My mother’s parents were farmers and woodlot operators who lived in the Ottawa Valley at the turn of the 20th century. I grew up on a smaller farm only a few miles away. Much of what furnished our homes was Canadian-made, often locally, such as the Orme piano from Ottawa. Ours was a simple and satisfying life that was largely defined, but never constrained, by what was close at hand.
The postwar period brought radical changes to that tightly knit world, for better and for worse. (For one, Canadian piano manufacturers — reportedly more than 50 of them before the Second World War — had all but vanished by the 1970s, leaving only Heintzman, Lesage and Sherlock-Manning.) As far-reaching as many of these changes were, we and other Canadians adjusted. Farming communities accounted for about 25% of employment in 1945 but barely more than 2% today. Farmers migrated to the urban world of factories and mass production, their native skills readily adaptable to the new industrial age.
That adjustment process has been overtaken by a shifting paradigm that accelerates with each passing day. We call it globalization, and while it promises increased wealth through the dynamic of international market integration, it also threatens the individual security of many.
No longer can those whose jobs are lost to technology, or to cheap but quality imports, readily move to new job opportunities of equal or better pay. The education levels of an increasing knowledge society and economy are much more demanding and the pace of change too quick. A fitting analogy could be that of a stone dropped in a pond. Initially, the radiating waves are close together, and as they move, the distance between them widens. The arrival of the knowledge economy is that stone dropped into our societies, but with the reverse wave effect. The integration of markets, combined with the stunning impact of information and communication technology, has brought the waves of change closer and closer together, making adaptation more difficult than it ever has been.
It is the “unless” that interests me, as we ponder the Canada that could be 20 years hence — an exercise that, as Keynes counselled, requires us to study the present in light of the past, for the purposes of the future.
As we look back to the extraordinary evolution of economies and societies, especially the Gilded Age of the 19th century, change seems to have been manageable despite rapidly improved global transportation and communication networks. Indeed, the turn of the 20th century witnessed vibrant international capital markets. Noted economic historian Angus Maddison reminds us that in 1914 the stock of foreign capital invested by western European countries in developing countries was 32% of their GDPs, compared with 22% in 1998. So infatuated are we with the “globalization” of today’s capital markets that this fact surprises just about everybody but economic historians.
Our immigrant ancestors adapted to the challenges of a new, different and often harsh life in the Americas, as did the flood of refugees following the Second World War. Such bold, life-changing moves and sacrifices laid the foundation of Canadian society.
Today, we have moved into a phase of economic and societal change that presents significant but different adaptation challenges. Unless we meet those challenges, future generations are unlikely to enjoy the quality of life of the current generation. Many will look back to the good life of the past and regret that they lack the training and skills to capture the jobs, opportunities and prosperity that could have been theirs. They will witness growing income and wealth disparities, with the concomitant risk of societal breakdown.
It cannot be that way in a country endowed with such natural and human capital. The right public policies should head off that dismal scenario.
From 1996 until 2006, I was privileged to direct the most important international economic organization in the world: the OECD. From its Paris base, we examined in minute detail the world’s most advanced economies, representing more than 60% of global economic output. During my time, we added many non-member economies to our analyses, including those of Russia, China, Brazil and, most recently, India. Significantly, our research documented the rise of human capital as a prime component of economic growth, especially in developed countries like Canada.
As a former Canadian minister charged with economic and regional development and science and technology, these findings did not surprise me. In the early 1980s, I organized a conference in Ottawa entitled Canada Tomorrow that brought together leading scientists, public-policy thinkers, industrialists and academics from around the world. We explored many avenues of the future in technology and innovation, focusing on the Information Society, as it was then known, and the so-called 5th Generation Computer, a Japanese initiative intended to be a seminal breakthrough in artificial intelligence that would herald a new era in economic development. (Predictions continue to be hazardous: overtaken by other technology, including the introduction of the World Wide Web in 1989, the 5th Generation project was abandoned by the Japanese in the 1990s.)
Returning to the dismal scenario and the importance of human capital for Canada in the 21st century, what do we see in the present that could point the way positively or negatively to the future? I will limit my comments to these areas: education, innovation, commercialization, competition, and the social and economic environment.
Canada has great potential to enhance its human capital base. International grading of our school systems is very positive when benchmarked against others, especially those of the United States. Tertiary education is also well served. Nonetheless, in all areas, there is no room for complacency and much for improvement.
Teachers are often underpaid, so teaching is often not a vocation of choice. We run the risk of creating two streams of students: one from public school systems and one from private, where resources are greater and teachers have more incentives. This has potentially negative consequences, both economic and social.
