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The Harry Kitchen Inaugural Lecture


Gov't transfers power upward in countervail fashion (EU, NAFTA) ... This was also the 'brain drain' era (because US incomes were way higher) ... – PowerPoint PPT presentation

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Title: The Harry Kitchen Inaugural Lecture

The Harry Kitchen Inaugural Lecture
  • Implications for Markets and Enterprise
  • By
  • Thomas J. Courchene
  • School of Policy Studies, Queens
  • and
  • Senior Scholar, IRPP
  • Trent University
  • November 15, 2007

  • 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
  • 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
  • IV Policy Blueprints
  • V Conclusion

  • 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

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
  • Arguably, need a Charter of H.C. rights for our
  • 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

Larger Study Governments/Governance
  • Glocalization powers transferred upward and
  • 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
  • Spending power may be able to come the rescue.
  • Global City Regions are key nodes in I-A
  • 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
  • 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

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
  • 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

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
  • Equals Globalization and the Informatics
    Revolution, but our terms will be KBE or
    Information Age (I-A)
  • GATT becomes WTO, way more intrusive of
  • 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

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
  • Schumpeterian Creative Destruction series of
    temporary monopolies superseded by new
    monopolists selling new products
  • Innovation requires that firms be subject to
  • For catch-up, can do this with existing skill
  • 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.

Markets and EnterpriseProductivity and
Innovation How Do We Fare?
  • Productivity rank 21st in OECD, 2nd lowest in
  • 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
  • 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.

Markets and EnterpriseForeign Direct Investment
  • 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),
  • 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.

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?

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
  • 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

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
  • 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.

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
  • 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
  • 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

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.

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

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
  • 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
  • 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.

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
  • 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
  • Bottom line Why are we forcing a trade-off
    between resources and manufacturing, or between
    the west and the center. We dont have to!

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
  • Infrastructure is important, but much of it will
    appear under the government component of the
  • We have already elaborated the taxation proposal.

Policy Blueprints
  • The burden of proof must not rest with the
  • 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

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,
  • 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

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.

  • 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

  • AND