The Toronto Star | By David Crane | January 7, 2004
When Paul Martin makes his first foreign trip as prime minister, to Mexico next week for the Special Summit of the Americas, he should set aside time for a special meeting with Mexican President Vicente Fox to discuss a shared concern.
This is the need for both Canada and Mexico to improve their capacity for innovation in order to improve living standards and narrow their respective gaps with the United States. While the Canadian and Mexican economies are much different in structure and capacity, there are opportunities to work together to boost their capacity for innovation. There are also opportunities for Canada to help Mexico improve its performance.
Both countries entered free trade arrangements with the United States with the expectation it would lead to a significant narrowing of the gap in productivity performance and per capita gross domestic product with the United States. But with the 10th anniversary of the North American Free Trade Agreement, or NAFTA, there is clear disappointment in both countries.
The reason is not mysterious. A major new research report from the World Bank - Lessons From NAFTA for Latin America and the Caribbean Countries - finds that while opening up markets and increasing the competitive environment through trade liberalization is important, it is not enough.
Specific policies to boost innovation are also essential. As the report stresses, "we have concluded that NAFTA and its trade and foreign direct investment effects are unlikely to lead to a sustained growth path led by technological progress."
While the focus of the report is on Mexico, it also draws attention to the need for Canada to do better as well. "Canada offers some support for the view that free trade is not enough to remedy low productivity growth," it says.
It points in particular to the work of Daniel Trefler, a University of Toronto economist, who has carried out important research on the impact of Canada-U.S. free trade on Canadian productivity.
Trefler has found that productivity has improved in some Canadian industries, especially those that experienced the deepest tariff cuts in Canada, such as furniture and clothing. But this was in large part because competition forced the most uncompetitive businesses to close.
"Canadian firms know how to cut costs, but we are not as good as U.S. firms at developing and marketing new products," according to Trefler. Yet the ability to successfully develop and market new products will provide the best long-term capacity for new jobs and rising living standards.
What really matters, though, is the capacity for research and development and "learning by using" within individual businesses, as Trefler argues. And it is here that both Mexico and Canada are weak.
There is a lack of receptor capacity for research and development coming out of universities and government laboratories and weak interaction between the private sector and these other sources of new knowledge. Commercialization of new knowledge is not taking place as it should. In both countries the systems of innovation are weak and investment in research and development is too low.
Mexico has the added problem of a clearly inadequate education system. It is not training enough university and college students which, the World Bank report argues, was one reason why Costa Rica beat out Mexico for a major Intel Corp. plant despite Mexico's NAFTA advantage.
Canada is now helping Mexico through the Alliance for Higher Education and Enterprise, a trilateral non-profit organization that emerged from the North American Institute. But much more needs to be done to raise the quality and extent of higher education in Mexico, increase the country's level of R&D spending, improve significantly the linkages between Mexican universities and the private sector and, perhaps most importantly, dramatically improve the capacity within Mexican businesses to innovate.
The World Bank also suggests Mexico should negotiate with its NAFTA partners the co-financing of research programs. "Given the fact that the U.S. government remains the world's leader in funding R&D, and given Canada's interest in promoting its own R&D, it is likely that Mexico can find receptive ears in these countries."
There clearly is much that Martin and Fox can talk about when they meet next week. Building the Mexico-Canada relationship is important for both countries. Martin's challenge is to take the lead in building a real partnership by dealing with issues that are important to both countries. Clearly, innovation should be high on the list.
David Crane's column appears on Wednesday and Saturday. He can be reached by fax at 416-926-8048 or at crane @ interlog.com.The Toronto Star:
