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Shankkar Aiyar
Visiting Fellow - IDFC Institute

Megatrends & Canada as the Incubator of the Future Economy and Society

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Takeaways

  1. Canada is at the cusp of technological disruption, demographic disruption and climate change, making it a potential incubator for future economies and societies.
  2. Canada has clear economic advantages in its natural resources, agricultural economy, knowledge economy, and robust financial system. It must now focus discussion and imagination on what its economy will be decades out.
  3. The Canadian government needs to take an active role in encouraging economic development by designing policies to help companies scale up and stay in Canada. Universities have a key role to play in this.

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Canadians must do better at telling Canada’s story. Each country that achieves economic stature and a strong international presence is good at telling its story—and Canada should be among them. Canadians should not be reticent about illustrating the country’s competitive advantages. They should be proud of the Canada’s history and current standing among the world’s advanced economies.


How will the COVID-19 crisis impact the future economy, and how is Canada positioned within it?

COVID-19 will catalyze and accelerate disruption. As with the virus, the crisis will accentuate pre-existing conditions. We can already see how COVID-19 and the measures deployed are pushing Canada’s systemic capacities. The crisis is propelling alternatives, which are visible in many of the trials and pilots that are being deployed—working from home, online education, retail shopping, management of courts—and this has the potential of accelerating adoption of new technologies, which will have implications for large segments of the economy and employment.  

COVID-19 also underlines the role of the state—as visualized by Adam Smith, Thomas Hobbes, and Beatrice Webb—in ensuring life and livelihood. There is the recognition of the need for universal health care and governments will review the existing health architecture, which is not as collaborative and innovative as it needs to be.  

For years, there has been a polarized debate on universal basic income and the moral hazards associated with it—but now that narrative has shifted. COVID-19 has coalesced consensus for direct income support, and the design and details are yet emerging.  

Canada, in a sense, is an early mover on welfare, and the steps taken in the wake of the COVID-19 crisis symbolize the legacy of its sensitiveness.  The expansion of healthcare and the institution of income support will form the template for dealing with the triad of disruptions; demographic change, technological disruption and climate change. Indeed, with its pioneering status in artificial intelligence, Canada could seize the moment to create data driven perspectives in the management of the pandemic. Fear will drive down traffic both into educational institutions and acceptance of immigrants, and Canada will need to leverage its resident tech advantage to build bridges with technology where human interface will be retrenched. Canada could be the incubator for global change. 


As an outside observer, what do you see as unique about Canada’s political economy? How can we improve to make our economy more globally competitive?

The political economy is largely about geography, demography and the economy. Canada has designed for itself a social construct of order to create a plural, diverse and progressive society. It has plenty of land and has invested heavily in human development, which is amazing. Canada has also provided its citizens with free education and healthcare, and it has good immigration policies. Its investments in education and higher technology have helped Canada emerge as one of the leaders in artificial intelligence (AI) and superior technology. It also has natural resources. If you put this in the context of what is happening around the world, Canada is in a very unique position. 

There is also a true sense of pluralism residing in the country—there is an amazing amount of good will. The design of the social order makes Canada unique in its adoption of democracy, its investment in people and in it choosing to be humane. That is the phrase I would use. Canada is a country with wide diversity: diversity in landscape, diversity in its population and diversity in its economy. There are few economies that have such large success in agriculture and high technology and are endowed with natural resources. All of this plays into Canada’s uniqueness. 

Geographically, you cannot choose your neighbours—you are tied at the hip. But Canada has retained its uniqueness, even while being overshadowed by the American economy and population that is 10 times its size. Canada has managed to retain its integrity and identity. It approaches the US with a sense of humility, and like any big country or corporation, you can be washed off, submerged or subsumed—but that has not happened to Canada. A lot of credit is owed to the previous regimes and the current regime for holding on and staking their ground, especially in trade negotiations. 

Canada has enough potential to be on its own. The investments it’s made in education, healthcare and maintaining harmony will pay off. That should happen now, because the country is on the critical edge of innovation. In fact, it has all the building blocks in place to be successful and innovative. It has invested in educational institutions and into making healthcare affordable and accessible. The “care economy” is a new buzzword, but Canada has always had a care economy—it looks after its elders and those who are disadvantaged. This creates the necessary framework for doing well by doing good. Canada should recognize that in some ways, it has understated its case.

