Canada is facing a range of challenges that will drive economic transformation at the national, regional and local levels. The relationship with the United States, its largest trading partner, is changing. Investment in defence is growing. Global energy markets are shifting as investment in clean energy and electrification is rising. The changing climate and geopolitical tensions are creating new risks for supply chains. And automation and artificial intelligence are increasingly being adopted in manufacturing and resource sectors.
A 2025 report by the Institute for Research on Public Policy (IRPP) argues that Canada needs a smarter industrial strategy to successfully navigate change. Part of this success lies in understanding the importance of place: national industrial priorities are implemented in specific places, where local assets, infrastructure, labour markets and institutions shape whether investments succeed and who benefits.
This brief builds on the IRPP report’s recommendations and findings from the IRPP’s multi-year Community Transformations Project. We examine how Canada’s industrial policy connects national priorities with regional and local economic development, and where gaps remain. We then consider how place-based industrial policy could address those gaps.
Many of the assets and industries central to Canada’s national priorities — from diversifying trade and developing major projects to building defence industrial capacity — are concentrated in particular communities and regions. So are key economic development opportunities in areas such as critical minerals and clean electricity. Major projects and other priority areas, including housing and infrastructure, also depend on place-specific capacity, supply chains and institutions.
These geographic patterns and local conditions matter for both economic performance and equity. From an economic performance perspective, progress toward national goals depends on the ability to address local barriers to development. It also hinges on the ability to draw on assets, skills and innovation beyond major urban and well-established industrial centres, including in smaller cities, rural areas, northern regions and Indigenous traditional territories. From an equity perspective, national investments and major projects do not automatically translate into strong local benefits, broader regional resilience or more equitable outcomes. Their benefits and risks can be unevenly distributed across places and people.
Place-neutral policy is not necessarily neutral in effect. Investment and support can disproportionately flow toward regions that already have stronger industrial ecosystems, research institutions and access to capital.
Place is already reflected in parts of Canada’s industrial policy system. However, links to regional and local economic development remain uneven and limited. Gaps arise at three levels:
In Canada, responsibility for accounting for differences across regions and places often falls to Regional Development Agencies (RDAs) and subnational governments, while place-based approaches remain insufficiently integrated into national strategies and policies.
A more place-based approach to industrial policy could help address these gaps by bringing top-down and bottom-up approaches together. In practice, industrial strategies and major projects with significant regional and community implications should consider local assets, barriers and priorities in industrial policy decisions. These efforts should be supported by the human, financial and institutional capacity needed to translate national investment into local outcomes.
The IRPP recommends a comprehensive framework to address these gaps at three levels: industrial policy strategy, implementation and community capacity.
Designing industrial strategies and major projects with these regional and local conditions in mind can help ensure communities capture a reasonable share of the benefits without bearing a disproportionate share of the associated risks.
Governments should identify early where place-based elements are needed and adapt policy design accordingly. This can be done through differentiated eligibility, project size thresholds, financing and cost-sharing terms for public funding and tax incentives, complementary local investments and supports, and major project planning that addresses potential local and regional benefits, risks and capacity needs. This process should draw on the knowledge and expertise of regional and local actors, including Regional Development Agencies, Community Futures Organizations (CFOs), municipal economic development offices, Indigenous economic development corporations, colleges, workforce development bodies, local unions and community innovation hubs.
For major federal industrial policy initiatives with significant regional or local implications, Regional Development Agencies should have a standing role in program design, project assessment or implementation, as appropriate. Regional Development Agencies should work with provincial, territorial, Indigenous and municipal governments, communities and local economic actors, including economic development organizations, sector and technology associations and cluster organizations, to identify significant local opportunities and the barriers that limit them. They should also work together to help connect those priorities to the federal programs and policy tools that can support them. This would formalize and strengthen functions that Regional Development Agencies already perform.
They should support innovation and entrepreneurship that reflect the distinct assets, knowledge and economic opportunities of rural, northern and Indigenous communities. Capacity funding should include multi-year support for economic development staff and strategic planning, funds for feasibility and early project development work, and technical support to prepare proposals and manage implementation. Communities hosting or affected by major projects should also receive capacity funding early in project planning so they can identify priorities, assess options and negotiate local and regional benefit arrangements before key decisions are finalized.
In a previous commentary, I suggested that the Bank of Canada replace its near-term inflation targeting framework (maintaining two per cent inflation over a horizon of approximately two years) with a macrofinancial stability framework. This new regime would focus on ensuring price stability over a longer-term horizon, allowing policy interest rates to “lean” against financial booms and busts. In this second commentary, I explore how non-monetary instruments, such as macroprudential and regulatory tools, can complement monetary actions in the pursuit of systemic financial stability.
Non-monetary instruments have traditionally focused on the stability of individual financial institutions within the financial sector, rather than broad systemic stability, and on rules to regulate capital markets. In Canada, responsibility for the former rests with the Office of the Superintendent of Financial Institutions (OSFI). Responsibility for the latter rests constitutionally with provincial agencies, although the Supreme Court ruled in 2011 that oversight and management of systemic risks of national concern were matters of federal jurisdiction.
In this commentary, I focus on three questions. First, how can non-monetary policy instruments support systemic financial stability? Second, what indicators might trigger the need for easing or tightening financial conditions — using both monetary and non-monetary instruments? Finally, which federal government agency should be given overall authority in the pursuit of systemic financial stability?
I begin with a brief recap of why near-term inflation targeting can threaten financial stability. I then address the three aforementioned issues in order: how financial regulation can complement monetary policy, which indicators and rules could guide when to tighten or ease, and which agency should be in charge. A further section considers more radical reforms should this framework prove insufficient.
I conclude that there should be a greater connection between financial regulation and monetary policy, both of which should be considered complements rather than substitutes in the pursuit of macrofinancial stability. I recommend that the Bank of Canada be given enhanced authority to direct OSFI to adjust financial regulations if there are clear indications of systemic financial risk that could reach the level of national concern.
Procyclicality in the financial sector, which occurs when lower interest rates magnify booms and lead to subsequent busts, can have large and costly effects on the real economy. Recall the magnitude and duration of the Great Financial Crisis that began in 2008.
In my first commentary in this IRPP series, I suggest that the framework for monetary policy focused on achieving a near-term inflation target worsens procyclicality. I recommend replacing this framework with one focused on macrofinancial stability. Such a framework would “lean against the wind,” or counter credit excesses associated with lower interest rates, by pursuing monetary tightening well before the end of a boom. In this way, monetary policy would help stabilize the real economy while still achieving longer-term goals for price stability.
Pursuing such a policy would also help preserve the stability of the financial sector. This is crucial because history teaches us that economic downturns accompanied by financial instability are particularly deep and long-lasting and are often followed by heightened political instability.
Prior to the 2008 Great Financial Crisis, many central bankers actively supported financial deregulation. They argued that a more complete financial market would increase the effectiveness of monetary policy. In this complete financial market, one could buy or sell protection against or a stake in every possible future outcome, and each of those trades would have a price. Now the downsides of that deregulatory approach are more evident.
Perhaps even more important, the low interest rates that emerged under inflation targeting altered investor behaviour. With safer investments, such as government bonds, offering low returns, investors instead sought riskier investments with higher yields. It also made them more willing to invest in less liquid assets, such as private credit and private equity, that would tie up their money for longer periods.
These developments have exposed financial institutions to increased liquidity risks (for example, running short of cash) and/or risks of losses large enough to cause insolvency. Closer and more complex linkages among financial institutions have also raised the risk that problems at one institution spread to others, increasing the likelihood of systemic crises.
Canadian banks, supported by an oligopolistic market structure, seem less prone to excessive risk-taking than U.S. banks. Nevertheless, they have become significantly involved in financing those offering non-bank credit and those involved in the AI investment boom. Both the Bank for International Settlements (BIS) and the Financial Stability Board have warned of the possible systemic implications should either of those involvements turn sour.
Canadian pension and insurance funds are another potential source of central bank concern, given the extent of their investments in private credit and Canadian banks’ exposure through lending, sponsorship, warehousing and risk transfer.
Significant investments in private credit and other alternative assets have raised risks for the broader financial system. For example, a lack of information about the quality of loans held in private funds could mean that spikes in defaults cause investors to exit their positions quickly. It could also mean larger and accelerated requests for capital contributions by these funds during times of financial stress. In either case, there could then be spillover effects into public credit markets. Spillovers could spread quickly from other countries to Canada, given the increasingly global nature of private credit. In this regard, the need for the Bank of Canada to formally make available liquidity support to pension funds during the COVID-19 pandemic’s period of acute financial market stress is notable.
Beyond the exposure of financial institutions, persistently low interest rates (especially when adjusted for inflation) have encouraged global asset prices to rise to record levels. With low interest rates, investors place greater value on future income, which encourages them to bid up the prices of stocks, real estate and other assets.
