EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, December 12, 1996

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[English]

The Chairman: We'll consider the committee hearing to be officially started.

Pursuant to Standing Order 108(2), the committee will resume its review of science and technology and the innovation gap in Canada.

I'd like to thank the witnesses for coming today. We decided to extend our hearings into this week at the last minute. I know the three of you have very busy schedules, and I can't tell you how honoured we are to have you come on short notice.

To give you the context of our discussions, our plans are to have an interim report the first week we're back in the House of Commons, which will be the last week of January or the first week of February, and to give the government a message as to what it should be doing in science and technology.

We've been using the witnesses this week to do a little more testing of our thinking and to have some prescriptions on the table. Feel free, as we come to the debate among us, to suggest what we should be doing. We're wide open for suggestions. We'd like to see ourselves as redeveloping a constituency for the science and technology community on Parliament Hill. We're here to listen to the witnesses and to project their ideas into the public debate.

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We work in an informal method. We ask the witnesses to present their ideas as briefly as they can to leave ourselves lots of time to open up for discussion. We will go into a round table discussion, which allows the members to go back and forth among the witnesses as they choose, so we don't really have a hierarchy as to who answers questions. They may be directed at you or may just be directed to the witnesses. Feel free to jump in as you wish when we have the discussions. We try to allow each member a chance to talk, and we don't follow the strict order of a normal committee in terms of who speaks when and so forth.

Dr. Mustard, I'm going to turn to you first. Dr. Mustard is the founding president of the Canadian Institute for Advanced Research. We're very pleased to have such a distinguished guest. Dr. Mustard, we'd ask you to make some opening remarks, and we'll take it from there.

Dr. Mustard has a submission in English, so I ask the permission of the committee to circulate this.

Dr. J. Fraser Mustard (Founding President, Canadian Institute for Advanced Research): Thank you, Mr. Chairman. I should tell you that you had my successor here on Tuesday, so I'm not going to say very much about that.

I'm going to talk a bit about what I learned over 14 years of building the institute across the country, because that involved my working with that motley crew of people from parliamentarians, cabinet ministers, and people from provincial governments, industry, the universities, and aboriginal groups. I'm sort of looking across all the cultures and regions of the country. I have a rather unusual perspective of the country and an unusual encounter of people. That's why the organization I'm now with is called the Founders' Network. It consists of a bunch of people who help me and who range from people in governments across the country, people in business, people in labour, etc.

In telling the story I'm going to tell you, I'm going to give you a bit of background to try to set the scope. I'll then try to give a few direct answers to your questions, if I may.

These slides are simply to entice you - and we'll have to douse the lights so you can sleep - that we are in a period of technological change.

Why do I think that's important? The late Ruth Macdonald, Donald Macdonald's wife, who was helping me build the institute 11 years ago, decided that Donald, who chaired the royal commission, should know something about science and technology. We had a full day meeting - about three dozen of us - with the commission, and the researchers and I want to emphasize to you that the meeting was a disaster. It was like two ships passing in the dark. They denied we were in a period of rapid technological change, and they denied that research and development had anything to do with economic growth.

It is absolutely marvellous to come to a committee that is asking the right questions 11 years later. This is slow progress in the world, but I would like to say that the fact that Industry Canada, in the document it released two years ago, talked about the global economy as undergoing a technological revolution perhaps as strong as the industrial revolution of the past century is a monumental step forward in understanding in this country. I just want to underline that for you, and I hope all your colleagues in Parliament fully understand it.

What this slide shows you is that we had the first industrial revolution, which was steam power. We know a bit about its effect. The second one was electricity for steam power. We know more about its effect. The third one you're in is not the information revolution; it's actually chips for neurons. I want to underline that it's the creation of low-level intelligence systems that function in society and make an enormous number of things possible, from genetics, etc., in the system to the flying of the aircraft I came here on.

A characteristic of these revolutions is that if you don't make the right investments, you'll lose out on them. The problem is that they take a long time. They do not occur in one year or ten years. We know that the second revolution took over 40 years to fully play itself out, with complex effects on society. We do know one piece of historical advice or information about that, which is that we know a bit about a country that failed to capture. That country happens to be the United Kingdom.

What you notice is that the per capita wealth of the United Kingdom in 1990 dollars - and these are all expressed in that - has slid from being first in the world in 1900 to being twenty-third today. It did so by neatly failing to do what is perhaps the single most important part of this story: to actually invest in the new economy.

The nice thing about that is that this is a lecture by Joseph Chamberlain - for those of you who are historians of English Parliament, Neville Chamberlain's father - in 1904 suggesting to the financial institutions in London that they were not the creators of the nation's wealth but the products of it. It is a very important thing for one to underline in this debate. There would be an enormous advantage if the banks were to keep investing in the economy, particularly the new economy.

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It's interesting that Chamberlain said that the decline of Great Britain is simply because of the failure to invest in the new economy. I won't take you through that story, which is well documented. At this crucial point in our transition, one of the policy issues you must address is the incentive structures to get our pools of capital to invest in the new economy. Don't do what Michael Porter calls becoming a well-driven economy. I would call it playing pistol roulette. That's the toughest issue that we face as a society. Great Britain recognized it at the turn of the century and could do nothing about it.

To illustrate this for you, a standard neo-classical economic argument whereby economies go along the white line with business cycles - the new concepts of economic growth - which I'm proud to say the institute did a large part in bringing to bear in this country, says you have to watch out for it, because it's not that simple.

If you become a well-driven economy - that is, if you invest in the money markets of the world - you will slide away from the white line to the green. If you know how to invest in the new economy and its uncertainties, which are science and technology driven today, you can go upwards. Great Britain is a classic example of an economy that failed. It had huge wealth and therefore could suffer the change better than we can suffer the change as we are. We in effect have become largely a wealth-driven economy because of our public policy since 1975. That's a macroeconomic issue, but I do hope you will say something about it.

With respect to its implications, we work in about four quadrants in our society, and these little rectangles are designed to show that. Under the new concepts of economic growth... I've left papers here for you that cover this from the institute's economic growth program, Romer, Lipsey, etc. I'm proud to say that Finance Canada even mentioned these two years ago in its document, which you might want to hook into your report.

The upper left-hand box shows where about 25% of Canadians work. It's the traded goods and services sector. That's your instrument of economic growth. Without it you can't create the wealth to flow through the other sectors.

I would remind those of you in Finance that you're represented in the lower left-hand quadrant, dynamic services. As Chamberlain said, you are not the creators of the wealth; you're products of it. Therefore, if the upper left-hand box doesn't grow, you ultimately cannot grow yourself. Therefore, you should have a vested interest in making the upper left-hand box work. We do not in this country have the institutional structures to handle that at the moment.

The right-hand side shows where most of us live and work, and it's dependent on the success of the upper left-hand quadrant. When the upper left-hand quadrant fails, governments no longer have the tax base. They do not have the income. Therefore, the things they support get cut back. The costs are very clear, and the small shopkeepers, of course, all get hit by this. If you go through any town, you can see that.

This is simply to emphasize an extremely important point: that your policies must emphasize that upper left-hand quadrant.

A member of the current government, before he was elected, came to talk to me. He was quite intrigued about this area. He, John Godfrey, and crew were writing a thing called the red book. I told them to identify the small businesses that are crucial for economic growth and to differentiate. That was not done. I want to make sure that you understand that point.

Let's think about how well we have done in this change. The second technological revolution began in about 1975. One way of looking at it is by looking at our external debt - the private and public - which can be picked up by the current account balance. Your wealth is what you produce in any year. Your expenditure is what you consume, plus your investment. The difference is the current account balance. It can be negative or positive, but if it's consistently negative, you have a problem.

