A majority of Canadians think that Canada is broken after years of stagnant incomes, affordability challenges, rising crime, government failures on basic functions like healthcare and immigration, and a deepening cultural malaise. But decline is a choice, and better public policies are needed to overcome Canada’s many challenges. Kickstart Canada brings together leading voices in academia, think tanks, and business to lay out an optimistic vision for Canada’s future, providing the policy ideas that governments need to ensure a bright future for all Canadians.
One key feature of the modern economy is the rather ugly economics term “urban agglomeration,” which refers to the concentration of economic activity—including investment and job creation—in big cities. Notwithstanding the garbled terminology, the basic concept has considerable explanatory power for understanding major economic, political, and social trends in advanced economies—especially Canada.
As a recent Hub article set out, Canada is one of the most economically concentrated jurisdictions among peers. Montreal, Toronto, and Vancouver are home to 37 percent of the country’s total economic output. The number jumps to more than half if the grouping includes Ottawa, Edmonton, and Calgary. To put that in perspective: one needs to add up 31 counties across 16 states just to account for a third of U.S. GDP.
The same goes for employment. In 2023, Toronto, Montreal, and Vancouver accounted for 38 percent of Canadian jobs. If Ottawa/Gatineau, Edmonton, and Calgary were added, the share exceeded 50 percent of total employment. The numbers are even starker when considering employment growth. These six metropolitan areas saw two-thirds of year-over-year employment growth between 2022 and 2023.
Canada’s experience of hyper-concentration is part of a broader trend that urbanist Richard Florida has described as “the rise of superstar cities” and economist Enrico Moretti has called “the great divergence.” Their basic insight is that today’s knowledge economy is less geographically egalitarian than the old production economy. It has generated huge returns to a small number of big cities.
It must be emphasized that these trends aren’t cases of market malfunctioning. They’re an example of markets doing what markets do: allocate scarce resources as efficiently as possible. We’ll come back to this point later.
The gains have been significant but there have also been some downsides. Many rural and peripheral communities across the country haven’t shared in the growth. They remain mired in stagnation or even decline—with various attendant socio-economic consequences including lower incomes and social mobility, lower education levels, and poorer health outcomes.
The superstar cities themselves have reaped a lot of benefits, but even within them there are signs that we’re reaching diminishing returns. The hyper-concentration of job opportunities has led to more than 50 percent of immigrants settling in Montreal, Toronto, and Vancouver alone, and contributed to real pressures on social services, basic infrastructure, and most notably the housing market. For instance, in May 2024, the benchmark home price in the GTA was $1,117,400 compared to just $359,889 in Thunder Bay.
The upshot is that there’s renewed interest in trying to boost investment and job creation in rural and peripheral communities and take some of the pressure off our major cities. A more geographically balanced economy could have some positive-sum advantages.
But it’s unlikely to happen on its own. If market forces produced these outcomes—if they’re behind the great divergence—, then they probably cannot be fully relied upon to cause a new convergence on their own. There’s got to be a role for public policy.
That comes with serious risks. Government intervention in the market’s allocation of resources can create significant distortions. This is the experience of past efforts of regional economic development. As Jack Mintz and Michael Smart wrote in a well-known paper more than twenty years ago, “governments are unlikely to be very good at picking winners—but losers tend to be very good at picking governments.”
We’re cognizant of the track record and the inherent risks here. Once policymakers decide to intervene in the market, there’s no perfect policy response. Any policy that tilts in the favour of a particular region or industry or whatever is going to come with some degree of inefficiencies. There’s always the risk of politicalization. And if what’s past is prologue, there’s good reason to be skeptical.
Herein lies the case for Opportunity Zones.
The TSX is shown on a business news ticker is seen in the Financial District in Toronto, Monday, March 9, 2020. Cole Burston/The Canadian Press.
First advanced by Democratic Senator Cory Booker and Republican Senator Tim Scott, Opportunity Zones were later enacted in the 2016 Tax Cuts and Jobs Act. The basic model involves a series of capital gains tax inducements for investors to deploy private capital into rural and economically distressed areas across the United States.
What makes the Opportunity Zones model interesting is that it has sought to learn the lessons of past regional development failures. It’s relatively flexible and neutral. The only major condition for investors is that their investment must flow to one of about 8,600 designated zones. Investors are free to choose where and how to invest across a range of asset classes.
There are no government applications or bureaucratic decisions. Capital flows through special investment vehicles called Qualified Opportunity Funds of which there are now approximately 8,000. As of the end of 2020, these funds had invested a total of $48 billion which was raised from 21,000 individual investors and 4,000 corporate investors.
Some funds have a national focus and are motivated by conventional rates of return. Others are geographic-specific and may have social investing mandates. Some are focused on particular asset classes like real estate or venture capital. Others have more diverse portfolios.
Put simply: Opportunity Zones aim to draw on the best features of market capitalism—including decentralization, experimentation, and the power of price signals—towards the goal of regional economic development.
These market features have not only sought to inoculate Opportunity Zones from the bureaucratic failings of past regional development policies, but they’ve also enabled the model to stand up quickly.
Although established in federal legislation, the designation of zones themselves (which are based on census tracts) was decentralized to state governments based on key economic indicators such as income. There were technically 42,000 eligible census tracts but governors were limited to 25 percent of eligible areas in their states. States followed different processes—including even a nomination process in Washington State—to designate their respective zones.
By the end of 2020, nearly half of the designated zones had received Opportunity Zone investment which flowed disproportionately to the most economically distressed communities—ranked from lowest to highest levels of need, they average in the 87th percentile for poverty, 81st for median household income, and 80th for unemployment.
Although it’s too early to render a full judgment on Opportunity Zones, the initial signs are promising. They’re getting private capital into rural and economically distressed through market mechanisms.
This early evidence should be of interest to Canadian policymakers in general and Conservatives who disproportionately represent the types of neighbourhoods and communities that would be eligible in particular.
The Opportunity Zones model is responsive to Canada’s growing challenges around the hyper-concentration of economic activity and fits our system of federalism. Decisions about the designation of Opportunity Zones could be pushed down to provincial governments. First Nations reserves and the three Northern territories could automatically be designated. Provincial and local governments as well as civil society organizations (such as business groups or trade unions) could augment a federal framework with their own programs and policies. As one of us has previously written: “Opportunity Zones could be a national project rooted in the shared goals of growth, inclusion and broad-based opportunity.”
One of the virtues of the Opportunity Zones model is that the fiscal cost is manageable. The U.S. Joint Committee on Taxation estimates that it will cost the federal government $8.2 billion in forgone revenues between 2020 and 2024. But even then, these costs are somewhat fictitious. It’s not obvious these are revenues that the government would have collected otherwise if it were not for the inducement created by Opportunity Zones themselves.
Either way, assuming that the fiscal cost in Canada would be broadly proportionate, policymakers could perhaps anticipate a gradual increase up to hundreds of millions of dollars each year. That’s much cheaper than the annual spending of the country’s now seven regional development agencies.
In sum, Opportunity Zones are a worthwhile policy experiment to boost economic activity in rural and peripheral communities and start to take some of the pressure off of our major cities. If the fiscal costs ultimately proves higher, it would be a signal that the policy is working.
