Yes, we have an innovation paradox, but we need to address our policy paradox first

We need to understand and surmount the barriers that prevent us enacting known solutions to our problems.

Photo by Viktor Talashuk on Unsplash

Canada has built significant strength in many fields of research. […] We do less well in converting strength in basic science into sustained commercial success. This is a long-standing deficiency in Canada’s innovation system which requires resolution for the full benefit of Canada’s considerable S&T strengths to be realized.

- “The State of Science & Technology in Canada”, Council of Canadian Academies, 2006

We face very real economic and environmental challenges that require a new level of effort and success. Canada’s productivity gap relative to our largest trading partner, the United States, is widening. For Canadians to continue to enjoy a high quality of life and standard of living, we must improve our productivity and competitiveness through innovation.

- “Mobilizing Science and Technology to Canada’s Advantage”, Government of Canada, 2007

The inescapable bottom line is that growth in Canadian labour productivity is falling further behind that of our American neighbours; the problem is even worse than previously thought. Unless productivity growth becomes more of a national priority, there is no reason to expect that long-term pattern to change.

- Glen Hodgson, “Canadian productivity: Even worse than previously thought”, Globe and Mail, 2013

The comparatively low rate of Canada's current productivity growth indicates that our economy can and needs to be more competitive […] If productivity growth does not pick up, the effect will be felt on corporate performance and jobs.

- “Seizing Canada's Moment: Moving Forward in Science, Technology and Innovation”, Government of Canada, 2014

I want to talk about Canada’s long-standing, poor record on productivity and show you just how big the problem is. You’ve seen those signs that say, “In emergency, break glass.” Well, it’s time to break the glass.

- Carolyn Rogers, “Time to break the glass: Fixing Canada’s productivity problem”, Bank of Canada, 2024

By making strategic investments today in innovation and research, and supporting the recruitment and development of talent in Canada, we can ensure Canada is a world leader in new technologies for the next generation. In turn, this will drive innovation, growth, and productivity across the economy.

- “Budget 2024: Fairness for every generation”, Government of Canada, 2024

If you have followed debates around Canadian innovation and economic performance long enough, you’d be forgiven for having an overwhelming sense of déjà vu. For decades, we have been having very similar debates about Canada’s lagging commercialization, investment, and tech adoption issues, which have resulted in our productivity challenges.

Carolyn Rogers may have called this a moment to break the glass, but she is hardly the first to speak of the urgency of addressing our productivity shortcomings. Former Governor of the Bank of Canada Gordon Thiessen warned in 1999 that “there is no room for complacency. Increases in productivity do not just happen.” Yet, clearly, that warning, nor any of the dozens that followed, have been heeded.

A couple of years ago, the UK policy commentator

Sam Freedman

wrote an interesting piece about the UK’s policy paradox. I think it is worth considering in the context of Canada’s persistent policy problems.

The Policy Paradox

Sam noted that “The longer you work in policy the more you realise new ideas are extremely rare. Even ideas that seem new are usually old ones repackaged and given a different spin.” While this can be a recipe for cynicism, Sam instead approaches this from the lens of “given you’re not the first person to think of this why hasn’t it happened before?” Just because it hasn’t worked before doesn’t mean it can’t work now, but if it is going to we need to “understand the history and explain why it can be different this time”.

Sam then defines the policy paradox: “The more obvious the idea, the less likely it is to happen.” He expands:

What explains the paradox? Why are the most widely supported things the least likely to happen? The simple answer is that if an idea is that obvious and not ideologically contested, and has featured over many years in reports and speeches, and still hasn’t happened, then the reason it’s not happening has nothing to do with support for the principle. Something else is acting as a barrier. More advocacy for the policy will not change this. As I tell the eager young think-tankers I meet, there’s no point writing another report making the case. The blockage needs to be identified and removed.

It should be astoundingly clear that this is true for Canada and our innovation and productivity challenges. We know the reasons behind those challenges and the different policies that should be solutions. Yet, they have never been adequately implemented (if even attempted). We need to identify and remove the blockage.

For the UK, Sam sets out and analyses three core categories of barriers: spending rules, misdiagnosis, and fear of the electorate. I don’t think the first applies to Canada. The strangely unstrategic and arbitrary fiscal rules that feature in UK politics and the “Treasury Brain” that forces policies and spending towards short-term priorities rather than long-term needs don’t have an exact parallel here. While there are fiscal and political constraints on spending, these do not act as they do in the UK, severely constraining policymaking. The fact that the functions of our Finance department and Treasury Board are separate federally and in many provinces helps significantly with that.

Misdiagnosis, however, certainly plays a role here. Sam defines that as “policy statements that are agreed on by nearly everyone at a high level but involve a misdiagnosis of the problem at hand, leading to politicians pulling at levers that aren’t connected to anything.” When it comes to innovation and productivity, we are definitely prone to pull the wrong levers.