That may show you how we've performed since 1975, and you can see that our cumulative current account debt has become deeper and deeper, because we've not been making the new economy work. We've sustained our gross domestic product by borrowing. The basic overall wealth of the society has been sustained by creating a very substantial foreign debt. We do have the distinction as a country of having the largest external foreign debt of this kind of the G-7 countries. We even surpass Italy. This is a very important message. It shows that we have not been making the transition to the new economy.

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What I am showing you is that we have mounted a sizeable external debt, and that is a huge marker. I want to make sure everybody understands that is not just government debt; that is private and public sector debt. We all borrowed without building the new economy.

You ask in your questions, how can you measure the innovation cycle in science and technology? The best measure at the moment, although it's still weak, is a thing called total factor productivity. It's in the papers I've left for you. This shows you Canada on the left-hand side, and you'll see that our total factor productivity performance is lousy compared to all of the other countries. The only country that is as bad as we are is the United States, which is an interesting question.

The total factor productivity is an extremely good marker of your investment in science and technology and innovation. So if you want to see why we have that debt and why we gotten ourselves into the hole, there's your marker for you. It's there in spades. If you want a marker of success, I'd start to measure that and get that published annually in Parliament and have everybody understand what it means, and you can do it by region.

The effect of not being able to create the wealth and flow it through those boxes I showed you is that the bottom half of the population - this is the recent Statistics Canada paper - shows that back in the early 1970s the bottom half of the population got the bulk of their income from work. Today look at where they're getting their income - from transfer payments.

That's up to 1992, but as you now have to cut back transfer payments, it doesn't take any genius to figure out that we're going to do all kinds of things to people, and the issues you're talking about are closely coupled to that. You can't turn that around unless you can build a new economy.

The other side of the agenda is what's happening to young people. This simply shows the average changes in income, by age sector. The fat cats over 45 are doing all right, thank you, but the people under 40 are not doing very well. That's a very serious problem for a country because it is the younger population that has to build the new economy. I want you to see the power of that kind of phenomenon that's associated with our failure as a society to come to grips with what the Macdonald commission couldn't come to grips with eleven years ago, and because of the fact that we didn't, we're paying a price for that.

So one of the major tasks of a government is to create a climate that fosters the building of the new enterprises, which your questions tried to address. But secondly, do not let it become separate from the strategy to maintain a stable social environment with diminished resources. That's an argument for integration that is in my paper, that I hoped governments would do instead of fragmenting these functions into separate camps, which I suspect you still do around the cabinet table.

Now, what to do... Well, this simply shows you that Canada's industrial expenditure on R and D - and this is up to 1992 - is anemic compared to other countries. You saw that in the total factor productivity story, and you'll see it here. One of the tricks is to learn how to address that, and one of the things I want you to do is to think a bit about one of Lipsey's points. I have his paper here from the C.D. Howe Institute. Dick talks about the weakness of neoclassical economics, and for the first time Dick comes out publicly in a newspaper and says something about it.

When you think of your own policy instruments being largely driven by people with backgrounds in neoclassical economics and not in the new-growth economics, it's a sizeable problem. I will say that both Finance and Industry Canada have moved substantially and released documents that are highly relevant to that, and if you have not read them, you should, because I think they're extremely important for your mandate. I have left some of the sets of papers with the people here. They partly came out of the institute's economic growth program.

But Dick talks about a neoclassical economist thinking you have input, you have a production function, and you have economic growth. He says the new concept of technological innovation, which is what you have to understand, that black box, which is what your questions all relate to, the facilitating structure, is absolutely key. Understanding that is crucial, and the microeconomic policies you are talking about have to be addressed as to how to make that box work. If you're looking for indicators and markers, that's the place to start to penetrate if you really want to measure economic growth, and I'd argue that total factor productivity is one of the measures you can use. There are some other ones we could talk about.

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The next little part of the story is here. What does the inside of the black box look like? The first point is that it is totally non-linear. This is from a very famous document by a man by the name of Kline. It comes out of a paper in 1986. It also comes out of a recent OECD document. But the important point is that you have research, you have a body of knowledge, and then you have the strategic industrial side on the bottom. The thing you have to work out in doing microeconomic policy development is to maintain a balance among those components, because if you have weaknesses in any of those elements, you can't move it forward.

I've tried to identify for you the fundamental weakness in our country, which is the lower one. We've made a reasonably good investment in the upper part, the basic research and some of the more applied research, but we mustn't cut it back, because if you cut it back you can't rebuild it. You have to concentrate on building that bottom line.

This allows one to put it into a slightly simpler context. If you think about this in terms of the current account balance slide I showed you, your wealthy creation is those top two lines. Your total productive capacity is what you could produce. What you produce is your wealth. Your expenditure line is consumption plus investment. This is both private and public.

To build an innovation-based economy you have to allow those components on the bottom to work. If you invest in the consumption or the fiscal roulette business and don't invest in that bottom line to enhance your real productive capacity or total factory productivity, you will end up having to borrow to sustain your standard of living, which you cannot do indefinitely. You have to learn how to create wealth.

If you think about that, the basic research base, it's not bad in this country; it's high quality. It's in danger because of what's happening to universities and public finance cutbacks. The applied research sector is tricky because part of that is industry and part of that is universities. It's not as strong as it should be. The product development and market development is okay in some industries such as Nortel, but it's pretty tough in some of the other areas. Some of the young start-up companies have real problems in getting financing.

The trick in understanding this is that basic research is uncertain. That's one of the reasons why it's publicly financed and it has a broad social goal to it. Some of these other components have high levels of uncertainty. Uncertainty is hard to finance through standard financial instruments and that's where a government partnership with industry becomes enormously important.

Our government support of industry really, if you look at it, is about 50% of what the United States, per unit, provides to its private sector businesses. We do not overfund industry in this country at all. Things like the technology partnership fund, therefore, become very important strategic devices to help make that middle sector work. It's important to understand that.

The lessons from this are to not let investment be skewed away from making that base work, because if you do, you'll lose components and you'll never build to rebuild your economy. Secondly, we are so far in the hole that we do have to work at a very strategic partnership between government and the private sector to move that forward. It's very important, and Dick Lipsey argues that in his paper.

That's an important element. Do we have some good news? Yes, we do. But I'll show you this overhead slide first.

Elhanan Helpman, who heads the Canadian institute's economic growth program, has done a paper which you may not have seen, but it's on the effect on economic growth in this country of increasing our expenditure in R and D by 0.5% of our gross domestic product. We hover at around 1.5%, which is low in G-7 countries. This will put us up to 2%.

The long-term effect of that on economic growth is massive compared to the United States, Japan, Germany, France and the U.K., all of whom have substantially higher R and D expenditures on a per capita basis. If that doesn't prove the point of why what you're doing is absolutely crucial, I don't know what will. It simply shows why you as parliamentarians must make your colleagues understand the importance of this and you must set it up so it has long-term capability, because it will take at least two political cycles to get this really in place. You want to underline that when you set up the policies.

That's extremely powerful information, I think, for your case. What you have in place in the country are some extraordinary innovative capacities. I've had good fun playing a part with some of them. You have industrial consortia; you have PRECARN, designed to do research in that applied domain that's pre-competitive but cooperative amongst industries linked to universities. That's an extraordinary adventure, and it's still working. It has done some rather dramatic things, and if PRECARN hasn't told you what they've done, you should invite them in to tell you.

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You know about CANARIE. PAPRICAN is an old pulp and paper institute that has been quite successful.

The academic consortia are marvellous. You've had the national centres of excellence people before you. Just think of getting Canadian institutions to work collaboratively across the country to build a knowledge and information diffusion system that is increasingly being linked with industry. But the industry isn't there to link with easily, and that's the real Achilles heel in this whole process.

