The Harry Kitchen Inaugural Lecture

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The Harry Kitchen Inaugural Lecture

• POLICY BLUEPRINTS FOR THE
• INFORMATION AGE
• Implications for Markets and Enterprise
• By
• Thomas J. Courchene
• School of Policy Studies, Queens
• and
• Senior Scholar, IRPP
• tom.courchene_at_queensu.ca
• Trent University
• November 15, 2007

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Outline

• I Introduction
• II Outline of the Larger Study Citizens
  Governments and Governance and Civil Society
• III Markets and Enterprise
• 1. Transition to the KBE
• 2. Increasing Returns and Schumpeterian Creative
  Destruction
• 3. Productivity and Innovation
• 4. Foreign Direct investment
• 5. Global Value Chains
• 6. Innovation and Income Trusts
• 7. Corporate Income Taxation
• 8. The Canada-US Exchange Rate Productivity and
  Competitiveness
• IV Policy Blueprints
• V Conclusion

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INTRODUCTION

• Information Age Building Blocks
• A new general purpose technology (GPT)
• A knowledge-based Economy (KBE)
• A new societal organizational form the Network
• Real-time globalization on a planetary scale

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The Larger Study Citizens

• Citizen are the principal beneficiaries of
  Information Age
• Human Capital is to the Information Age what
  physical capital was to industrial Revolution
• Mission Statement for Century 21
• Ensure equality of opportunity for all Canadians
  to develop H.C.
• This will address both competitiveness and
  cohesion
• Arguably, need a Charter of H.C. rights for our
  children
• Policy Blueprints
• Early childhood education aboriginal education
  transferability of credentials Immigration (visa
  students), increase access to PSE (lower 1st year
  tuition), level taxation playing field.
• They are all directed toward increasing skills
  and H.C. in an equitable way in order to lay the
  background for enhancing innovation.,
  productivity, and competitiveness (and personal
  well-being)

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Larger Study Governments/Governance

• Glocalization powers transferred upward and
  downward
• Upward economic space transcends political
  space. Govt transfers power upward in
  countervail fashion (EU, NAFTA)
• Downward Information revolution breathes life
  into subsidiarity
• Conflict networked federalism vs. open
  federalism
• Spending power may be able to come the rescue.
• Global City Regions are key nodes in I-A
  geo-economy
• Because GCRs are where one finds dense
  concentrations of H.C.
• GCRs are key coordinating and integrating
  networks in their regional economies, and also
  are the dynamic nodes in the intl networks that
  drive growth, trade, and innovation in the global
  economy
• Huge deficit in public infrastructure
• Challenge How to ensure that GCRs become more
  fully and formally integrated into the substance
  and processes of Canadian fiscal and political
  federalism

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Larger Study Civil Society

• Technologically driven
• Printing made us all readers Xeroxing made us
  all publishers Television made us all viewers
  Digitization makes us all broadcasters.
• Of the 25,000 INGOs in 2000, 20,000 did not exist
  in 1990. INGOs are a product of the Internet
• NPOs, NGOs, and CSOs, plus faith-based
  institutions
• Largely ignored by economists they respond to
  societal-maximizing opportunities and make the
  markets for democracy, environment, rights and
  ideas contestable especially at the
  international level.
• Play a huge role in public policy
• They need to become more accountable, internally
  democratic, efficient and innovative

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Markets and Enterprise1. Transition to KBE

• Transition from a govt-driven, nation-state
  centered vision of capitalism to a
  liberalized-markets (private sector) driven and
  global-centered capitalism. (Thatcher/Reagan)
• Then linked up with ongoing technological
  revolution
• Equals Globalization and the Informatics
  Revolution, but our terms will be KBE or
  Information Age (I-A)
• GATT becomes WTO, way more intrusive of
  sovereignty
• Changing N.A. economic space. As a result of
  FTA/NAFTA, Canada is no longer a single east-west
  economy. Rather a series of north-south,
  cross-border economies

