September 2, 2015 – Economic growth from technological innovation tends to spring up in unpredictable places, creating winners and losers, states a new report from the C.D. Howe Institute. In “Mushrooms and Yeast: The Implications of Technological Progress for Canada’s Economic Growth,” author Peter Howitt finds that rather than focusing on supporting specific industries, governments should encourage economic growth through a process of “creative destruction.”
“Whether Canadians talk about income inequality, regional growth or technological change, it is clear that economic growth is not uniformly spread across the country,” says Howitt. “Canada is not unique in this regard: modern economic growth theory shows that economies grow like mushrooms, not yeast. Instead of expanding uniformly like bread in the oven, economic growth pops up sporadically like mushrooms in the forest bed.”
Howitt notes this type of economic growth is a process of “creative destruction”, and believes that policy discussions around this kind of growth have often focused on the consequences for those left behind by change, while winners are often diffuse.
“New technologies create fortunes for some, while rendering obsolete the skills, products and processes on which others’ livelihoods depend,” proclaims the author. “What matters for society as a whole is the overall distribution of gains and losses. Predicting this distribution is often difficult, but the task must be undertaken.”
Howitt explores the policy implications that follow from the unevenness of technological progress. He focuses on five areas in particular:
- the consequences for Canadian economic growth of the Comprehensive Economic and Trade Agreement with the European Union;
- how exchange-rate movements affect economic growth;
- how tax preferences for small businesses could be reformulated to promote economic growth;
- how Canada could gain from eliminating foreign ownership restrictions in the telecommunications industry; and
- the appropriate division of labour among universities, community colleges and businesses in developing the human capital appropriate for a growing economy.
“Rather than a rising tide that lifts all boats, economic growth is a process of creative destruction in which there will be winners and losers,” concludes Howitt. “Policymakers at all levels should take this into account both in formulating policy and in predicting the reactions to policy changes.”
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada’s trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada’s most influential think tank.
For more information contact: Peter Howitt, Fellow-in-Residence at the C.D. Howe Institute and Lyn Crost Professor Emeritus of Social Sciences and Professor Emeritus of Economics, Department of Economics, Brown University; 416-865-1904, or email: amcbrien@cdhowe.org.