You have regional developments: ASI in British Columbia, and CRIM in Quebec; and you have individual university initiatives, such as Waterloo. Even the national laboratories, the IRAP program, have been very successful. My own institute, which I've now left the leadership of, has played its part in helping to put that into place.

The reason I put that on for you is that not many parliamentarians will know about all these things, yet they represent the extraordinary strength of this country. I should tell you that those programs operate across regions and language barriers. They simply work. That's an important message, to talk about capabilities in a country.

The final overhead for this presentation is this one. Your single biggest task is what my friend Lipsey calls uncertainty.

I will confess I'm on the board at Ballard Power, which some of you know a bit about. The technology partnership fund has come in to help it. It's a revolutionary technology that will change the energy systems in the world, developed in British Columbia. Even it, at this stage, has a huge uncertainty factor. It just cannot become a world-scale organization unless there's some partnership with governments, because of the huge problem of putting this technology into the system, which I won't go into in detail on for you. But I would underline for you that there are examples of how these partnerships were done in the past in the United States.

AT&T funded Bell Laboratories, not from its profits but by a direct tax on subscribers, because the government allowed it to charge its subscribers 1.5% of the bill to run Bell Labs, which created a huge uncertainty base that powered a large part of the Bell Laboratories development indirectly and fed into Bell Canada and Nortel.

That's an example. It's now broken up. The United States will have to think of other ways if it wants to do this.

The other one is the pharmaceutical industry. In the days I worked with the pharmaceutical industry, they would run five uncertainty projects - the good ones would - which might cost them each $10 million a year. After about ten years, one of them might pay off. If they thought it would pay off, they would take it and put it to market. The way we set up the process for them is that they then could set the price for their product - patent protection. They basically set the price to recoup the cost - if they were a good firm - of all those uncertainty projects. So they had the capacity to do that.

But now when you face uncertainty in a wide range of fields, there isn't a blanket rule. You have to target each area specifically and figure out ways you can facilitate the uncertainties of the innovation cycle. That's why the partnership principles are enormously important, and that's why as a government you must very carefully tailor your initiatives to the strategic area and what its needs are.

I can't resist putting this one on, because it was deleted from Michael Porter's document on Canada when he wrote it a few years ago. It was an interesting chart he had, in which he wanted to point out that the hierarchy of benefits to a country seemed extremely crucial. The relevance of this in today's day and age for parliamentarians is: multinationals that are owned and home-based in your country, that may logically do manufacturing outside your country, are the most powerful economic drivers for your society. So just remember that local ownership on local home base is not trivial. Porter says that in spades.

You can just think of Nortel's debate with AT&T about some contracts in the Middle East and you'll know the power of the United States government coming in behind and settling that contract.

That hierarchy is important, so your investment practices and your support must help you build some world-class multinationals operating out of Canada, and you must create an incentive basis to keep capacity. You may argue that's not important, and some people would. But if you want to maintain a geopolitical entity called Canada with the social values we have, then you're going to have to debate the implications of this one intensely.

That concludes my brief presentation. Let me close by summarizing how I would answer each of your questions, if I may quickly, Mr. Chairman - about three minutes.

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The Chairman: Yes. Please do so.

Dr. Mustard: From the bottom up, I think your national centres of excellence programs are a way of identifying where the critical industries and technologies are. That's where the talent has come together to do things.

What is the role of government? Partnership is key for government, and it has to take up the financing uncertainty and, by its policies, steer investment in the right direction if it can.

What are the impediments to doing this? The facilitating structures are incomplete, a problem that governments can help solve. Tax policies are an important part of the issue in sorting things out. I alluded to that in my opening comments. Revenue Canada is a problem for any of these people trying to do these things, and you might want to try to address that.

The fourth thing you really have to think about is what steps can be taken to promote the climate. I think the national consortia that have come into place are extremely powerful, and as you watch the leakage of venture capital, which you also want to promote with the national centres of excellence, you're perhaps beginning to see the emergence of institutional structures that really can move things forward for the future. You should do that, and you must pay attention to the incentives and reward structure.

How well are Canadians meeting the skills needs of high-tech industries? Moderately well. The centres of excellence have actually done a pretty good job of producing manpower that's gone off into industry. I'm sure they've presented those figures to you. And that can be grown enormously. There are some other strategies you can develop to do it.

Question six is the toughest one: how do you keep Parliament on side in this area? I would argue that you really do have to identify some issues of performance that can be published annually, and I would argue that total factor productivity should become a much firmer indicator in our lexicon. Secondly, I think there should be a much much powerful indicator of how well we're performing in building industries that are doing research and development to link with the structures we have in place. You should measure government's programs by how effectively they're building that capability within regions and across the country.

Thank you, Mr. Chairman.

The Chairman: Thank you very much, Dr. Mustard.

We won't go to questions right now. We'll go to the next witnesses and then we'll open it up to the committee.

I'd like to welcome Dr. Barry McLennan and Dr. Clément Gauthier, from the Coalition for Biomedical and Health Research.

Dr. McLennan, why don't we start with your comments. Then we'll have our round-table discussion.

Dr. Barry McLennan (Chair, Coalition for Biomedical and Health Research): Thank you, Mr. Chairman.

Ladies and gentlemen, thanks very much for inviting the Coalition for Biomedical and Health Research, or CBHR, to appear before the committee. In front of you are copies of our brief, in both languages.

First of all, I'll briefly tell you about the coalition. CBHR is an non-profit corporation, bringing together sixteen medical schools, four schools of veterinary medicine and twelve Canadian biomedical and biological societies, with about 3,500 researchers.

It also brings together 800 clinical researchers through the Association of Canadian Medical Colleges, the Confederation of Canadian Faculties of Agriculture and Veterinary Medicine, the Canadian Federation of Biological Societies and the Canadian Society for Clinical Investigation, as well as about 28,000 medical specialists through the Royal College of Physicians and Surgeons of Canada.

The Health Research Foundation of the Pharmaceutical Manufacturers Association of Canada is an associate member of CBHR. The voluntary sector also has ex officio representation on CBHR through Canadians for Health Research.

CBHR has two clear objectives. First, CBHR promotes increased funding for biomedical, clinical and health research activities in Canada, and second, it tries to increase the awareness of science among the public and government representatives with respect to the progress and the value of these activities for improving the quality of life for Canadians and our Canadian economy.

Mr. Chairman, I'd like to make a presentation, and in doing that, I will address each of the six questions you posed to us.

I want to start off by referring you to an article that appeared yesterday in The Globe and Mail. The Prime Minister was described as saying that governments don't create jobs in the modern global economy, but rather they create the conditions in which the private sector does.

In responding to the six questions posed by this committee, I will address how to bring about the conditions to which the Prime Minister referred.

With respect to your first question, the critical industry and technology that offers the most opportunity for jobs and growth is the health research sector. This sector has a wide base and a huge growth potential. It's a pioneering sector, and that's an important point. It's not a mature, saturated industry.

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The current market value of public companies in Canada's fastest-growing life sciences sectors - for example, therapeutics, medical devices, and diagnostics - exceeds $11 billion. This is identified in our report on page 2.

A 1993 report from the United States shows that the biomedical and health sector, followed by the natural sciences sector, is the most likely to have commercialization success, the kind of activity Dr. Mustard was talking about. About the future capability requirements for biotech in Canada, a 1995 study commissioned by Industry Canada and Human Resources Development Canada revealed that employment in that sector will grow from 8,000 to 14,076 jobs by the year 2000.

For example, BiochemPharma has generated 1,000 jobs in the last 10 years. It now has the fourth-largest market value of any biotech company in North America. BiochemPharma in Quebec, TerraGen in British Columbia, and Vascular Therapeutics in Ontario all have one thing in common. They started out by using grant funding from the Medical Research Council. They started out from investing in basic research.