Moreover, the assumed ongoing smooth functioning of global financial markets, not least the market for U.S. Treasuries, has become increasingly questionable. Had central banks replaced the inflation targeting framework earlier with a framework focused on macrofinancial stability, these threats to financial sector stability and their potentially severe macroeconomic effects would likely not have emerged.
Imagine if the focus of monetary policy were to shift from short-term inflation control to avoiding systemic crises over longer periods. By leaning against the wind of credit excesses, monetary policy would affect the behaviour of both borrowers and lenders.
Adopting such a macrofinancial stability framework would be beneficial on its own, but regulatory policies for the financial sector could also play an important, complementary role. These policies are often seen as a substitute, aimed at hiding the worst side effects of a particular monetary stance.
Whereas monetary policy “gets into all the cracks” of the economy and financial markets, prudential policies could be directed to specific, troublesome areas of credit creation. This would reduce the need for higher interest rates that might have undesirable side effects.
Central banks and financial regulators have often been in situations when one policy foot is on the accelerator and the other is on the brake, leading to less than optimal results. Central banks are increasingly aware that lower-for-longer interest rate policies can lead to undesirable side effects and financial distortions. However, instead of questioning the desirability of such monetary policies, they envisage the use of regulatory polices to address these side effects. This was effectively the case in most countries from the time of the Great Financial Crisis until the tightening of monetary policy in 2022 in the wake of the COVID-19 crisis.
Were financial regulations to instead support monetary policy in leaning against the financial cycle, two complementary changes would also have to happen.
So-called microprudential regulatory policies, such as minimum capital requirements or liquidity coverage ratios for financial institutions, would have to focus more on systemic exposures than just the exposures of individual institutions. A focus on systemic exposure could examine whether multiple institutions could be exposed to the same risks at the same time or be connected in ways that allow failure at one to spread and create national concerns. OSFI has already moved in this direction, to a certain extent, with the introduction of system caps on mortgage exposures with specific limits for individual banks.
So-called macroprudential policies like monetary policy would have to be conducted in a more symmetric way over the financial cycle. That is, during periods of rapid credit growth or rising financial risk, relevant regulations could be tightened. During downturns, relevant regulations could be eased to allow financial institutions to absorb losses.
Traditional financial regulation policies have focused primarily on credit risk and liquidity risk as the principal threats to a firm’s solvency. The credit risk problem has been dealt with largely through regulations concerning expected losses and capital requirements. Liquidity risk has been addressed through regulations affecting both liabilities (exposure to withdrawals) and assets (the capacity for liquidation).
The implicit assumption has been that the system as a whole would be healthy if its individual components were healthy. However, the 2008 Great Financial Crisis, the financial market stress at the onset of the COVID-19 pandemic in 2020, the U.K. gilt crisis in 2022 and the failure of Silicon Valley Bank in 2023 show that risks can also arise from shared exposures and connections across financial institutions.
Institution-specific regulations have been relied on since the 1930s, if not earlier, and were tightened considerably after the 2008 crisis. However, they have not yet evolved to adequately address systemic risk.
While microprudential regulatory policies do not generally lean against the wind, in terms of working to limit booms and busts, their strength and application vary with time. Over long periods, these regulations are time-variant because they tend to loosen as memories of the last crisis fade. This tendency can be exacerbated in relatively small countries (like Canada) if bigger partners (like the United States) are already moving to ease regulations. Indeed, OSFI’s decision to reduce the required Domestic Stability Buffer for Canada’s largest banks in June 2026 followed decisions by U.S. regulators to ease capital requirements for American banks. This approach can actively fuel procyclicality.
Over shorter periods, how banks evaluate the riskiness of their assets can also contribute to procyclicality. For example, when banks use time-variant risk weights, based on their own calculations of the risk that borrowers will default, they may tend to favour measures that allow for greater lending. This practice leads to the riskiest loans being made during times when system-wide risk is building.
The problem worsens if banks consciously attempt, as experience suggests they do, to lower risk weights to increase their capacity to lend. The leverage ratio, which relates unweighted assets to capital, was brought in under Basel III international banking standards developed under the Basel Committee on Banking Supervision. They aim to deal with the problems arising from using risk weights to calculate capital requirements.
A macrofinancial stability framework would focus on the links among financial agents and threats to the system as a whole. Advising individual banks to sell risky assets in their own interest becomes unwise if this leads to fire sales that affect the solvency of others. Capital requirements might also be calculated differently — not on the individual institution’s risk profile alone but also the risk that its failure would lead to the failure of others.
Recall, for example, how the 2023 failure of Silicon Valley Bank led immediately to runs on regional banks with similar portfolios. Ultimately, this situation required unprecedented actions by the U.S. Federal Reserve (Fed) to stabilize the situation. Of course, just raising the possibility of system-wide events of this nature implies that capital requirements for banks ought to be higher as a general rule.
Stress tests of individual banks, which seek to determine what happens to bank capital in adverse circumstances, should be extended to include the possible bankruptcies of important counterparties. This might require that stress tests be conducted confidentially, as in Canada, rather than publicly, as in the United States. Similarly, the “too big to fail” problem — when large, interconnected financial institutions are likely to be bailed out to avoid threatening the entire financial system — would rise in the hierarchy of regulatory concerns.
The fact that Swiss authorities preferred to merge Credit Suisse with UBS in 2023, rather than let the former proceed to liquidation, shows the widespread, ongoing relevance of this problem. Moreover, the Swiss solution is now accused of creating a new UBS that has become “too big to save,” as it is now so large that even the government might struggle to rescue the bank should it fail.
As stated above, macroprudential policies can complement monetary policy by being implemented more symmetrically over the financial cycle, helping to mitigate the buildup of unsustainable debt exposures. This implies more leaning during the upswing of the financial cycle to prevent unsustainable increases in debt. Indeed, that was the basic motivation for introducing the counter-cyclical capital buffer under Basel III international banking standards. As well, regulators might pay more attention to the pricing of risk and excessive lending to trendy sectors at the expense of others. The latter includes loans to promising small and medium-sized businesses or sectors with high growth potential.
Moreover, downturns provide an opportunity to ensure that more accumulated debts are actually written off, rather than refinanced. The International Monetary Fund (IMF) suggests that regulatory authorities act more vigorously to prevent evergreening (refinancing or extending troubled loans to delay recognizing losses), especially by undercapitalized banks. More broadly, there are still far too many impediments to the ability to restructure or write off unsustainable debts — whether by private non-financial entities (households and corporations) or by financial institutions, especially large ones.
Evidently, if lending conditions were tighter during upturns in the financial cycle and less easy during downturns, they would be tighter overall. It is legitimate to ask whether this would lead to lower corporate investment than otherwise, particularly in new startups. The head of OSFI stated recently that Canadian banks have $60 billion of capital beyond regulatory requirements but are still loath to lend to small and medium-sized enterprises without collateral. That pattern may be changing, however, with recent announcements from Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank all committing to invest more in Canadian business growth.
It is also important to note that investment levels are not primarily determined by the ease or tightness of credit conditions. Investment levels in Canada have been low in recent decades in spite of highly accommodative lending conditions for most of this era. A more urgent problem affecting investment levels in Canada might be the inadequate presence of a risk-taking business culture (potential borrowers). Adding to that is the lack of a broad-based, deep domestic angel and venture capital system (potential lenders) through which successful entrepreneurs can both mentor and lend to other aspiring startups.
More attention must also be paid to liquidity risk — the possibility that a bank might not have sufficient cash to cover its short-term obligations. Central banks, confronted with such fears, will be more inclined to provide the needed liquidity, regardless of the underlying solvency of the bank in need. Like many other central banks, during the emergency phase of the COVID-19 pandemic, the Bank of Canada took unprecedented measures to provide liquidity to many markets. This included markets for repos, where financial institutions obtain short-term loans by providing securities as collateral, and Bankers Acceptances, with which Canadian businesses can get short-term financing backed by a bank guarantee.
The bank liquidity issue is, unfortunately, closely linked to an even broader concern. As regulations on banks have tightened in recent decades, lending has shifted to markets and institutions outside the traditional banking system. This includes private credit and private equity. Moreover, whenever these non-bank sources of credit are threatened, the official safety net, especially access to central bank liquidity, has generally widened as well.
In the United States, access to credit from the Fed was extended from banks to bank holding companies in the financial crisis of 2000, when a bubble of investments in Internet startups burst. The Fed safety net was further extended in the Great Financial Crisis of 2008, going beyond institutions to the point that the Fed became the buyer of last resort in many financial markets.
In Canada, the Bank of Canada gave unprecedented support to pension funds during the COVID-19 pandemic, as noted above, and to other “financially sound” financial institutions.
