Canada’s weak economic growth due to loss of values that foster innovation

Canada’s decade-long weak economic growth is caused mainly by a loss in cultural values that foster entrepreneurship and innovation, says the author of a study on the country’s “growth crisis.”

Canada is especially weak on values such as willingness to compete and teaching children to be independent thinkers – cultural values that correlate well with economic growth, says Philip Cross, senior fellow at the Fraser Institute, a public policy think-tank, and author of “What is Behind Canada’s Growth Crisis?”

“I think the willingness to compete is a very real problem,” he told Research Money. “A good one-half of our economy is sheltered from competition.”

It is only partly joking to say that the No. 1 industry in Canada is rent seeking by businesses seeking favours from government that uses tariffs, restrictions on foreign investment and other means to shelter Canadian companies from competition Cross said.

“We’ve sheltered our banks, our telecommunications industries and our cultural industries and media forever,” he said.

In his study, Cross examines the broad reasons for what he calls the loss of dynamism in the Canadian economy. In looking at how cultural values drive innovation and economic growth, he utilized research by U.S. economist Edmund Phelps, a 2006 Nobel Prize winner in economics.

“Dynamism and human flourishing require challenges and struggles, not just material prosperity.” – Edmund Phelps

“Canada’s in a full-blown economic growth crisis, which is homegrown and largely due to poor government policy,” Cross maintained.

The federal government’s approach to stimulating innovation, with a dependence on institutions and dozens of public programs focused on inputs and providing financial subsidies to companies, “is just wrong,” he said.

Innovation, Science and Economic Development Canada’s portfolio, for example, now includes 46 different programs and initiatives.

“Government thinks it can create innovation through a formula. All the evidence is that that approach actually discourages innovation and doesn’t encourage it,” Cross said.

Extensive government interference in the private sector ends up protecting vested interests, rather than encouraging the innovation and risk-taking that are the real basis of innovation and economic growth, he said. He pointed to huge government subsidies for foreign-based electric vehicle manufacturers Volkswagen and Stellantis-LG.

It will take 20 years – not five years, as Ottawa has suggested – to generate sufficient government revenues to break even on federal and Ontario government production subsidies totalling $28.2 billion for two electric vehicle battery plants,  according to a new report by Parliamentary Budget Officer Yves Giroux.

Ottawa needs to scale back its innovation programs and subsides and implement policies that encourage more competition, in the interest of consumers, Cross said.

“It’s competition that’s going to force people [to innovate]. It’s not the carrot of government incentives or the offer of subsidies. That encourages businesses just to be lazy, frankly.”

Business investments and exports declining

Business investments and exports are the components of the economy that embed innovative technologies and reflect the competitiveness of Canadian companies, Cross said.

Yet over the last 10 years, Canada’s business investment and exports have declined by nearly 20 per cent, whereas in the U.S. these investments are up by more than 10 per cent during the same period, according to his study.

The $189.8-billion value of business investment in Canada in the fourth quarter of 2022 was 17.6 per cent lower than at the end of 2014 (after adjusting for inflation). Also, the value of exports in Canada “has basically flatlined” since 2014,” says the study.

The study notes that per capita real GDP is growing at its slowest rate since the 1930s and the Great Depression – rising by only 0.8 per cent (after adjusting for inflation) from 2013 to 2022.

“I think both ‘headline’ GDP and its structure argue that we have a serious problem in this country,” Cross said.

The persistent slump in both business investment and exports are symptoms of structural shortcomings in Canada’s economy, according to his study. These include: low rates of business formation; regulatory uncertainty; barriers to investment especially in the resource sector; restrictions on internal trade; faltering confidence of foreign investors in Canada; and low levels of productivity and innovation.

Current economic policies not working

Canada has adopted many of the policies that economists recommend to boost growth, including high levels of immigration and education, lavish government support for research and development, consumption and carbon taxes, and free trade deals with all the G7 nations, Cross’s study notes. Yet slow growth has become more entrenched.

Policies such as more government spending and “relentless” monetary stimulus provide at best a short-time boost to growth but depress long-term potential, especially through such policies’ negative impact on business investment, says the study. “Canada cannot rectify its poor record on growth by continuing its exclusive focus on such formulaic policy making.”

Cross argues that raising growth requires a resurrection of Canadians’ faith in the ability of Canadian businesses to compete in the global marketplace, without constant government guidance and interference.

Canada was still producing world-class corporations, such as Nortel and Research In Motion, as recently as the 1990s, Cross noted.

During the COVID-19 pandemic, the quick discovery of vaccines and the rapid shift to online work, shopping and communicating seemed to promise that the pandemic would usher in a burst of innovation.

“So far, the exact opposite of creative destruction has happened, as massive government subsidies insulated many firms and households from the need to make fundamental changes other than the occasional virtual meeting or online financial transaction,” says his study.

The larger problem resides in Canada’s contemporary culture, which has moved to avoiding risk, discouraging entrepreneurship, resisting change, and prioritizing government planning over market competition, according to the study.

Governments in Canada emphasize public or non-profit institutions, including universities, health care, the House of Commons and the Senate, and arts and cultural organizations, rather than the broader institutional and cultural environment that supports entrepreneurship and innovation, says the study. For example, Canada has the highest formal education level in the OECD, yet the country’s income growth has lagged.

Need to change how we talk to businesses

“The No. 1 problem isn’t specific government policies, it’s values. It’s how we talk to businesses about businesses,” Cross said in the interview.

In the U.S., Americans talk about business leaders such as Steve Jobs, Bill Gates and Warren Buffet with admiration and respect, he said. “You just don’t see that in this country, and I think that’s our major failing.”

Cross said Canadian business leaders he talks to strongly agree with something former Maclean’s magazine senior writer Paul Wells wrote: “In Canada, if you run a successful business, you are made to feel you’ve done something wrong.”

In looking at what’s gone off the rails over the last decade, Cross added, “more than anything I would put my finger on that – more than regulation, more than taxes, more than all these other specific problems. It’s how we talk to businesses and about businesses.”

“If we talk to businesses in a different way, I think that more than anything would send a signal to businesses here and around the world that Canada truly is open to business.”

The federal and provincial governments also should immediately implement policies to encourage more competition, Cross said.

The provinces could reduce barriers to interprovincial trade, which research shows would increase GDP by more than five per cent, he said. “The premiers have been talking about it forever, but nothing ever gets done.”

The federal government could lower tariffs and taxes, ease restrictions on foreign investment, and encourage rather than block development, he suggested.

“We’ve seen over the last decade that a lot of firms, especially in the resource sector, want to expand oil and gas development, want to build pipelines in this country. But they’re frustrated by government roadblocks.”

To snap Canada out of its lethargy and recapture the values that enabled the country be an innovation leader in the past, the private and public sectors and Canadians in general need to stop this reflex of expecting government to do everything, Cross said.

“We have to start thinking in terms of how do we encourage firms to help solve our problems, because clearly governments aren’t succeeding.”       

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