Overly centralized federal government and “meek” civil service are unable to improve Canada’s productivity

Canada’s “meek” federal civil service is incentivized not to generate ideas or long-term economic strategy and lacks the operational capacity to help reverse the country’s productivity decline, says a prominent political scientist.

“The real problem in the public sector is it doesn’t like the risk of dealing with new technology and innovation because [it] might fail,” said Dan Breznitz (photo at right), University Professor and Munk Chair of Innovation Studies at the Munk School of Global Affairs & Public Policy at the University of Toronto.

 “We changed from a public service that was trained to come up with ideas, debate them publicly, then agree and come up with a solution. We now have a much more meek public service,” Breznitz said during a webinar presented by the Munk School.

The decline in the civil service’s expertise, capability and influence started about 30 years ago when Canada committed to a North American free-market trading system, said Breznitz, who’s also co-director of the Munk School’s Innovation Policy Lab.

Unlike the U.S., however, Canada failed to ensure there was real competition to create an actual, robust market in the country, he said.

In buying into a world view that basically said the market will take care of everything, Canada developed a public service “that actually does not have the ability to do any strategic thinking,” Breznitz said.

Instead, he said, politicians now set the goals and expect the public service to figure out a way to make them happen. In doing so, the public service’s expertise and capabilities decline and politicians want even more power and centralization.

Government now uses more external political advisors than ever – several hundred of them run as an organization from the Prime Minister’s Office (PMO), Breznitz said.

The increasing centralization of government also has diminished the power and influence of cabinet ministers, he noted.

People in the PMO – not the ministers themselves – choose the chief of staff for even the most important ministers. People in the Privy Council Office choose the deputies for the ministers.

“So the minister has no choice, either at the professional civil service level or with respect to their own staff,” said webinar moderator Janice Stein (photo at right), professor of political science and founding director of the Munk School of Global Affairs & Public Policy.

Breznitz said the situation is similar to what he found in China: two parallel organizations that try to run the country. Canada’s public servants don’t know who they should report to and in none of their departments or agencies is there a personal incentive to actually help Canada.

The federal government, like the federal public service, no longer has an effective operational capacity, he said. “Operational capacity is actually doing stuff, from [implementing] industrial policy to educational policy to housing policy. It’s not just writing a cheque.”

During the more than nine years that Justin Trudeau’s Liberals have been in power, Canada’s civil service has grown by more than 43 percent, according to Treasury Board data, even though the country’s population has grown by less than 15 percent in the same period.

The Canada Revenue Agency now has 55,000 employees and still can’t manage to answer half the phone calls it receives from Canadians, Breznitz said.

The government isn’t utilizing new knowledge, implementing new solutions and enhancing productivity, he said. It’s simply adding more people – “over-educated and over-skilled people” – to use the same old equipment because the workers are so skilled they can do just enough to prevent the whole thing from crashing down, he added.

This approach underlies the failure of both the public and private sectors when it comes to innovation, Breznitz said. Even though the country has a well-educated and highly skilled workforce and is extremely good at coming up with new ideas, both sectors fail to turn these inventions into innovations needed by Canadians and the rest of the world, he said.

Canada is “asleep at the wheel” in protecting IP, growing large firms

Based on international comparisons, Canada has one of the world’s best-educated workforces, from K through 12 and into post-secondary education, Breznitz said.

Looking at how the country educates the young, he said, one would think Canada’s vision is to have highly skilled, creative, confident Canadians who are educated to get the jobs that allow them to use their skills.

“Instead, we have highly educated, highly skilled Canadians – which we invest in – [who] are then used by the public service but especially by the private sector as a subsidy in order not to invest in innovation, not to invest in new capital, not to merge the talent with the new technology,” Breznitz said.

Canadian businesses are among the best in the world to earn the highest profit from for the lowest amount of risk, he said. "So they don't have to innovate. That's a system problem and it's something that the government should deal with."

Up until around 2000 Canada had companies, like Inco and others, in its resources sector that were highly innovative and did “massive R&D,” Breznitz said. But all these companies have been sold to foreign entities, he said. Inco, for example, was sold in 2006 to Brazilian mining company Vale.

“We are now in our resources sector where decisions are controlled by multinational corporations, some of them fully owned by foreign governments,” he said.

When Nortel and its intellectual property were sold in 2009 and 2011, there were efforts by Canadians to buy the company and keep its assets in Canada, Breznitz said. However, the federal government insisted on not only selling Nortel but all of its patents.

The U.S. Department of Justice intervened in the sale of Nortel's IP to prevent a reduction in competition in the smartphone market, Breznitz pointed out.

“[Nortel] was sold in such a horrific way that the U.S. Department of Justice said Canada couldn’t sell so much innovation and control of the telecommunications sector as if it doesn’t have consequence on global markets.”

Stein said public money supported Nortel’s R&D to create IP that was then sold in the private market to private buyers largely from outside of Canada. “That’s a double catastrophe.”

