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									Government and Globalization:
What Kind of Public Service Does Canada Need in Order to Thrive in the Knowledge Economy?

September 2007

GOVERNMENT AND GLOBALIZATION:
WHAT KIND OF PUBLIC SERVICE DOES CANADA NEED IN ORDER TO THRIVE IN THE KNOWLEDGE ECONOMY?

September 2007
Michael Lister

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The Public Policy Forum The Public Policy Forum is an independent, not-for-profit organization aimed at improving the quality of government in Canada through better dialogue between the public, private and voluntary sectors. The Forum’s members, drawn from business, federal and provincial governments, the voluntary sector and organized labour, share a belief that an efficient and effective public service is important in ensuring Canada’s competitiveness abroad and quality of life at home. Established in 1987, the Forum has earned a reputation as a trusted, neutral facilitator, capable of bringing together a wide range of stakeholders in productive dialogue. Its research program provides a neutral base to inform collective decision making. By promoting more information sharing and greater links between governments and other sectors, the Forum helps ensure public policy in this country is dynamic, coordinated and responsive to future challenges and opportunities. Public Policy Forum/ Forum des politiques publiques 1405-130 rue Albert Street Ottawa, ON K1P 5G4 Tel.: (613) 238-7160 Fax: (613) 238-7990 www.ppforum.ca

About the Author This report was prepared by Michael Lister, Senior Research Associate, Public Policy Forum. The views expressed in this report are those of the author alone.

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Introduction
National prosperity is created, not inherited…Ultimately, nations succeed in particular industries because their home environment is the most forward-looking, dynamic and challenging. Michael Porter, “The Competitive Advantage of Nations,” Harvard Business Review, 1990

Though its core values and traditions were set out in the mid-19th century, the Westminster model of public service has adapted over time to changing economic circumstances and policy directions. In Canada, the post-war era of government intervention in the economy and society was a Golden Age of influence for mandarins. The “Washington Consensus” of smaller government, privatization, and lower taxes in the Reagan-Thatcher-Mulroney era had its public administration equivalent in the New Public Management. The global economic landscape continues to evolve and the federal public service continues to adapt. In particular, it has been suggested that we are in the midst of a “great transformation” to a world in which all the globally competitive firms will be headquartered in a limited number of locations.1 Globalization and the rise of global value chains has put countries in competition for those high-value, knowledge-intensive activities that are key to prosperity. The Canadian business community is adapting to or realizing the implications of this new reality; but what of the public service? Does its role need to change in this new environment? In short, what kind of public service does Canada need in order to thrive in the global, knowledge economy? In fall 2007, the Public Policy Forum is holding roundtable discussions with business leaders across the country to discus this question. The lens for the discussion is the public service as an organization: What kinds of characteristics will it need? What kinds of attributes should it have? How will it need to operate in order for it to contribute to Canada’s competitive advantage on the global stage? The questions are not about which policies Canada should adopt; rather, they are meant to prompt discussion about what the public service of the future should look like in order for Canadians and Canadian businesses to thrive in a global knowledge economy. The purpose of this paper is to provide a common frame of reference for the roundtable discussions. The first section describes the context for reform in the public service and changes in the global economy. The second section summarizes what the experts are saying about the state of Canada’s economy and its challenges going forward. The third section looks at the role of the public service as a key part of Canada’s competitive advantage, including a review of the evidence for the fundamental role of institutions in generating and sustaining national wealth. Finally, the paper turns to the implications of
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Roger Martin and Gordon Nixon, “A prescription for Canada: rethink our tax policy,” Globe and Mail, July 1, 2007.

