Matthew Mendelsohn is Visiting Professor at Ryerson University and a co-creator, with the Ryerson Leadership Lab and the Brookfield Institute for Innovation + Entrepreneurship, of First Policy Response. Noah Zon is the co-founder of Springboard Policy, a public policy research and advisory firm based in Toronto. He has spent his career in public policy in the non-profit sector, think tanks and public service.
This commentary is drawn from the Executive Summary of a new paper from the Canadian Inclusive Economy Initiative, a project of First Policy Response, Matthew Mendelsohn, the Brookfield Institute for Innovation + Entrepreneurship, Ryerson Leadership Lab and Springboard Policy. To read the full paper, click here.
Along with the devastating public health crisis of COVID-19, the pandemic has exposed and deepened worrying trends in the Canadian economy. The economic futures we had imagined at the start of 2020 have evaporated, and many Canadians have lost their jobs, their businesses, and the paths they saw for themselves.
Canada has arrived at the end of the policy paradigm shaped by the recommendations of the Macdonald Commission and the long tail of the Washington Consensus, including free trade agreements, deficit fighting and the rules-based multilateral trading system What comes now?
It is hard to exaggerate the significance of this moment. The pandemic has revealed and exacerbated well-known problems, accelerated changes that were already underway and reminded us that effective government is absolutely essential to help Canadians and businesses through this period of unprecedented disruption. This generational economic crisis demands a generational economic response to ensure a strong economic recovery and lasting prosperity.
There is a surprising emerging consensus across the political spectrum in Canada on two issues: governments need to engage in activist industrial policy; and economic growth isn’t a sign of success if it exacerbates inequalities, damages the environment, destroys communities and fails to create good middle-class jobs.
Across the political spectrum in Canada, policy leaders are re-evaluating the role that industrial policy plays, recognizing the active role that governments have played in Europe, Asia and here in North America to support strong companies and sectors. Facing prospects of weak growth domestically and an increasingly competitive and protectionist international environment, there are growing calls from all corners for an ambitious, proactive economic agenda that would look to Canadian governments to build both strong fundamentals and directly engage in helping Canadian firms succeed.
The narrative that “government can’t pick winners” depicted “industrial policy” as a caricature of grinning politicians and jumbo cheques delivered to failing factories, coupled with barriers to free trade. This was a deeply misleading story but a powerful narrative and it succeeded in making industrial policy taboo, though it did not actually make industrial policy go away. As a result, because Canadian governments engaged in industrial policy without acknowledging it, the results of our policies to support businesses, sectors and regions have been underwhelming and often captured by political imperatives.
The problems made more visible by the pandemic are a product of economic policies that failed to understand that economic growth and inclusion are mutually reinforcing rather than competing policy goals. There is growing evidence that more inclusive growth isn’t just more equitable, it’s also stronger growth — and an active and strategic state helps businesses succeed.
So what should a modern industrial policy should look like?
The goal should not simply be to support the growth of successful Canadian companies. If our industrial policies build great companies that contribute to inequality and wealth concentration, they will have failed. Our industrial policy needs to support economic growth, innovation and successful firms in a way that delivers widely shared economic, social and environmental value.
Strong macroeconomic fundamentals on their own are not enough to build prosperity in today’s environment. Around the world, governments are investing more in their industrial policies. Many are focusing on building competitive advantages in emerging fields like AI, accelerating the shift to a low-emission economy and supporting businesses that deliver social returns, like community wealth and good jobs.
Canadian governments are already investing public dollars, shaping markets and making industrial policy decisions in explicit and implicit ways. But Canada can undertake its industrial policy in ways that are more effective and better aligned with broader policy goals. It is not a question of whether Canada embraces industrial policy but whether we do it well. With massive public investments occurring in economic recovery, it will be a generational failure if we fail to account for what kind of growth we want to see and what kinds of communities we want to build.
This discussion paper marks the launch of a new project — the Canadian Inclusive Economy Initiative. In this first paper, we lay out a framework for an inclusive industrial policy agenda as well as some promising options to pursue.
A well-designed industrial policy seeks to overcome collective action problems, address issues of scale and build ecosystems in which positive economic spillovers are more likely to occur. A well-designed inclusive industrial policy understands the additional positive good for society that stems from high quality jobs, broadly shared economic security, community wealth and sustainable development.
Inclusive industrial policy is a conscious effort to build economic capacity that generates broadly shared wealth for individuals and communities on a sustainable basis.
Our proposed framework for an inclusive industrial policy focuses on three overarching goals: inclusion, community wealth, and sustainability. And successful industrial policy efforts rest on a foundation of strong governance, policy alignment, and sophisticated and varied measurement of impact.
At the core of this approach is a toolkit of promising practices that have been used successfully in Canada and internationally that could comprise an inclusive industrial policy. We organize these tools into three overarching themes: more strategic use of procurement; democratizing access to capital; and using government investment decisions to shape behaviour in ways that advance the goals of inclusion, community wealth and sustainability, which should include more equity investing by governments in firms.
Some will argue that Canada has enough trouble simply creating and retaining innovative, high-growth companies, and that as Canada engages more actively in industrial policy, we should first focus on building advantages and helping businesses succeed.
That is a reasonable argument. But our concern is that even if we are successful in that project, the risks to inequality, sustainability and social stability will need to be addressed, and redistribution through the tax and transfer system is not a substitute for shared, inclusive, sustainable growth. This framework and toolkit will make it more likely that we can deliver on both projects at the same time.
Matthew Mendelsohn is Visiting Professor at Ryerson University and a co-creator, with the Ryerson Leadership Lab and the Brookfield Institute for Innovation + Entrepreneurship, of First Policy Response.
