likewise, as natural resources diminish in relative importance in the coming decades, Canada will need to make such a transformation. With an increased focus on innovation, a natural evolution will emerge to higher-value processing within the economy.

Pillar 4: Access to consumer and capital markets

Canada must aggressively pursue free trade and investment- protection agreements with more global markets. While enhanced access to these markets is necessary, it is by no means sufficient to overcome the significant headwinds we face. Enhanced productivity and innovation are required in order for Canadian businesses to be prepared both to exploit opportunities in new markets and to compete more effectively against the increased foreign competition inside Canada that would come with new trade and investment agreements.

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As indicated earlier, many of the obstacles to innovation and productivity in our economy stem from protectionist policies. Canadians are indeed able to compete and win in the global economy, provided they are given the appropriate environment to operate within. Moving away from the protectionist mindset, enabling our companies to be more innovative and productive, opening up to both more imports and inward investment, and opening markets abroad to more Canadian exports and outward foreign investment will allow us to achieve our potential.

It is important to note that despite tariff exemptions within the United States-Mexico-Canada Agreement (USMCA) for imports of intermediate inputs, many companies — particularly smaller ones — are unable to do the paperwork involved to take advantage of these arrangements. Despite the tariff-free access to the U.S. and Mexican markets that come with the USMCA agreement, many companies pay the non-USMCA (i.e. non-NAFTA) tariff rather than incurring the costs associated with complying with the agreement. The costs of demonstrating compliance on local content are too high and bring friction to the economy.

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Canada must strive to dismantle supply management, a system of tariffs and quotas that protect domestic farmers from foreign
competition. As noted in a recent National Post opinion piece, “NAFTA or not, protecting supply management is protecting an ever-dwindling number of ever-wealthier farmers.” It raises the price of dairy products, encouraging consumption of less healthy alternatives, especially among the poor. This arrangement puts the interest of dairy farmers above that of all other Canadians. In Canada’s agreement with Europe, the Comprehensive Economic Trade Agreement, quotas were put on the imports of cheese, which effectively means that once Canadians eat a certain amount of cheese, they are then forced to eat Canadian cheese.

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Although we have made recent progress, Canada must also be made more open to foreign investment. It still has room to liberalize its foreign investment rules in the context of the needs and priorities demanded by the modern economy. Both the mandatory review for investments over the government’s threshold and the sectors that have heavy restrictions on foreign ownership have hurt the economy significantly.

These restrictions on foreign investment must be reduced. In the case of the review, there is evidence that it should be abolished (except for national security reviews) or at the very minimum made even more transparent. As it is currently set up, the Federal government can simply reject a potential foreign investment transaction on national security grounds, whereas the decision may actually come across as being for protectionist reasons.

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There are strong arguments why almost all restrictions on foreign participation within telecom must be eliminated. There are few insurmountable economic or security justifications for many of these restrictions. In the case of air transport, domestic carriers cannot hold Canadians hostage to take routes that are profitable to these incumbents but sub-optimal for Canadians. When the business case makes sense and foreign carriers are willing to offer a direct flight to an international location, they should be allowed landing rights if a domestic carrier does not offer that service. If there is sufficient demand, then both the domestic and international carriers should be allowed to offer these flights, which would enhance the quality and variety of services available and lower prices. This would enhance connectivity, make our companies more competitive and improve Canadian trade and investment performance in the global economy.

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Enhanced competition within Canada would enable our firms to penetrate global markets and win. Increased innovative capacity would bring more cutting-edge exports—both within the resources sector and more broadly—and enduring prosperity. Recall that during the rapid rise in the value of the Canadian dollar during the 2002 to 2007 period, it was Canada’s most innovative exports that proved most resilient.

These recommendations can form new normal for Canada — a move away from low-value exports to those that are much more innovative and advanced. And when this happens, Canadian firms will be better placed to succeed in Asia, Europe, Latin America and elsewhere.

