Industrial Strategy

Industrial Strategy

Industrial strategy is a term that generally refers to any attempt by government to apply a coherent and consistent set of policies that are designed to improve the performance of the ECONOMY. These policies are frequently directed at the manufacturing sector, but an industrial strategy could also center on the performance of a number of other sectors in the economy, ranging from resource production to services. Industrial strategies are oriented towards correcting imbalances in the economy's performance and involve the assumption by government of a prominent role in facilitating or effecting economic change. Sometimes the means deployed are very direct (what is now called "interventionist"), but attempts to restructure an economy can be undertaken using a laissez-faire, free-market approach.

While the debate about industrial strategy is fairly recent, the concept of using the powers of government to shape the economy is not new. In the late 19th century there were major efforts in Canada to build an integrated national economy through tariff protection, the construction of the transcontinental railway and the encouragement of immigration to settle the West. Each of the initiatives complemented the others to yield a national framework for development that became known as the NATIONAL POLICY.

The intention was to encourage manufacturing in central Canada through the use of tariffs. Markets for the manufactured goods would be expanded by creating a wheat-based agricultural economy in western Canada through settlement policies (see IMMIGRATION POLICY). The western wheat economy would, in turn, provide the agricultural exports needed to support the new western population and to pay for eastern manufactured goods. All this economic activity would be tied together by a transcontinental railway.

Like many economic strategies, the National Policy was driven by an external imperative: the rapid growth of the US economy after the Civil War, which was expected to create pressures for the annexation of the Canadian West and for north-south economic integration (see CANADIAN-AMERICAN RELATIONS). The politicians of the time feared that if political means were not used to promote the emergence of a national transcontinental economy, Canada's future as an independent country would be seriously compromised.

The current interest in industrial policy has also been prompted by external factors, most notably the rapidly changing environment of INTERNATIONAL TRADE. By the end of WWII, Canada had emerged as a middle-level power both militarily and economically. In the postwar era, Canada's economic strengths lay in resource exports (principally to the US) and in the expansion of manufacturing (primarily through foreign-owned subsidiaries oriented towards domestic, as opposed to export, markets).

However, by the early 1960s the manufacturing sector was under pressure. Europe had fully recovered from war and was expanding its industrial base. Moreover, the US dominated the international trading system. Thus, while international demand for traditional resource products such as pulp and paper and minerals was still strong among Canada's industrialized trading partners, international trade in manufactured goods became more competitive and the manufacturing sector began to experience increasing difficulties. This resulted in a national debate about the future prospects of the Canadian ECONOMY, including the issue of whether Canada would revert to its former status as a resource producer or whether it would succeed in expanding its manufacturing base.

Even in the early 1960s there was a fairly well-developed national consensus about the nature of the problem. Manufacturing firms in Canada were internationally uncompetitive because they tended to be oriented towards the domestic market, because they were not sufficiently concerned with export activity, and because they were poorly managed, did little in the way of innovation or research and development (R & D), and often operated at a level of production too low to allow economies of scale (ie, lowering of the average costs of production).

Debate revolved around the origins of this problem and the possibility of solutions. The majority of economists (but by no means all) argued that the root of the difficulties facing the manufacturing sector lay in tariff protection (a remnant of the National Policy) and advocated a steady reduction in the level of tariff protection enjoyed by Canadian firms and a fuller integration of the Canadian economy into the international economic system, eg, through active government support for international agreements and institutions that promoted the liberalization of world trade, such as the GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT). An increase in competition, generated by an increase in imported products, and wider export opportunities for domestic producers were expected to improve the health of Canadian industry.

Another school of thought stressed the structural problems of the manufacturing sector, such as the relatively small size of most firms, excessive concentration on domestic as opposed to export markets, and a failure to give sufficient emphasis to industrial design and innovation. From this perspective, one of the major causes of the problems in the manufacturing sector was the high level of foreign ownership. Foreign ownership, it was argued, had encouraged firms to increase the purchase of parts and services from their parent firms, to rely on innovations from abroad, and to concentrate on the domestic market so as to minimize export competition with the parent firm or its other foreign subsidiaries.

Economists of this school stressed the need to reduce the level of foreign ownership in the economy and to improve the competitive capability and export orientation of Canadian-owned companies through various forms of government assistance, ranging from support for R & D to the promotion of leading sectors of industrial growth. These economists rejected the use of tariff reductions or FREE TRADE as a means of restructuring the Canadian economy, arguing that a weak Canadian economy would be adversely affected by trade liberalization. Instead, they advocated a degree of restructuring before tariff barriers were lowered to ensure that Canadian industry would be strong enough to take advantage of new international markets and would be able to compete with increased imports. Restructuring in this context meant the development of an industrial strategy focused on Canada's key economic sectors.