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the evolving economic landscape for the federal public service, with examples from other jurisdictions providing illustrations of some of the possible pathways forward. Global Value Chains and the Knowledge Economy By most measures Canadians are in an enviable position: part of an elite group of countries that are prosperous and democratic, their governments run by an honest, efficient, and professional public service. Canada consistently rates highly on international measures of governance and of public institutions.2 Over the past ten years, it has outperformed other G-7 countries on most measures of national economic success, including economic growth, employment, and public finances.3 And for the most part Canada has also managed to successfully translate economic success into well-being (the First Nations population being the most glaring exception). In 2006, Canada ranked 6th on the U.N. Human Development Indicators, higher than the United States despite having a lower average income.4 And yet, signs of anxiety about the future abound. Policy analysts and pundits worry about a “prosperity gap” and the declining competitiveness of the Canadian economy.5 More than half of Canadians now feel that their quality of life will be worse in 25 years, and a majority also believe that the world is more dangerous now than five years ago. At the same time, though the public service has undergone recurring bouts of (self-imposed) reform, Canadians seem increasingly disenchanted with their governments. Trust in government and perceptions of public sector ethics have declined since the 1960s, despite a modest recovery from a nadir in the 1990s.6 What is behind these seemingly contradictory trends—success on the one hand, reform/ angst on the other? In the broadest sense, both are responses to the sweeping changes that are transforming societies around the world, and which by now are familiar: the revolution in information technology; globalization, in the sense of increasingly interconnected societies and economies; demographic change—in particular an ageing and more diverse population; global migration; a less deferential and trusting citizenry with rising expectations of government; and a more pervasive (and intrusive) mass media. For the bureaucracy, one result of these broad trends has been a proliferation of complex issues—such as climate change, social exclusion, and public health issues. These problems tend be long-term, have many causes, and enjoy no clear agreement about what
See Governance Matters 2007: Worldwide Governance Indicators, 1996-2007, World Bank , 2007. http://info.worldbank.org/governance/wgi2007/home.htm 3 “Canada’s Financial Performance in an International Context,” Annex 2, The Budget Plan 2007: Aspire to a Stronger, Safer, and Better Canada, Government of Canada, March 2007. 4 UN Human Development Report 2006, Beyond Scarcity: Power, Poverty and the Global Water Crisis, http://hdr.undp.org/hdr2006/statistics/. 5 See. e.g. Agenda for Canada’s Prosperity: Report on Canada 2007, Institute for Competitiveness and Prosperity, March 2007; and How Canada Performs: A Report Card on Canada, Conference Board of Canada, June 2007. 6 Frank Graves, “Towards a 21st Century Public Service,” PPF Breakfast Presentation, November 9, 2006.
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a solution would look like or how it could be achieved. They do not map neatly onto the silos into which we have organized government departments. Many require behavioural change. This comes at a time when the policy levers available to bureaucrats have become more diffuse. Governments increasingly have to share the “public policy dance floor” with a growing array of other actors, including non-governmental organizations, think tanks, advocacy groups, lobbyists, ministerial staff, political consultants, and the media. All this is taking place in an environment of increased transparency and scrutiny. Citizens and interest groups have access to vast amounts of government information via the Internet, and governments, as a result “have less control over who knows what and when.”7 In short, the new problems are “seemingly intractable”;8 the old tools are out of date. For private firms, the new environment is characterized by a number of interrelated changes: increasing international trade; a growing number of multi-national firms with global supply chains that distribute production around the world; a seismic shift in the location of manufacturing and backroom operations to developing economies, with the rise of China, India and others as emerging economic powerhouses as a result; and a change in emphasis in the developed world from making goods, to providing services and to creating new ideas, technology and creative content.9 The key change is that companies are increasingly fragmenting the full range of activities needed to bring a good or service from conception to market—rather than producing entire products within one country. With production broken into smaller parts, companies can then produce or buy each input for a particular good or service from wherever it can be made or provided most efficiently. According to the Conference Board of Canada, the evidence indicates that slicing production into smaller pieces raises productivity, which in turn raises living standards. “This does not mean working harder but smarter,” they reported in March 2007. For example, by buying information technology components globally, U.S. companies lowered their prices by 30 percent, raised productivity, and boosted the country’s gross domestic product (GDP) by $230-billion (USD) from 19952002. Specialization in production and trade has also resulted in higher Canadian incomes and employment.10 The result is that there is competition for those parts of the value chain that can moved from country to country—whether goods such as electronic parts, or services such as engineering. Much of the debate thus far in Canada and elsewhere has focused on the “offshoring” of jobs to countries with lower wages. The evidence suggests these fears are overblown. According to the Department of Foreign Affairs and International Trade (DFAIT), “jobs lost to offshoring represent only a very small fraction of total job turnover in a given year and occupations that are claimed to be at risk of being offshored
Donald Savoie, “The public service: the glue is coming unstuck,” Policy Options, March-April 2005, p. 53. 8 Guy Lodge and Susanna Kalitowski, Innovations in Government: International Perspectives on Civil Service Reform, Institute for Public Policy Research, April 2007, p. 7. 9 See, e.g., Richard Florida, The Rise of the Creative Class, New York: 2002. 10 Danielle Goldfarb and Kip Beckman, Canada’s Changing Role in Global Supply Chains, Conference Board of Canada, March 2007, p. 1.
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continue to grow in Canada.”11 In fact, the real competition will be for those high-value activities that require specialized knowledge and that are the key to prosperity in a knowledge economy—such as research and development, and the activities associated with corporate headquarters, including management, finance, legal, accounting, and so on. The drivers of prosperity in this “post-industrial” world are thus changing.12 “We have moved,” according to Thomas Friedman, “from a world where the key to wealth is how you seize, hold and exploit territory to a world in which the key to wealth is how your country or company amasses, shares, and harvests knowledge.”13 Knowledge, ideas, and creativity are the new means of production—giving rise to the term the “knowledge economy,” coined in the 1960s but popularized in the 1980s by management guru Peter Drucker.14 The public policy implications of the shift to a global knowledge economy are profound. First, it has blurred the lines between economic and social policy. In many countries social and labour market policies emerged haphazardly and independent of one another; and they were often seen to serve different needs. But in an economy in which high value work has come to be defined by knowledge and creativity, social policies such as education matter more than ever. The relatively recent economic Source: Knowledge matters: skills and learning for Canadians, success of Singapore, Hong HRDC, 2001 Kong, and Taiwan, for example, has been attributed in part to several generations of investment in education and training at all levels.15 As MIT’s Lester Thurow has described, “If capital is borrowable, raw materials are buyable and technology is copyable, what are you left with if you want to run a high-wage economy? Only skills, there isn’t anything else.”16 Perhaps the most compelling piece of evidence for the importance of the knowledge economy is the
Canada’s State of Trade: Trade and Investment Update-2007, Foreign Affairs and International Trade Canada, p.4. 12 Daniel Bell, cited in Florida, The Rise of the Creative Class, p. 196. 13 Thomas Friedman, The Lexus and the Olive Tree: Understanding Globalization,1999, p.175. 14 Florida, The Rise of the Creative Class, p. 44. 15 John Llewellyn, “Tackling Europe’s Competitiveness,” Oxford Review of Economic Policy 12 (3), 1996, pp. 87-96. 16 Lester Thurow, quoted in Thomas Courchene, “Canada as a ‘State of Mind’ in the Knowledge Era,” Policy Options, July-August 2007, p. 59.
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increasing number of jobs in developed countries that require formal and advanced schooling. By this definition, knowledge workers are the fastest growing group in the workforce. In 2001, they accounted for a third of the U.S. workforce and are projected to make up close to 40 percent of the workforce of all rich countries in the next 15 years.17 In Canada, jobs for university graduates almost doubled over the course of the 1990s.18 According to competitiveness expert Michael Porter, a productive and growing economy requires not only rising skill levels, but other social conditions as well: safe working conditions, healthy workers in decent houses in safe neighbourhoods, low levels of pollution, a sense of opportunity, and the assimilation of under-employed citizens into the workforce.19 The UK Treasury under Gordon Brown recognized this and was a leader in linking social investments to economic outcomes. “There is a wider incentive in economic terms for the nation to tackle deprivation,” Mr. Brown said as Chancellor of the Exchequer. “In a modern economy where skills are essential to production, denying opportunity is an unacceptable inefficiency that holds back the nation’s potential prosperity…”.20 Ontario’s Institute for Competitiveness and Prosperity recently came to the same conclusion in a paper that analyzed the relationship between inequality, poverty, and productivity.21 Overall, the new economic landscape has swept away ideological arguments about the size of government that were prevalent in the 1970s and 80s. More important than size is the quality of government intervention. “[T]here is only one way that any country has gotten rich:” according to Roger Martin, “through a substantial level of productive government involvement in the economy.”22 A recent study of the shrinking middle class worldwide by economist Steven Pressman suggests that countries with active government policies (such as Canada and Norway—two of the few countries whose middle class has not declined over the past 30 years) are the most successful at mitigating the inequalities that a global economy seems to produce. “Contrary to earlier economic belief,” wrote Doug Saunders in a review in the Globe and Mail, “the countries that are most competitive in a globalized economy are those with the most robust taxand-spend programs.”23 Second, in the knowledge economy, success will be defined by the extent to which countries and regions not only develop but also attract knowledge workers. “Access to creative and talented people is to modern business what coal and iron were to steelmaking,” according to Richard Florida, new director of the Centre for Jurisdictional
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“The New Workforce,” The Economist, November 1, 2001, pp. 8-11. “Advanced Skills for the Knowledge Economy,” Background Paper on universities and Canada’s Innovation Strategy, Association of Universities and Colleges of Canada, June 3, 2006. 19 Michael Porter, “The Microeconomic Foundations of Competitiveness and the Role of Clusters,” Presentation, Communication Information Technology Organization of Mississippi, May 2000. http://www.cit.ms/archive.asp. 20 Gordon Brown, quoted in Duncan MacLennan, “Remaking Neighbourhood Renewal: Towards Creative Neighbourhood Renewal Policies for Britain”, Caledon Institute of Social Policy, February 2006. 21 Prosperity, inequality, and poverty, Working Paper #10, Institute for Competitiveness and Prosperity, September 2007. 22 Roger Martin, “Eat or Be Eaten,” The Walrus, October 2007, p. 46. 23 Doug Saunders, “The Secrets of Canada’s World-Leading Middle Class Success”, Globe and Mail, August 4, 2007.

