Productivity and innovation have been declining in troubling ways globally, but even amongst our OECD peers Canada is a laggard.
We have been trailing countries such as Australia and the United Kingdom for the past 18 years. So while the pandemic has certainly exacerbated the issue, these weaknesses were pre-existing and have been hampering our productivity growth for basically the entirety of the 21st century.
A new report from C. D. Howe, Upping our Game: How Canada’s Financial Sector Can Spur Economic Performance, offers recommendations on how to arrest this decline as we exit the COVID-19 pandemic. Identifying the need to move beyond the diminishing returns of labour and capital, the authors of this report, Jeremy M. Kronick and Farah Omran, are instead focused on how we can spur on this growth through innovation and technological advancements.
They highlight three areas where policy changes in the financial sector will go a long way in boosting this much-needed growth:
- Fintech: The current environment of under- or overregulation of fintechs creates a fragmented and complex regulatory system. Regulations should focus on the function performed and be proportional to the risk this function poses.
- Small and medium-sized enterprises: Canada has the largest spread between interest rates on loans to small and medium-sized enterprises (SMEs) and those to large firms among OECD peers. Policymakers could improve SMEs’ access to capital by deepening Canada’s capital markets beyond domestic bank debt financing.
- Open banking: Open banking gives customers of financial institutions control over when and how to share their financial data. Implementing open banking would help spur the development of the types of tailored products and services that would create a more innovative and competitive market.