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Markets and EnterpriseKBE Increasing Returns/
Creative Destruction

• Old paradigm increasing costs
• Compete by producing more of same
• KBE increasing returns/decreasing costs
• Compete with new firms with new products
  (leapfrogging)
• Schumpeterian Creative Destruction series of
  temporary monopolies superseded by new
  monopolists selling new products
• Innovation requires that firms be subject to
  competition
• For catch-up, can do this with existing skill
  sets
• To innovate, need higher H.C., where innovation
  can be defined (The Economist) as fresh ideas
  that create value
• KBE vision Innovate or die (Michael Porter)
• Lipsey GPT (creative destruction) takes time to
  permeate an economy. Good news can look forward
  to more productivity gains as GPT spreads.

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Markets and EnterpriseProductivity and
Innovation How Do We Fare?

• Productivity rank 21st in OECD, 2nd lowest in
  G7
• Over last 5 years 1 in Canada, 3 in US
• World Economic Forum Competitiveness Canada
  was 3 in 2001, by 2006 we are 16th
• In terms of the 3 components of productivity
• Capital deepening (Increase capital per labourer)
• Labour composition changes (increasing skill
  level, etc)
• MFP (multifactor productivity) is a residual,
  assumed to relate to technological change,
  returns to scale, innovation, organizational
  change
• Evidence suggests that in comparison to the same
  3 US factors, 90 of our overall productivity
  shortfall stems from our weak MFP.
• In effect, then our productivity problem arises
  because we have under-invested in the general
  purpose technology (GPT) of the Information Age.
  This is not good news.

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Markets and EnterpriseForeign Direct Investment
(FDI)

• Canadas share of N.A. inward FDI fell from 40
  in 1980 to 16 in 2005 (see appended Figure). Our
  inward FDI has increased recently (Figure 1) but
  most is M A activity, not new investment
  (Figure 2)
• Overall our stock of Outward FDI exceeds our
  Inward FDI
• Must be careful here outward FDI may contribute
  to our businesses becoming global (next section),
  etc.
• These data are difficult to interpret. But my
  take is that the FTA and NAFTA ought to have made
  Canada a much more valuable location from which
  to service NAFTA economic space. No evidence of
  this in the FDI data.

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Markets and EnterpriseGlobal Value Chains 1

• Production networks or value chains are an
  integral part of the I-A.
• Goal is to have Canada be the location of choice
  for the higher-value-added elements of these
  supply chains.
• Head offices are important because they need a
  bundle of high-level services (legal, research,
  advertising, logistics, tax, etc). Global product
  mandates are obviously valuable.
• Guy Stanley (Policy Options) says we are
  failing here
• We have cut taxes, reduced barriers, increased
  support for S T, put our fiscal house in order,
  subsidies to RD, ST are largest in OECD
• Result basically no change. Why?

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Markets and EnterpriseGlobal Value Chains 2

• Why? Because our national innovation system has
  three huge problems (from Stanley)
• Disconnect between the national science capacity
  and the national ability to commercialize the
  research
• Failure of our traditional value chains to evolve
• No ability for the system to correct itself (see
  next section)
• Guy Stanley again Neither Canadas medical
  technology nor telecommunications networks is any
  longer leading edge, so there are few if any
  Canadian companies that might have built to
  service businesses around them at a global level.
  Yet these are amongst the largest business
  opportunities, going forward (Policy Studies,
  July/August, 68-69

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Markets and EnterpriseIncome Trusts

• Tax advantage to create an income trust. The
  trust serves as a conduit for passing all the
  income it receives from the operating company to
  the unitholders.
• Problem because the trusts pay out virtually all
  their cash, they will not have enough funds to
  reinvest in their companies for them to remain
  viable.
• For some companies, a trust format may be ideal,
  But we took it to excess, and Finance Minister
  Flaherty lowered the boom retroactively. Why?
  Because Bell was about to go the income trust
  route with more firms to follow
• Something is really amiss when presumed leaders
  in the I-A (like Bell) are tempted by tax
  provisions to remove themselves from the creative
  destruction process thereby eroding our
  productivity and innovative potential.