“Canada has enough potential to be on its own. The investments it’s made in education, healthcare and maintaining harmony will pay off.”

Typically, it has been a reticent observer of its own progress, strengths and prowess as a nation. Canada has not yet told its story—and it has so many stories to tell. How many people know that pacemakers were invented in Canada? How much of the AI and technology story is known to the world? We can watch a movie on mobile today because of technology developed in Canada. However, there is reticence from Canadians and the Canadian government—socially and culturally—to speak about themselves and their successes. It is good not to be boastful, and hyperbole is not helpful, but the at the same time Canada’s success stories need to be told better and to a wider audience. Every country that has globalized, acquired scale or economic stature is good at getting its story told abroad. We know CNN, BBC, Deutsche Welle— where is the Canadian version of that?

“There is reticence from Canadians and the Canadian government—socially and culturally—to speak about themselves and their successes.”

Canada’s leaders need to tell their story better—the country’s competitive advantages and colours need to be better illustrated. One person does not make a difference, but if there is a collective effort by institutions, thinkers and thought leaders in Canada, they can make this happen.


What are the major forces shaping our future, and what challenges and opportunities do they present for Canada’s future economy?

The first trend we are seeing is in demography. In the developed part of the world—what I would call the “paved economies”—the population is aging, and population numbers are shrinking. This is true for countries like Canada, many European countries, and Japan. On the other side, in the less developed countries, the population is booming. Around 1.9 billion of the next two billion people on our planet will be from the less resourceful, less developed part of the world, while the developed world will shrink further—particularly the working age population. The population is shrinking in countries that have resources, better government systems and a strong knowledge base; while the population is going up in countries that need resources and better government systems. 

The second trend is a shift in global centres of production. A country like India adds roughly one million people to its workforce every month. How do you find those jobs? With globalization, equalization happens—people migrate and production centres shift. This is generally what we knew about globalization. Now, with technology replacing human interface in the developed world, these two forces have coalesced to make a necessary change to the opportunities that exist for countries and for migrants. This change could happen more rapidly than we can imagine now.

The third trend is climate and Canada is on the frontier of climate change. Because of Canada’s historic policies and technology, climate change could be viewed as an opportunity—it would enable a longer agricultural season and probably bring down housing energy costs. It could create the opportunity for public finances to be diverted elsewhere. However, we do not know enough about this story yet. What we know is that we do not know enough. 

“Canada is at the cusp of these three disruptions—demographic disruption, technology disruption, and climate change. In that sense, Canada is the incubation centre of the future economy and next society.”

Canada is positioned to be the incubation centre for global change. It has to adjust its demography—its shrinking population—and leverage technological prowess to produce solutions for more economic growth, like cleantech. What Canada does today will set the pace and space for what the world must do in its own context, because Canada is at the cusp of these three disruptions—demographic disruption, technology disruption, and climate change. In that sense, Canada is the incubation centre of the future economy and next society. 

The basic foundation is already there—Canada has designed a caring, plural society that promotes human development. All of this is in place. Now, the field is fertile to absorb new ideas and new theses. The challenge is in how Canada goes about doing this—how it articulates solutions without losing track of its identity, integrity or harmony. How Canada approaches this can provide lessons for other countries. For example, in the US, it is the underlying political system and policies that are creating inequality. In the earlier world, those who owned capital created a space for themselves—but in the new world, ideas will create wealth and development. 

The ideas generated by technology companies are a result of the underlying investment that the residing country has made in its education or research system. To make that clear, one can look to the US. The famous FAANG companies—Facebook, Amazon, Apple, Netflix and Google—have roughly $4 trillion of market capitalization. But their wealth rises from two inventions that were both funded by the US government: the internet and the Global Positioning System (GPS). What did the American society get back from these innovations? In terms of taxation, there is no wealth tax, making it easier for people with ideas to create wealth. But that wealth needs to be redistributed if the state is going to sustain itself because there are those in society who feel that some are benefiting from the ecosystem more than others.

“In the earlier world, those who owned capital created a space for themselves—but in the new world, ideas will create wealth and development.”