Similarly, support given to the gilts market by the Bank of England after former prime minister Liz Truss’s mini-budget of 2022 was triggered by leveraged pension funds selling gilts in response to margin calls.
Globally, speculation has already begun as to whether the broad-based, large-sized and too often opaque exposures of financial institutions to the AI industry might lead to bail-outs on systemic grounds if anticipated profits fail to materialize.
Such action by the government and regulatory agencies increases moral hazard, directly encouraging imprudent behaviour by banks, non-banks and market sources of credit. Moreover, such imprudent behaviour also contributes indirectly to increased risks to the banks themselves if they have lent extensively (as they have) to these non-bank entities.
Finally, this migration to non-bank sources of credit raises transparency issues, as multilateral institutions and the Bank of Canada have identified. Such concerns stem from the reduced availability of timely data and other information about these non-bank entities. All these developments raise the likelihood of future crises and, potentially, the degree of their severity.
Some treat regulation as the appropriate response to the moral hazard brought on by government safety nets. If current trends continue, that approach invites a further, perhaps never-ending widening of both safety nets and regulation. Bernard Connolly referred to this process in the title of a recent book, You Always Hurt the Ones You Love: Central Banks and the Murder of Capitalism. With this unacceptable end point in clear view, greater efforts are required to rein in the use of official safety nets.
Together with easier monetary policy in the face of both actual and anticipated financial crises, widening the safety net encourages the belief that concerns about financial stability will always outweigh concerns about price stability. Consider how both the Bank of England (albeit temporarily) and the U.S. Fed (continuing to date) have been willing to increase the size of their balance sheets to avoid significant disruptions in financial markets despite earlier promises to reduce them to more appropriate levels.
As such beliefs grow, they also threaten to destabilize previously anchored inflation expectations. This pattern, in which private debt migrates to the balance sheet of governments and is ultimately financed by the central bank, has been seen many times in history.
Further, wider safety nets for banks and non-banks imply possible future claims on the broader public safety net. Together with already dangerous levels of government debt in many countries, they could increase the risks of fiscal dominance over monetary policy. Fiscal dominance occurs when higher interest rates have large effects on government debt service charges. This is due to large debt levels and/or significant shares of short-duration debt that need to be refinanced frequently. That can, in turn, lead to fears of increased recourse by governments to central bank financing, followed by higher inflationary expectations. The result would be an eventual sharp increase in inflation if central banks are unwilling to adequately raise interest rates.
The essence of a macrofinancial monetary policy is that interest rate changes would be guided more by financial developments in the economy than in the past. These financial developments would not just relate to changes on the balance sheets of financial institutions but also to non-financial balance sheets as well as broader conditions in financial markets. Similarly, the macroprudential regulations governing financial institutions would also respond to these broader financial conditions. History clearly indicates that significant economic downturns — such as the balance sheet recession in Japan and the Great Financial Crisis in North America and Europe — quickly lead to the insolvency of borrowers. That, in turn, threatens lenders with insolvency.
Identifying more specific financial data that could be useful predictors of future financial crises remains a work in progress. The IMF has, for some years, suggested a list of Financial Soundness Indicators and actively uses them in conducting Financial Sector Assessment Programs. Other researchers like Claudio Borio and Philip Lowe at the Bank for International Settlements have focused on more highly aggregated data, such as credit growth relative to trend and exaggerated asset prices, including property. Today, with the digitalization of data sources well advanced, we have more microdata and computer power allowing the simulation of agent-based models. Such models can more easily capture the interaction of agents, the possibilities of multiple bankruptcies and the likelihood of highly non-linear outcomes. These tools need to be more widely used.
Another important issue is whether macroprudential regulatory policies or, indeed, monetary policy under a macrofinancial policy framework should be guided by discretion or rules. Discretionary responses require a high degree of knowledge of emerging dangers and how they might be mitigated. Some experts recommend a rule-based approach in which specific actions are taken in response to changes in the growth of credit and/or asset prices relative to trend. They suggest that the knowledge required for discretionary action is lacking. A rule-based approach effectively takes out insurance against unexpected bad outcomes.
Perhaps a practical compromise would be augmenting the Taylor rule, a formula used by central banks to guide interest rate decisions. An augmented rule could use a longer horizon and include financial variables, as discussed below. The framework could also incorporate opt-out procedures in unusual cases when more flexibility is desirable.
This brings me to the third question: Which federal agency should have overall authority in pursuing systemic financial stability?
If both central banks and regulatory agencies are jointly given a new task, the independence of each is threatened. This may not be a bad thing, assuming their mandates from governments are clear and ways can be found to make them singly and jointly accountable to governments for their stewardship. What is clear is that both agencies will have to co-operate much more closely than in the past on systemic financial issues.
What is not clear is how that co-operative work should be governed at the national level. Looking across countries, a wide variety of formal and informal arrangements exists between governments, central banks and offices charged with regulating the behaviour of financial institutions and financial markets. The only consideration that unites them is that each domestic regime seems to have evolved as a product of historical circumstances specific to that country. In short, current arrangements often seem to have no logical rationale.
Perhaps the most central, practical question for Canada is whether the regulatory function for financial institutions should be in a separate agency, such as OSFI, or incorporated into the central bank.
Some difficulties inherent in making such governance changes can be seen in the recent U.K. experience. There, regulatory oversight of banks had traditionally been a function of the Bank of England. However, in 2001, that responsibility was transferred to the new Financial Services Authority (FSA) to consolidate all the prudential regulators of financial institutions. Issues related to consumer protection were consolidated in a new Financial Conduct Authority. Only a dozen years later, in 2013, the FSA was dissolved and its functions transferred back to the Prudential Regulatory Authority within the Bank of England.
Apparently, the consolidation within the central bank reflected growing concerns in the aftermath of the Great Financial Crisis. These concerns centred on systemic financial fragility and the need for much closer co-operation between the monetary and prudential authorities when regulating financial institutions.
While this is true in Canada as well, it cannot be forgotten that procyclicality is not the only problem regulators face in trying to preserve financial stability. Other problems include cybersecurity, the impact of technological advances like AI and quantum computing, and the effects of climate change that may lead to demands for finance to support adaptation and mitigation activities.
In suggesting changes to improve the regulatory response to the procyclicality problem, these other critical functions of financial regulation should not be compromised. Together with the danger of supervisors being accorded second-class status in a merged organization, these would seem to be compelling arguments against merging OSFI and the Bank of Canada.
How then might the two agencies co-operate in the pursuit of financial stability? Which agency should be given the ultimate responsibility for making policy decisions in pursuit of a stable financial system?
One approach to providing an answer is to specify criteria for good public policies. First, we have the should test. What policies should be followed to meet agreed-on objectives? Second, we have the could test. Does the agency have the legislated powers to do what it should do? Finally, we have the would test. Does the agency have the will, given how often it may face resistance, to do what it should and could do? Assessing the capacity of institutions to meet the should and would tests provides some guidance on where power (the could criterion) should be allocated.
The should test would give central banks the primary role in setting policy instruments, both monetary and macroprudential, to lean against the financial cycle. They are generally further advanced in thinking about systemic dangers and broader macroeconomic objectives. Similarly, the would test would also support the primacy of central bank decision-makers. They have a longer tradition, using central bank jargon, of taking away the punch bowl when the party is really getting going. Further, they might be less likely to be captured by powerful financial interests opposed to such macroprudential tightening, though such capture always remains a dangerous possibility.
Of course, central banks would have to be supported in this macrofinancial endeavour by a clearer, legislated mandate. This might be part of the Bank of Canada’s 2026 renewal mandate. The Bank would have to take care to avoid culturally dominating its regulatory partners and, thus, lose their important insights. Regulators would also require new powers through legislation, as well as instructions on how they should interact with the central bank in the use of macroprudential instruments otherwise under their control.
These relationships might also differ between periods of tightening (crisis prevention) and easing (crisis management). In effect, it would be business as usual for OSFI except for periods when it would act under a specific directive from the Bank of Canada. These would be, presumably, both time-specific and transparent. The mandate of the current Financial Institution Supervision Committee, in which the Bank of Canada participates, might be amended to this end.
A further problem facing Canada in the pursuit of systemic financial stability is that the oversight of financial markets is divided over a number of provincial authorities. There is no single point of federal authority. Because financial markets play an ever-increasing role in providing finance, relative to banks in particular, this is a crucial shortcoming. The Bank of Canada’s renewal mandate might attempt to fill this void, consistent with the Supreme Court’s ruling of 2011 that underscored the federal role in financial stability of national concern.
It cannot be denied that the introduction of a macrofinancial stability framework, even with appropriate institutional realignments, might fail to adequately reduce the economic costs of procyclicality. In this case, still more radical solutions might be suggested, preferably in an order corresponding to how easy the proposed solution is to implement.