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Advantage and Prosperity at the Rotman School of Management.24 Pointing to the way in which high-tech, knowledge-based, and creative industries tend to cluster in certain places—theatre in New York City, movies in Hollywood, software in Silicon Valley— Florida argues that “place has become the central organizing unit of our time”. It used to be that people went where the work was. Now, it’s the other way around, as HewlettPackard CEO Carley Fiorina explains: “Keep your tax incentives and your highway interchanges; we’ll go where the highly skilled people are.”25 What kinds of environments attract knowledge workers and why? According to Florida, they gravitate to places that have the kinds of lifestyle attributes they are looking for: cities that are not only centres of creativity but also places that are authentic, unique, diverse, tolerant, and open to new ideas. Regions that embody these attributes will attract the “Creative Class”, as he calls it, and will hold a competitive advantage over regions that do not. To him, this new dynamic reflects changes in social attitudes to work, leisure, and community—all based on a shift to an economic and social system based on human creativity. In DFAIT’s latest annual Canada’s State of Trade report, the Department’s Chief Economist asked the key question that arises from this brief summary of the implications of the global knowledge economy: “When each stage of the value chain can be located anywhere in the world based on where they can be performed most efficiently, what activities will locate in Canada?”26 The answer, according to Richard Florida, is that knowledge-intensive economic activity is increasingly clustering in locations with a competitive advantage, which he sees as a combination of people and place. Globalization, far from spreading out economic activity evenly, has in fact made the world more “spiky”, at least in terms of high-value activities: talented people group together in a limited number of regions in the world where they work for innovative companies that dominate their industries. Roger Martin, Dean of the Rotman School of Management at the University of Toronto and Gordon Nixon, president of Royal Bank of Canada, argued recently in the Globe and Mail that this was the key aspect of a global transformation that rivals the Industrial Revolution of 200 years ago. “[W]e see the transformation proceeding in one direction only—to a spikier world in which all the globally competitive firms in all industries are headquartered in a limited number of locations.”27 The next section takes a look at how Canada is faring in this new world order. Economic Check-up
We are still in the gifted class among nations, but we are slowly being pushed to the back of the class. We need to recognize the factors that are causing us to lose ground in the areas that are critical to our ability to compete globally. Mission Possible: Sustainable Prosperity for Canada, Conference Board of Canada, November 2006

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Florida, The Rise of the Creative Class, p. 6. Florida, The Rise of the Creative Class, p. 6. 26 Anthony F. Burger, Canada’s State of Trade: Trade and Investment Update 2007. 27 Roger Martin and Gordon Nixon, “A Prescription for Canada: rethink our tax policy,” Globe and Mail, July 1, 2007.

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In 1991, Michael Porter analyzed Canadian economic competitiveness in a paper called “Canada at the Crossroads.” At the time, he concluded that while the Canadian economy had performed well historically due to a rich endowment of natural resources, a welleducated population, and a wealthy neighbour to the south, this situation was “likely to erode and produce a decline in standard of living unless Canada and its firms chose a distinctly different path.”28 Since that time, Canada’s economic performance has been mostly robust, on the strength of drastic improvements in the country’s macroeconomic situation. From 2000 on, Canada has been a top performer among G-7 countries in annual economic growth. Unemployment has fallen to its lowest level since 1974. Exports as a share of Gross Domestic Product (GDP) are second only to Germany in the G-7. The currency has returned to levels not seen in a generation. Inflation is largely under control, with the exception of Alberta where the booming energy sector is experiencing labour shortages.29 Corporate profits reached record highs in 2004.30 The federal government has run nine consecutive annual budget surpluses. It has used some of this windfall to pay down the national debt, which the OECD projects to decline to just over 25 percent of GDP in 2007—the lowest in the G-7, though still higher than Australia, Sweden, and Ireland.31 And at just over $42,000 (CAD), Canada’s Gross Domestic Product per capita—a broad measure of a country’s standard of living—was second only to the United States among G-7 countries in 2006. “Altogether,” according to the OECD, “Canadians enjoy one of the highest living standards in the OECD, a result that reflects the pay-off from good macroeconomic management and the structural reforms put in place.”32 The fundamentals of the Canadian economy seem solid. And yet, in 2001 when Porter revisited his earlier analysis of Canadian competitiveness he concluded that despite Canada’s spectacular macroeconomic turnaround, “Canada took the lesser path from the crossroads in 1991. There has not been a clear and relentless focus on upgrading productivity and pursuing global competitiveness.”33 Other experts have since echoed his concerns, including the Conference Board of Canada and Ontario’s Institute for Competitiveness and Prosperity. At the root of their concern is Canada’s relative decline in standard of living. In 1990, Canada’s GDP per capita was the fifth highest in the world; by 2005 it had fallen to 11th, surpassed by Australia, Denmark, Iceland, Ireland, the Netherlands, and Norway. 34 In terms of overall GDP, Canada remains in 8th spot, but other countries are catching up, including Spain, Mexico, and Brazil. These trends show that though it was once sufficient to benchmark ourselves against other G-7 countries, in many instances the global leaders are now smaller countries. “We are the best in the G-7
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Michael Porter and Roger Martin, “Canadian Competitiveness: A Decade After the Crossroads,” Rotman School of Management, 2001, http://www.rotman.utoronto.ca/research/competitive1.htm. 29 Phillip Preville, “How to fix Canada—On the brink,” MacLean’s, November 27, 2006. 30 “Financial statistics for enterprises,” The Daily, Statistics Canada, February 25, 2005. 31 “Canada’s Financial Performance in an International Context,” pp. 310-316. 32 OECD Economic Surveys: Canada 2006, OECD 2006, p. 8-9. 33 Porter and Martin, “Canadian Competitiveness,” p. 8. 34 OECD Factbook 2007: Economic, Environmental and Social Statistics, OECD 2007. www.sourceoecd.org/factbook.

