Canada must boost innovation and invest in human capital to sustain growth

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Canada will have to become more productive to sustain its high standard of living, according to the Organization for Economic Co-operation and Development's (OECD) latest Economic Survey of Canada.

In a report presented today in Ottawa, OECD notes that a timely fiscal stimulus, low interest rates, a solid banking sector, and revenues from natural resources helped Canada return to a stable growth path after the global economic crisis of 2008-09.

But new risks threaten Canada's long-term economic and social well being. The report identifies sluggish productivity growth as the main long-term challenge facing Canada's economy.

Per capita income has increased in recent years as result of an increasing number of people entering the labour force and the soaring price of commodities including oil, pushing up the value of the Canadian dollar, notes the report. However, multi-factor productivity or the amount of labour, capital, and natural resources needed to produce a unit of GDP has remained largely the same over the past few decades.

Canada's overall productivity has actually fallen since 2002, while it has grown by about 30% over the past 20 years in the United States, notes the report.

At the same time, income has shifted towards the resource-rich western provinces, while the regional economies of Ontario and Quebec are still adapting to increased external competition resulting from the high exchange rate, it states.

Priorities for change

The OECD identifies two key priorities for meeting this long-term challenge.

First, Canada needs to boost innovation. Canada has world-class research institutions and provides strong public support to business investment in research and development (R&D). However, the business sector devotes only about 1% of GDP to R&D, compared with 2% in the U.S. and more than 2.5% in Japan, Korea and some of the Nordic countries. Canada remains a low performer on business investment in R&D, even when the large share of natural resource production is taken into account.

The OECD recommends more focused support for business investment in R&D. The government should maintain the current system of tax credits; however, particularly generous credits to small Canadian-owned private firms should be reined in and partly replaced by more targeted direct grants. Opening up network industries and liberal professions to more competition would also enhance incentives for innovation, thereby generating higher productivity.

Second, Canada should invest further to improve both quality and access to tertiary education, to maintain the supply of highly-skilled workers as the population ages. Financial assistance to students should become more targeted and granted on a means-tested basis. This would help reduce the barriers for financially disadvantaged students and promote more socially-inclusive growth.

Tertiary education should also become more flexible and facilitate lifelong learning, notes the report. Canada should seek to attract more foreign students into its tertiary system and make it easier for them to work and stay in Canada after graduation.

Finally, the report suggests that universities be differentiated between institutions that engage in research and those that focus primarily on teaching.

Green Innovation is Essential

Innovation can also help reduce the costs of avoiding environmental degradation notes the report, In addition to the positive externalities common to all forms of innovation, it also reduces the negative externalities of environmental degradation (air and water pollution, climate change, biodiversity loss, etc.), all of which will be needed if Canada is to transition to a low-carbon economy.

The OECD Innovation Strategy concludes that such policies can succeed only if a price is put on environmental externalities such as carbon emissions, ideally in this case through a carbon tax or a greenhouse gas emissions trading scheme.

Such pricing corrects for externalities and can also be a source of government revenue. British Columbia, Québec, and Alberta have moved a small way towards carbon pricing., Alberta is also subsidizing innovative technologies like carbon capture and storage through its Climate Change and Emissions Management Technology Fund.

'Canada is blessed with abundant natural resources. But it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and an equitable distribution of the fruits of growth,' said Peter Jarrett, one of the authors of the study and the head of the Canada division at the OECD Economics Department.

Research conducted by GLOBE Advisors and published recently by the Pacific Coast Collaborative reached similar conclusions on the importance of innovation and new skills development.

The West Coast Clean Economy Report, published in March 2012, notes that the 'clean economy' represents a shift toward less carbon-intensive solutions and longer term, sustainability-based planning and programming that in turn promotes enhanced economic performance and global competitiveness, energy and environmental security, and sustained investment.

The research has shown that clean economy jobs have grown on average 2-3 times faster than total jobs in the economy over the last decade, and that they are more resilient to market volatility and vulnerabilities. The West Coast Clean Economy Report is available here for download.

Further information on the Economic Survey of Canada is available at: www.oecd.org/eco/surveys/canada.

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