Domestic changes would normally meet strong opposition from those who benefit from the status quo. Yet, overall, they would likely be less difficult to implement than changes involving the international monetary system. These domestic changes are considered first.
As a first step, changing the excessive risk-taking of domestic lenders, through more self-discipline and market discipline, would be desirable. Fines and sanctions levied on the individuals responsible, not their firms, would be helpful. So too would strict limitations on share buybacks, particularly with money raised by cutting real investment or issuing debt. Attempting to make borrowers, especially consumers, more aware of the risks associated with high indebtedness and leverage would be a worthy but difficult cause.
Changing the structure of domestic financial systems would be significantly more difficult given the industry interests at stake, but it could provide significant benefits. Major changes in recent decades stem from factors including globalization, financialization and consolidation. Changes arising from each factor could be rolled back through domestic legislation if the costs were thought to outweigh the benefits.
For example, a system made up primarily of large banks might, on the one hand, suffer from oligopolistic practices but, on the other, be systemically more stable. Ring-fencing individual financial sectors would not only help prevent the spread of financial turmoil across sectors, but also prevent the inadvertent extension of public safety nets. An example of ring-fencing is the 1933 U.S. Glass Steagall Act, which separated commercial and investment banking.
All domestic efforts to deal with the problem of procyclicality will also be threatened by an inconvenient fact: many forces supporting procyclicality come from outside domestic borders and domestic control. Since the breakdown of the Bretton Woods system in 1971, we have had an international monetary “non-system” in which there are no formal rules directed to preserving international stability. Absent explicit and clear rules that limit the size of its international debts, and benefitting from the U.S. dollar as the global reserve currency, the United States has for decades felt free to boost domestic spending through monetary stimulation.
The resulting capital inflows to other countries, particularly emerging markets, then stimulated procyclical forces in those places as well. Some countries, mostly emerging market economies, used capital controls and macroprudential controls to help deal with these spillover problems. However, most developed economies, again free of international constraints on the accumulation of foreign assets, resisted upward pressures on their currencies by lowering interest rates along with the United States.
Against this international backdrop, solely domestic efforts to control procyclicality have been, and sadly will be, severely compromised. Given current geopolitical tensions, this international situation seems unlikely to change soon.
This commentary set out to answer three questions.
First, can non-monetary instruments support systemic financial stability? Yes, with two conditions: microprudential rules focus on shared exposures and interconnections rather than on individual institutions alone, and macroprudential policy is applied symmetrically over the financial cycle, tightening during booms and easing during busts.
Second, what indicators and rules might trigger the need for easing or tightening financial conditions? These might include credit growth and asset prices relative to trend and/or data series included in the IMF’s Financial Soundness Indicators. More research is needed on this question, perhaps using agent-based models in addition to more traditional research approaches. Once identified, such indicators might be introduced into an augmented Taylor rule with opt-out procedures for unusual cases.
Third, which federal government agency should have overall authority in pursuit of systemic financial stability? Here, the Bank of Canada is better placed than OSFI to lead on systemic financial stability. It should be given a clearer, legislated mandate to do so, without merging the two agencies.
The 2026 Bank of Canada mandate review provides an opportunity to start to address some of the issues that contribute to procyclicality. This may be achieved by shifting to an approach where monetary policy and financial regulations are viewed as complements rather than substitutes. Furthermore, giving the Bank of Canada a greater role in guiding OSFI — when established indicators and enhanced monitoring raise concerns about national financial stability — would help improve overall macrofinancial stability in Canada.
Amid U.S. President Donald Trump’s on-again-off-again trade war, trade diversification has been the talk of the town. But for a country like Canada, which has long felt the gravitational pull of the enormous U.S. market, diversifying trade will be no easy feat. It also shouldn’t be the goal in and of itself. As the first part of the IRPP’s new multi-year research initiative, this paper explores the ultimate objectives of trade diversification. It presents a diversification plan, identifies what stands in the way of implementation, and proposes a pathway to develop policy solutions to overcome obstacles.
Policymakers and governments are facing daunting challenges such as climate change, aging demographics, income and wealth inequalities, low productivity, unstable geopolitics, and international conflicts. For some, this means governments need to develop new approaches and capacities to meet these challenges. For others, the solution is to limit the size of government by focusing on key priorities and reallocating resources.
Both groups should agree that measuring and improving government efficiency and effectiveness is a smart way to boost state capacity. Without accurate and ongoing measurement of government performance, it is not possible to know how well governments work or whether initiatives to make them work better are successful.
Assessing government results requires measuring how efficiently programs are delivered and how effectively they achieve their objectives. Efficiency improves when programs are delivered at lower cost or with fewer inputs over time through productivity enhancements such as technology investments, alternative delivery channels or reorganization. Using scarce public funds more efficiently frees up financial resources for other priorities.
Effectiveness measures the extent to which programs achieve their expected outcomes and provide value for money — that is, whether they provide benefits that are greater than their costs. Measuring effectiveness allows governments to make better-informed decisions by identifying which programs achieve desired outcomes most effectively. It also helps governments better understand the trade-offs involved when benefits are difficult to measure, such as when pursuing equity or meeting national defence imperatives.
To examine productivity in Canada’s federal public service and inform the government’s economic plan, the President of the Treasury Board appointed the Working Group on Public Service Productivity in fall 2024. In 2025, the working group (of which I was a member) provided 19 recommendations to measure and improve the productivity and effectiveness of the public service.
Implementing these recommendations would help the federal government both measure and improve public service efficiency and effectiveness.
If a government wants to improve public-sector productivity, the first thing it needs to do is measure it. This is easier said than done. Since governments mostly produce non-market outputs (i.e., they do not sell their services at market prices), measuring output indicators for public services is challenging.
Until recently, Statistics Canada has followed international standards that allow for two ways of measuring government output: the direct inputs approach, which treats the resources used to produce public services as a measure of output; and the direct output approach, which measures what the public sector actually produces.
While the output approach is recommended, the input approach is considered the fallback when measuring output is too challenging (e.g., defence spending). What is unique about Canada is that it uses the input approach across all government sectors, whereas many countries have used the output approach for sectors such as health and education for some time.
This makes for an unsatisfactory and often misunderstood measure of productivity for the public sector. In a review of Statistics Canada’s measure of public-sector productivity, Phillip Smith, a former assistant chief statistician at Statistics Canada, concluded that the measure was misleading and should no longer be published. In December 2025, Statistics Canada terminated its national public-sector productivity series “due to the difficulty of adequately measuring production” in that sector and began to publish labour productivity indicators only for the business sector.
An alternative would be for Statistics Canada (with input from departments and agencies) to follow the example of the United Kingdom and the European Union and develop and test a direct output approach to estimate public service productivity. As with the business sector, the output of many public services can be measured using physical counts or quantities of services provided to Canadians, such as patients treated, students enrolled, inspections conducted or passports processed.
While the output of many key activities conducted by the federal government would inherently be difficult, if not impossible, to measure, programs delivering direct benefits to Canadians would be strong candidates for testing an output-based approach to measuring public-sector productivity.
The federal government should require departments and agencies that provide services directly to Canadians to develop and report on productivity metrics for those services. These metrics should be standardized by type of service to facilitate comparisons across programs and reported alongside how often service standards are respected. (Service standards are commitments made by governments on the level of service Canadians can reasonably expect, such as processing times for passport applications).
Productivity indicators and service standards should be consolidated on a single government website to facilitate public access. This information would not only help Canadians and government officials assess performance but also provide Statistics Canada with the data needed to develop output-based productivity measures for the federal public service.
The federal government’s Expenditure Management System is designed to ensure that all existing and new programs are focused on results. It requires public servants to identify, measure and report on an array of performance indicators and targets. The system is built on three pillars: the Policy on Results, which provides the framework for measuring and evaluating program performance; Departmental Plans, which set out targets; and Departmental Results Reports, which report on results achieved.
The system should not be replaced, but there is an opportunity to simplify and improve it. Replacing a plethora of program-level performance indicators, objectives and self-determined targets with a unified framework for measuring efficiency and effectiveness would reduce the reporting burden on departments and be more useful for decision-makers.
The federal government can start making changes now, without waiting for an overarching measurement framework. The Working Group on Public Service Productivity made many recommendations for the federal government on how it could boost productivity, including accelerating investments in artificial intelligence (AI) technologies.
In its response to the Working Group on Public Service Productivity, the federal government indicated that improving public-sector productivity and measuring the impact of its actions are priorities. It went on to emphasize that it intends to accelerate the adoption of AI to enhance public-sector productivity and develop a “consistent approach to measuring the productivity impacts of AI use cases across the Government of Canada”.
The Treasury Board Secretariat recently published the federal government’s first public AI register, providing information on where and how AI is being used across the public service. The register includes over 400 projects from 42 federal organizations, including most departments, where a range of AI tools are being developed or deployed. The mere fact that so many AI projects are being developed and implemented within the federal government is impressive.