We are also witnessing declining interest in science and technology, especially in the physical sciences and mathematics at the university level, throughout the OECD. Canada is no exception. At the OECD, the Global Science Forum, concerned with this trend, launched a study with a number of objectives, one being “to identify the underlying factors that affect students’ choices.” The reports in 2005–06 were inconclusive on this point. My own view is that the incentives in the financial services sectors, law and consulting have become excessive relative to the incentives for those who actually create and innovate. This is becoming a serious challenge for Canada’s future.
In 1967, author J. J. Brown wrote an appropriately titled book, Ideas in Exile: A History of Canadian Invention, a remarkable and very substantial volume of research sponsored by several Canadian corporations.
An observation made by the author a full four decades ago still resonates today. “Canadians have made contributions to world science and technology out of all proportion to their small number,” wrote Brown. “Some Canadian inventions made possible major world industries, but we have ended up importing from England, Belgium, Italy and the United States billions of dollars’ worth of equipment invented here. This is our basic problem as a nation: a conservatism carried to the extreme of idiocy. If not corrected soon, it will leave us unable to compete as an industrial nation in the modern world.”
The point remains relevant. As stated in a working paper of the Canadian Health Industries Partnership (CHIP), “We invent, they exploit, and we buy back.” (I will return to CHIP in a moment.)
I believe we have largely overcome any psychological barrier that Brown may have detected. Bombardier, the world’s third-largest commercial aircraft manufacturer, is an example. Still, had we not abandoned the Avro jetliner, a Canadian product years ahead of the competition, it is not unreasonable to suggest that Canada today might be the No. 1 aircraft manufacturer in the world.
Despite setbacks and psychological challenges, Canadians are far from being hewers of wood and drawers of water. In 2006, Canadian exports of goods and services represented 37.9% of GDP. Of that, nearly 60% consisted of industrial goods and materials (18.7%), machinery and equipment (20.9%) and automotive products (19.5%).
There is much evidence that Canada has failed to maximize the commercial opportunities that have been created by our scientists and engineers.
Notably, a recent OECD study of innovation in Canada tells us that “while Canada has enough scientists to meet current demand, it lacks people with management, marketing and other business skills.”
Obviously, we failed in the past to commercialize many innovations and inventions, and ended up buying foreign products. Complementary management, marketing and entrepreneurial skills are clearly essential. The cleverest scientists and engineers in the world are no guarantee that Canadian inventions will be commercialized and exported. Research In Motion’s BlackBerry helps to dispel that perception, but is this the exception?
My thesis that human capital is the foundation for Canada’s success down the road is unassailable. But we risk losing much of this resource to the United States. This is not a new challenge for Canada; however, it is compounded by the failure of the United States to enhance its human capital base to the extent that it should. While that remarkable country, with the largest economy in history, continues to excel in almost every domain of human endeavour, serious fault lines are becoming evident.
General education achievements are poor by international standards; the health system is in need of serious overhaul; the political system appears to have become the domain of the rich; income and wealth disparities are widening, a trend which is not sustainable. In brief, the United States seems to have embarked upon a period of sharp decline both domestically and certainly internationally, and that is a phenomenon of great concern to the world and especially to Canada.
Historically, the United States has provided leadership in nearly every social and economic area, demonstrating to us all “what to do” rather than “what not to do.” Now — with corporate governance fiascos, executive compensation out of control, growing protectionism and abysmal foreign policy — there are many trends that Canada should not follow.
A huge challenge going forward is to keep our skill base in Canada and to attract more from abroad. It will be many years, and hopefully never, before the U.S. economy will actually “tank.” Despite the problems outlined, I have much confidence in the United States to self-correct as it did so effectively post-Watergate. For all its challenges, it remains the most robust democracy in history.
But the U.S. will continue to poach talent from around the world, and especially from its friendly neighbour Canada, as its own human capital resource base declines. We cannot afford a brain drain. Already, a large number of doctoral students from Canada study in the United States. An OECD study shows that in 2001, the most recent data available, 62% of Canadian students who had obtained a PhD five years earlier in the U.S. remained there after graduation.
Look at it this way: Our abundant natural resources have made this a wealthy country. Today, our most important resource is our highly qualified manpower. Our timber, natural gas, oil and minerals cannot migrate to the United States, but people — our most important assets — can and will, through financial incentives the wealth of America can provide. We need to bring those skills home. Bear in mind that they have been heavily subsidized by Canadian taxpayers to boot! I doubt that we would be as generous with our natural resources.
Will we be able to retain our talent and to attract more?
Environment (Social and Economic)
Obviously, Canada must provide an environment for qualified people and entrepreneurs that is second to none. It is not just money, although that is clearly important. It is the quality of life. At some point on the taxation scale, Canada will see some talent seduced by lower taxes south of the border. The offsetting factors should be healthy Canadian sustainable development under three pillars: economic, social and environmental.