Over the years, the federal government's approach to the question of industrial policy has embodied both of the approaches outlined above. During the last 30 years tariffs have been gradually reduced, and Canada has been a strong supporter of the GATT system and of other attempts to liberalize international trade. In the mid-1960s a modified form of sectoral free trade in automobiles manufactured in Canada and the US was introduced, allowing the major North American car manufacturers to import and export cars free of duty, provided that certain minimum production levels were maintained in both countries (see CANADA-US AUTOMOTIVE PRODUCTS AGREEMENT).

More recently, the Conservative administration of Prime Minister Brian MULRONEY launched an intensive set of negotiations with the US, with the aim of establishing a bilateral free-trade agreement. This initiative, based on a desire to ensure access for Canadian industry to an increasingly protectionist US market, was seen by some of its advocates as providing, through increased trade and competition, a powerful instrument for restructuring the Canadian economy and making it more efficient.

The resulting Canada-U.S. Free Trade Agreement signed in 1987 was subsequently expanded to include Mexico, and potentially other western hemisphere countries, as the North American Free Trade Agreement in 1992. However, federal (and provincial) industrial policy has involved more than trade promotion and tariff reductions. During the 1960s the federal government took a number of steps designed to improve the structural characteristics of Canadian industry. In 1963 the Department of Industry was created and was charged with assisting Canadian manufacturing firms to improve their competitive capability. This department was then fused with the Department of Trade and Commerce to form the Department of Industry, Trade and Commerce (ITC) in 1969. The 2 departments developed a number of industrial assistance programs designed to encourage investment, to improve firms' marketing capacities both at home and abroad, and to increase corporate spending on R & D.

The 1960s also witnessed the emergence of a number of specialized federal departments or agencies, designed to improve the government's management of the economy, deal with emerging technologies, or help industry expand in foreign markets (eg, the Departments of Employment and Immigration, Communications, Regional Economic Expansion, the Ministry of State for Science and Technology and the Export Development Corporation). While all of these initiatives were intended to facilitate industrial development and sometimes to encourage industry to restructure, there was little, if any, attempt to lend these initiatives coherence through the development of an industrial strategy.

During the 1960s and early 1970s, however, there was strong pressure to develop such a strategy. A number of studies commissioned by the federal government raised the problem of foreign ownership in the Canadian economy (seeFOREIGN OWNERSHIP AND THE STRUCTURE OF CANADIAN INVESTMENT, TASK FORCE ON). These reports, and others, also suggested that a broader approach to the problems of the structure of the Canadian manufacturing sector was required. In addition, the growing importance in international trade of the newly industrializing countries of the Third World, the emergence of HIGH TECHNOLOGY (an area in which Canadian industry was weak) as a major factor in international trade, and increased uncertainty in the international trading system (caused by a worldwide increase in protectionism and the subsidization of exporting industries) seriously challenged Canadian firms in their efforts to expand export markets and to fight off import competition. These factors encouraged the federal government to deal with the problems of the manufacturing sector in a more comprehensive manner.

In 1974 an explicit attempt was made to control the flow of FOREIGN INVESTMENT into Canada through the activities of the FOREIGN INVESTMENT REVIEW AGENCY. Later a number of other measures were taken in an effort to address specific structural problems in individual industries. Grants for R & D and investment were offered to the AEROSPACE INDUSTRY, and the government took over the country's 2 leading airframe manufacturers to ensure the development of new aircraft projects. Restructuring initiatives or financial assistance programs were also undertaken in other sectors, ranging from clothing and footwear to forest products.

Although these diverse initiatives were not part of an overall industrial strategy, several federal agencies, such as the Privy Council Office (PCO) and ITC, made attempts to design one in the 1970s; but no agency was able to design a strategy that met with general acceptance within the federal bureaucratic system. In fact, the ITC initiative, which had started as an ambitious effort to construct a strategy encompassing a large number of public policy objectives, gradually evolved into a more modest industrial consultation process that concentrated on sectoral competitiveness.

Despite these failures, the industrial strategy issue kept re-emerging. When the Liberal government of Pierre TRUDEAU was returned to power in 1980, there was another attempt to formulate an industrial strategy, inspired by the government's NATIONAL ENERGY PROGRAM. This attempt also failed, partly because of growing American objections to Canadian energy and foreign-ownership policies. In the end, the federal government did succeed in developing a strategy, which appeared in an economic development White Paper published with the 1981 federal budget (Economic Development for Canada in the 1980s). This paper assumed that resource developments both in eastern and western Canada would be the future engine of growth, and that these resource developments would both provide industrial benefits for central Canada and expand and diversify economic activity in the regions. Unfortunately, this strategy also came to grief with the collapse in energy prices in 1981-82.