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in many areas,” notes Robert Wright, deputy minister of Finance, “but the fact is that there are a number of countries that are even better. Australia, Sweden, Spain, Ireland: we have to benchmark to the winners.”35 What are these countries doing better? The most glaring statistic is productivity or output per worker, measured as the ratio of GDP per employee. In 2006, Canada’s labour productivity for the whole economy was 82.5 percent of U.S. levels, down from 89 percent in 2000. This translates into an annual income gap with the United States of over $14,000 (USD) per person. In addition to the U.S., there an increasing number of countries that are outperforming Canada in terms of productivity performance, including Germany, Ireland, Italy, the UK, Sweden, the Netherlands, Denmark, Belgium and Austria; France, Luxembourg, and Norway outperform both Canada and the United States.36 Between 1960 and 2004, Canada fell from third among developed countries in productivity to seventeenth.37 Productivity hinges broadly on investments in things like technology, research and development, and human capital. In particular, raising productivity depends upon innovation—whether of products, processes, organizational design, or marketing techniques.38 The Conference Board of Canada has compared various countries’ performance on the creation and diffusion of knowledge (e.g. scientific articles published in peer-reviewed journals, number of patents filed); transformation of knowledge (amount of venture capital as a percentage of GDP), and the use of knowledge through commercialization (revenue from new or improved goods and services) and concluded that Canada’s performance on innovation is “stunningly poor,” ranking 14th out of 17 OECD countries.39 An important factor in this dismal performance is lagging investment in R&D, which remains below the OECD average, particularly from the business sector.40 Experts and pundits have not had much success turning productivity into a top of mind issue for Canadians. A poll conducted for MacLean’s magazine in March 2007 showed that 72 percent of Canadians were satisfied with their standard of living; only 12 percent thought that closing the prosperity gap was a high priority.41 Journalist and author Andrea Mandel-Campbell argues that that it is time for Canadians to “wake up” to the realities of the global marketplace. Avrim Lazar, President of the Forest Products Association of Canada, chalks up Canadians’ complacency to confusion over “neighbourhoods”. Canada is “a good place to live,” he wrote in Policy Options July 2007:

Robert Wright, “Improving Canada’s Business Environment and Competitiveness,” Opening Address, Public Policy Forum seminar, March 2007. 36 Canada’s State of Trade—2006, p. 21. 37 Andrea Mandel-Campbell, Mexicans Don’t Drink Molson, p. 62. 38 38 OECD Economic Surveys: Canada 2006, pp. 73-92. 39 How Canada Performs: A Report Card on Canada, Conference Board of Canada, June 2007, pp. 2-4. 40 Canada’s State of Trade—2006, p. 63. 41 Peter Shawn Taylor, “In Pursuit of Prosperity,” MacLean’s, March 19, 2007.

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But we make the mistake of thinking that we work here too. We do not work in Canada; we work in the global marketplace...and this is a very different environment where they will steal your pacemaker, they will not say ‘sorry’ and they will take your job.42

The current government seems to have recognized Canadians’ ambivalence and has sent out correspondingly mixed signals on the subject—on the one hand, they have shied away from publicly using terms such as “competitiveness” and “productivity”; on the other, they released Advantage Canada in December 2006, which set out an agenda for improving Canada’s economic outlook, and a Science and Technology Strategy in May 2007, which provides a blueprint for helping turn knowledge into products, services and production technologies that will improve Canadians’ wealth and health. Some have questioned whether improved productivity is even a desirable goal, equating it with greater income inequality. In fact, productivity, social investments, and the quality of public institutions are all positively linked. The World Economic Forum’s (WEF) annual Global Competitiveness Report posits a link between a country’s public sector and private sector performance. The Index is an overview of the factors critical to productivity and competitiveness, and consists of three sub-categories. The first captures the “basic requirements” of competitiveness—public institutions, infrastructure, macroeconomic conditions, and health and primary education. Under public institutions, the WEF measures “the various ways in which the government interacts with economic agents in the domestic economy, particularly the business sector”.43 This includes respect for property rights, public sector ethics, government efficiency, and rule of law and public safety. In 2006, Canada’s institutions ranked 21st in the world. Nordic countries— Finland, Denmark, Iceland—occupied the top three spots. Overall, on the basic requirements of competitiveness, Canada was 13th. The second sub-category captures a series of “efficiency enhancers”, including higher education and training, market efficiency and technological readiness; on these measures, Canada fell from 11th to 15th in the world. The third sub-category captures “innovation factors” such as business sophistication and innovation. According to the WEF these are the factors most critical to developed economies. This was Canada’s lowest ranking of the three sub-categories, at 16th. Overall, Canada has slid down the WEF’s Index in recent years, coming in at 16th in 2006 (down from 13th in 2005)—consistent with trends in declining relative GDP per capita and productivity. The Nordic countries provide an example of the importance of both strong public institutions and proactive innovation platforms to economic performance. They have been consistent top performers on the WEF’s competitiveness rankings in recent years as a result, in part, of the transparency, accountability, and effectiveness of their public institutions (Figure 1, below, represents the close relationship between competitiveness rankings and the quality of public institutions). The International Institute for Management Development (IMD) in Switzerland issues an annual competitiveness report
Avrim Lazar, “Making Canada World Competitive: The Forestry Industry as a Case Study,” Policy Options, July-August 2007, p. 51. 43 Augusto Lopez-Claros, et. al., “The Global Competitiveness Index: Identifying the Key Elements of Sustainable Growth,” Global Competitiveness Report 2006-2007, World Economic Forum, September 2006, p. 6.
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of its own and in 2006 it compared the relative contribution of countries’ economic performance and government effectiveness to their overall competitiveness: in other words, which countries’ governments are hindering or facilitating economic growth. Similar to the WEF’s findings, 2006’s top government performers according to IMD were Finland and Denmark; Canada’s government was considered to have made a “balanced contribution,” in the same league as the Netherlands and Sweden.44

