Canada's Culture Myth: Getting Tangible about Canada’s Intangibles Gap

By Laurent Carbonneau
CCI Director of Policy and Research

If you spend enough time studying Canada’s economic performance, someone is bound to tell you, a bit regretfully, “At some level, it’s a culture problem.”

I have always found this answer unsatisfying. If the answer to Canada’s sluggish productivity growth and the widening gap with the U.S. in the wake of the long hangover after the Great Financial Crisis is somehow deeply rooted in the ineffable human spirit … then what are we even doing here, really?

But luckily for us, I think this thought-terminating cliché is also basically wrong. It’s a thin shroud of mystery applied to choices we make every day that hold us back from a more innovative economy, greater prosperity, and stronger public services like education and healthcare.

Professor Horatio Morgan at the University of Waterloo has a new paper out that does important work demystifying our economy. By taking a close look at Canadian value chains, history, and institutions, he argues that what Canadians chalk up to cultural distinctions with the US are the products of events and decisions that happened in the real world instead of in our hearts and minds.

Morgan isn’t the first to do this. Daron Acemoglu and James Robinson’s Why Nations Fail is a great global view on how institutional architecture matters for a country’s economy. Robin Naylor’s dry-sounding but fascinating The History of Canadian Business, 1867-1914 dives deep into the Canadian picture (and from which I draw some details further down).

It’s a very liberating idea once you process it. Yes, the tradition of all dead generations weighs like a nightmare on the minds of the living — but it doesn’t have to!

Canadian leaders made a lot of consequential choices in the years immediately after Confederation, and we continue to live with the consequences of those choices. Morgan points to three in particular: patent laws, bankruptcy laws and our financial system’s fixation on staples.

The first factor: Canada’s patent laws started from the idea that the Canadian industrial economy was to essentially function as a staging ground, where American technology was deployed to produce goods for British imperial markets. British and American investors were thinking this way at the time, and Canadian political leaders held the same view. Americans couldn’t apply for Canadian patents except through Canadian agents, and in order to be granted a patent they had to make commitments to set up shop in Canada. This requirement was eventually eliminated.

The branch-plant-ification of Canadian industry followed quite naturally. These early choices meant that Canadians didn’t invest in the kinds of industrial research and industry-focused education that was common in the United States. By 1908, Canadian inventors made up only 16% of patent grantees. Universities and colleges focused on liberal arts and the traditional professions (i.e. medicine, theology, and law) and they got generous tax breaks which technical colleges didn’t get. This certainly didn’t help Canada’s supply of practically-minded, entrepreneurial graduates.

The second factor: Our early bankruptcy laws were also very punitive to entrepreneurs and debtors in general. These laws were largely inherited from Britain, and enthusiastically maintained by Canadian landowning elites who were more concerned about sustaining the debts of their tenants. Punitive measures for debtors could and did include imprisonment. From 1880 to 1919, Canada had no federal bankruptcy law at all. As you can imagine, this could make interprovincial trade complicated, to say nothing of making a failed business venture extremely costly. Morgan’s paper alludes to “waves of indebted people who fled Canada for the United States” in 1880.

The third factor: Canada’s capital market was fixed on extracting as much natural resource and farming wealth as possible. In fact, our whole economy was geared heavily toward agriculture and natural resource extraction, to recoup huge investments in the heavily financialized railroads owned by British and other international creditors.

Canadian banks and financiers had little reason to give advanced manufacturing in Canada much of a look when railroads and natural resources were right there.

The combination of incentive structures — devaluing Canadian entrepreneurship and a capital market uninterested in industry — meant that we, as a country, essentially missed the boat on the industries of the second industrial revolution. The intense research and development, combined with capital-intensive investments in things like chemicals, rubber and steel defined the economies of the US, Germany and other big industrial powers and set the stage for so much of the knowledge-based economy.

Morgan’s paper also makes the point that Americans had institutions that pushed them to get in on the ground floor of important global value chains like automobiles. To the extent that Canadians have participated, we’ve mostly done so in upstream functions like raw materials and assembly.(This is where Canada is going to have to be careful while navigating 21^st century trends like ‘friend shoring’ and ‘nearshoring’ because they could mean just sticking us with the parts of an industry that are low-value compared to the good stuff that ends up in the United States).

All of this is to say that what we might see as cultural differences can often be traced pretty directly back to concrete choices made by people, mediated by institutions and markets. That doesn’t make changing our trajectory easy. But if we see the structure of our economy now as resting on choices made by people who are long dead, then we’ve already taken the first step.

Estonia was, for a long time, a tiny agricultural outpost of the Swedish, Russian and Soviet empires. And South Korea was once a colony of Imperial Japan. Both countries have managed to mold themselves into rising innovation powerhouses despite much more difficult conditions.

We can’t keep telling ourselves the culture myth – we need to recognize our structural challenges for what they are, and get to work.

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