In part as a reaction to these failures, by the mid-1980s many observers, including the Royal Commission on the ECONOMIC UNION AND DEVELOPMENT PROSPECTS FOR CANADA (the Macdonald Commission), were advocating a less interventionist approach to industrial strategy - an approach that would place a greater reliance on market forces to shape the competitive structure of the Canadian economy. In their approach to industrial policy in the 1980s and 1990s subsequent Conservative and Liberal governments seem to be broadly following this advice. While not abandoning the use of industrial assistance programs, these governments have significantly reduced their scale and scope and have tended instead to rely more heavily on market-oriented industrial policies, such as deregulation (especially in the transport sector), privatization of CROWN CORPORATIONS (eg, CANADIAN NATIONAL RAILWAYS, PETRO-CANADA, AIR CANADA, etc), the pursuit of free-trade agreements and other policies designed to improve the private sector's ability to adapt to a rapidly changing international economy (eg, export promotion and development, training and labour market policies and support for technology transfer and research and development).

Particular emphasis is now placed on ensuring that the regulatory and legislative frameworks that governments put in place to manage economic activity are sensitively designed to encourage competition and innovation so that firms are able to cope with more open domestic markets and are able to perform well in export markets.

The idea of exercising leadership on the future direction of the country's industrial development still seems to have some attraction to governments when they deal with those parts of the economy where innovation and industrial change have been very rapid and where the influence of the policies of other foreign governments are very strong. In such high technology areas as AEROSPACE and environmental industries and the TELECOMMUNICATIONS and information highway sectors, the federal government has taken a leading role in shaping the regulatory environment these industries will function in and in supporting research and development work for them. The objective is to shape the structure of these industries in their early stages of growth to ensure a Canadian presence in them and the development of Canadian products and services that can capture rapidly expanding markets both at home and abroad.

There are various explanations for Canada's continued lack of an industrial strategy, despite the immense effort and large sums of money that the federal government has expended on industrial policy. One viewpoint holds that much of the problem centres on the nature of the bureaucratic system in Ottawa, in which various CENTRAL AGENCIES compete with individual departments for influence over policy, frustrating the ability to create consensus. But perhaps far more significant in recent years have been the general financial problems of governments, which have very significantly limited their ability to assume the cost of industrial development initiatives. In addition, with increasing openness of economies like Canada's to world trade and investment, it has become difficult for the government to develop policies which overcome or attempt to change these broader global pressures. In addition, liberalization of the world trading system and the emergence of international trade agreements have also significantly limited or prohibited a wide variety of industrial development activities that governments once undertook. The scope for government action in developing an industrial strategy is thus much more limited today than 15 or 20 years ago.

The highly diversified nature of the Canadian economy is another reason why it has been difficult to implement an industrial strategy for secondary manufacturing in Canada. In Canada, manufacturing accounts for less than 20% of total economic activity, compared to between about 25% and 33% in many European countries and in Japan. In fact, manufacturing has played a far less significant role in Canada than in virtually any other industrialized country. Moreover, the growth of manufacturing in Canada has been based as much on foreign-owned branch plants as on domestically owned firms. Even in the relatively homogeneous economies of Europe and Japan, a consensus on industrial issues has never been easily achieved, but the structure of traditional, industry-government relations in these countries and the bias towards manufacturing allows the development of a consensus on specific issues. In Canada, manufacturing interests are overshadowed by the resource sector and are fractured by disputes between large and small business and between domestic and foreign-owned firms.

In addition, and perhaps more importantly, there are marked differences of economic and industrial interest between the various regions within Canada (see REGIONAL ECONOMICS). For example, an industrial policy designed to assist the AUTOMOTIVE INDUSTRY will be seen by the western provinces, whose economies are based primarily on resource development and agriculture, as being favoured treatment for central Canada. Indeed the export markets of these provinces may be threatened if a policy for restructuring the automobile industry includes import restrictions on cars from a country, such as Japan, that is a major export market for western grain or coal.

The Canadian economy, with its highly industrialized centre and resource-producing periphery, frequently displays contradictions of this kind. Indeed, it was these very contradictions that in the end caused the breakup of the original National Policy. These contradictions explain, moreover, why provincial governments became much more active during the 1970s in implementing their own provincially based industrial policies. The provinces have fairly homogeneous economies, based on fewer and less diverse economic activities, and it is easier for them to develop coherent strategies that command a reasonable degree of local public support. But in the 1990s, with reduced financial resources and emerging problems in managing their core areas of responsibility such as health care, social services and education, even the provinces are retreating from an activist role in shaping their economies.