Source: Global Competitiveness Index 2006, World Economic Forum, p. 7

There are conceptual and measurement difficulties associated with indices comparing national competitiveness, including the fact that many of the indicators are based on subjective perceptions. They should be taken with a grain of salt. Some economists, such as Paul Krugman, have even questioned the validity of “national competitiveness” itself as a concept—do nations really compete with one another in the same way that firms do? In fact, however, since “competitiveness” entered public policy discourse in the late 1980s and 1990s, it has increasingly turned into a proxy for productivity. The WEF, for example, defines national competitiveness “as the set of factors, policies and institutions that determine the level of productivity of a country.” Likewise, Harvard’s Institute for Strategy and Competitiveness (headed by Michael Porter) defines national competitiveness in terms of how productive a country is in producing goods and services, which ultimately determines national prosperity.45 A competitive economy is thus one that makes the best use of its resources and will likely grow faster in the long-term. Countries compete in that they choose policies to promote higher living standards. And if Richard Florida is correct and the world is becoming “spikier” with innovative companies
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Stephane Garelli, “The World Competitiveness Landscape in 2006,” IMD World Competitiveness Yearbook 2006, International Institute for Management Development, May 2006. 45 http://www.isc.hbs.edu/econ-natlcomp.htm

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clustering in regions with a competitive advantage in skilled and creative people, then countries compete to develop highly skilled people, to provide the most attractive lifestyle environments for these highly-skilled workers, and to foster the right business environments for the high value activities of global companies in which these people participate. Concern about Canada’s economic competitiveness may be part of a broader existential angst about Canada’s uncertain place in the world. The country spent the 1990s looking inward at fiscal and constitutional issues. Thanks in part to a string of budget surpluses and booming energy exports, however, the federal government has reinvested in both the military and official development assistance (though not in DFAIT), reflecting an attempt to re-assert Canada’s international relevance. But trends do not favour Canada. The future of NATO is uncertain. And the rise of emerging economies will affect the relevance and/or composition of the G-8. Both were venues that allowed Canada to ‘punch above its weight’ on the international stage. Meanwhile, smaller countries such as Australia, the Netherlands, and Norway are increasingly occupying niche roles international affairs, while others such as Denmark and Finland are seen to be more proactive in supporting and stimulating the competitiveness of their economies. The public service: a key part of Canada’s competitive advantage? Why do indices of national competitiveness measure the quality of public institutions? And what does this tell about the kinds of attributes Canada’s public service will need to contribute to Canada’s competitive advantage? The answer to the first question comes from a recent strand of a huge body of research that seeks to account for and understand the drivers of national economic success. As most parts of the globe started at about the same level prior to the industrial revolution, the difference today is a reflection of the fact that some countries and regions have managed to sustain high rates of economic growth over the past two hundred years, while others have not or have grown at a slower rate. To take one example, in 2003 Canada had a per capita income that was about 107 times higher than Burundi’s. This despite the fact that Canada appeared marginal during the colonial period—the British apparently seriously considered taking Guadeloupe over Canada as reparations for the Seven Years’ War in the 18th century.46 Some countries have made relatively recent gains, but in general this has only reinforced the divergence between rich and poor countries: a February 2007 Senate report on Sub-Saharan Africa notes that in the 1960s, newly independent Kenya and Zambia had comparable living standards to South Korea and Singapore. Since that time, the East Asian countries have surged ahead while sub-Saharan Africa has struggled to achieve sustained economic growth: “Today,” the Senate Report notes, “the Gross National Income (GNI) per capita

William Easterly and Ross Levine, “Tropics, Germs, and Crops: How Endowments Influence Economic Development”, Journal of Monetary Economics 50 (1), January 2003.