Less impressive is the absence of quantitative estimates of the expected or realized net gains from any of the projects, such as reductions in operating costs net of investment costs or specific improvements in services provided to Canadians. This oversight suggests either a lack of capacity or, possibly, a lack of willingness within the federal public sector to adopt rigorous measurement.
While measuring public-sector productivity is important for determining whether its capacity is growing or shrinking, there is a question that is even more important to consider: are government programs and activities providing a net benefit to society?
To answer this question, we need to consider the costs and benefits provided by a program. For example, a training program would pass a cost-benefit test if the benefits to participants — such as increased employability and earnings — exceed the program’s costs, including the cost of raising taxes to finance it.
As mentioned above, this cost-benefit assessment is, in principle, handled by the federal government’s Expenditure Management System. Under this framework, program performance is assessed in terms of relevance, efficiency — which encompasses both operational efficiency (e.g., productivity) and allocative efficiency (e.g., the net benefit experienced by program participants or beneficiaries) — and effectiveness, which concerns whether programs achieved their intended outcomes.
Deputy ministers are responsible for establishing, implementing and maintaining departmental results frameworks. Within departments, the head of performance measurement and the head of evaluation, together with program managers, are responsible for ensuring the appropriate data collection and other systems are in place.
In theory, the Expenditure Management System should provide the federal government with the information needed both to measure public-sector productivity and to determine whether programs provide value for money through cost-benefit analysis.
Unfortunately, a recent C. D. Howe Institute report indicates that when evaluations are performed, they rarely assess productivity or value for money. Instead, they tend to focus on implementation issues, qualitative assessments (e.g., recipient satisfaction) or how program beneficiaries are affected, without assessing whether the outcomes can be attributed to the intervention itself. There are, however, a few federal programs that have been evaluated with state-of-the-art cost-benefit analyses. For example, the federal-provincial Labour Market Development Agreements and Pathways to Education program invested in systems that linked administrative and economic data. The federal government should build on these exemplary evaluations.
But these evaluations are the exceptions rather than the rule. Excessive flexibility in the federal evaluation framework makes it difficult to produce useful assessments of productivity and value for money. Departments have wide latitude in how they assess these core economic concepts, including through approaches that are only loosely connected to them. As a result, evaluations often fail to report on these basic performance indicators that would allow decision-makers to compare programs and assess whether they deliver value for money at the lowest possible cost.
Given the diversity of government programming, evaluation approaches should retain some flexibility. However, that flexibility should apply only once departments have met a set of mandatory requirements. A recent C.D. Howe Institute conference report suggests the evaluation framework should be revised to require departments to assess programs’ value for money, alongside relevance, efficiency and effectiveness, using clearly specified methodologies. Standard efficiency metrics, such as output-to-input and unit-cost ratios, should be mandatory, as should appropriate value-for-money tools, such as cost-benefit analysis.
Strengthening evaluation practices would better equip ministers and other decision-makers to make difficult choices about whether to create, maintain, scale up, scale down or eliminate programs. The objective is not simply to identify and cut “wasteful” spending, but to give decision-makers comparable information about the costs and results of different programs when allocating scarce public resources.
Some may argue that it is difficult to apply cost-benefit analyses across all federal programs and that they may not be feasible for initiatives such as social or redistributive programs. We think the evidence suggests otherwise. For example, the U.S.-based Policy Impacts initiative created a library with over 200 programs, including social and income-transfer programs, with unified cost-benefit analyses.
The federal government’s experience mandating and applying cost-benefit analyses across departments under the Cabinet Directive on Regulation demonstrates what can be achieved when a framework clearly requires a common analytical approach. Under the directive, departments and agencies developing or amending regulations must provide a regulatory impact analysis that identifies and assesses the costs and benefits of the proposed regulation. This approach has been successfully applied to regulations governing activities that, at first glance, might not seem well suited to cost-benefit analysis, including energy efficiency, food nutrition labelling and foreign influence transparency and accountability. This suggests that a mandatory requirement to assess costs and benefits need not prevent departments from applying judgment or adapting their analysis to the characteristics of individual programs.
This is not to suggest that cost-benefit analysis will always provide sufficient information for decision-makers to assess a program. Programs that pursue fairness objectives — such as income redistribution, reconciliation or strengthening social trust — involve outcomes that are inherently difficult to quantify. Evaluations should therefore complement the value-for-money perspective provided by cost-benefit analysis with a thorough assessment of a program’s broader impacts, including its effects on fairness and equity. Blending quantitative and qualitative analysis would give policymakers a more complete basis for weighing trade-offs between economic performance, fairness and other policy objectives.
Is the federal government interested in measuring and enhancing public service efficiency and effectiveness? The evidence suggests that it genuinely is. What is less clear is whether the public service can walk the walk.
In the 2025 Speech from the Throne and the prime minister’s May 2025 mandate letter, the government recognized the importance of improving the productivity of the federal public service to achieve better results for Canadians. In its response to the Working Group on Public Service Productivity’s recommendations on measuring and enhancing productivity, the government indicated that most of the recommendations either align with existing government actions, including those outlined in its 2025 budget, or could inform future work by the Cabinet Committee on Government Transformation.
One notable exception is the government’s decision not to pursue the working group’s recommendation to measure productivity across Canada’s public sector. This is unfortunate and a missed opportunity but should not prevent Statistics Canada from continuing its exploratory work on measuring output in the education and health sectors.
But does the public sector even have the capacity to improve how it measures productivity? Evidence from program evaluations and the AI register suggests that the public sector lacks capacity and, possibly, willingness, to establish a rigorous measurement framework. If the government is serious about its commitment to measuring and improving public-sector productivity, it will need to provide clear direction and invest in the capacity required to deliver it. In addition to rewriting the evaluation framework, as discussed above, and investing in data systems and people skills through training and recruitment, the government could take some relatively simple steps. For example, it could return to departments and agencies included in the AI register and require them to provide an assessment of the expected or realized returns on their AI projects.
What about ensuring that programs focus on results and provide value for taxpayers’ money? The public service does not have a good record of conducting cost-benefit analyses of government programs, and the evaluation policy framework needs to be updated to clarify what exactly is expected from program evaluation. The federal government should update the framework to make systematic assessments of programs’ value for money through rigorous cost-benefit analysis a mandatory part of program evaluation. This would be the most important long-term contribution the federal government could make to achieving better results for Canadians.
The troubled times in which we live may require governments to increase their capacity to deliver on new and ambitious policies and missions. But any added capacity must be effective and efficient. Likewise, current programs and initiatives should also be able to deliver results.
In both cases, the federal government will need a measurement framework that systematically tracks the efficiency and effectiveness of government programs and activities. Such a framework would ensure appropriate results are achieved for current programs and activities, as well as new initiatives. The federal government appears genuinely interested in improving public-sector efficiency and effectiveness. But without the right framework to achieve its mission, it risks overestimating its capacity to deliver for Canadians.
Canada’s economy is evolving, which will bring both positive and negative change. But transitions — such as moving toward a low-carbon economy, shifting trade relationships or the rise of AI — can disrupt specific workers in specific places. In some instances, people in affected sectors will keep their jobs or move into new, often similar, roles. But for those who lose their jobs, the path forward is rarely obvious. Finding a new career is a complex decision, and Canada’s approach to workforce development has historically failed to adequately equip workers, businesses and communities to face these disruptions.
This study demonstrates what a place-based, skills-based approach to transition planning can look like in practice. Rather than starting from credentials or job titles, it asks two questions: What do workers actually do on a day-to-day basis? And where do the competencies they have overlap with other occupations?
Applying a data-driven methodology across seven Canadian communities susceptible to workforce disruption from the low-carbon transition, the study identifies potential career pathways for 15 occupations and the specific skill gaps workers would need to bridge to alternative occupations. In doing so, it also makes the case for greater investment in the data infrastructure that underpins this kind of place-based analysis.
In practice, this framework narrows hundreds of potential career pathways to a manageable number. The approach follows four steps:
Our study does not advocate for any single pathway, nor does it predict which opportunities will emerge in a given community. Because the analysis works with existing occupational data, it cannot capture emerging opportunities — such as new roles tied to nuclear, defence or major infrastructure investments, or shifts driven by changing trade relationships. It also relies on national-level competency profiles that may not fully reflect local labour market dynamics.
For example, a heavy equipment operator may have the skills to become an elevator constructor, but if multi-storey buildings are not planned for the community, it is not a realistic pathway. These limitations underscore a central argument of this study: that greater investment in timely, granular and accessible skills data and projections would make this kind of analysis significantly more powerful. And because career transitions are ultimately personal and shaped by community context, this framework is designed to be refined through local knowledge and engagement — providing an evidence-based foundation for decisions that workers, communities and policymakers reach together.