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Markets and EnterpriseTaxation Corporate
Income Taxes and the GST

• There is a view that our problems in the I-A
  relate to high taxes
• We do need a level playing field for taxes on
  mobile factors
• Finance Minister cut CIT rate from 22 to 15 by
  2012
• Provincial CITs range from 10 in Alberta to 16
  in NB and PEI, and 14 in Ontario. Flaherty wants
  all at 10
• But biggest provincial problem is the 5 provinces
  that still have PSTs which tax capital inputs, as
  well as provincial capital taxes. Converting
  these 5 PSTs to GSTs and removing capital taxes
  would lower overall marginal tax rates on
  business inputs by 7
• Ontario is foolish not to do so, but tough issue
  politically
• Flaherty missed a chance to use the GST cut to
  force these conversions. GST is a good
  provincial tax, because it is export-import
  neutral and distributed rather equally across
  provinces Especially good if the feds can
  transfer some GDT points to the provinces in
  return for receiving some of the provinces CIT
  points.

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Markets and EnterpriseProductivity and the
Exchange Rate

• Figure 3 charts exports and the exchange rates
  and Figure 4 has indices of Canada and US unit
  labour costs in US.
• The Canadian ULC line basically follows the
  exchange rate
• Focusing on the 1992-2002 undervaluation (and
  assuming that capital equipment is priced in
  US), the huge depreciation induced firms at the
  margin to meet the US demand by adding labour
  (because capital has gone way up in price
  absolutely and relatively).
• This was also the brain drain era (because US
  incomes were way higher).
• Therefore the capital-labour ratio falls for both
  physical and human capital, absolutely and
  relative to the US
• Assertion this has a great deal to do with the
  much lower level of productivity growth in Canada.

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Markets and EnterpriseProductivity and the
Exchange Rate 2

• But why wouldnt the current overvaluation
  reverse all this and buttress the claim the
  exchange rates do not affect productivity. It
  could, but.
• But because the appreciation was so rapid and so
  large (70 over 5 years) that before capital
  could deepen, there was downsizing, outsourcing
  (internationally), offshoring and outright
  closure, so that any capital deepening will be on
  a (substantially lower) capital base.
• Therefore, it is highly unlikely that our
  exchange rate volatility and amplitude is
  neutral with respect to productivity
• Moreover, this volatility must decrease the
  attractiveness of Canada as a location for
  servicing NAFTA economic space. Now we turn to
  the Dutch Disease

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Markets and EnterpriseExchange Rates and the
Dutch Disease

• Hollands North Sea energy exports appreciated
  its currency so much that this served to clobber
  its manufacturing sector. Hence the term Dutch
  Disease. (Solution peg to German mark, then the
  Euro)
• Canada has clearly caught a bad case of the Dutch
  Disease, with energy-driven exchange rates
  cobbering Ontario manufacturing (and
  manufacturing everywhere, even in Alberta).
• The basic problem is that the Canadian currency
  area is way too small to accommodate a world
  class manufacturing cluster and one of the
  worlds most diversified and dynamic energy
  sectors.
• The obvious solution (to me) would be to immerse
  Canada into some version of an FTA or NAFTA
  currency area, starting with fixing the Canada-US
  exchange rate. Rick Harris and I have elaborated
  the mechanics of this in a earlier (1999) paper
  (C D Howe Institute).
• There is also the Norwegian approach to
  redeposit any major energy-related capital
  inflows back into international capital markets.
  It would help to have Alberta on board for this
  to work.