I now want to show you, ladies and gentlemen, how research investments create a virtuous cycle of growth and development. I refer you to the graph on page 3 of our document. You'll notice that mature companies are the tail-end of the spectrum, whereas start-up companies offer the greatest potential for new job opportunities. Most importantly, the knowledge-generating basic research is the rate-limiting step of the cycle. It's the box at the top of the graph. That's the basic research, the uncertainty factor Dr. Mustard was referring to. Basic research is the key rate-limiting step in that circle, and the key element.

In answer to your second question, Mr. Chairman, it's in this high-risk phase where government must play a dominant role. I'm going to repeat that: it's in this high-risk phase that government must play a dominant role.

As shown on the right-hand graph, specific programs such as the NCE, the national networks of centres of excellence, the Canadian medical discoveries fund - and I believe you had Dr. Stiller speak to you recently - and the Medical Research Council-PMAC health program, PMAC being the Pharmaceutical Manufacturers Association of Canada, are positioned following this initial investment by government in basic research, and that's a terribly important point. In other words, the programs - NCE, the CMDF, and the MRC-PMAC health program, all follow in time the initial investment by government in basic research. The basic research must come first. It's the key element in the whole cycle.

I emphasize again, the role of government is priming the pump, investing in basic research. It's a fundamental role the government cannot escape.

I would now like to address your third and fourth questions. To my mind the greatest barrier to economic growth and job creation has been identified by the Conference Board of Canada in their September 1996 report. The board targeted Canada's low level of research and development support as a cause of our poor productivity. To increase productivity, the OECD, in their May 1996 Jobs Strategy, recommends an improved level of public support for basic research, and especially university research, because of its educational value, as a vital, complementary action to deficit reduction.

Canada is attempting to address the second barrier, the innovation gap, through the networks of centres of excellence, a program administered jointly by the three granting councils, which are the cornerstone of the NCE. I realize you've had presentations on that, so I won't go into details.

Our graph on page 3 illustrates the point, and I would emphasize that this continued support and expansion of the NCE program is essential in order to bridge the innovation gap. This has been recommended by the Commons finance committee in their report issued one week ago.

Canada's competitive position amongst the OECD countries has slipped from fourth to twelfth in just seven years. As a Canadian, I'm embarrassed about that. This declining competitiveness is the third barrier.

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I'll now refer you to the graph on page 8 of our document, entitled ``Trend in Budgets for Health Research''. Note that since 1995 Canada has been in a tailspin while our competitors have increased their investments in health research. We go off the graph on the lower line, and the investment in basic health research by our competition - the other G-7 countries - is increasing.

You'll notice that Japan, a major economic player, is not shown on this graph. The reason is simple. Japan until recently has been a technology follower rather than a technology innovator. The Japanese have realized that leading-edge technology now goes straight into the marketplace, and incremental improvements are inadequate to ensure its future economic well-being.

Japan now proposes to invest $155 billion U.S. over the next five years on basic research, and most of this will go toward the health research sector. Recognizing that the university research system is the ultimate technology generator, the U.S.A. has followed suit and will dramatically increase the budget of NIH, which is the U.S. equivalent of our Medical Research Council, over the next five years.

The fourth barrier is the intense competition we face with respect to foreign direct investment. The Conference Board's September report revealed that Canada's ranking in world foreign direct investment inflow is falling. We've fallen from third to eighth in the last six years.

I now refer you to the statement from Astra pharmaceutical confirming that access to qualified scientists in sufficient numbers is a critical factor in attracting global R and D in Canada. This is on page 5 of our brief.

I want to show you an article that appeared in The Gazette. To illustrate how important this is, Astra announced one month ago its intention to spend $300 million by 2004 in Montreal. Montreal was selected over four other sites primarily because it has four universities producing a ready supply of highly skilled labour. We have to maintain a proper research environment in Canada if we want to attract foreign investment.

A final barrier is the threat to Canada's health system. Our system's a positive factor in competing for foreign investment. For example, our health system saves General Motors about $750 per vehicle in workers' health care costs. As stated by the Hon. Diane Marleau, the former Minister of Health:

Our health system, one of the finest in the world, must be defended and preserved in difficult and challenging circumstances. This is the role of research.

The present Minister of Health, the Hon. David Dingwall, is in full agreement and stated last June:

Canada must set priorities to address critical research funding gaps that could threaten its internationally competitive health research capacity.

Some of the impediments standing in the way of emerging technologies are excessive regulation and bureaucracy, which is a particular problem for small businesses; lack of infrastructure support; failure to capitalize on our investment in human resources; and the lack of cooperation between governments. For example, on the point about excessive regulation and bureaucracy, do you know it takes twice as long in Canada to get drug approval as it does in the U.K.?

Canadian institutions of higher education are failing miserably to provide a highly qualified workforce. There are several reasons for this. First, there's no coordinated national plan or target for providing a highly qualified workforce. There are no incentives for universities to develop national programs. There's a lack of infrastructure support and chronic underfunding, recently exacerbated by recent cuts in federal transfers.

One solution would be a federal infrastructure plan to provide grants for innovative programs designed to boost the output of technically qualified individuals. In the health sector, another solution would be to expand the highly successful youth experience project - a partnership between the Medical Research Council and Human Resources Development Canada. The statistics on this are detailed in our brief.

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I now want to address the final question, number six. Over three years ago, CBHR initiated, within the scientific community, a call for the creation of an integrated national science and technology strategy. After extensive public consultations involving over 3,000 Canadians, about half of them members of industry and half of them members from the academic community, the government released Canada's first federal S and T strategy last March.

This government must be held accountable for the implementation of the S and T strategy. This committee has a major role to play in ensuring that this process takes place. The first principle in that science and technology action plan, as it applies to the health portfolio, involves increasing the effectiveness of federally supported research.

It's noteworthy that the process of program review within government and many other initiatives in expenditure management have tended to look within envelopes, departments and programs rather than across departments and programs. There hasn't been a thorough and systematic examination of the idea of subjecting a significant part of the $3.5 billion spent by government on intramural science to peer review and open competition.

CDHR's first recommendation is that this initiative be implemented to enhance the cost-effectiveness of public investment in R and D and to allow the reallocation of funding toward priority areas.

Our second recommendation is that this committee hold hearings to monitor the progress of the S and T strategy. We suggest that the methodology developed in 1994 by the National Advisory Board on Science and Technology committee on federal S and T priorities be used. We also suggest that external advisers, who are members of departmental advisory bodies, be invited to appear before this committee. The fundamental challenge facing Canada is to reverse the trend in budgets for health research. As the graph I referred to shows, our funding for health research is in a tailspin.

This leads me to our third recommendation, that this committee urge the government to bring corrective measures in the February 1997 budget in order to increase Canada's productivity and provide the Medical Research Council of Canada, the Natural Sciences and Engineering Research Council of Canada, and the Social Sciences and Humanities Research Council of Canada with funding levels competitive with other G-7 countries.

Our fourth recommendation is that this committee, in conjunction with the Prime Minister's Advisory Council on Science and Technology, evaluate what impact any further deficit or debt reduction measures will have on Canada's research system, and recommend corrective measures that will ensure a competitive and efficient academic research infrastructure.

In closing, CBHR would like to propose an action plan that will create high-value jobs at low cost in the expanding health research sector. Our proposal, detailed on page 9, would provide over 1,600 jobs across Canada annually. Our proposal, based on the economic concept of potential output, would provide over 32,000 jobs if it were also extended to the other granting councils - NSERC and SSHRC.

This proposal would also salvage the health research sector, increase Canada's productivity and restore our competitive position. Ladies and gentlemen, the consequence of not taking immediate action will be disastrous. As the president of the Medical Research Council of Canada, Dr. Henry Friesen, warned:

Canada is at risk of becoming dependent on the discoveries of other countries unless more money is pumped into basic research

In addition, our quality of medical teaching and health care will surely decline. Canada will no longer be able to attract or provide the best researchers and teachers in our academic health centres.