While the methodology focuses on disruption that could arise from the low-carbon transition, the same approach can be used to support workers facing disruption from trade policy, automation or other structural changes.
Based on our findings, we offer four recommendations for governments, employers and education providers to better support a skills-based approach to workforce development:
1. Federal, provincial and territorial governments should institutionalize a skills-based approach to workforce development.
2. Federal, provincial and territorial governments should invest in data infrastructure to make skills-based approaches effective.
3. Education and training institutions, working collaboratively with industry, should experiment with innovative approaches to delivering non-cognitive skills.
4. Communities facing foreseeable economic transitions should be equipped with actionable skills-based analyses and supported in building the local capacity to use them.
Like many advanced economies, Canadian governments are increasingly turning to industrial strategies to try to strengthen their economic sovereignty — defined here as the capacity to protect and shape key domestic economic capabilities — and to support economic growth aligned with the global energy transition and net-zero emissions goals. This represents a shift from previous decades when governments in Canada generally favoured market-led approaches and limited direct intervention.
Industrial policy refers to government actions that deliberately seek to shape the structure of economic activity, which could include what is produced, where production takes place, or which firms, sectors or regions and places are supported in pursuit of a public goal. It’s not new. Government efforts to promote economic development in particular sectors have a long history. Consider Alberta’s oil sands industry or Ontario’s automotive industry. What sets the current period apart is the scale and scope of industrial policy. Government intervention in the economy is now much more extensive, ambitious and better-funded.
Three pressures are driving this new generation of industrial policy: weak productivity growth and persistent regional divides that market-based policies have not fully addressed; climate and digital transformations that require co-ordinated long-term investment at a scale and pace markets are unlikely to provide without public direction or support; and geoeconomic rivalry as countries increasingly use trade, investment and industrial capacity as strategic tools to advance economic and geopolitical interests.
In this context, industrial capacity is increasingly seen not only as an economic policy but also as a requirement to achieve strategic autonomy — the capacity to act independently or with a significant degree of independence from other powers.
While industrial policies could help address these issues, they also pose a hard test of state capacity to steer economic change. More specifically, this refers to whether governments can achieve the following: set clear and focused objectives; design instruments that fit those objectives; co-ordinate across institutions and levels of government; deliver policies effectively, including arm’s length bodies where useful; and evaluate results.
A key challenge facing policymakers is to ensure they have the institutional capacity to guide economic transformations. Our research suggests that the design and governance arrangements underpinning industrial policies largely influence whether state interventions will catalyze and support economic transformation or merely subsidize the status quo.
How are recent industrial policy measures in Canada designed and implemented? How do they compare with those in other advanced democracies?
In a recently published report, we explored this question by assessing and comparing the governance of industrial policy in Canada and the United Kingdom. The U.K. offers a useful benchmark. Like Canada, it has historically relied on market‑oriented approaches to economic development and has been cautious about more direct government intervention. Yet, it has still managed to advance an industrial policy agenda despite the disruptive effects of Brexit and frequent changes in political leadership. As both nations have recently moved toward explicit industrial strategy and deliberate government intervention, they provide a useful setting for understanding how states with similar institutional structures navigate this policy field.
Our analysis does not seek to evaluate whether recent industrial policies have achieved their intended results. Instead, we draw on a comparative analysis to provide a set of evidence-grounded principles against which strategy design and governance arrangements can be evaluated.
We identify five key elements:
(See figure 1 for an overview of means across all areas for Canada and the U.K.)
Figure 1. Comparing Canada and the U.K. on industrial policy elements
Source: Authors’ analysis based on: Krawchenko, T., McCann, P., Arcand, B., & Hsu, M.-W. (2026). The governance of new industrial strategy: An inclusive and green agenda for economic transformation. 10.18357/1828/23746
A key idea from our report is that these five mechanisms reinforce one another. Strategies that acknowledge spatial complexity — the differences across places, regions and local economies — tend to reach for more binding requirements or incentives with clear conditions. This is because place-specific challenges require targeted responses. Conversely, strategies that lack place-based grounding tend toward generic, weak instruments. Strategies without governance accountability tend to have gaps between the stated goals and the tools used to achieve them.
While such relationships do not imply causality, they align with the literature on industrial policy, which underscores the importance of these dimensions in state-led economic transformations. In this way, these mechanisms provide a framework for assessing the capacity of states to govern industrial transformation.
In what follows, we explore each element and reflect on how they can help improve industrial policymaking in Canada.
Research on industrial policy has long warned against the pitfalls of overpromising its benefits. For policymakers, a key way to minimize this risk is to first articulate a vision of where the economy should go and why. Then, translate this vision into measurable, time-bound economic targets that reflect competitive goals in specific value chains, i.e., from input to production, processing and end use. While ambition is important, it must be paired with a deep understanding of what is actually achievable. Policymakers need high-quality information in specific sectors to devise such targets.
Our analysis shows a number of industrial strategies in Canada fall short in this regard. Many policy documents lack any measurable objectives, making it almost impossible to track progress. In addition, many outlined objectives are too broad to help focus investments. For example, many strategies set employment and export targets within broad economic areas such as clean energies, natural resources and digital technologies. While each area on its own may be promising, their broad formulation makes it difficult to map the precise part of the supply chain that governments aim to build or grow. Without such details, policy targets cannot be used to co-ordinate investments or monitor whether government support translates into productive capacity.
Canada’s strategy on critical minerals is a partial step forward on this front by explicitly prioritizing six sectors: lithium, graphite, nickel, cobalt, copper and rare earth elements. But it falls short of turning these priorities into actionable economic targets that reflect the role Canada could play in this global value chain. While recent international commitments — such as the G7 pledge to reduce reliance on single suppliers for rare earths and permanent magnets to under 60 per cent by 2030, with an ambition to reach 50 per cent “as soon as possible” — begin to articulate dependency‑reduction goals, they do not yet translate into clear, Canada‑specific production, investment or capability targets along the value chain.
The U.K. critical mineral strategy offers a better approach. It sets the objective of meeting at least 10 per cent of that country’s critical mineral demand through domestic production by 2035. This economic goal is then translated into production targets for specific critical minerals, such as at least 50,000 tonnes of lithium carbonate equivalent by 2035. In addition, the report estimates the quantity of each prioritized critical mineral across a range of end-user sectors, such as electric vehicles and life sciences, thus helping to anticipate the scale of the opportunity and boost investment across entire supply chains.
The U.K.’s critical minerals strategy is not an isolated case. Our analysis shows it has set production or deployment targets for several economic priorities, including low-carbon hydrogen, carbon capture, utilization and storage, and offshore wind. This approach aligns with existing literature, which emphasizes the importance of turning economic visions into measurable competitive objectives.
In public debates, industrial policy is often associated with government subsidies to preferred firms. Under this approach, the key task facing policymakers is to correctly identify the most promising companies, then design policies that ensure cost-effective results, such as adequate profits to sustain the firm.
But to really understand industrial policy, we need to start from the observation that the structure of an economy, or what is being produced, matters for public goals. A key task for policymakers is to ensure the economy is on a trajectory aligned with societal ambitions. This entails not only assessing current performance but also anticipating future transformations that reshape global value chains. So, a core function of industrial policy is deliberately aligning structural change with public goals to achieve outcomes that markets may not deliver at the necessary scale or pace.
Achieving this objective requires more than simply subsidizing firms. It requires a diverse and co-ordinated mix of policy instruments, including funding, financial incentives or procurement policies that shape production and demand in strategically important areas. These areas can include digital and clean technology products and services that matter for climate, security, or productivity and prosperity goals.
In other words, industrial policy is not about picking corporate winners but about deliberately co-ordinating investments to catalyze and support the development of economically promising value chains in areas that advance economic, social, environmental and national security objectives, including sovereignty and economic resilience.
Our report shows that co-ordination across supply-side and demand-side policy instruments is less developed in Canada than in the U.K. Supply-side instruments strengthen the capacity to produce or provide targeted goods, services or technologies, while demand-side instruments create or stabilize the markets for those goods, services or technologies.
The U.K.’s industrial strategy for offshore wind is a concrete example. Guided by a clear target of 50 gigawatts of power by 2030, it combines targeted support for domestic manufacturers with incentives, such as contracts for difference, with a set price for output and a government guarantee it will pay the difference if market prices are lower. This strategy aims to encourage electricity generation from renewable sources, including wind.
The strategy also sets a target of achieving 60 per cent local content in the offshore wind supply chain by 2030, thereby helping to align investment in domestic wind turbine manufacturing with electricity generation. With the U.K. accounting for more than 40 per cent of Europe’s total installed offshore wind capacity, it is a good example of how industrial policy can support decarbonization goals.
