Business ambition must be a Canadian value

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Appeared in the Financial Post, September 30, 2021
Business ambition must be a Canadian value

It’s well-documented that Canada’s economy has underperformed for more than a decade. Business investment has slumped, productivity growth has almost completely stalled, innovation has lagged and our major companies are no longer global leaders. The result has been that real GDP grew more slowly over the past 10 years than in any decade since the 1930s. Like many European countries, Canada has fallen behind the United States.

What has gone wrong with Canada’s economy? In a paper released by the Fraser Institute, I outline some of the major factors.

To start with, too much of Canada’s economic model is based on limiting competition. Firms and workers have come to rely on a broad array of government devices that restrain market forces, including inter-provincial trade barriers, exemptions from international trade agreements for large sectors of the economy, restrictions on foreign investment, extensive licensing that erects barriers to entering many occupations and myriad other regulations.

The mistaken mindset behind much of this obstructionism is that favouring producer over consumer interests demonstrates a government’s pro-business credentials. In fact, putting producer interests before consumer interests is the very opposite of what economists say is best for society. In The Wealth of Nations, Adam Smith made the point that “Consumption is the sole end and purpose of all production and the interest of the producer ought to be attended to only so far as it maybe necessary for promoting that of the consumer.”

Underlying the proliferation of rules and regulations that put the interests of producers ahead of consumers is a shift in values. University of London Professor Gylfi Zoega described this shift as being one “in which protection of the vested interests is prioritized over innovation and risk-taking. The corporatists do not approve of uncertainty and disorder, something that is ingrained in a dynamic, innovative economy.” A country cannot reap the benefits of creative destruction if it resolutely resists all forms of destruction—outside the resource sector, at least—while erecting barriers to creative innovation that by its very nature disrupts the status quo.

Stimulating and rewarding innovation would lead to exactly the opposite of governments favouring particular firms and coddling special interest groups, practices that may be pro particular businesses but are anathema to well-functioning capitalism. This is partly because indulging businesses’ rent-seeking only encourages them to ask for more protection and handouts, which for good reason further undermines public trust that businesspeople earn their incomes fairly. The resentment this largess nurtures in the public is then used to justify raising taxes on high incomes and corporations, which further depresses growth.

The only truly pro-business policies are those that foster competitive markets and produce a more level playing field for all firms by relaxing regulatory controls, cutting taxes, removing tariffs, reining in occupational licensing rules, encouraging startups and boosting business investment. Such widespread reforms can only happen in a country whose values support business dynamism and private-sector innovation, including a willingness to take the initiative even if doing so entails risks and the acceptance of competition. Canada today is a long way from being such a country.

Despite all the talk in political circles about “Canadian values,” the country’s biggest problem is that it lacks the values that foster innovation. Instead, our governments wrongly continue to target more education, science and R&Dt in a futile bid to boost innovation. The damning result, in the words of University of Toronto Professor Daniel Breznitz, is that “since 2007, the more the Canadian government has invested taxpayers’ money in trying to spur innovation, the less Canadian private businesses have done so. Canada easily wins the wooden-spoon award for the worst innovation policy among all the developed nations.”

The result of all these barriers, regulations and restrictions has been a clear loss of dynamism in Canada’s business sector. This is reflected in: a steady decline of both firm entry and exit over the past decade; an inability to scale up the dwindling number of startups brave enough to launch a business in Canada; a 30 per cent drop in business investment since 2015; fading competitiveness in export markets that has lowered our share of the U.S. market; and a reduced ability to respond to the opportunities offered by the trade deals we recently negotiated with both the European and the Pacific regions.

It’s remarkable that the recent federal election campaign featured almost no discussion of Canada’s lagging innovation and declining business dynamism. In a campaign that many characterized as being about nothing, this was a missed opportunity to debate what needs to be done to restore our competitiveness and reignite the growth of businesses in Canada.