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Thank you again, Mr. Chairman, for the opportunity to address this committee. We urge you to consider seriously the recommendations and the proposal outlined in our brief.

Thank you.

The Chairman: Thank you very much, sir. I think between the two presentations the committee has been directly challenged this morning to ask some questions and to get our minds around to exactly what we expect from the federal government in the areas of research and productivity.

Mr. Schmidt.

Mr. Schmidt (Okanagan Centre): Thank you very much, Mr. Chairman.

Thank you, gentlemen, for appearing this morning.

I guess the first word of commendation is that you didn't fear to attack the government and suggest it ought to make some changes in its current direction, and in particular the slashing in research and development funds. I personally find myself very much in agreement there. When we presented an alternate budget, one of the greatest fights I had within our own budgetary committee was to make sure that part of the budget was not cut. We won that argument on the basis of many of the things you've said. That's aside from the questions I wanted to ask you.

Gentlemen, how did you ever get to the point where you developed a coalition among these various and different bodies? I think one of the accomplishments you've achieved is one the government would do well to achieve as well, because you brought together agriculture, medicine, and a few other areas, and it seems to me at the moment within the bureaucracy there is a fierce turf war in these areas. How did you get this group together to do this?

Dr. McLennan: Do I have an hour?

It has been a very important and rewarding struggle. We started about seven years ago. Many of us were involved in some of the other organizations, which were very broad, very diffuse, and we recognized there was a need to focus on the health sector. I think that was the key element.

The second thing is we have some very capable people in the coalition, and in particularDr. Clément Gauthier, our executive director, is a master at laying down the ground rules and establishing the principles. What the coalition has tried to do is to base our arguments on facts, to base our arguments on evidence, and to present strategies and proposals that are workable and that are not just asking for more money but rather showing how we can generate wealth in Canada and how we can restore not only the trends I've shown you but also the ones Dr. Mustard showed with his graphs.

As a nation, we have no choice. I'm embarrassed, as you are, I'm sure, to realize we're slipping on the various graph lines, whether you're looking at trends in health research or looking at foreign development investment inflow. We ought to do much better. We can do much better. We just have to do it.

Mr. Schmidt: I really appreciate the first identification of a common problem. We have to work together to solve the problem.

You said it's based on facts and convincing economic benefit arguments. If that's true, it seems to me a fact is a fact, whether it's known by you, your colleagues, the bureaucrats, or the politicians, because knowledge facts don't change. They're impervious to political partisanship.

I wonder why this kind of interpretation of the facts is so different when it comes to certain bureaucrats as compared with what you have been able to accomplish. Surely the facts should speak for themselves if, as you say, that was the basis on which you arrived at a coalition. What is different in the way you treated the facts from where the government is treating the facts?

The Chairman: Dr. Gauthier.

Dr. Clément Gauthier (Executive Director, Coalition for Biomedical and Health Research): Thank you very much.

The difference is that I believe within the coalition we have been able...and the coalition is one of the rare bodies in Canada where you have industries and academics and institutions where the research is done brought together. This has indeed brought great benefits to Canada in investments in Canada by foreign firms.

To come back to the real problem we have outside the coalition, we have been able to bridge the communication gap. We have learned a lot from, for example, regular exchanges with industry, regular exchanges with academics, regular exchanges with medical doctors. So all these groups who are in fact involved together in academic health centres in delivering services, subject to both federal and provincial policies, are really physically close to each other and integrated at the level of exchanges of ideas, and this is improving.

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What is missing, I believe, within the civil service...and that was the sense of our fourth recommendation, basically, when we suggested that this committee should bridge the interdepartmental gap by having regular hearings on the progress of the S and T strategy and inviting the external advisers. As a result of the S and T strategy most departments have struck advisory bodies and have appointed external advisers.

To give you a scoop, I have been invited to become one of the external advisers for Environment Canada, and I would be more than pleased to come here after a year or six months to tell you my own conclusions on the improvements they have made to put in place and follow up on the S and T strategy. It would be a way for parliamentarians to bridge the interdepartmental communications gap, which will always be there.

It is systematic; and I believe Dr. McLennan could testify to that. Whenever we come to talk to with Industry Canada, for example, about a subject, we come back two weeks later two doors closer to where we were before, and those individuals don't talk to each other or they are not aware of what's happening within that system.

Besides, the perspective of a civil servant is important, but you should also always make sure you have the views of those who are living with these policies, those who are in the field and actually giving the service and who are subject to the policies, at the same time as the views of civil servants. So bridging the gaps for you through external advisers is important.

Dr. Mustard: I would like to comment and put your question in a broader context.

Some of us are quite old. We go back to a history of people in this country arguing about the importance of the subject we're talking about today and nothing happening with it. I outlined for you the Macdonald royal commission, and that was only eleven years ago.

There is the need for a broader understanding among all Canadians about what really determines economic growth and the creation of wealth. That's poorly understood. Unless you can get that commitment you will not get the subject discussed in the kind of context my colleagues have presented it. Those of us who come out of the field of science and technology understand it and feel deeply about it. But because, as I tried to outline for you, the philosophy of economics in our country was that science and technology were unimportant, which is essentially what the Macdonald royal commission stated, we're only now beginning to understand that you actually have to use ideas to create wealth. That's part of this extraordinary technological revolution.

In answer to your question, you as parliamentarians must do everything to get your colleagues to understand this, as well as dealing with your constituencies. If any of us can help you get your constituents to understand it, it's there.

I would just like to remind the people from Cape Breton - because I have contacts in Cape Breton - you can take people out into the firehall in Inverness and talk about this subject and they will understand it. It's up to us to take it out, because the media do not do a very good job.

The Chairman: That's a very good point. As politicians, we all very much feel it's one thing for us to talk with you and others like this, it's another thing to make sure we bring Canadians along with us in this debate.

Mr. Schmidt: I have another question. I would like to follow this a little further, but I would like to move into another area. It has to do with a science strategy for Canada. I believe it wasDr. Mustard who said this.

The specific question I would like to ask you, sir, is what would be the strategy we should have for Canada, in your opinion?

Dr. Mustard: I think the first thing you have to do comes back to my reply. You have to increase the sophistication of society about the real determinants of economic growth and the role of science and technology innovation in that process. You have to watch very carefully that our slide into what Michael Porter calls a wealth-driven economy has not trapped us in such a way that we will cease to invest in the uncertainties - and my colleagues have talked about the key aspects of this - of research.

Therefore, I would say your first thing has to do with your Minister of Finance and the macroeconomic policies, to see if you can change the tax structure of this country to reward investments in the uncertainties and to penalize my pension fund for keeping me fat and wealthy by playing in the global financial markets.

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Voices: Oh, oh!

Dr. Mustard: That's a tough political choice, but it actually is a very basic lesson.

A voice: Very basic.

Dr. Mustard: And the United Kingdom is a classic example of a country that failed at that and paid a very high price for it. As well, we can show you some adverse effects on the health of populations that occurred because of that, effects that health care cannot compensate for.

Second, if you can create that broad fabric of understanding - which means you have to bring the media along with you in your own constituencies, and I'm going to argue that your constituencies will come with you on this one - then you must go into the microeconomic policies my colleagues have been talking about, and take that black box that Lipsey talks about very well in his paper. I left a copy of that C.D. Howe paper here for you.

In that box Lipsey talks about, you're going to create the infrastructures that make it possible to do it. That should be uppermost in government policy. And you should look at how well that black box is working. It shouldn't be isolated in Industry Canada. It should be part of the finance ministry and other ministries. Get coordination across all your ministries so that they pay attention to this, because all the components feed into it.

