By Philip Cross, July 26, 2023
In the past decade, Canada had its slowest per capita GDP growth since the 1930s, due largely to lacklustre exports and a sharp drop in business investment. Bad government policies have played a significant role, but this slide towards stagnation increasingly reflects a hostile environment for business that undermines our economy’s dynamism.
Canadian governments claim without exception to be pro-growth. And, to be fair, over the years they have adopted many of the policies economists have recommended to boost incomes, including free trade deals, high levels of formal education, carbon and consumption taxes, and repeated stimulus to research and development. But Canada’s lagging economic performance shows these policies are not enough. Free trade deals don’t ensure export competitiveness if a country’s culture does not support innovation and entrepreneurship. And most government policies provide at best a one-time boost to incomes, when sustained economic growth requires a culture that relentlessly drives innovation year after year.
Governments in Canada also like to think of themselves as pro-business. They tout their pro-business bona fides by pointing to generous subsidies to favoured firms (most evident this summer in the tens of billions of dollars to battery manufacturers) and extensive government regulations and barriers to internal trade that protect entrenched interests. But such actions are actually the antithesis of supporting capitalism. They undermine public confidence in competition and raise doubts about whether the inequality capitalism produces is justified or earned, leading to calls for higher taxes on firms and the wealthy that further reduce lower long-term growth. Such catering to special interests not only is costly and inefficient but cultivates “a culture that undermines the spirit of aspiration and discovery that is required for dynamism” in the words of Edmund Phelps, Nobelist and growth theorist.