January 22, 2019

By Mike Moffatt

My recent move to an environmental think-tank might seem unusual. My career as both a policy researcher (Chief Innovation Fellow for the Government of Canada, Canada 2020, the Mowat Centre and the Lawrence National Centre) and as a professor (at Ivey Business School, where I teach a course on political risk in foreign direct investment) has been focused on issues around innovation, trade, and regional economic development. This makes a think-tank with an environmental focus the perfect spot for continuing this work. I am excited to be the Senior Director of Policy and Innovation at Smart Prosperity, working with a team of researchers on the intersection of the following three big questions.

1) What are the policies needed to accelerate Canadian economic growth?

I agree with my good friend Armine Yalnizyan, who has written that slow economic growth (or “slowth”, as she has coined it) will become the “new abnormal” for Canada. Over the past few decades, Canadian growth has been aided by a number of factors including favourable demographics, rising labour force participation by women, an increased proportion of workers with post-secondary education, and soaring commodity prices; we cannot count on these in the future.

Optimists point to increased “innovation” as a driver of future economic growth (while simultaneously recognizing the social and economic disruptions this would cause). While I agree that increasing the rate of growth multifactor productivity (a reasonable proxy for innovation) is both desirable and necessary to maintain increased living standards, I take the contrarian view that, unless there is a substantial economic policy shift in developed countries, we are likely entering an era of reduced innovation, and that the next forty years will be less economically disruptive than the last forty years. This just amplifies the need to focus our attention on ensuring our policy mix promotes both the generation and capture (within Canada’s borders) of economic rents from innovation. 

Despite my thesis that innovation is likely to slow (which deserves a much longer piece), there is no question that the economic rents from innovation have risen, due to enhanced IP protections and increasing network externalities, as explained (by example) in Alec Ross’ excellent book The Industries of the Future:

Before Uber there was in Milan, Italy, in Lyon, France, two or three mini-car companies that used to compete. The owner of that company would be worth 1 million or 2 million bucks. He was a rich guy in the local community. You had that in every city in Europe. They’ve all ceased to exist. The same thing will happen all over the world. You will still have drivers. But that’s the most unskilled job in the line. The rest of the money will flow to Uber shareholders in Silicon Valley. So a huge chunk of the Italian GDP just moved to Silicon Valley. With these platforms, the Valley has become like ancient Rome. It exerts tribute from all its provinces. The tribute is the fact that it owns these platform businesses.

At Smart Prosperity, I will be working on the innovation-related policies Canada needs to meet both its economic and environmental goals. Which leads to the second big question.

2) What are the policies needed for Canada to accelerate greenhouse gas (GHG) emission reductions?

I teach my students that for complex problems, it is often helpful to work backwards (using tools like pre-mortem analyses) when developing strategies or policies. Let’s suppose we live in a future where the world has managed to reduce GHG emissions to the levels necessary to keep global warming at 1.5 or 2°C, while still experiencing economic growth and enhanced living standards. What was needed to get us there? And in that world, what should Canada’s strategy have been?

We know in such a world that there must have been significant levels of innovation (so some countries must have managed to avoid the problem of stagnating innovation).  Even if we assume far wider adoption of existing technologies (particularly in developing countries), this would not lead to large enough reductions in GHG emissions, even in the most optimistic scenarios. For us to reach the target, there must have been a suite of new technologies developed and deployed.

Now what’s the best strategy for Canada in such a scenario? The conventional wisdom is that, since less than 2 percent of global emissions happen within Canada’s borders, we should simply free-ride and let other countries do the heavy lifting. That would be incredibly misguided given that we’re also in an era where a country’s prosperity is, in part, determined by its ability to create and capture value from intellectual property.

Ultimately, we need to acknowledge that Canada’s actions on GHG have impacts on the emission levels in other countries. There is an understanding that our reductions could increase emissions in other countries (through carbon leakage) and we need well-designed policy to minimize this effect. What is often overlooked is how emissions in Canada can decrease overseas emissions through the creation of innovative new technologies.

In crisis comes opportunity, and as a country we need to recognize the business and economic opportunities created by the need to reduce greenhouse gas emissions. There is a significant role for public policy to create the conditions for entrepreneurs to generate this value and ensure that this value is “captured” within Canada. These conditions include creating a robust domestic market for needed innovations (using tools from carbon pricing to procurement), but also ensuring our tax, regulatory, skills, trade, competition, etc. policies meet the needs of a 21^st century economy where intellectual property generates significant economic rents.

3) What are the policies needed to ensure the benefits of innovation are widely distributed?

The economics benefits from innovation are unlikely to be equitably shared across Canadian society, particularly if we do not consider distributional impacts when designing policy. In particular, innovative industries tend to cluster in large cities (see Moretti’s New Geography of Jobs), creating regional haves and have-nots. Of course, this does not apply to all industries. Innovation in agriculture and agri-food can create both economic and environmental benefits that are widely distributed. While government can correct some financial inequality through redistribution, it cannot correct for inequality of opportunity, so policy design with an eye towards predistribution is vital.

The question of “who benefits” cannot be ignored. Along with exploring the policies needed to accelerate both Canadian economic growth and greenhouse gas emission reductions, this question will motivate our work on innovation at Smart Prosperity.