“Not having these [large innovative] companies headquartered in our cities is a tremendous cost to our urban infrastructure and our social infrastructure, because they champion philanthropic activities in the cities in which they’re in,” she said.

Losing such anchor companies incurs a social cost, because the most interesting jobs for the educated people Canada invests in aren’t found in Toronto, Vancouver, Montreal and other Canadian cities, Breznitz said. “If you want really interesting jobs in headquarters and learning how to run those companies, you don’t have that opportunity in Canada and you leave.”

Breznitz, author of the book Innovation in Real Places: Strategies for Prosperity in an Unforgiving World, said Israel and other countries have economic strategies and market frameworks to ensure that an innovative company and its IP supported by public money remain and grow in those countries, even if the company is sold to a foreign entity. But in Canada, he said, “We’re asleep at the wheel.”

Canadians need to make a decision about what we want to do, where we are now, and where we want the country to be in five or 10 years, Breznitz said.

Federal governments have failed to do that, he said. “Our fault as Canadians is we didn’t demand more of politicians, so they did whatever they did – which is nothing for 45 years.”

Canada needs an economic strategy and vision

Breznitz, who was a visiting economist with the federal Department of Finance for a year and a half until the end of 2022, was asked about Ottawa’s multi-billion investment in new electric vehicle battery manufacturing plants to be built by foreign companies.

“I was in government for a time. I and nobody else was aware that there was a process of creating industrial policy with a plan and decisions about the options, before we decided to give a huge amount of money to foreign companies to do a very specific set of actions,” he said.

Spending billions of public money on foreign-built battery plants “was just an investment strategy basically with decisions made in less than 30 days,” he said. “This is not how you do strategy. This is how you make deals and then regret them later.”

Innovation, Science and Economic Development Canada is supposed to be managing a market framework policy that promotes a competitive marketplace that protects consumers and  encourages innovation, “not just giving cheques to industries,” Breznitz said.

“When was the last time they did it [managing a market framework] seriously? And if we [as Canadians] don’t do that, why should the behaviour and the organizations change? They’re making a lot of money.”

While he was with the Department of Finance, Breznitz helped a team led by Finance Canada and Innovation, Science and Economic Development Canada design the proposed new Canada Innovation Corporation (CIC). The CIC would support businesses across all sectors to develop and protect IP, commercialize inventions and capture segments of global supply chains.

Ottawa in February 2023 publicly released the “blueprint” of how CIC would operate, committing to a budget of $2.6 billion over four years. However, with the Liberal government likely to be toppled this spring and polls indicating there’ll be a new Conservative government, the CIC is likely dead in the water.

Canada needs to understand what its comparative and competitive advantages are and focus on how best to leverage these areas and sectors, Breznitz said.

For example, the critical minerals needed for the clean energy transition will require a 10- to 15-fold increase in mining activity. If these minerals are mined with current technologies and the existing global business structure, “the environmental catastrophe will never be fixed,” he said.

However, Canada could focus on developing innovative and less destructive mining technologies, equipment and processes and reap billions of dollars each year by exporting these innovations to the world, Breznitz said.

Similarly, Canada’s forest sector – like that in Finland – could focus on using the forests to manufacture value-added products rather than simply selling timber and buying back such products from other countries at much higher prices.

Other opportunities exist in medicine, such as making precision drugs and developing patient-tailored treatments, he said. Canada’s agricultural sector and energy sector also have similar opportunities for targeted innovation and exports.

Canadian startups will continue going to the U.S. because of the greater venture capital pool and more supportive business environment south of the border, “and I don’t see this changing any time soon,” Breznitz said. “I think we need to, instead of constantly looking at the U.S., look at other countries like Taiwan, Finland, Denmark and Switzerland as a model of how we can compete.”

Canada also could grow its economy by eliminating interprovincial trade barriers, Breznitz said. He cited one case where 32 different provincial agencies were needed to approve a single product before it could be sold across Canada.

“How many companies do we lose because it’s easier to sell to the whole of the U.S. than it is to sell to Quebec?” he asked.

Bernstein agreed, saying: “We could compensate for almost any conceivable Trump tariff if we would just reduce interprovincial [trade barriers].”

Canadians shouldn’t be shocked that U.S. President Donald Trump wants to impose tariffs because he did it before during his first term, Breznitz said.

But because Canada doesn’t have an economic strategy and a vision, instead of deciding what the country is going to do and how it will get there, politicians are now pleading with Trump not to hurt Canada too much “until we figure out what we want to be,” he said.

Canada in some ways is the world leader in “crony capitalism,” with oligarchies like the big banks deciding on the banking rules, Ontario’s car insurance industry deciding the rules for car insurance, and so on, Brezntiz said.

“I don’t see the system as it is changing by itself, unless a huge number of Canadians demand it or the system has a crisis.”

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