Stop shunning industrial policy
Naticoonlaulmbnuissitness
Canada hasn’t had a proper think about economic policy in more than 30 years.
Assuming most people don’t take politics seriously until they reach voting age, that means approximately 17 million Canadians — 44 per cent of the population — have had their lives shaped by the conclusions of the Royal Commission on Economic Development Prospects for Canada, published in 1985, without having had any real say in the matter.
To be sure, anyone who started working in the mid1990s or the early years of the 21st century has had little to complain about. The trinity of budget surpluses, lower taxes and freer trade — described by some as the “Washington Consensus” and often personified by Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom — set up a nice run of mild inflation, fairly robust hiring and impressive economic growth in Canada and elsewhere.
Furthermore, the Soviet Union had been vanquished and most assumed the World Trade Organization would make China a trusted ally of the western alliance. Smart men and women talked of the “end of history” and mused about whether the business cycle had been “conquered.”
Canadians had the extra comfort of enjoying privileged access to the U. S. market, while maintaining the right to be choosy about which of that country’s wars to join. No wonder generation X produced so many slackers. With everything sorted, why get off the couch?
As it turns out, we genXers should have been paying closer attention.
For more than a decade, the business pages have been building a case against the Washington Consensus simply by documenting all the damage caused by the arrogance and complacency that it bred in important political capitals, including Ottawa.
Apart from the various financial crises and the failure to reverse climate change, it had become clear that policy- makers were struggling to adjust their assumptions to fit a world dominated by Google LLC and Amazon. com Inc. instead of Exxon Mobil Corp. and Boeing Co., and a global playground in which the U. S. and China are bitter rivals instead of friends.
Now, the COVID-19 crisis will surely bring about the end of the Reagan-thatcher phase of economic history. The pandemic has exposed, at great cost, the fragility of societies that overweight the virtuosity of balanced budgets and underweight the value of being able to deliver essential goods and services. Bottom line: the Washington Consensus is dead.
“The rules of the game have changed,” Robert Asselin, a former adviser to Finance Minister Bill Morneau, and Sean Speer, a former adviser to Stephen Harper, the previous prime minister, said in a new paper that challenges the Canadian policy community’s intellectual smugness. “The idea that Canada can just rely on traditional market forces to remain competitive while everyone else is not is foolhardy. The COVID-19 pandemic has exacerbated and accelerated these trends. It is an epochal crisis that will reshape globalization and the economic thinking that has underpinned it.”
Asselin, who works at Blackberry Ltd., and Speer, an associate professor at the University of Toronto, teamed up a year ago to write a report that showed Canada was poorly positioned to compete in a world that values ideas more highly than oil and automobile parts. This time, they joined with Royce Mendes, a former Bank of Canada economist who now works at CIBC Capital Markets, to push even harder for a policy overhaul that reflects the rise of the digital economy as well as the likelihood that geopolitical competition weighs at least as heavily on decision-making as generating optimal outcomes.
COVID- 19 introduced a twist, and Speer and Asselin delayed their paper to adjust their conclusions. They decided that the way in which governments jump- started medical gear production and began the quest for treatments almost overnight showed that their main proposal could work. That idea is one that will make the remaining champions of the Washington Consensus howl: re- embracing industrial policy, decried for decades as an inefficient use of public resources that sees unqualified bureaucrats and politicians attempt to select winners and losers.
Asselin and Speer agree that governments should avoid showering subsidies on individual companies. But a knee- jerk rejection of industrial policy is misguided for a number of reasons: it ignores the considerable success countries such as the U. S. and Germany have had at using the public’s resources to create new industries; it wrongly assumes that the worst impulses of politicians can’t be mitigated; and it cripples Canada’s ability to compete in a world that has no such hangup.
But instead of attempting to create winners, Speer and Asselin propose that the federal government adopt a “challenge- driven industrial strategy” that would marshal the billions that Ottawa already spends on business subsidies to find solutions to major society problems. ( Their list includes building “smart” communities, public health and climate change.) The idea is to “lean into” the parts of the economy that are competitive and have a chance at joining global supply chains.
Government would remain a significant funder of education and research, but it also would favour domestic companies for procurement, and it would ensure that tax and regulatory policy weren’t working at cross purposes.
If that sounds heretical, it’s only because you’ve been cooped up in Canada for too long.
“Our competition has no qualms about arraying the power of both markets and the state in prioritizing the industrial capacities they need for a strategic advantage,” Asselin and Speer write. “Yet Canada still develops and implements policies for a world that increasingly no longer exists.”