Canada is moving more slowly in deploying a comprehensive policy mix in industrial policy. Consider the electric vehicle (EV) industry. In recent years, Canadian governments have introduced ambitious policy measures to support both the production and consumption of EVs. But mechanisms that deliberately link domestic production to consumer demand, such as local content targets or requirements, remain largely absent. Failure to close this gap risks hindering Canada’s ability to achieve both its climate and economic goals in transportation.
While recent federal initiatives such as the Defence Industrial Strategy and the forthcoming Nuclear Energy Strategy show a shift toward more integrated, value chain‑oriented approaches in other sectors, a comparable level of co-ordination has yet to emerge around EVs.
All of this suggests that the question is less about how much governments should spend on specific firms than about whether policy instruments — tax incentives, regulations, R&D funding, consumer subsidies, etc. — work together to accelerate investment and build or grow production capacity across strategic value chains.
The governance dimension of industrial strategy — the institutions and processes used to co-ordinate, monitor and adjust strategy — is an important predictor of whether strategic ambitions translate into actual changes in investments, production and sectors.
In general, the literature points to four key dimensions of robust governance arrangements in industrial policy: industrial strategy is embedded at the heart of government; sector-specific co-ordination bodies are used to drive structural change; dedicated public-private forums co-create roadmaps and strategies; and departments take a whole-of-government approach to the policy mix using sustained, multi-year horizons.
Advanced democracies have long been portrayed as institutionally ill-equipped to govern state-led economic transformations. While there is still room for improvement in the U.K., the British government has made important progress in recent years in this area.
In the climate sphere, research published in Nature Climate Change has broadly described the country as exhibiting “high levels of state capacity and research body autonomy, as well as substantial policymaking authority afforded to climate-motivated bureaucrats.” Progress has also been made in industrial policy. A report by the International Institute for Strategic Studies noted that, following recent institutional reforms, “new ministries are [now] better aligned with the challenges of the energy transition and the digital transition, and imply greater focus in the UK government on strategic industries.”
Our findings broadly align with these observations, showing that the U.K. overall embeds collaborative delivery mechanisms across many of the studied strategies. Across the policy documents studied, we also found a relatively strong integration of climate and industrial objectives, which helps overcome departmental silos. This is not to say that the governance of industrial and climate policy in the U.K. is without weaknesses. These observations should instead be read as evidence that state capacity-building is possible and is happening here.
Like other studies, our report found that in Canada, the federal government is falling behind its trading partners in modernizing its governance arrangements for industrial policy. We found that the federal government often relies on ad hoc, temporary bodies to inform and govern industrial strategies. Without permanent co-ordination bodies specialized in specific sectors, Canadian industrial policy currently lacks the institutional foundation to learn and correct course based on independent expertise.
At a moment of rapid geoeconomic change, the ability to adapt strategy in response to new information is a condition for relevance. Addressing this gap is a critical step to move Canada’s industrial policy toward a better place.
One striking finding from our comparative analysis is that place-based thinking often goes hand in hand with stronger policy instruments. This type of thinking seriously considers how economic conditions, including assets, opportunities and challenges, differ across places and regions. Strategies that explicitly acknowledge spatial diversity by naming regions, targeting clusters or recognizing that different parts of the country face different opportunities and risks tend to use more robust policy tools than strategies that treat the national economy as if all places are essentially the same.
Nearly 70 per cent of U.K. strategies combine high place-sensitivity with strong instruments while 41 per cent of Canadian strategies combine low place-sensitivity with weak instruments. One reason is that place-based industrial strategy requires governments to develop detailed, contextual knowledge of specific industrial ecosystems, which are also conducive to more robust policy targeting and co-ordination with subnational governments.
In addition, the effects of deindustrialization, such as the loss of industrial jobs, firms or production capacity, are often highly uneven across regions and sectors. As such, place-sensitive industrial strategies are critical to avoid deepened spatial inequality.
The tendency of the federal government to prioritize spatially undifferentiated instrument design — sector-neutral tax credits, broad innovation programs, horizontally applied competitiveness measures — appears insufficient to rise to this challenge. There is also a tendency to put place-based policies into regional development agencies instead of integrating place-based approaches into national policies.
Our findings provide quantitative evidence that strategies investing in understanding clusters, local production systems and regional ecosystems are often the ones that advance more sophisticated policy instruments.
Quebec’s aluminum strategy is a good example. It prioritizes the local transformation of resources in specific regions and uses intermediary organizations to help inject local knowledge into policymaking and to connect innovation infrastructures to the specific needs of industries. This illustrates how place-sensitive thinking can be harnessed to improve the design and governance of industrial policy.
At its core, governing economic change is a distributive question, which inescapably creates winners and losers. For industrial policy, this means how gains from economic transformation are shared across firms, regions, communities and social groups must be an integral design criterion.
In the Canadian context, this takes concrete form in what has been called “inclusive industrial policy” or a framework in which economic growth, innovation and firm success are pursued alongside economic and social inclusion, community wealth and environmental sustainability. Core instruments include using public procurement to create local jobs and opportunities, broadening who can access and shape investment capital, and embedding inclusion metrics such as building equity goals and measures into program design and evaluation metrics.
Our comparative data found both Canada’s strength and its characteristic gap in this dimension: Canadian strategies score significantly higher than U.K. strategies on recognition of specific groups, reflecting the stronger integration of Indigenous rights frameworks and equity-oriented participation requirements. But this recognition advantage is often not matched by distributional instruments, such as community benefit agreements, equity stakes and mandatory revenue sharing. A good example of how to do this correctly is Indigenous Business Australia, a government enterprise that promotes the equity participation of Indigenous communities in industrial projects to foster their economic independence and the nation’s prosperity.
The U.K. strategy for carbon capture, utilization and storage offers another mechanism for making industrial policy work to reduce regional inequality between London and the country’s industrial regions. By making firms’ access to government funding for such projects conditional on locating in government-designated industrial regions, this mechanism helps promote green sources of economic development in economically struggling geographic areas.
It is worth noting that the prioritization of regions was not based solely on political considerations. The U.K.’s industrial regions were independently mapped using transparent criteria to identify those with the greatest economic potential for these projects. This approach to spatial prioritization helps align social and environmental goals with the pursuit of credible business opportunities.
All of this points to the need for industrial policy not only to improve its awareness of marginal communities but also to share appropriate returns with them. Without such redistribution, recognition creates the appearance of inclusion without the substance of shared prosperity.
Many nations are now using ambitious, targeted industrial policies to build specific industries in the 21st-century economy. In this environment, Canada needs targeted, co-ordinated and place-based industrial policy to address its current challenges, such as weak productivity and social inequality, and to strengthen its position in global value chains.
At the same time, there is no question that industrial policy is difficult. Canada needs to have an open, transparent debate about how it is done to ensure that risks and rewards are appropriately distributed across society. But to be productive, this conversation should not centre on how much state intervention is needed to shape economic transformation. We argue that a more productive starting point is to ask whether states possess the capacity to advance industrial policy strategically, accountably and in ways that distribute the benefits of change broadly across society.
To recapitulate, the evidence points to five interlocking elements to move in this direction: an operationally grounded vision; a diverse, integrated instrument mix that includes demand-side tools; a governance architecture that embeds accountability and enables learning; place-based thinking that acknowledges and addresses spatial heterogeneity; and inclusion that delivers material redistribution, not merely procedural recognition.
Canada’s current issues — geopolitical and trade pressure, climate targets and renewed federal interest in industrial policy — create a clear opportunity to apply these good design and delivery practices in industrial policymaking. If we focus on getting these design fundamentals right, industrial strategy can substantially shape Canada’s economic and social future.
For decades, Fort McMurray has been synonymous with one thing: the oil sands, a vast deposit of viscous, heavy oil mixed with fine sand that accounts for the fourth-largest proven oil reserves in the world.
But to the more than 82,000 residents of this northern Alberta community, it is so much more. It is a place of stunning nature, located at the intersection of four rivers where the forest stretches as far as the eye can see and where the northern lights dance across the night skies. It is a place of recreation, where passion for the outdoors is combined with a love of adventure.
And, perhaps most of all, it is a place where people look out for one another.
When a wildfire known as the Beast destroyed a significant portion of the town in May 2016, the community came together in shared trauma and grief to build back what was lost. Then, just after the start of the COVID-19 pandemic in 2020, a major flood hit and the community was forced to rally once again.
Fort McMurray also lives with the ups and downs of oil prices, and with the jobs and housing costs that rise and fall in tandem.
Then there is the extreme weather that frequently leads to treacherous driving conditions.
Shared adversity has fostered a culture of neighbours helping neighbours when the need arises because, as everyone knows, it could be them next. It is this culture that has created a strong community that residents are proud to call home. People visit for a few days or a couple of weeks and end up staying for decades.
