Let Winners Emerge and Then Back Them

According to the IMF, Canada’s economy is expected to grow 2.5% in 2017, putting it on track to be the fastest growing country in the G7. How do you react to this data?

First of all, let us talk about what that growth is. Global economic growth is still quite tepid and, in some respects, it may very well be that Canada is the fastest snail. While we are doing a number of things quite well in Canada, I am not sure that we should be particularly complacent about 2.5% growth for one year, given where the economy has been performing over the last several years and where we have been operating relative to our potential.

Why are we in the position of being the fastest snail? Some of it can be attributed to good economic policy set in place by the government. However, much credit should go to Canadian entrepreneurs and the business community, who have embraced the new economy perhaps faster than other countries have, and to a young, and well-educated workforce. What is somewhat surprising is that much of that economic growth is coming from non-traditional sectors. Contrary to what many expected, growth is not being driven by what were previously the primary drivers; natural resources or manufacturing. Much is coming from the new knowledge-based economy. That is a positive development for the country and hopefully it puts Canada ahead in the race.

“Canadian entrepreneurs and business people have embraced the new economy perhaps faster than other countries.”

Yet there is a long way to go. As you know, I am part of the Finance Minister’s Advisory Council on Economic Growth and we continue to make recommendations to help generate long-term growth and a higher median per capita GDP. Canada’s focus on areas like education and skills training has been very valuable and should be maintained. Also, investments in infrastructure that were made on the back-end of the financial crisis are now paying off in terms of assisting Canadian productivity growth. Most importantly, Canada’s continued commitment to open and robust international trade has had a very substantial impact, and is allowing Canada to come through this period better than most G7 and G20 countries.

What role is investment – both foreign and local – playing in Canada’s relative economic resurgence?

Canada is increasingly seen as an attractive market for foreign investment, but Canadian entrepreneurs are also seeing more opportunity to invest at home. I am seeing many young people starting their own businesses, and entrepreneurs trying to both take advantage of the knowledge economy and build capabilities close to home. It would seem this entrepreneurial activity is playing a meaningful role in driving growth where some of the traditional sectors of the economy are now less powerful. We have seen a shift in the contribution that different sectors are making to the Canadian economy. If you take Toronto as an example, where the primary historical economic driver would have been manufacturing, we have seen a real hollowing out of the manufacturing sector in Ontario. The positive surprise is that – at least to some extent – this has been replaced by the knowledge-based economy, whether that is in healthcare, IT, services, fintech, or other sectors. This may be due to a greater entrepreneurial ethos that has emerged in Canada.

“We are going to see an increasing amount of our economic growth being driven by those smaller, high-growth companies that will hopefully become the next national champions.”

Historically, we have relied on the large corporation and the multi-generational family corporation to drive economic growth, whereas today, more entrepreneurs are carving out their place. Anecdotally, I am seeing more young people willing to take the risk to start a business, and get the financing they need more easily. With the implementation of some of the Growth Council’s recommendations, financing small businesses will be made even easier. I think we are going to see an increasing amount of our economic growth being driven by those smaller, high-growth companies that will hopefully become the next national champions.

You mentioned fintech. How much potential do you see in Canada developing its fintech sector considering the relatively small size of the domestic market?

We have all the advantages in that area if we choose to focus our weight behind it. We have a concentrated and mature banking sector, so it is easy to coordinate in the market. A few examples include:

• Interac works unbelievably well in Canada and has done so for over a decade. There is no real equivalent to that in the United States where the banking sector is much more fragmented.
• We have a higher uptake of technology among our population, meaning people have a higher degree of willingness to use alternative payment mechanisms.
• We also have a financial regulatory structure that is federal in nature and therefore less fragmented than it is in other parts of the Canadian economy.
• Canada is a manageably-sized market of 36 million people and it is also a reasonably sophisticated market. These ingredients have created an ideal environment to test strategies before they are rolled out more broadly, but it will take a degree of coordination between public and private sector to move this forward.

If government and the private sector are supportive – particularly banks and insurance companies – there is a real opportunity for Canada to become a significant leader in fintech.

Canada is often criticized for its inability to finance its young businesses and its companies’ inability to scale up fast enough to go global before they are acquired by large foreign firms. Are you confident in Canada’s ability to compete globally in these new innovation and entrepreneurship-driven sectors?

One of the major recommendations that the Growth Council has made is to ensure that there is more early stage money in Canada – whether it is through a matching fund or some other method. Then importantly, there is the business growth fund, which several of the banks have been supporting to provide second stage and third stage financing to take the companies through the growth phase. That is in a very special program in the UK and I am highly supportive of that model being implemented in Canada.

“We have to create a system that lets winners emerge and then back those winners. This is not always what we are known for in Canada, maybe because we are a little too nice and a little too egalitarian.”

This requires an alignment of strategies. In Canada, we run the risk of constantly spreading the proverbial peanut butter too thin: we think we have to do something for each and every sector of the economy, each and every province, and every constituency. The reality is that we have to create a system that lets winners emerge and then back those winners. This is not always what we are known for in Canada, maybe because we are a little too nice and a little too egalitarian. The public and private sector have to determine where we think we are going to win and then play hard to win – but that cannot be in every sector and in every single region. Governments are not always great at picking winners, so what they have to do is support winners as opposed to picking winners.

Mark Carney, the former Governor of the Bank of Canada and the chair of the Financial Stability Board, co-created the Taskforce on Climate Related Financial Disclosures, which advocates strongly for increased sustainability reporting. Is sustainability reporting and climate related disclosure truly valuable to long-term investors?

It is crucially important, particularly for long-term investors, and I am very supportive of the work that Governor Carney is doing with the Financial Stability Board (FSB). My former employer, the Canada Pension Plan Investment Board (CPPIB), and BlackRock have both participated very significantly in the recommendations that the FSB has made. Long-term investors are increasingly thinking about environmental, social, and governance issues, not only because it may be the right thing to do, but because of its role in creating long-term value.

“Long-term investors are increasingly thinking about environmental, social, and governance issues, not only because it may be the right thing to do, but because of its role in creating long-term value.”

As you think more long-term, issues related to environmental, employee relations, supply chain management, and best governance practices will contribute to the value of the underlying security. If you look at the work that both BlackRock and I have done on the Focusing Capital on the Long-Term (FCLT) initiative, we truly believe that being a long-term investor is the best way to create value. Being a long-term investor requires that you pay attention to those factors. We are extremely supportive of most of the recommendations that are coming out of the FSB, and I think investors are increasingly realizing that these types of considerations are going to be critical to the value of their portfolio in the long run.

What is your hope for Canada’s economy in the decades to come?

My hope is that Canada will punch above its weight to an even greater extent, that we will be a leader of individual median income, and that we will continue to have a highly inclusive economy. There is a real opportunity for us to achieve these goals. It will take the right policymaking, the right private sector participation, and a little bit of luck, but we are well positioned for it to come together. The way that we are approaching important issues like immigration, upskilling and reskilling our labour force, open trade, and building a robust technology sector will help make us successful over the decades to come. I am quite bullish on Canada. I am bullish on the Canadian economy, and increasingly, global investors are too.

“I am quite bullish on Canada. I am bullish on the Canadian economy, and increasingly, global investors are too.”