Why is Canada’s economy stuck in the last century?

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John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).

Whatever one makes of the glee with which Americans chase the latest economic fads, like the AI bubble, you can’t help but admire their endless capacity for reinvention. Theirs is an economy always looking to the future.

Turn the lens north to Canada, though, and a different picture emerges. To get a sense of it, you can start by looking at the weighting in the stock markets. In the U.S., tech and tech services account for 35 per cent of market cap. Throw in health technology, which includes medical and pharmaceutical research, and these sectors at the frontiers of innovation account for close to half of total market capitalization.

In Canada, in contrast, tech accounts for barely 10 per cent of the total market. The country’s research performance reflects this distance from the cutting edge. Despite being one of the world’s biggest per capita spenders on higher education, Canada punches below its weight in the production of new patents. When it comes to new research and development spending, Canada lags most developed countries, and its corporate sector is the biggest laggard of all, suggesting an economy with a concentration in legacy industries.

In fact, that’s largely the profile Canada has. Unlike the tech-heavy U.S. market, fully a quarter of our market cap comprises energy and mining stocks. Add in banks and that total reaches half. In short, we’re a nation that to a substantial degree still lives off the land then recycles its profits – largely, in recent years, into a housing bubble that has itself sapped the economy of dynamism.

Some might say this doesn’t matter, that given Canada’s rich endowment in natural resources, it makes sense to build the economy atop exports of energy and minerals. Moreover, the rapid growth of the developing world and the global energy transition will in the coming years generate huge demand for oil, natural gas and the minerals needed for renewable-energy infrastructure. Many analysts thus expect a long commodity supercycle to begin, one that should fill Canada’s export coffers anew. You can thus understand why some think the best thing for government to do is get out of the way and let businesses get on with the task of making money.

But this model is starting to look a bit long in the tooth. If you think of commodity supercycles as waves, each crests a bit lower than the last, the terms of trade steadily turning against primary exporters. Meanwhile, the start date of the next supercycle keeps getting postponed, with commodity prices currently still trending downward.

In any event, a commodity supercycle driven by the rise of countries such as India will mirror the last one, which was driven by China and peaked early this century. After frantically building out its industry and infrastructure, China did as other developed economies do and began shifting into services, slowing its demand for primary inputs. As the world develops, its energy intensity and demand for raw materials will similarly peak. Not only will each supercycle top out at a lower level than the previous one, they will probably come less often.

Canada doesn’t face an imminent crisis. But, lest we abandon future generations to their fate, we’d do well to avoid complacency while the surpluses that could fund the transition to a newer, more knowledge-based economy are still available. Consider some of our peers with similar resource endowments. Despite the huge breakthroughs the U.S. has made in hydraulic fracturing, catapulting itself to the top of the world table for natural gas exports, energy comprises a paltry 4 per cent of its market; throwing in the rest of mining and resource extraction still doesn’t reach 6 per cent. Instead, the U.S. is reallocating huge amounts of capital to engineer a transition to renewable energy. Similarly, Norway and Saudi Arabia, both of which depend more heavily than Canada on exports of energy, are nonetheless investing heavily in decarbonization and the development of new industries.

The world economy is changing rapidly. The likely choice facing Canada is to either get in the race or prepare for a long and eventually irreversible decline. Canada’s per-capita GDP has already begun falling, and if we’re not careful this could become a chronic condition. As an immensely rich country that has been favoured by both history and geography, Canada has the endowment of wealth that makes grand ambitions feasible. If it can continue to successfully integrate immigrants into its cultural fabric, as it has done in the past, it would be able to continually renew itself.

But the key question is, do Canadians have the desire to do it? Or has this economy, built for an earlier age, become a bit too comfortable for us to now want to change it?