“It’s a special place,” said Sandy Bowman, Mayor, Regional Municipality of Wood Buffalo. “Everybody comes here on a two- or a five-year plan, and they’re still here. I’m that person, and so many of us are. It’s the community and the people. It’s not just about [the oil sands] industry. There’s a different feel in Fort McMurray, and people are proud to be here.”
Yet the community also faces an underlying susceptibility to global forces because of the high concentration of employment in a single, export-oriented industry: oil production. Whether it is the global energy transition, U.S. threats of trade disruption or the trend toward cost-cutting automation, change and uncertainty are expected to loom large over the community in the coming decades. The spike in oil prices due to the Iran war is boosting company profits but is unlikely to translate into new investment without clear longer-term signals on oil prices, global demand and pipeline infrastructure.
An agreement between the federal and Alberta governments, and a partnership on a new West Coast pipeline, offer the potential for a more collaborative approach to oil production than in the past. But residents are also looking for more government support to navigate workforce disruption, investments in training and recognition of some of the unique social challenges their community faces.
Prime Minister Mark Carney has indicated a desire for change in the federal public service to deliver on the Liberal government’s Make Canada Strong agenda. He hopes to realign the country’s economic and political relations to respond to new global and North American realities. The question is whether the public service has the capacity to effectively and efficiently execute such an ambitious agenda. Given widespread concerns about declining public trust in government, it is important to assess public service reforms by whether they increase trust in public institutions.
The overarching discourse around public service reform has focused on efficiency and speed. Whether efforts to streamline the public service and make decisions faster will impact overall trust is still unclear. Improved speed and efficiency may increase perceptions of public service competence, but risk decreasing perceptions of benevolence and care, as inevitably some groups will feel their interests and values have not been considered in decision-making.
We must ask whether the public service has the capacity to execute the current government’s mandate, but also whether it has the capacities needed to build trust in the institution. Recent research suggests that the ability of public servants to engage directly with citizens is one such capacity.
Political trust is linked to the public’s belief that political actors and institutions will look after their interests and values when exercising power. Research shows that trust can affect institutional stability, political participation, and the public’s willingness to abide by laws and accept the costs of policy. While Canada generally performs well on indicators of public trust compared to other OECD countries, typically only about half of Canadians say they have a lot of trust in the federal government. Trust in the public servants specifically isn’t high either. The 2026 Confederation of Tomorrow survey, of which the Institute for Research on Public Policy is a partner, found that 61 per cent of respondents were not confident in the ability of public servants to plan ahead by 10 to 20 years.
Populist politics, which rely on anti-government rhetoric and fostering distrust of political institutions, has become more mainstream in Canada in the last five years. This development further threatens political trust in the country. If we are indeed in a hinge moment, with political and economic changes that have not been seen in a generation, then higher levels of trust in political institutions, including the public service, will be necessary to weather disruption.
How can trust be maintained or increased? While the determinants of trust in political institutions are multiple, complex and contestable, a starting point is the three-pillar framework used in organizational psychology, political science and public administration. The framework suggests that trust is determined by competency, the ability or capacity to perform a task; benevolence, caring for and considering others’ interests; and integrity, being honest and following through on commitments.
Where does the public service rate on these pillars and where are opportunities to increase trust? New, yet-to-be-published research from Andrea Lawlor and Marc Bodet, at McMaster University and Université Laval respectively, has begun to unpack what, exactly, the public trusts different political institutions to do. In their 2025 fieldwork, the researchers found that Canadians have higher trust in the public service on competency elements like carrying out its duties well, having the capability to perform its job and being knowledgeable about its work. These all speak to the effectiveness and efficiency of the public service. Where Canadians trust the public service less is on questions of benevolence, whether it acts in the best interest of the public and if it would take advantage of the public. The public had the least trust in the public service’s integrity, whether it delivers on its promises and does what it says it will do (figure 1).
Carney’s approach largely focuses on the public service’s competence in executing policy decisions and delivering services. The Clerk of the Privy Council Michael Sabia’s open letter to the federal public service in July 2025 highlighted the need to focus on fewer priorities, simplify procedures and processes to act faster, and increase accountability for results. Mission-driven government has been the buzzword under Carney. The approach, originating with the U.K. government, focuses on framing priorities as missions to overcome departmental silos and get different parts of government pulling in the same direction.
Former clerks and a chief of staff have largely echoed the need for the public service to move faster. They have offered a range of options including restructuring departments, decreasing the power of the centre, reviewing spending priorities and establishing a Chief Operating Officer. Academics have also been involved, examining capacity and co-ordination issues, assessing digital transformation, service delivery and data management, and considering the impact on employees.
There’s an implicit assumption in these discussions that increased public service competency will lead to greater public trust in government. But evidence on the extent to which performance contributes to citizens’ trust in government is, at best, mixed. Focusing on competency, where the Canadian public service already enjoys higher trust, risks further undermining the pillars that command less confidence, thereby missing the best opportunity to improve trust. A focus on speed and efficiency creates a trade-off with the benevolence pillar, as time is needed to hear and consider competing interests and explain important decisions.
When promises made to the public to secure political support are broken, the integrity pillar is undermined. Of course, competency is required to deliver on promises and ensure integrity as well. In short, the public service must be able to do things right, but it also has a role in ensuring government is doing the right things.
One key area of Carney’s bureaucratic reform agenda is accelerating approvals of major infrastructure projects to grow Canada’s economy and decrease reliance on the United States. This represents a test case for the government’s public service reform approach. The government established the Major Projects Office, headed by Dawn Farrell, a chief executive with significant experience in the private sector, and committed to a streamlined process that leads to project approvals in two years.
Given the length of approval times for projects like the Trans Mountain Pipeline, two years would certainly qualify as an increase in efficiency. But the experience of pipeline review processes in the early 2010s under the Stephen Harper government suggests that trying to move quickly may undermine trust in both the institutions involved and the broader government. This was particularly true among local and Indigenous communities that were directly affected by the projects. Already, Indigenous leaders and environmental groups have expressed concern about the new process and their ability to have their voices heard. Communications from the Major Projects Office have habitually emphasized that Indigenous rights and environmental responsibilities will be honoured. But if these groups are not satisfied, the integrity pillar will be undermined, leading to a further erosion in trust.
A key test will be how the Carney government reforms, focused on speed and efficiency, interact with existing strategies and plans. These include the Government of Canada Trust and Transparency Strategy, and public service reform initiatives like Beyond2020 and the Call to Action on Anti-Racism, Equity and Inclusion in the Federal Public Service. All these strategies, to some extent, suggest increasing public participation, expanding partnerships and collaboration, and empowering diverse voices inside the public service. But they were initiated under prior prime ministers and clerks and predate the seismic shift in Canada’s relations with the United States under the second Trump administration.
It may be enticing for the government to focus on transparency and modernizing access to information legislation as the primary means to secure the public’s trust. Access to information about government activities and decisions is a necessary condition for trust. But it is by no means sufficient, as it is largely a one-way, government-to-public form of interaction. Two-way interaction, where the public can provide feedback and input into decisions, is essential to building trust. A recent OECD report found that the largest gap in trust in the federal government was between Canadians who felt the political system gave them a say and those who felt it did not.
Public service reforms that will build trust in government must dig deeper than efficiency and speed in decision-making. They must recognize the trade-offs of streamlining processes, including fewer avenues for public deliberation and input. Reforms that do not recognize this trade-off and promise more and better of everything will ultimately undermine the integrity of the public service.
The first step in addressing these trade-offs is thinking of public servants not just as inward-looking administrators, focused on processes and procedures, but also as outward-looking managers. In this second role, public servants seek to create public value by considering the goals and aspirations of people and communities, rather than thinking of them as clients seeking the efficient delivery of a product or service.
Public servants deliver democracy not only by implementing government decisions but also by participating in public discourse and helping define the public interest. My research, published in International Review of Administrative Sciences, highlights that Canadians already recognize this as an important role. In 2021, I surveyed 830 public servants from all levels of government across Canada, nearly 2,000 members of the public and 74 members of Parliament. Majorities in all three groups rejected the idea that public servants should remain anonymous and shielded from public scrutiny. They also agreed that public servants have a responsibility to engage with media and stakeholders about their work (figure 2).
This shift in the role of the public servant is not only desirable but may also be inevitable. Public servants are increasingly losing their anonymity and being scrutinized as individuals in the public space. Recent media coverage of Deputy Minister of National Defence Christiane Fox, as well as her public statement on findings that she breached a provision of the Conflict of Interest Act while working at Immigration, Refugees and Citizenship Canada, illustrates this trend. Public servants will not remain anonymous and free from public scrutiny even if they want to.
While competence will likely remain an important pillar of public trust in the public service, in the 21st century, it must be balanced with the public servant’s capacity to engage directly with Canadians. Such engagement demonstrates benevolence and integrity and creates an institution that truly earns the confidence of Canadians.
