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The right policy responses to the forces of disruption

Glen Hodgson

Senior Fellow

This article was originally published in The Globe and Mail on November 27, 2017.

Disruption surrounds our economy and society today, making it difficult for policy makers to determine how best to respond. The Conference Board of Canada recently suggested a way to understand disruption using three dimensions—technological, structural and geopolitical. The next stage is to identify the available policy responses for each dimension.

Technology is the most obvious and best-understood form of disruption. Continuing technological change can have significant positive implications for innovation and productivity. But technology is also shifting financial returns away from labour and toward capital in the United States—albeit not in Canada. This trend results in displaced workers and puts strain on social cohesion.

In our view, the most appropriate public-policy response to disruptive technology is to recreate a level playing field in as many ways as possible, so that neither status-quo businesses nor the disruptive forces gain an arbitrary advantage. This approach requires two phases: properly identifying the specific function and market being disrupted; and finding the right policy tools to establish or re-establish a level playing field.

In some prominent examples, the policy response is uneven—at best. Uber and other apps are linking consumers directly to personal transportation service providers. Cities in Canada and around the globe have struggled with how to respond to this transformation. The array of policy approaches being considered range from attempting to shut Uber out of the market to doing nothing—with different regulatory approaches in between.

Without a clear regulatory framework, the financial playing field is clearly tilted in favour of the disruptors. Broadly speaking, city governments can insist on transparency among the disruptors to ensure that their business practices are comparable to that of existing service providers. Ensuring that all forms of personal transit services meet adequate public-safety and security standards is a reasonable policy objective. Cities could be even more pro-active to level the playing field among providers.

For instance, the existing municipal system of licences to control the supply of taxis has driven up the price of these licences well beyond their value on paper. Notwithstanding the one-time financial cost and the political objections, cities could opt to buy back taxi licences from current holders as part of a transformation to a more free-market system.

Netflix is another prominent example of digital disruption. The simplest approach is to treat different forms of media entertainment the same for tax purposes, such as payment of sales taxes. The federal government's recently announced approach instead calls for Netflix's assurances of a minimum level of creative production in Canada. The end result is differing treatment of similar service providers.

The second dimension, structural disruption, has a quiet but steady transformative impact on the economy and society. Aging demographics and much slower labour-force growth are prime structural disruptors in industrial countries, and China is now facing the same challenges. Population aging is slowly dragging down potential growth, making it harder to fund priority public services.

A variety of structural policies can help to moderate (but not fully offset) the impact of aging demographics. These include an active immigration policy, providing comprehensive programs for basic education, modernized work-force skills and human capital development and engaging underrepresented groups and older workers more fully in the work force. Canada scores well in these areas compared to most other industrial countries, but the forces of demographics are unrelenting.

Climate change is another major structural disruptor. In response, governments in Canada and elsewhere could develop and implement long-term structural policies that mitigate its impact and ease the transition toward a lower-carbon economy. These policies include carbon pricing, complementary regulations, public infrastructure investment and targeted green procurement. Well-articulated policies should also be developed for dealing with the consequences of climate change, such as increased severity and frequency of floods.

Geopolitical disruption has emerged the past two years as an unexpected dimension. The Trump administration's "America first" approach and the Brexit referendum are two prime examples that threaten to break down many of the international norms to which the world has become accustomed.

While maintaining North American economic and security connections remains paramount, Canada should continue to strengthen a web of international relationships on trade and investment, foreign affairs and defence policy, as well as other international matters. Free-trade relationships with the European Union and the Asia-Pacific region can help shape a more diversified trade strategy. A strong web of international relationships would give Canada options when geopolitical disruption happens.

The age of disruption now under way forces us to confront multiple forces at the same time. Targeted public policy, smartly designed and implemented, will be necessary to mitigate the negative consequences of disruption, and capture benefits for consumers, businesses and society.

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