When I arrived at the OECD in 1996, I introduced what I referred to as the triangular paradigm of societal progress. It was anchored in one corner by economic growth and in another by social cohesion or social stability, both locked inseparably by solid good governance. The whole paradigm rests on a foundation of healthy natural capital — namely, the air we breathe, the water we drink, the soil we till, and biodiversity. Natural capital is the foundation of all sustainable development.
The challenge for public policy is to keep those priorities in balance, and to preserve and enhance the natural capital foundation. I use the analogy of the government as a tightrope walker with a balancing rod. At one end is economic growth; at the other end, social stability. Moving forward on the tightrope requires constant balance. If there is an abundance of economic growth without a transfer to social stability, there can be no forward movement. Instead, the wealth and income gap will further widen. This is not sustainable. It is equally true that an effort to distribute wealth and income through excessive taxation will suffocate growth. Then the balancing pole dips in the other direction, and balance cannot be maintained.
The secret of successful democratic governments has been to maintain that balance and move forward. If the populace is unhappy, the government will be pushed off the tightrope at the next election. In non-democracies, we have seen the results: revolutions and bloodshed. But the issue and the challenge for public policy is always the same.
Over the years, Canada has done quite well in maintaining that balance. To be the country I envision 20 years from now, it must continue to do so. Canadians must be prepared to accept that public health care and education come at a cost. Social security is expensive, but it is essential to ensuring the stability and quality of life that makes Canada the place to which those PhDs will return.
A word about synergies. Here, I draw upon my recent acquaintance with CHIP, because I see it as an example of what Canada should be encouraging and supporting through appropriate public policy.
The mission of CHIP is to establish a “meeting place” for senior decision-makers from federal and provincial governments and the health innovation sector, “for the purpose of discussing and considering appropriate strategies aimed at improving the economy and health care system through innovation.”
Canada is and will remain a relatively small but important player on the world stage. But it is important to be realistic and look at those areas where Canada has a comparative advantage, while recognizing areas where we must be well positioned to adopt innovations and technologies developed elsewhere.
One challenge addressed by CHIP is the alignment of health and economic development policies. The health sector could be an enormous contributor to Canada’s economic growth. In 2006, Canadians spent some $148 billion on health care, but we are told that the economic return on that investment is sub-optimal.
CHIP has conducted extensive research into issues such as Canada’s competitive advantages, as well as this country’s poor productivity performance and insufficient business-sector investments in research and development. As a recent CHIP-commissioned paper concluded: “The failure to obtain an economic return from health spending has led to the situation where ‘we invent, they exploit, and we buy back.’” The paper points out that there is nearly a $10-billion annual trade deficit in health products, and we are, therefore, funding about 100,000 jobs in other countries.
As all other nations, Canada competes within a global environment. We are in a race to improve productivity and become more innovative. The competition is fierce and, as some have said, this is a race without a finish line. Perhaps CHIP is simply a model for how to win that race through national collaborative strategies engaging the public and private sectors.
Research, development and innovation within Canada will improve the performance of Canada in the health-care sector. Objectively, Canada will never achieve the same R&D intensity — in health care or any other sector — as exists, for example, in the United States or Japan. We should also recognize that technologies in all sectors will be largely developed abroad. Therefore, we must be knowledgeable and nimble, never embarrassed to exploit the innovation of others. One could, to a degree, rephrase the statement that has been offered to us by the CHIP paper: “They invent, we exploit and they buy it back”.
This is not in any way to diminish the importance of R&D and innovation within Canada. But we must recognize that no matter how much Canada invests in R&D, publicly and privately, it will be dwarfed by what is happening on a global basis. So, I suggest that we must be very selective. Even within the health-care sector, that means taking on board as quickly as possible innovations developed in other countries.
Australia, for example, has had one of the best productivity growth records of the OECD membership, and yet it has a lower investment in R&D than Canada. It has relied on imported technologies to be more productive — a lesson for Canada.
Having watched Canada from a distance for a decade, and with the benefit of experts performing examinations not unlike a detailed medical checkup, I conclude that Canadians are well placed to confront the challenges I described, and to avoid the “dismal scenario.”
The American historian Lewis Mumford, when asked about his assessment of a particular set of potential scenarios, replied, “I am optimistic about the possibilities, pessimistic about the probabilities.” In the case of Canada 20 years hence, I am optimistic about both. Too bad that I am likely to have changed addresses by then.
Donald J. Johnston served as secretary general of the Organisation for Economic Co-operation and Development (OECD) from 1996 to 2006. Currently, he is counsel to Heenan Blaikie (of which he is a founding partner); senior adviser to the McCall MacBain Foundation, Geneva; chairman of the International Risk Governance Council (IRGC), Geneva; and visiting professor at Yonsei University, Seoul.