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Markets and EnterpriseExchange Rates and the
Dutch Disease 2

• Note that the same would apply to any reason why
  the exchange rate appreciates, e.g., the US
  overhang of debt and deficits.
• Canadians would mount the barricades if the US
  were to put a 70 import duty on our shipments to
  them. Why are we so passive when our authorities
  place a 7O export tax on our shipments to the
  US?
• Like Free Trade, the proposal for a common
  currency will not have any traction unless the
  business community comes on side.
• Nonetheless we should recall what happened the
  last time we had a common currency with the
  USthe Pearson era.
• This was the era where we diverged
  socio-economically from the US (CPP/QPP, CAP,
  comprehensive equalization program, expanded
  arrangements for PSE and Medicare and hospitals).
• Our productivity growth exceeded US growth and we
  were closer to the US level of productivity than
  we are now, in spite to the fact that the
  FTA/NAFTA were supposed to increase our
  productivity
• Bottom line Why are we forcing a trade-off
  between resources and manufacturing, or between
  the west and the center. We dont have to!

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Policy Blueprints

• Need to stress that we are doing well
  unemployment rates are at multi-decade lows, and
  we can probably count on continued economic
  success given that Brazil, India, China will
  continue to grow. Nonetheless, the policy
  blueprints that follow are designed to increase
  innovation, producitvity and competitiveness
• Some introductory considerations. 1. Need to
  recognize climate change choose 1 policy
  choice of IRPP study a progressive carbon
  management standard or a carbon air pollutants
  tax with proceeds to fund conservation
  initiatives
• Infrastructure is important, but much of it will
  appear under the government component of the
  study
• We have already elaborated the taxation proposal.

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Policy Blueprints

• The burden of proof must not rest with the
  innovator
• Government should adopt as a principle the
  presumption that any private sector initiative
  is permissible unless it can be demonstrated to
  run counter to the public interest.
• The importance of exit
• An innovative culture must allow exit. As Sylvia
  Ostry noted governments may not be any worse
  than the private sector in terms of picking
  winners, but losers are incredibly adept at
  picking governments! Protection begets further
  protection and it traps factors of production in
  unproductive activities.
• Sustaining Competition
• We have to get away from the income trust
  mentality. Far too many of our key sectors are
  sheltered from competition telecommunications,
  banking, broadcasting, cultural industries,
  uranium, transportation services

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Policy Blueprints

• Embracing Competitive Federalism
• With 10 provinces there is ample scope for
  innovation in the design and delivery of
  provincial public services Medicare, training,
  etc
• R D Incentives
• These are like tax rates necessary but not
  sufficient. Canada needs to have a level playing
  field internationally. But the effectiveness of R
  D incentives will be positively related to
  having other policy blueprints adopted
• Securing the Internal Economic Union
• Securing Greater Access to NAFTA Economic Space
• Lowering Import Duties on Inputs

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Policy Blueprints

• Addressing the Dutch Disease
• The Canadian Energy Sector
• Needs to become a global leader in terms of
  low-carbon-emission fuel and the central node in
  an international value chain where Canadas role
  (in addition to supplying the feedstocks) must be
  to occupy a place well up in the value chain, and
  to encourage the development of related clusters.
• But the further reality is that there must be a
  national perspective to this activity. If it is
  under the control of the provincial fiefdoms,
  then the potential for the efficiencies and
  positive externalities may be lost.

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Conclusion

• Canada excelled within the former paradigm
• We are having difficulty mastering the
  Information Age
• Perhaps we should not care much because
  India/China are allowing a return to much of what
  was the old paradigm
• Arguably, however, this would be long-run folly
  because Century 21 will be about people not
  resources so we must also strive to excel in the
  Information Age, or the KBE
• The motivation for this paper was that we must
  try to understand what the KBE is all about
  before we can come to grips with the nature of
  the underlying challenges and, therefore, with
  relevant policy prescriptions.
• I hope I made some useful inroads in this
  direction.

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• THANKS, HARRY, FOR THIS MEMORABLE OPPORTUNITY TO
  EXPLORE A
• NEW AREA
• AND
• BEST WISHES FOR A HAPPY
• AND PRODUCTIVE RETIREMEMT

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References