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of Kenya is $480 (USD) compared to $14,100 in South Korea (i.e. 29 times more); the GNI of Zambia is $400 compared to $26,000 in Singapore (i.e. 67 times more).”47 Economic growth is complex and cannot be reduced to one variable. Geography, demographics, geo-politics, and culture all play a role in defining a country’s economic prospects. A forthcoming book by Gregory Clark, for example, suggests that the key factor behind the Industrial Revolution was the emergence of a set of middle-class, commercial values and behaviours that appeared first in Britain: non-violence, literacy, long working hours, and a willingness to save.48 In recent years, however, economists have amassed a significant body of empirical research that points to the importance of another variable above all others: differences in the quality of public institutions. Based on a proliferation of qualitative and quantitative data measuring various aspects of governance and institutional quality, the broad thrust of the research is that “governance matters, in the sense that there is a strong causal relationship from good governance to better development outcomes such as higher per capita incomes, lower infant mortality, and higher literacy.”49 The World Bank’s conception of good governance is similar to the indicators on which the WEF measures public institutions: the process by which governments are selected, monitored and replaced (“Voice and Accountability”); the capacity of the government to effectively formulate and implement sound policies (“Government Effectiveness” and “Regulatory Burden”); and the respect of citizens and the state for the institutions that govern economic and social interactions among them (“Rule of Law”). “Government effectiveness” is focused on the inputs for good government—it combines perceptions of the quality of public service provision, the quality of the bureaucracy, the competence of public servants, and the independence of the public service from political pressures into a single grouping. “Governance, as measured by these indicators,” the World Bank concludes, “matters a great deal for economic outcomes.”50 And though there is ongoing debate among experts, according to one recent review of the literature, “the empirical evidence seems strongly in favour of a positive and important effect from institutions to growth.”51 While this conclusion has been heralded by the development community, it does not provide much guidance on what actually works and why, in specific circumstances. Institutions are embedded in specific contexts. What comes first—institutional or social change—can be hard to pin down. As Harvard’s Dani Rodrik notes: “Telling poor
Overcoming 40 Years of Failure: A New Road Map for Sub-Saharan Africa, The Standing Senate Committee on Foreign Affairs and International Trade, February 2007, p. 9. 48 Gregory Clark, A Farewell to Alms : A Brief Economic History of the World, Princeton, June 2007. 49 Kauffmann et al., “Governance Matters,” Policy Research Working Paper 2196, World Bank Development Research Group, October 1999, p. 1. 50 Kauffmann et al., “Governance Matters,” p. 18. 51 Morten Bennedsen et al., “Institutions and Growth: a Literature Survey,” Centre for Economic and Business Research, May 2005. See also, Dani Rodrik, “Getting Institutions Right,” Harvard University, 2004, http://ksghome.harvard.edu/~drodrik/papers.html; and, Hall and Jones, “Why Do Some Countries Produce So Much More Output Per Worker Than Others?” The Quarterly Journal of Economics 114 (1), 1999, pp. 83-116.
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countries in Africa or Latin America that they have to set their sights on the best-practice institutions of the U.S. or Sweden is like telling them that the only way to develop is to become developed—hardly useful policy advice!”52 Moreover, the importance of institutions tends be pronounced over the long-term. Though growth may be difficult to sustain without quality institutions, a country with scarce resources might not get the most ‘bang for the buck’ in the short-term by focusing on large-scale administrative reform. Nevertheless, among the world’s rich countries, the relative performance of a countries institutions—including the bureaucracy—can either act as a drag on the economy or be a source of competitive advantage. For example, the WEF notes that Italy’s downward competitive position may reflect “deep-seated institutional problems, which are shown in low rankings for variables such as the efficiency of government spending, the burden of government regulation, and more generally, the quality of public sector institutions.”53 Argentina, Venezuela, and Brazil all suffer from institutional shortcomings that undercut their economic performance and overall competitiveness; Chile, meanwhile, enjoys solid institutions that perform above those of the EU on average and which underpin the country’s rapid economic growth. The answer to the second question—what are the implications for the public service going forward—is less clear. Some outlines, however, are beginning to emerge. The WEF index, in particular, reflects the fact that different factors are more or less critical at different stages of a country’s economic development: for all countries, getting the basics of governance and public institutions right is critical to economic success; once these are in place, however, other factors come into play. For developed countries, innovation in particular is a key factor that drives improved living standards. The federal government has taken steps over the past ten years to address Canada’s productivity and innovation performance, including lowering taxes and increasing public funding for science and technology. And yet, not much has changed. According to Guy Stanley at McGill’s School of Management, part of the answer to this riddle lies not in policy prescriptions but in governance. Canada needs a coordinating institution, he argues, to “re-align science, industry, and national prosperity or competitiveness objectives…Already a price is being paid for failing to match the governance and national economic management skills of our competitors.”54 Stanley recommends the creation of a federal agency to oversee, track, and accept accountability for Canada’s innovation performance, along the lines of the Finnish Tekes organization. Tekes, the Finnish Funding Agency for Technology and Innovation, is the main government financing and expert organization for research and technological development in Finland. It finances industrial R&D projects as well as projects in universities and research institutes. Tekes “joins up” industry, science and government to cooperate on improving Finland’s innovation capacity. It links a portion of academic
Dani Rodrik, “Goodbye Washington Consensus, Hello Washington Confusion?” Harvard University, January 2006, p. 13. http://ksghome.harvard.edu/~drodrik/papers.html. 53 “The Global Competitiveness Report 2006-2007: Country Highlights,” World Economic Forum, http://www.weforum.org/en/fp/gcr_2006-07_highlights/index.htm 54 Guy Stanley, “Upgrading Canada’s national innovation system: more than money required,” Policy Options, July-August 2007, p. 69.
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research with industry needs, and makes continued research and commercialization funding contingent upon achieving results, such as more patents, more internationalization, and expanded market share. The key differences in this model, according to Stanley, are the coherence of the funding strategy, with a focus on building organizational capability in Canada; and the emphasis on performance accountability— “if you don’t achieve the specific targets,” he writes, “the funding disappears.”55 Andrea Mandel-Campbell cites the example of the southern Finnish city of Tankere as a local example of a “mutually supportive, virtuous circle of industry, academia and government.”56 Local business leaders were involved in shaping municipal policy; the university produced skilled engineers; and research was tailored to the needs of industry. According to Mandel-Campbell, part of the challenge in applying this model to Canada is that Canadians are ambivalent about the role of government in facilitating wealth creation. While this may be true, in fact there are a number of examples in Canada of linking government support, education, and company output: • The mining and energy industries invest significantly in R&D and have links to universities. The civil aviation industry centred in Montreal links university research and degree programs to firms with the aim of commercializing scientific research and preparing highly qualified personnel.57 The Canadian Automotive Partnership Council (CAPC) was formed in 2002 as a forum for industry, government, labour and the research community to discuss common issues and identify a course of action to strengthen Canada's automotive industry. It includes senior executives from industry, labour and academia, as well as the industry and economic development ministers from the Governments of Canada, Ontario and Quebec. The Government of Ontario responded in 2004 to one of CAPC’s priorities by investing $500-million to train highly skilled workers, support research, and improve infrastructure.58 Through its strategy, the government claims to have leveraged more than $7-billion in new investments “that will create thousands of jobs and help position Ontario's auto industry for long-term competitiveness.”59 Similarly, a Steel Partnership Council made up of industry, union, and government representatives was formed in 2005 to come up with a strategic vision for the sector; unfortunately soon after the council was formed, the Canadian steel industry succumbed to foreign takeovers of Dofasco, Ipsco, Algoma Steel, and most recently, Stelco. The Steel Partnership Council was formed precisely to come up with