Let me just give you one extreme example that you may not have thought about. Because of our failure in our economy, we have in Canada an increasing proportion of people who are at risk. They happen to be mothers and children. If you start to monitor the performance of children coming into schools, you will find that there are public school teachers in this country who will tell you that up to 30% of the children coming into their schools can't cope. Their cognitive behaviour characteristics are in trouble and the school system can't do much about them.

We know those measures have a prognostic capacity on learning ability in the school system in science and mathematics, for example. We know that affects the quality of the human capital that you're eventually going to have to staff your high-tech businesses. It's wrong, in my view, that the argument you're putting forward is separate from your colleagues in the health and human resources departments; those things need to be much better integrated, because you're actually sharing a common package.

Let me underline this with one very important historical observation. One of the world's best economic historians - because he does things I like - is from the University of Chicago. And it's not Milton Friedman. Fogel has done an analysis of what happened in Great Britain with respect to the industrial revolution improving the quality of the population, and he came to the conclusion that 50% of Britain's economic growth from the industrial revolution was the improvement in the quality of the population. That's an extremely important figure.

So when you're talking about human capital and learning, you have to think of the whole stage of the human development and how, during this transition, you're going to handle this very tough problem of the adjustments that particularly affect young children. And I can tell you this: they can be very important allies for you in the science and technology argument if you'll bring them into your discussions.

The Chairman: Let me go on to Mr. Murray.

Mr. Murray (Lanark - Carleton): I believe Dr. Mustard anticipated my question. While this committee has been doing this review of the innovation gap, we've been blessed with an absolutely outstanding array of witnesses. This morning is no exception. I think we all go away from these meetings fired up and wanting to do something, but I do think we run into a major political roadblock, which Dr. Mustard has addressed.

As an example, Dr. Mustard was talking about government tailoring initiatives to strategic areas, which makes me think about our recent investment in Bombardier and the amount of political flak the government took for that investment into what's essentially a research and development program. As just one of many backbench MPs, I took a lot of heat over that. People were not able to understand why we were doing that.

This question of how we move the markers when it comes to science and technology in this country has been going on, as has been mentioned, for many years, long before the Macdonald royal commission. You can go back to the Lamontagne report, if you will. With respect to my own background, I spent eleven years with Northern Telecom, and I remember Walter Light, when he was chairman, talking about many of the same things in his speeches that we're talking about today. This is not new at all.

The only thing that gives me any hope is that I think we're at a point now in our country's history where people are actually looking for the ``vision thing'', if you will, with all due respect toGeorge Bush. We may be at the point now where we can start looking at building the next railway. And maybe this is what it will be. Maybe the country is hungry enough for the type of vision that will lead to economic growth. Perhaps the CBC's town hall meeting the other night is an example of what happens when people don't see much in their futures.

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My real concern is how we, as politicians in a democracy - except that perhaps this takes two political cycles to bring into effect - get the media on side. As I said, the witnesses we've had before the committee are outstanding individuals. The media would be as impressed with you people as we are when we listen to you, but for all the support I can detect in the country, there are no grounds for anything that does not address the immediate concerns people have.

It's interesting that the graph showing income levels showed senior citizens having a much higher income level. That stopped a few years ago, I believe, but I can't remember the date. A lot of senior citizens are very concerned today because they don't see their savings accounts producing the interest and the returns that they did in previous years. These are very immediate concerns. And there's no appetite within the senior citizen population that I can detect to have the country going off in another direction in terms of investing in science and technology.

What I'm saying is nothing new. I'm just stumped as to how we can get the whole country on side.

Who should be the spokespeople if politicians are not as credible as others? I think it's very important that we do this. Have you any further thoughts on that?

The Chairman: I think we'll go to Dr. Mustard and then ask the other witnesses.

Dr. Mustard: I have a bit of experience with the issue that you're talking about. In years past, I was with my colleagues in these areas and have suffered the impossibility of really getting understanding and acceptance of this in any kind of consistent manner.

In starting Canadian super-advanced research, one of the targets was to try to get at this problem. As you vaguely know from Steve Dupré's description, it's a national-international institution designed to tackle complex problems and to mobilize talented people to do so.

After the Macdonald royal commission disaster, I took on the deliberate creation of a program on the determinants of economic growth because I found that the economics community didn't really accept this as a major issue.

If you think about that in terms of university education and public policy, that's a very serious problem. Fortunately, Dick Lipsey was prepared to take it on, not without some concern and harassment from his colleagues, because when you try to move to understand something that is very fundamental, such as what really determines economic growth - as opposed to business cycles - you have to get people to refocus. That's why I took you through a little bit of that story very quickly this morning.

I've left you a set of papers that Industry Canada and the institute have produced, which really do address this subject. It seems to me to be absolutely important for you as citizens of this country to understand that subject. I've been harassing universities to make sure everybody who graduates from a university or a community college understands the determinants of economic growth, because until you do that, you cannot get the commitment you're talking about.

I can say, with some experience in speaking to diverse communities across this country, including probably constituents in your constituencies, that people have no problem understanding this if you can articulate it to them in a way that has a much broader perspective than I briefly gave you this morning. That's an obligation you have. We can give you the material to do that kind of teaching with your constituents if you want it.

If you do that, then you stand a substantial chance of moving the agenda forward, because people are frightened about whether the country will be able to create and distribute the wealth to sustain itself. People are frightened about the deterioration in our social fabric. People are responding to the symptoms when they need the diagnosis. And what you're talking about is the diagnosis. That's why I talked about diagnosis and treatment in my comments this morning. It's absolutely essential for you be open about it.

I was in Sudbury two weeks ago talking about the broad problem. What does a resource-based community where people like to live do with the obvious change in mineral resources over the next 20 to 30 years? We talked about this, but we didn't talk about it in isolation. We talked about it while integrating the social environment, the social structure, their children and the need to build a new economy, and we talked about how they could partner and how government could partner with them. They would have no problem with this discussion we're having. They would accept it.

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I think in comparison to 10 or 15 years ago, the readiness to learn in our broader community is very high. The tough challenge for you is to try to transfer it in.

Coming back to the Bombardier case, I'm on the other side of this, because I'm on the board of Ballard Power Systems, which was given some support, and quite correctly so. But let me tell you a bit about that story because it's an attitude about Canadians.

There sits on our board a gentlemen from the United Kingdom who is actually very much a Thatcherite. He was stunned to find the lack of interest of the Government of Canada in what is a transforming energy technology. It's a revolutionary technology. I was equally stunned to find the lack of understanding within the Government of Canada about what was going on there and its importance.

Fortunately, that bridge has been crossed. The Government of Canada's partnership arrangement with Ballard is to handle some of the uncertainty as you go to the next stage of what is a long cycle to develop this technology for commercial markets.

It's so powerful that if you can keep the base in Canada, it will generate income flows for this country that will be awesome in the future, but it's going to take another five to ten years. It has huge uncertainty, which to me is a very good strategic investment of the government in partnership. If it fails, it goes out because of market failure, and the government gets paid back, but you have to build that kind of capacity.

Let me underline this. If you look at the data, our government support of the business enterprise of innovation is still, on a per-business unit, only 50% of that of the United States. We are a long way from making that commitment because of the attitudes that you referred to about Bombardier, etc.

But if you transfer the understanding to people, you can get people to understand why it's important to do it. The Ballard people aren't becoming fat cats; it's the people who play with money who are becoming fat cats, and you want to make that distinction.

Dr. McLennan: I'd like to address a few questions. Let me start off with this one. It goes back to Mr. Schmidt's question as well.

We're an educational process. It was mentioned this morning that we have several publics to educate.

I'm not suggesting for a moment that the fault lies at the feet of the politicians or the government only. We in academe and the research community have been negligent as well. We have not stood up to tell our local communities enough times and loudly enough about the importance of investing in research.

