Canada in the 21st Century Series

No. 11: Institutions and Growth — Framework Policy as a Tool of Competitive Advantage for Canada

by Ronald Daniels, University of Toronto, under contract with Industry Canada, 1998

Request this document

---

Summary

The paper examines the design of Canadian institutions in light of the modern challenges confronting the Canadian economy and it evaluates the broad, institutional lessons of modern growth theory for framework policy in Canada.

The first part of the paper canvasses the new institutional economics and sets out those principles of institutional design which are widely acknowledged among individuals and institutions advising developing nations as catalysts for economic growth. The key components of a competitive legal/institutional landscape include a stable government and currency, a strong but limited government, high investments in education, and a transaction- cost reduction orientation in framework policy. Not only have these principles been demonstrated as essential for growth in developing nations but they can also be effectively applied to the Canadian scene.

The second part reviews Canada's track record in framework policy over the past 10 to 15 years, highlighting changes that impact the neutrality of framework policy and comparing those changes to the principles canvassed in the second section. Overall, changes in the taxation system, competition law, intellectual property and trade policy have been largely consistent with the creation of distribution-of-power arrangements between and among various levels of government in order to create a stable political climate that is also responsive to the voice of the public. Nevertheless, there are a number of problems that must be addressed including the distortive effects of Canadian competition policy and the need to adopt competition enhancing policies in recently deregulated sectors.

The third part of the paper outlines the pressures currently being experienced in Canada. Challenges of globalization, demographic change, unstable and highly fractious inter-governmental relationships, and pressing fiscal constraints are all working to complicate the adoption of efficient framework poli-cies and corresponding institutions.

The fourth part applies the development theory principles and sets out a series of institutional recommendations designed to facilitate the adoption of a responsive framework policy for Canada. The paper makes the following recommendations:

• The creation of distribution-of-power arrangements between and among various levels of government in order to create a stable political climate that is also responsive to the voice of the public.
• The creation and maintenance of a strong, independent bureaucracy which is professional, merit-driven, resistant to corruption, and committed to broad public accountability. This expert bureaucracy will be especially important in the next decade as the state is forced to achieve significant reductions in public expenditures.
• A more rapid divestiture of Crown assets in order to achieve the goal of a more limited government. Canadian governments will have to invest greater energy in determining privatization priorities and then in constructing streamlined and effective instruments for implementing these goals.
• The creation of an elaborate institutional regime that supports a public/ private partnership in a range of different policy areas. Such a regime would be designed to develop an environment conducive to the transfer of services and activities from the public to the private sector.
• The continued acknowledgment of the importance and persistence of public goals and values in a setting of increased market reliance. Policy-makers must not lose sight of the central role for government in creating a foundation for market interactions that is perceived as legitimate.
• That the state promote and nurture citizen capacity for risk-taking. The existence of state-sponsored insurance distortions which thwart individual initiative must be overcome since citizen willingness to make economically rational investments in physical, financial, and human capital is what underlies an institutional regime oriented to the provision of neutral framework policy.

The conclusion of the paper notes the role of political forces in frustrating the adoption of value-enhancing institutional changes. Certain groups who will be subjected to concentrated losses as a result of the proposed changes can be expected to lobby vigorously for policies and arrangements designed to mitigate the impact of these changes. The key challenge for policy-makers is to develop mechanisms that address the costs of economic change without thwarting the capacity of markets to make those changes in the first place.

Canada in the 21st Century Series