•

•

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Stanley, “Upgrading Canada’s Innovation System,” p. 74. Mandel-Campbell, Mexican’s Don’t Drink Molson, p.# 57 Guy Stanley, “Upgrading Canada’s national innovation system,” pp. 69-73. 58 “Province of Ontario, Canada Strengthens Auto Sector: $500 Million To Train Highly Skilled Workers And Attract Investment,” News Release, Ministry of Economic Development and Trade, Government of Ontario, April 14, 2004. 59 “Canadian Automotive Partnership Council Discusses Competitiveness Issues,” News Release, Industry Canada, May 7, 2007.
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strategies that would help Canadian companies compete globally and according to fomer Dofasco CEO Don Pether, “it had the right approach” but it “didn’t get off the ground soon enough.”60 • Government-sponsored industry sector councils play a role in bringing industry, workers, and learning institutions together to meet emerging skills requirements, address labour shortages, and overall, to “enable skills development to keep pace with the evolving economy.”61 Finally, the business-led Networks of Centres of Excellence (NCE) foster research partnerships between research institutions, government, industry, and non-profit institutions. NCEs are nation-wide, multidisciplinary and multisectoral partnerships that connect research with industrial know-how and strategic investment; they are funded by the federal government’s three granting agencies (SSHRC, CIHR, NSERC). Budget 2007 provided $11-million to help create new networks, to be proposed and led by the private sector, in order to accelerate the commercialization of Canadian ideas and knowledge.62

•

Other governments have responded to the competitiveness challenge of the knowledge economy in a more overarching way. Ireland, for example, created the National Competitiveness Council in 1997 to report to the government on key competitiveness issues facing the Irish economy together with recommendations on policy actions required to enhance Ireland's competitive position. The Council is made up of representatives from the business community, labour, the public service, and academia. In summary, there is widespread agreement on: • The drivers of change of the economic landscape: the emergence of a global knowledge economy and the rise of global value chains. The diagnosis of Canada’s economic performance: underperforming, with continued improvement dependent on enhancing productivity, stimulating innovation, and encouraging foreign direct investment. Some of the key policy options: including investments in education and training, and improving Canada’s business environment.

•

•

There is a gap, however, when it comes to the question of the kind of public service Canada needs in order to thrive in this environment. What kinds of characteristics should it have? Wat kinds of mechanisms does it need? And what skill sets should public servants have? The following section suggests a number of essential attributes of a public service that seeks to contribute to Canada’s competitive advantage on the global stage.
60 61

Shawn McCarthy, “How Ottawa let the steel industry slip away,” Globe and Mail, August 28, 2007. 2000 Speech from the Throne, cited in “Sector Councils,” accessed on September 12, 2007 at http://www.hrsdc.gc.ca/en/hip/hrp/corporate/sector/sectorcouncil.shtml. 62 The Budget Plan 2007, p. 205.

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The public service of the future should be… Collaborative The examples provided here suggest that the public service needs to have the capacity and inclination for strategic collaboration among all sectors in order to respond to new and emerging economic realities. In his research on national industrial policies, Dani Rodrik, of the John F. Kennedy School of Government, has come to a similar conclusion:
The right model for industrial policy is a model of strategic collaboration and coordination between the private sector and the government with the aim of uncovering where the most significant bottlenecks are, designing the most effective interventions, periodically evaluating the outcomes, and learning from the mistakes being made in the process…This way of thinking about industrial policy ensures that we view it not as a list of policy instruments, as in the traditional model, but as a process of discovery. The process focuses on learning where the binding constraints lie and on eliciting information on the private sector’s willingness to invest subject to the removal of those bstacles…The appropriate way to judge the success of the policy is then to ask: have we set up the institutions that engage the bureaucrats in an ongoing conversation with the private sector, and do we have the capacity to respond selectively, but also quickly and using a range of policies, to the economic opportunities that these conversations are helping identify?63

The federal government has established ongoing relationships with stakeholders in various sectors of the economy, through sector councils, NCEs, and targeted partnership councils. But are these the right kinds of mechanisms? Are they enough? And are they coherent or do they work at cross purposes? The need for an ongoing conversation between bureaucrats and the private sector suggests other questions as well. Is the public service isolated from or attuned to the business community, and in what direction is the relationship heading (is it getting better or worse)? Does the current climate around accountability encourage or discourage open lines of communication between public servants and outside stakeholders? Is there too much churn within the public service—i.e. is it difficult to establish a ‘corporate memory’ within the public service on business issues? Does the public service have a close knowledge of business issues? Overall, does the public service ‘get it’ when it comes to the government’s role in helping Canada succeed in a global economy? Finally, many predict that workers will increasingly move between sectors over the course of their careers, rather than staying in one job—in that context, is the federal public service sufficiently ‘porous’ to outsiders? Does the culture of the public service support or hinder the movement of people between sectors?

63

Dani Rodrik, “Normalizing Industrial Policy,” DRAFT, Harvard University, August 2007, http://ksghome.harvard.edu/~drodrik/papers.html (emphasis in original).

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A facilitator Beyond engaging and working effectively with all sectors, the public service of the future will need to be better at enlisting Canadians’ expertise in solving the most pressing social and economic issues of the day. In the past, public engagement has tended to focus on consultation: government representatives listening impartially to a range of stakeholders on a given issue, then retreating behind closed doors to make a decision. This model is outdated, according to Don Lenihan, CEO of Crossing Boundaries and PPF Fellow: “Government does not have to present itself as the impartial listener. It should engage in the process more as a facilitator. As such, its primary task should be to get the various 64 stakeholders to begin engaging one another, rather than competing for influence.” Public engagement through deliberation can facilitate behavioural change by transferring some of the responsibility for action and social change from government to communities, organizations and citizens. The UK think tank DEMOS noted the potential of transferring responsibility to, and empowering citizens for action, in a study on Re-Imagining Government for the 21st Century:
The idea of a radically more democratic state has a powerful moral appeal…but it is also immensely practical. Democracy helps governments to secure buy-in to change, helping share responsibility with the people for economic and social success. A more democratic society ought to be better at identifying the challenges its citizens face, and mobilising those citizens to play an active role in their resolution.