Now, managing these forces and sentiments are challenges for any government across the world. But the technology companies stayed in the US—they listed in the US, they created wealth for shareholders in the US, and ordinary people gained from it. If you are a supplier to Amazon, for example, you begin to create your own ecosystem with secondary and tertiary jobs, so there is a tilting economy. A similar thing will happen in Canada once tech takes off. But you will need to design a policy that ensures those tech companies scale up and stay in Canada. The benefits will flow back to the Canadian economy.

When Canada moves from one level to another in each of the forces that will define our future—aging, climate and technology—it will have to manage its people and the harmony that exists. This is where sound public policy comes into the equation.

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How can Canada better support SMEs to scale? Who should lead the way in making these changes?

Let us use the phraseology of the tech sector. Startups do not do well on their own—they require incubation, mentors, funding, seed capital, venture capital and private equity. Similarly, small and medium-sized enterprises (SMEs) require mentorship, guidance and have problems that we do not know exist. This is where public-private partnerships (PPP) come into play. The government and the institutions need to build a bridge of knowledge between the traditional manufacturing or service sector, which are small and medium-sized, and the emerging technologies that are being incubated in Canadian cities. 

Part of the reason Canada has a large number of SMEs is culture. It is not as materialistic or hedonistic as American society. In a sense, it is a bit like Germany—it has a similar landscape of SMEs. But the difference for Germany is that they have Volkswagen, Porsche and Deutsche Bank because the governments have invested in enabling scale. This is the one big challenge for Canada: scaling SMEs into large companies.

There are two challenges to acquiring scale. One is management capability and the second is access to markets. If you make good investments in SMEs, the SMEs will begin to seek opportunities in larger markets like India or Africa. Bringing a company to this scale enables you to see much more. Imagine a doctor who sees 100 patients a day, and a doctor who sees 5. Arguably, the doctor who sees 100 patients has a better sense of what is happening, and how to develop prescriptions and diagnoses. Similarly, once you have access to scale, innovations bloom. The payback for large corporations is that it enables them to invest in research and development (R&D). As the company grows, you will have more surplus capital and a population that is able to invest in financial savings. For this to happen, we have to pave the knowledge bridge between new innovations and existing SMEs, and universities are well positioned to take the lead on that.

“This is the one big challenge for Canada: scaling SMEs into large companies.”

If the universities were to take the lead on this, the efforts will be sustained and consistent, instead of being wishy-washy and dependent on a particular regime. Once you have educational institutions bridging the knowledge gap, the government can help to provide what they need—grants or new tax laws, for example. And, if universities take the lead, you can have someone from the tech sector resolve a problem that arises within an SME. So, this is the first line of action in helping companies to scale. The second is enabling companies to get market access in areas where they can scale their operation.

“We have to pave the knowledge bridge between new innovations and existing SMEs, and universities are well positioned to take the lead on that.”

Parallel to this, universities and the government need to understand how to create managers that can manage at scale. This is a challenge the world over—and universities need to come up with courses that offer that kind of managerial experience. The university system and the education system coalesce to create these managers of scale. Being able to sustain that scale, however, requires a robust capital market in Canada. It requires a strong financial centre that has access to global capital. For example, when a company—let us say, Shopify—is listed in Canada. The Canadian savings and the global savings should be able to subscribe to Shopify’s public offering. The savings should create enough capital in that company to hire a CEO or a manager. The profits, in the form of taxes, flow back to the government and the dividends flow to the shareholders. 

So there is a sequence to helping companies scale up, and it is not one after another. It is like a string quartet in an orchestra: you have a percussion side, a wind side, and everything has to play a role. 


What role does the government play in economic development and innovation, especially in the context of climate change?

It is an American myth that governments have no role in economic development. A large part of technological innovation in the US came out of the Defense Advanced Research Projects Agency (DARPA) and the National Aeronautics and Space Administration (NASA); out of the universities that were funded, and from the tax laws that allowed rich people to make endowments to universities. The New Deal of Franklin D. Roosevelt, the Great Society of Lyndon Johnson and the entrepreneurial spirit doctrine of Ronald Reagan—they all had government intervention. Adam Smith, in The Wealth of Nations, defines the role of government: government should not be in business, but it has every business of being in government. It has to put the education system, tax laws, security, the justice system, and contracts into the context of economic development.