Creating a frictionless ecosystem

For all people and businesses to pursue their passions, creativity, innovation and economic opportunity, we need a friction-free ecosystem that promotes rather than impedes their efforts. To ensure the best overall outcomes for society, governments must eliminate unnecessary bureaucracy and red tape. This theme was reflected in the many interviews we conducted for our book.

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Perhaps the best example was our interview with the CEO of a company that exports to many countries who had recently expanded his production facility, doubling its capacity. However, the opening was significantly delayed, during which time the completed facility sat empty and idle, while his company negotiated with more than one level of government on the environmental front, notwithstanding the company’s full legal compliance.

Clearly, this reflects a government bureaucracy imposing unnecessary costs on a productive business creating jobs, capital investments and exports, which otherwise contribute to growing the Canadian economy and tax revenue for the Canadian government. “Canada’s regulatory system is smothering business in Canada, thanks to a growing mix of complex, costly and overlapping rules from all levels of government,” he told us. A report by the Canadian Chamber of Commerce, Death by 130,000 Cuts: Improving Canada’s Regulatory Competitiveness, calls on governments to modernize their regulatory frameworks and give businesses room to thrive.

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Not surprisingly, guess what tops the World Economic Forum’s annual ranking for key business challenges in Canada? An inefficient government bureaucracy, followed by high tax rates, insufficient innovation capacity and inadequate infrastructure. As indicated in Figure Two, the top two obstacles reflect challenges working with government; the third and fourth are challenges with both innovation and infrastructure; and the next three once again all involve government policy — tax regulations, policy instability and restrictive labour regulations.

One of the authors of this book (Walid) recalls participating in a Canadian government roundtable in the Middle East in 2016 with an ambassador and two other prominent Canadian executives. The panel was promoting Canada as a place to invest to international investors. The very first substantive question related to policy uncertainty: “If we invest in Canada, is our investment welcome?”

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During the debrief with participants afterward, it came out that these concerns were the result of the government’s unfortunate treatment of Wind Mobile. After making commitments to its foreign backers, the Canadian government reneged and forced Wind to spend millions in legal and other costs to overcome obstacles placed before them by incumbents in the telecom sector.

Upon inviting the foreign investors into Canada, the Canadian government at the time clearly signalled it had the political will to open up the sector to foreign competition. But when it came time to demonstrate this political will, it retreated: Promises for spectrum and tower sharing were never honoured. This has been a costly error and contributes to the significant policy uncertainty within Canada.

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The general sentiment of people we spoke to, who were working to start small businesses in Canada, highlighted many regulatory hurdles and the absence of will on the part of government officials to be helpful. The outcome of such obstacles is dire: a stifling of the entrepreneurial spirit and innovative capacity of the Canadian economy and a diminishment in prosperity. This must be addressed immediately, before further damage is done.

In closing

Our road map for Canadian prosperity requires bold policies that address challenges across all four pillars while enabling a frictionless ecosystem. Tinkering on the margins will be insufficient. The headwinds facing Canada are increasing, and the longer we wait, the further we will fall behind and the more difficult it will be to reverse the troubling trends noted herein.

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We invite readers to consider this as a call to action for all Canadians to participate in this national conversation. Only by implementing the changes summarized herein can Canada can take control of its future destiny. Despite the challenges we face, the opportunity for shared prosperity remains ours for the taking and has never been more achievable in human history.

Dany Assaf is a Partner at Torys LLP and co-chair of the firm’s Competition and Foreign Investment Review Practice. Walid Hejazi is an Associate Professor of Economic Analysis and Policy and the Academic Director of Executive Programs at the Rotman School of Management, Fellow of the Michael Lee-Chin Family Institute for Corporate Citizenship, and member of the Board of Directors of the David & Sharon Johnston Centre for Corporate Governance Innovation. Joe Manget is Chairman and CEO of Edgewood Health Network and Board Chair of Ontario’s Health Sector Audit Committee. They are the co-authors of Everybody’s Business: How to Ensure Canadian Prosperity Through the 21st Century (Sutherland House, 2023).

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