We need to do that, and we're beginning to do that. I quite confess that as a community we've been negligent there. We expected the taxpayer to fund the research in this country and to let us get on with it. It goes back to your question, Mr. Schmidt, about why it's so difficult for people to understand why we must invest in basic research, why we must prime the pump.

It's difficult because you don't see the benefits right away. If we don't continue to invest in basic research, then when I'm an octogenarian there won't be any new medical therapies or new treatments because we will not have done the research.

It takes time to go from the idea to doing the work, getting the product, applying the therapy, building the medical device or whatever. There is a continuum in there. That continuum is very difficult for politicians to understand because they tend to think in multiples of four, not ten or fifteen, as someone mentioned earlier this morning. It takes ten years and $250 million to put a new drug on the market.

Dr. Mustard talked about the uncertainties. Say you invest in maybe 100 projects. There may be 100 research projects that are under way right now. Only one of them will probably lead to a commercializable product.

We must capitalize on that. of course, but we mustn't ignore the other 99 ideas either, because although not all of them will be commercializable, they contribute to knowledge-generating ideas and generating wealth. We have been negligent, I submit, as a nation by not focusing on that.

Look at the headline that was in The Globe and Mail last Saturday: ``Why David left Canada''. There are some heart-rending statements in this document. Why would The Globe and Mail devote three full pages of its paper to this story? That's because it's absolutely fundamental to our problem. If we lose - this is happening at the moment - our best brains to other countries, then they become our competition. They start generating wealth in the area in which they should be doing it here. We have to keep our brains in Canada, and we can do it.

You haven't had time to read our proposal, of course, but I'm going to emphasize again that we laid out a proposal in the health sector, which I submit is an area on which we really must focus because it has a broad base and high potential.

There's the fact that we already have the machinery in place. We have an academic health centre structure across this country that is primed and ready to go. We have administrative structures in place through the granting councils to peer-review grants and monitor the process so that we get the best bang for the buck by investing in research. We have the tools there, and the industry around the world knows this.

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We're a small player in Canada, with only 3% of the world's total, so why would industry invest in Canada at all? They do that because they know we have good people here. We have talented researchers. We have to maintain that environment so that they will invest in Canada. We have to capitalize on that.

I refer you back to our basic proposal. It's a strategy to very quickly put in place high-value jobs at low cost.

In the meantime, Mr. Chairman, we must continue to educate our populations, our local communities. I and my colleagues must take the time to go out to talk to those in the communities to tell them why this is important.

Thank you.

The Chairman: Dr. Gauthier.

Dr. Gauthier: I would like to address a question raised by Mr. Murray, which was about how you as parliamentarians could help to improve the situation.

I happen to be the son of a member of Parliament who was here for 19 years. He came from a northeast constituency, Roberval, in the province of Quebec.

I must say to you that MPs would actually gain a lot of credibility if they would first take the time to understand the points we're trying to make here this morning. This is a key element for the future economy in terms of growth and jobs in this country.

Second, I believe that part of the level of cynicism that citizens now have toward this function comes from the fact that there is a lack of substance behind the debates going on now. This is in the sense that people are probably tired of always hearing the same things and going around the same circle, while at the same time observing the declining standard of living in this country.

We offer some new ways of looking at that, facing the challenge and turning basically a very sad situation into an opportunity. If members of Parliament would take the time to educate, then we would be willing to help with that. That's we're trying to do by coming here and by publishing articles in the business sections of national newspapers. We're quite successful at that.

But what we need now is for you people to return the ball. This committee could play a key role by providing a forum to address those issues.

You spent a lot of time on regulations relating to banking in the old economy and on the currency that's there, but as Dr. Mustard said, that's not really the source of the generation of real wealth in the economy of this country.

The currency for the new economy is knowledge. The finance minister said that last year in his own presentation to the finance committee. That's the way we should go, and that's what you could do.

MPs would gain a lot of credibility meanwhile. They could become visionaries and explain that. They could bring their people forward in their constituencies to help them.

We could team up with you on that. We would be pleased to do it.

The Chairman: Mr. Schmidt wants to make a quick intervention, then we'll go toMr. Godfrey. We'll have lots of time, Mr. Murray, to get back to other points.

Mr. Schmidt: There are a few things here that I just can't resist.

Number one, Mr. Gauthier, you'll be pleased to know that we now have established an awareness, through this committee, in the banking community. They now employ those whom they call KBI people, knowledge-based industry people. I don't think they're anywhere near adequate yet, but the point is that they now employ people like that, which is a major breakthrough.

This is the other one. You talked about the need for substance in the debate and positioning. I think there's a beautiful opportunity coming up, Mr. Chairman, when the review of Bill C-91, the pharmaceutical bill, comes up. I think we could get into that type of substantive debate. The debate, as you know, is going to go into political position rather than the substance stuff you're talking about.

So I think it would be very incumbent upon all of us to recognize just how the researchers and people who really want to get that message across so that it gets to the substance and the significant part of it as a determinant of economic growth and development...rather than on the purely self-interested situations, very temporary and very short term.

Dr. McLennan: May I follow up on that, Mr. Chairman?

The Chairman: Yes.

Dr. McLennan: You would be interested to know that I was involved in wearing a different hat ten years ago with Bill C-22 and Bill C-91.

An hon. member: Surprise, surprise.

Dr. McLennan: Surprise, surprise.

Yes, I welcome the chance to participate in that debate. I think it's very important. There are arguments to be made on both sides. We look forward to it. I can assure you that CBHR is already looking at developing a position paper.

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The Chairman: We'll give you an opportunity to return to that topic.

Mr. Godfrey, please.

Mr. Godfrey (Don Valley West): I have to declare that it's nice to see my old boss,Fraser Mustard, here. Also, I'm back on my old committee. It's like old home week all over.

The thing that really struck me in the answer to Ian Murray's question was how to educate people and how to educate ourselves. It seems to me that the very beginning of the answer to that question is how we think innovation actually works. I thought the two models that Fraser talked about, which are basically from Dick Lipsey - the neo-classical model and the structureless model - go to the heart of the matter. Until we, as parliamentarians, develop a fairly clear mental map of how this stuff works, we're never going to go anywhere. You can't have a discussion about a gap if you don't know what and where a gap is.

This is really directed towards Dr. Mustard as much as anything else. In order to present this in a dramatic but not over-simplified manner, if you say that the characteristics of the first model are that... You have inputs of production function and economic performance. The only thing that is in that production function box for a neo-classical economist, it seems to me, is pure market-driven assumption. Let the market decide, clear out of the way, don't be an impediment, level the playing field, don't put in false signals, and all the rest of it. A very simple model dominates the Department of Finance of this country.

The other model is a more complex model, because it says that what you call a production function we call a facilitating structure or the ``black box''. That is made up of a whole bunch of components that collectively constitute a system. It's not a random activity. It's not just a bunch of market decisions. It's not strictly serendipity. It is actually a system, a structure. It's not well known but it's something you can think about purposefully. It all hangs together, and it hangs together on a much larger scale than simply looking at one sector. That is to say, it's a societal system, asDr. Mustard says. It has all the other inputs about the quality of the education system, which affects eventually the quality of the people who work in the system.

Is it possible to summarize this facilitating structure? I think you really have to buy into the structureless model if you're going to talk about the innovation gap. Otherwise, you get out of the way and let the market decide. Is it useful or possible to try to render that in language that is accessible but truthful? Is it useful or possible to talk about the black box or the facilitating structure as societies compete, which is of what it's about, as national systems of innovation - are these useful phrases? - as domestic Team Canada? In every case, what is implied is that there are huge numbers of diverse elements which, if you could put them in some kind of configuration that made sense - you could identify where the gaps were, where the assets were, and where the failures were - would leave you further ahead than if you just let the market decide. These are two fundamentally different mental maps.

