Prime Minister Mark Carney participates in the First Ministers' Meeting closing news conference with premiers on Parliament Hill in Ottawa, on Thursday.Justin Tang/The Canadian Press
Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.
Federalism, the system of governance that divides power between Ottawa and provinces, has always been a cornerstone of how Canada balances regional interests. But in the context of Prime Minister Mark Carney’s meeting with provincial leaders on Thursday, it is worth remembering just how poorly suited that system looks for the 21st century.
The origins of Canadian federalism are illustrative of both its utility and its weaknesses. By giving provinces meaningful autonomy, Confederation united disparate colonies into a workable national state. That compromise helped make Canada possible. However, it also hard-wired a recurring challenge. When the national interest requires co-ordination, we have to negotiate our way there province-by-province.
One way this manifests today is trade. Despite all the federal government’s talk of eliminating interprovincial trade barriers, it actually can’t eliminate all of them by itself. Many of the frictions that affect the free flow of goods, services and labour across provincial borders are still decided by the provinces.
Smith defends Alberta separatists after Eby’s ‘treason’ remarks
The International Monetary Fund estimates that eliminating all such barriers could raise Canada’s real gross domestic product by 7 per cent, or more than $200-billion. In attempts to address such frictions, the federal government signed the Canadian Mutual Recognition Agreement with provinces, and some provinces signed bilateral memorandums of understanding last year. But even in the dream scenario where we actually turn each of these non-binding MOUs into policy, many of the most critical bottlenecks remain.
Food and alcohol for example, are not covered by the mutual recognition agreement and are excluded from most of the MOUs. Moreover, four-fifths of the IMF’s estimated gains from trade come from services, yet services are absent in the agreement. For example, in trucking, University of Calgary economist Trevor Tombe estimates that seemingly inconsequential differences in provincial regulations – regarding truck size, permitting and the like – add up to 8.3 per cent annually to freight rates and cost the Canadian economy $1.6-billion a year.
The same is true in other sectors. There are provincial registration requirements in financial services, as well as limits to data movement and licensing in health care. All make our economy less effective.
Federalism also limits our ability to complete projects in the national interest. Centralization works like insurance, where provinces give up their short-term interests in return for federal support on projects where it is most needed. But if federal authority to build major infrastructure is limited, provinces have much more incentive to dig their heels in to defend short-term local interests, since they can’t be sure the government will deliver on their project interests in the future.
Canada’s chronic inability to build pipelines is the canonical example, exemplified by British Columbia’s opposition to the recent MOU between Alberta and Ottawa.
The fact is that exporting energy to Asia is relatively low-hanging fruit for growth, particularly under the threat of U.S. tariffs. And Canada doesn’t have enough monopoly power to reduce global oil consumption by restricting our own supply. But because the benefits of pipelines accrue disproportionately to Alberta while the potential harms fall largely on B.C., provincial autonomy incentivizes stalling these kinds of projects instead of rewarding B.C. in the long run for being a team player.
Even if one has disdain for pipelines, there are plenty of national projects that even the most ardent of environmentalists ought to agree on.
Expansion of the electricity grid is a prime example. The Canadian grid remains largely segmented by provincial borders, according to the C.D. Howe Institute, a think tank. This raises costs and risks for consumers, but also slows down the adoption of renewable energy. If demand for Ontario wind power is restricted to the province, that lowers the incentive to build the turbines.
As professors Costas Arkolakis of Yale University and Conor Walsh at Columbia Business School point out in a working paper (one that I worked on), renewable sources of energy are rarely located where people live and thus, grid improvements can significantly accelerate adoption.
Perhaps more subtly, constitutional federalism also bleeds into political federalism. This tendency to prioritize provincial identity over national interest raises uncertainty, which disincentivizes investment.
The Sunday Editorial: The conflicting signs from François Legault’s departure
The classic example is the Quebec independence movement. Until 1970, Montreal was the centre of the Canadian economy. But as the Parti Québécois moved to hold a sovereignty referendum, businesses relocated from the province to hedge political risks, stifling Quebec’s growth.
Even if the possibility of secession is remote, like in Alberta, the rhetoric provides political leverage for defying federal policy, such as minimums on the industrial carbon price. Such disconnect leads to a patchwork of policies across provinces and a lack of clarity for investors – should an investor listen to Ottawa or Alberta to learn what’s going to happen to their carbon capture investment?
Canada faces a very different set of challenges than it did in the past, where compromises had to take precedence over dreams of the perfect union and we could reap gains from the slow march of globalization. Today, it is far more important that we turn to each other for help. But here, the degree of provincial autonomy no longer looks fit for purpose.