Developing Canada’s International Growth Strategy

By Angus Gillespie

A fundamental goal for Canadian policymakers and business leaders is to create an even more developed international economic strategy that will lead to enhanced diversity and growth within the country.

At the end of October, Prime Minister Justin Trudeau signed a free trade agreement with the European Union known as the Comprehensive Economic and Trade Agreement (CETA). The deal is designed to be the first of what could be many more trade agreements with other regions in the world whereby Canada and its partners will begin sharing their expertise in products and services across various enterprise sectors. Final ratification must still be approved by the Canadian Parliament and the member nations of the EU, but it is expected to be approved.

Ontario was first to react, saying the new trade deal will create 30,000 jobs in the province while adding $3.5 billion to its gross domestic product.

Meanwhile, Canada’s Finance Minister Bill Morneau has named Dominic Barton, McKinsey & Company’s Global Managing Director, as head of the federal government’s new Advisory Council on Economic Growth. In his role, Barton leads a diverse group of business and academic leaders with an ambitious mandate – to guide the development of Canada’s long-term growth strategy and particularly to strengthen its middle class.

There are a number of global macroeconomic trends facing Canada and being able to capitalize on the opportunities before other countries do so is crucial. Barton recently spoke to a business audience at the Toronto Region Board of Trade and offered his thoughts on ideas about what Canada needs to do to maximize its potential in a global environment.

“It is vitally important for mid-sized countries to have a strategy,” Barton says. “We have a lot of strengths but we aren’t big enough to do whatever we want. We need to be focused on where we are.”

Barton is of the opinion there are three essential components to follow. “You need to know your strengths and weaknesses, you need to understand the trends in terms of how the world is going to move and finally you need to be able to make a series of bold moves.”

Canada has traditionally produced a strong and respected workforce with our natural resources and financial stability leading the way. But more and more countries are trading goods and services, and while Canada has such agreements as NAFTA and possibly CETA, it lags behind the deals agreed upon by many other nations.

“We actually have very limited free-trade agreements, especially if you look at other countries such as Mexico,” says Barton. “We see a lot of automotive players are going to Mexico not because of low-cost labour but rather because it is a good place to trade from with more than 40 different agreements in place.”

Barton mentions how we used to be much more connected to Asia than we are today and need to re-establish that partnership and expand upon what we once had. He previously led McKinsey’s operations in South Korea and Asia and said his own personal view is that it would be very good for Canada to enter into negotiations with China on a free-trade deal.

“I’m biased being a Canadian, but I do believe Canada can play a unique role in helping China as it evolves over time. But there has to be a basis for it,” he says.

Barton is also of the opinion that Canada should also aggressively seek trade deals with Japan and India.
On the risk side, the demographics are interesting. If you look the biggest driver of GDP growth per capita is the labour force. But there are cautionary issues to deal with there as well. Canada has seen, on average, GDP growth of about 3.1% over the last 50 years – growth Barton says may fall to 1.5% if nothing is done.

“Demographics are pretty reliable to look at; these are not just some forecasts,” Barton says. “It’s a call to action. We have an aging labour force with less supply and we need to do something on that front.”

Protecting Canadian Jobs

The ultimate economic objective is to boost potential output growth and maximize living standards for Canadians through a policy framework that encourages education and skills development, innovation, openness to trade and investment, responsible resource management, economic diversification and a strong financial sector. This policy framework is firmly anchored in a commitment to long-term fiscal sustainability.

Artificial intelligence is viewed as being the next main economic contributor, much the way the advent of the Internet was when it first became widely available to the general public in the mid-1990s.

“It’s going to lead to a lot of automation very quickly, and is something we need to prepare for,” says Barton. “Many of the current jobs are going to become automated, but the hope is that new jobs will be created.”

“We believe that ag-food is going to be a significant contributor for Canada on the world stage,” continues Barton. “Resources are going to come back. We are in a downturn right now.”

Technology is moving so rapidly, and it’s not just to do with data and the Internet or artificial intelligence. It’s energy storage, material science as well as everything that is going on in biotech.

“We need to think about this because it’s very disruptive. It’s driving churn rates in companies and in jobs. The average lifetime of an S&P company has gone from 90 years in the 1935 to about 50 years today. The speed with which we have to change has been accelerated,” says Barton.

As a country, Canada has a number of unique capabilities within various technological realms, but the task at hand is to determine how to best scale them for premium economic advantages. It’s vitally important that we try not to be a ‘Jack of all Trades’ but rather focus on our best offerings and develop those.

“The UK, which is significantly larger than us, has selected six areas that they think they can focus on. On our current course we are looking at 15 areas, so it’s going to mean making some choices on picking the best ones,” says Barton.

As the head of Prime Minister Trudeau’s economic advisory council, Barton has moved for an easing of immigration rules to attract more talent, retraining a large segment of the workforce to adjust to the rapid increase in automation and creating what he calls the world’s first infrastructure agency designed to attract billions of dollars in private and foreign capital.

Education is Critical

There is undeniable nervousness about the speed with which technology and automation are disrupting jobs. Half of the current jobs may be automated over a rather short period of time. It doesn’t mean they’ll be completely gone but Canada needs to start thinking about skilling people and training them for future positions. This is going to be extremely important over the next 10 years. The most crucial aspect will be preparing future generations for jobs that may not even exist as of now.

“I don’t think our education systems and corporate structure are ready for how we’re going to be able to deal with all these technological changes,” Barton candidly states. “The notion of lifelong learning is going to be very important.”

There has also been a noticeable increase in the number of independent workers as we move through the 21st Century. Less people are working for companies, but rather themselves. In some countries, independent workers account for as much as 25% of the entire workforce. But there are implications moving forward, such as how will they remain plugged in with external enterprise.

To maintain the necessary infrastructure, the overwhelming costs are always a hindrance. Although the federal government has committed funding towards the cause, it won’t be nearly enough.

“Our sense is that there is about a $500 billion gap. The government is doing some tremendous things but it can’t do everything. What we’re keen to look at is whether there are ways that we can attract private capital to be able to work with the public capital. We think there is a lot of appetite from investors within Canada and also outside,” says Barton.

“We are not doing very well on foreign direct investment,” Barton says. “We are ranked by the OECD (Organization for Economic Co-operation and Development) as one of the more difficult places for people to invest.”

There are $16 trillion in the global financial system that’s generated negative returns in bonds according to Barton. “There’s a lot of private capital looking for the opportunity to invest in infrastructure, and they’re not expecting extraordinary returns. They’re expecting stable returns.”

Regulatory restrictions in a number of key economic sectors are also burdensome and in need of reworking with banking, telecom and supply management being three prime examples.

Being an exporting nation it is essential for that to not only be sustained but continue to expand in order to meet the country’s internal requirements. Canada has strength in many areas that are envied by other nations and Barton says it would be foolish not to take advantage of those strengths. Assets range from world-class colleges and universities, a robust ag-food industry, as well as overall economic and governing stability.

Population aging and the associated weaker growth in labour supply could exacerbate existing labour shortages over the medium term. The employment rate will also inevitably fall in the long run as a result of population aging, meaning the positive impact of employment growth on incomes will wane in the coming years.

Despite many challenges, Barton says Canada must reach out and engage these other countries about working together, which will ultimately benefit us all.