Over decades, plan after plan, strategy after strategy, has focused on pulling supply side levers, seeking to inject more talent, more research, and more capital to help solve our innovation and productivity challenges. The 2007 and 2014 strategies quoted up top, as well as the 2017 Innovation and Skills Plan, all hit strikingly similar notes in the policy levers they use. Yet, as Jakob Edler argued back in 2019, our policy mix is “overly focused on the generation of knowledge, technology and innovation” and “relying on policies of the past [that] will not do the job.” Instead of focusing on the generation of these things, we need to switch towards using more demand-side levers, such as strategic procurement, supporting technology adoption, and building new structures responsible for utilizing innovation to address societal challenges.

That said, you would be forgiven for recognizing those policy prescriptions as familiar, too. Edler was hardly the first to argue for greater use of demand-side policies, nor was he the last. Many, including myself, have argued for the greater use of demand-side levers in report after report, op-ed after op-ed. While misdiagnosis perhaps plays a role among decision-makers, the fact that the wrong levers are being pulled has been pointed out plenty of times by a huge variety of organizations and experts, so I’m not sure that is the key blockage.

Sam’s final category, fear of the electorate, plays a role, too, but I’m also unsure if it is the main barrier in our case. He sets this out as “policies that are regularly advocated by think-tanks and experts that are not pursued because they would be unpopular, at least with key voter demographics.” As

David Coletto

of Abacus Data set out in a recent newsletter, while younger Canadians have an increasing “desire for political leaders to move beyond Band-Aid measures and confront the structural issues at play”, older Canadians instead “often support incremental changes, trusting that the tried-and-true approach might eventually steer the country back to calmer waters.” That steady-as-she-goes mentality of certain voters may constrain the ambition of policymakers.

It is often noted that there is a particular kind of caution that marks out Canadians. One report from Deloitte noted that “Canada has a deep-rooted, cultural aversion to risk”, for example. This no doubt plays out in terms of voter pressure to stick to those “tried-and-true” approaches. And, as others have noted, risk aversion also pervades our businesses, holding back companies from investing in R&D or technology adoption and commercialization. Business risk aversion is then a cause of our productivity and innovation challenges, and voter risk aversion is a barrier to solving them.

Yet, I don’t fully buy this as an overarching explanation. Voter coalitions can be mobilized to address some of these issues. We’ve seen that with the growing focus on competition policy and last year’s overhaul of the Competition Act that passed the House of Commons unanimously. Increasing competition has long been identified as a major part of solving our productivity challenges, and there has long been a voter consensus on that topic - you only need to look at past polling around wireless competition to see that. But it was only last year that we saw major reform.

Many of the potential demand-side levers discussed above are also not going to be make-or-break issues for governments. Shifting towards more strategic procurement or finally reforming SR&ED are not vote-movers. They don’t elicit heightened emotions in the way some of Sam’s examples from the UK do regarding drug use or property taxes. Fear of the electorate, then, is not irrelevant, but I don’t think it is an insurmountable barrier, at least on this policy file. 

If Sam’s explanations of the UK’s policy paradox have some overlap with Canada’s but don’t fully explain it, then what might?

One key explanation is that we’re too focused on the wrong level of government. Canada is one of the most decentralized countries in the world, yet when it comes to addressing innovation and productivity challenges, the policy community almost entirely defaults to talking about the federal government. We repeatedly call for new national strategies around innovation: again, and again, and again, and again. 

Yet where the rubber hits the road is local, in real places across the country. As William Lyon Mackenzie King put it, “If some countries have too much history, we have too much geography”. By not respecting that geography, and the diversity of the local economies and local conditions that make up Canada, we have erected a major barrier to addressing our innovation paradox.

This isn’t to say the federal government or national policies have no role —that would be ridiculous. Federal institutions and federal dollars clearly have important parts to play. But I think unless we do the hard work of deeply thinking about what Canadian decentralization and our dispersed geography mean for local innovation and productivity conditions and where the provinces need to step up and deliver, we will never move the needle.

Other barriers also play a role. While Canada is highly decentralized, I don’t think we can ignore the fact that the federal government itself is incredibly centralized in its decision-making. Former Clerk of the Privy Council Paul Tellier, among many others, has highlighted how the “centralization of everything in the PMO, is in the process of destroying the public service.” That centralization has constricted the ability of ministers and departments to make constructive moves on policy files that don’t necessarily have major political implications where a heavier PMO steer might be justified. This perhaps serves as the equivalent of the UK’s spending rules in promoting short-term policymaking.

We need to focus more on understanding and surmounting these barriers. If we don’t before you know it, it’ll be 2040, and one of today’s economics postgrads will be the Deputy Governor of the Bank of Canada, giving a speech calling for breaking the glass on the emergency of Canada’s productivity crisis.

Sam Freedman concluded his post on the UK’s policy paradox with this:

It's taken me a long time to realise it but ideas are overrated in policy. The real skill is figuring out how to make the ideas we already have happen. Finding ways round the structural barriers to good policy; correcting misperceptions about the causes of widely accepted problems; devising cunning ways to make unpopular but necessary policies palatable. It sounds less exciting than coming up with a big new idea, but it’s a lot more useful.

We need to listen to his advice and make sure the Canadian policy community is also focused on making the ideas and solutions we already have happen here.