Such an approach might go a long way to reconciling criticisms of Canada’s supposed complacency with respect to its declining standard of living. “Values,” the report goes on to say, “should not just be an add-on to economic growth. They should be what shapes growth and makes it legitimate and desirable.” 65 Until a convergence of opinion emerges around Canada’s economic competitiveness and the role of government, it will remain a challenge for policy makers to achieve traction on the issue. But is the public service prepared and equipped to share information and to cede control to citizens on this scale? Governments, like corporations, have traditionally been organized around vertical chains of command; and in the Westminster model, the accountability framework depends to a certain degree on this vertical organization. What is the role of the M.P. in this vision of a public service that is actively engaged with and facilitating citizen input and decision-making? Don Tapscott and Anthony Williams’ work on mass collaboration suggests that the public service will need to adapt to changing realities. In their book Wikinomics: How Mass Collaboration Changes Everything, Tapscott and Williams show how people are collaborating across offices, departments, and continents using the Internet and open source software to facilitate mass collaboration in online communities. Business has
Don Lenihan, “Public Engagement in a Multi-Stakeholder Environment: Transforming Government Relationships,” Workshop Outline, Crossing Boundaries/ Public Policy Forum, September 2007, pp. 2-3. 65 Simon Parker and Dunan O’Leary, Re-imagining Government: Putting people at the heart of New Zealand’s public sector, DEMOS, 2006, pp. 17, 37.
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started to heed this phenomenon and some have opened up their processes to take advantage of “expanded peer production,” including Procter and Gamble, which invites outsiders to find solutions to research challenges. This is a new model of production and problem-solving, based on community and self-organization. According to the authors, this new way of organizing will eventually displace the traditional corporate structures as the economy’s primary engine of wealth creation: “Today, companies make their boundaries porous to external ideas and human capital outperform companies that rely solely on in their internal resources and capabilities.”66 The same might be said of governments. Attuned to Global Issues Many of the key domestic issues going forward—the environment, security, and the economy—have international causes and implications. And Canada’s interactions with global trends is only increasing. Canadian companies operate globally. Canadian NGOs work around the world. Canadians are increasingly diverse and have family ties that span the globe. These trends make the public service more important than ever, according to Kevin Lynch, Clerk of the Privy Council:
In such a fast paced world, countries like Canada with our relatively small and very open economy have to understand the global trends, global issues, global opportunities better than our larger neighbours…In this profoundly globalized world, success depends on agility and flexibility. It also depends on our ability to learn and adapt business strategies and government policies from others, to leverage policy ideas, and to Canadianize best global practices. 67

Is the public service sufficiently attuned to global issues and trends and their implications for Canada? Does it have the right people and mechanisms to understand and react quickly to the rapidly changing external environment? Does it anticipate problems and devise the right solutions?68 Is it open to new ideas and global best practices? Conversely, is the public service too insular and ‘Ottawa-centric’? By 2017—Canada’s 150th birthday—roughly one-fifth of Canadians will be a visible minority, according to Statistics Canada.69 This poses challenges for labour market integration, for example; but diversity in a profoundly global world could also be a source of competitive advantage. In this context, does the public service adequately reflect the diversity of the Canadian population? Is official bilingualism a source of competitive advantage and how does it enhance and/ or hinder the public service’s global outlook?

http://wikinomics.com/book/index.php Kevin Lynch, “Making Public Service Renewal Real,” Remarks by the Clerk of the Privy Council and Secretary to the Cabinet, The 2006 APEX Symposium, May 30, 2006. 68 See, Jim Balsillie, “Why International Policy Matters,” Globe and Mail, September 7, 2007. 69 “Study: Canada’s visible minority population in 2017,” The Daily, Statistics Canada, March 22, 2005.
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Agile Thomas Friedman wrote that if globalization were a sport, it would be the hundred-metre dash—over and over and over.70 The impact of globalization, however, is deeper than increased levels of trade, travel, and communication. As Thomas Homer-Dixon, Director of the Trudeau Centre for Peace and Conflict Studies at the University of Toronto, has pointed out, there has been a “relentless increase in the connectedness, complexity, pace, and scope of all humankind's activities,” including technologies, institutions and interactions: the population is bigger than ever and continues to grow rapidly; our ability to disrupt global climate and ecological systems is unprecedented; and the systems we have created, whether for international finance, energy, or industrial agriculture, to name a few, are more complex, interdependent, and volatile than ever before. The possibility of “synchronous failure,” in this context, arises from “simultaneous, interacting stresses acting powerfully at multiple levels of these global systems,” which create a cascading effect: imagine a sharp climate shift, an international financial crisis, and a string of major terrorist attacks, all occurring in quick succession.71 In this context, the speed with which the public service can react to emerging issues is critical. Moreover, if getting the relationship between the public and private sector is important, so too is the public service’s capacity to act strategically on what they hear. Is the public service sufficiently ‘agile’ to perform these functions? Is it able to partner effectively and quickly with other jurisdictions? Or is it hamstrung by a web of rules that inhibits innovation, creativity, and initiative? Do the accountability, performance evaluation, and ‘managing for results’ regimes encourage appropriate risk-taking and learning from mistakes?

70 71

Thomas Friedman, The Lexus and the Olive Tree: Understanding Globalization, (New York), 1999. Thomas Homer-Dixon, “Synchronous Failure: The Real Danger of the 21st Century,” The Robert J. Pelofsky Jr. Distinguished Lecture, Elliot School of International Affairs, George Washington University, December 4, 2002.Retrieved from http://www.homerdixon.com/talksspeeches.html, September 13.

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