There is significant opportunity in the energy sector for this type of economic development, especially when considering climate change. There is plenty of energy potential in the oil sands, but there is also an environmental issue: how do you evacuate that energy? Should it be evacuated by a pipe, or used to generate storage sells? Imagine if, instead of using pipes, a Tesla-like innovation created storage banks of power, which can be transferred to other centres. This could play out, because we do not know what technology can deliver. AI, for example, came through gamers who invented a computer chip that could process data with more intensity—almost like a supercomputer. Right now, we do not know what could come out of the energy sector, and the government cannot be agnostic about its development—it cannot be an impartial observer of what is happening. 

“How the world addresses demographic, climate and technological change is going to be the single biggest question in political democracies across the world”

Climate change is a reality, and it will be a megatrend. There are many parts of the world that are deprived and dispossessed—they have no elbowroom to think about what is happening after tomorrow, because they are too busy thinking about today. But those who are on the front end of climate change in Canada are already thinking about the Canadian Arctic since 30% of Canada’s geography is permafrost. In a genuine warming, this might be advantageous if the permafrost begins to melt, or it might be completely disastrous. The government has to play a role in this, because they need to nudge those who understand the problem to find solutions. The government itself does not know anything—it only knows who knows. In this way it is simply an agent, and it is the people and institutions that are making things happen. The people are the principal, and they have to figure out a system to tackle these big issues. Canada is blessed to have very small numbers, which makes conversation around climate possible. You could not have that in the US, it would be difficult in India and it is probably banned in China. But these are real issues, and how the world addresses demographic, climate and technological change is going to be the single biggest question in political democracies across the world. 


How competitive is Canada at attracting foreign direct investment?

To understand foreign direct investment (FDI), one must understand a bit of history. What was colonialism all about? Why did the Spanish conquistadors go to Latin America? Because their geography could not support the desire of monarchs to build fortunes and prosperity. The need for FDI is a recognition of the fact that your own savings and capital may not be enough to build a better future. But FDI is not just about money, it brings technology and it brings knowledge. That is one part of the story.

“FDI is not just about money, it brings technology and it brings knowledge.”

The other part is that we are seeing rising protectionism in trade. Canada has many free trade agreements, so investing in Canada opens doors to three or four of the world’s largest markets. And because of rising protectionism and the relocation of production centres, access to markets is becoming more important. North America accounts for roughly 40 cents of every dollar of consumption in the world. The US itself is 30% of global consumption. But Canada also has free trade agreements with Southeast Asian countries and Europe.

New technologies that are born in Canada will also bring in FDI. Right now, countries need to figure out what they are most competent at producing and leverage it to attract new investment and build a story. This is the premature deindustrialization and deglobalization of the world—there is a process happening in the supply chain where no single product is made by a single country. And there is no baby boomer generation to consume that kind of single product. So, you have to figure out what you are most competent at to attract foreign direct investments into it. 

“Canada has clearly identified advantages: natural resources, a robust agricultural economy, and a knowledge economy, and it has built a reasonably robust financial system.”

So the potential for Canada to get attract more foreign direct investment depends on how well it designs the next phase of its development. What does Canada want it to be? Canadians do not want to be the next China, and they surely do not want to be the next United States. Canada has clearly identified advantages: natural resources, a robust agricultural economy, and a knowledge economy, and it has built a reasonably robust financial system. That would make the playbook complete. However, the Canadian Government should not draw up a 5 or 10-year plan—it should encourage discussion within the society and its stakeholders on what Canada’s future economy will be decades out. It is not possible to engineer a solution for the future, but you can definitely imagine what that future will be.

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The Investment Attraction Series is Supported by

Shankkar Aiyar
Visiting Fellow - IDFC Institute

Bio: Shankkar Aiyar is an award-winning India-based journalist, analyst, columnist and author. He has written extensively about the political and economic history of modern India. Aiyar specializes in the interface of economics and politics. He is currently working on the implications of evolving demographics on the future economy.

 

Organization Profile: The IDFC Institute is a think tank established to investigate the economic, political and spatial dimensions of India’s transition towards a prosperous market-based economy. It provides research and recommendations that are based in political economy. The institute encourages stakeholder’s collaboration, bringing together communities, government and business to deliberate on reform and execution. Its primary focuses are state capacity and socioeconomic transitions.