Fraser.

Dr. Mustard: Good student.

Mr. Godfrey: That's what we call a pop-up question in the House of Commons.

Dr. Mustard: First of all, if you've not read through it - and I would recommend it to everybody - you should read the paper by Pierre Fortin and Elhanan Helpman that was done for Industry Canada. Both are members of the institute's economic growth program. It's the best simple document on economic growth and endogenous innovation, which is what you're talking about. It states a number of very key principles that I would say should be embodied in your recommendations. I won't take you through it, because you can read the summary yourself and draw your own conclusions from it.

The second one is Lipsey's most recent paper from the C.D. Howe Institute, a copy of which I've left here. For the first time, Dick is open about the failure of neo-classical economics. This is a man who has written the classical teaching texts in economics in North America and the United Kingdom.

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Dick is harsh about the failure of neo-classical economics; and when Dick takes that on and is public about it, you have a powerful weapon, as parliamentarians, to counter some of the people who don't want to move to where Dick is. Dick is fully backed by people such as Romer and Helpman, who are amongst the most distinguished economists in the world.

You should let yourselves spend some time on that. I'll make a voluntary effort for you. If you have a group who want to spend some time mastering that, we'll set it up for you to do it. I'll bring along my colleague Peter Nicholson to help get that across, Mr. Chairman.

John has put his finger on something enormously important. If we don't understand that, you can't move the agendas forward. My colleagues on the left can speak forceably and cleanly about why they know it's important, but unless you can set it in this broader context you really won't get the buy-in, because you're dealing with institutional structures, bank economists, etc., who are not quite there yet. You're dealing with the ``Report on Business'' in The Globe and Mail, which is a long way from getting there. So I want to emphasize the importance of John's question.

When you think of the little chart I showed you of Elhanan Helpman's paper, looking at what a 0.5% increase in R and D does to economic growth, that's a stunning document. To get a 16% increase in your wealth in comparison with other countries getting only 9% to 10% is so fundamental as a measure that I don't know why you don't just grab it and run with it. The Prime Minister is talking about jobs. There's the answer to his jobs. If you don't do that, you cannot create the income flows to have the jobs.

My colleagues have given you one field where you have huge potential. There are others - I hope they don't mind my saying that - which I am quite familiar with in this area and which have already come up in the country.

Then John said you have to understand what is inside that black box. You need to spend a bit of time.

I showed you a slide, a marvellous slide, of that complex innovation process from Mr. Kline. I met Professor Kline at Stanford about ten years ago and he took me through this chart. After an hour I had a searing headache, because he can fill in that chart, which is on fundamental research - applied, production functions, and development - in a way that only a very clever engineer who has worked with industry can do for you. It's worth while taking time to understand that chart, because all the microeconomic policies you're considering hit it. That's really the black box. I won't take you through it today.

So, John, you're right about the importance of this. The good news is that compared with ten years ago we now have a bigger cadre of people who understand it. There are public servants within Industry Canada, and I'm told by Peter Nicholson even people in Finance, who understand this -

Mr. Godfrey: No! Don't tell me!

Dr. Mustard: Peter said that. I can't tell if it's true or not.

Nevertheless, we simply have to build with these players. We have to work with them to get the collective effort to go forward.

So I would just reinforce the importance of John's question and say there indeed is a base to start to move this forward. If you take the subject of the black box to general audiences outside and go through it, they don't have any problem with it. They can understand why it's important.

School teachers can understand it. We've tried an experiment. We've taken the subject matter I have been talking about today and actually tried it on high school students. High school students can absorb it. Indeed, it changes their attitude towards things.

If I had my way we would get more of this out, because I've given up on universities. I hate to tell you that. If you can get the high school students to understand this, think of the potential to move your society forward. There's a very angry group of people under 30 in this country who are fed up with our generations.

The Chairman: With the indulgence of the questioner, I would like to pursue this.

The great experience that came out of the work we did on the Canada Pension Plan was that when we communicated with people we saw ourselves as communicating with those who were just about to receive their cheques. We never thought of all those people who are thirty years away, not receiving the cheques, and their great concern that the CPP is not going to continue. If we're going to communicate about economic security as a government, we have to change our whole thinking about who we're trying to reach.

When I look at the science community, I say okay, we have a small group of parliamentarians, and we scratch our heads. As Mr. Murray said, how do we even get our colleagues in the wider caucus to take an interest? Then your community internally - I come from that background - has disagreements, but essentially are up to speed. What's the next step? You don't just go to the general public. As you said, Dr. Mustard...is it the high school students? If we're going to suggest a communications strategy, do we say we should zero in on the high school students or zero in on X? In a practical sense, what's the next step to broaden this debate?

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Dr. Mustard: I speak from probably the unusual experience of doing this with very diverse groups across the country. We are in an information highway explosion, and a group of us have been trying to bring together communities in this country that are pretty diverse from places like Montreal, Port au Port in Newfoundland, Saskatchewan - the Meadow Lake Tribal Council, and Edmonton.

I take time to meet with them, to go through the broader integration of this subject with them. They are extremely receptive to the framework, but what they need now is access to an information system they can use that integrates the issues about economic growths, science and technology and the basic qualities of society.

I argued with some of your colleagues in government and in the Prime Minister's Office that they should have capitalized on what we did in Winnipeg a year ago. We brought together a little over two dozen communities in Canada that are really trying to come to grips with these complex social economic changes. I'm putting it into a broader context for you because I think that's where the sell is.

They'd never come together before in this country because they're separated by all their linguistic and political barriers, but we could bring them together because we don't represent government. I asked the people from the Prime Minister's Office why they don't use the information highway to let those communities start to talk to each other, because then they could put the information into the system. There's something you could do that would be tremendously powerful. That meeting was held in your constituency in Winnipeg.

We've been working quietly on it, and I'd just take it a step further and say the visit to Edmonton was organized by the head of the Edmonton Community Foundation, who happens to be the former chief of police in Edmonton. He's a marvellous man - I saw him on television when he was still chief of police. His theme was that the juvenile crime and delinquency problem is set before the age of 5. I thought, boy, when you have a chief of police who can do that...

Then I found out this man had become head of the Edmonton Community Foundation. He brought out every key leader from his community. The head of PCL was there, which is one of the worlds biggest multinational construction firms. They are all totally committed to the agenda of how to build the new economy, the role of having home-based, world-class multinationals - because PCL is that - staying in Edmonton, and how to start to correct the social problems of the change.

I think there's a huge opportunity to do this, and the Government of Canada can play a role by using the information highway concept as a way of linking things together and actually putting information in for people to use in ways that can be very powerful. I'm very optimistic it could be done, and I offer to the Minister of Health this funny network we have if he wants to use it to his advantage. He hasn't taken me up on it yet.

The Chairman: Back to Mr. Godfrey. Sorry for that intervention.

Mr. Godfrey: I've been playing hookey from the committee I really belong to. I just thought that at this stage - it's so nervy coming back as a former chair. It's like that dead hand from beyond the grave visiting crank ideas on the committee.

It seems to me that at this point in the committee's deliberations it's important to be able to slot the information into a kind of wiring diagram of how you think things actually work. It's really useful to have those alternative models of how people explain how things work.

I guess the model without a structure not only allows the broader framework of understanding but also allows you to go after strategic opportunities of the sort we were talking about earlier, because they are a subset. They assume that if you could put all the pieces together from top to bottom across the country and pull all the assets off the shelf, you would get further ahead by doing it in a purposeful and directed manner - not directed by us but directed by the effort itself. If we can find those consortia arrangements gentlemen are up to, then you would have a projet de société, si je puis ainsi dire. You would really have a societal project.

Dr. Mustard: I would hope as a committee you will meet with key people in Statistics Canada who can become your allies in creating the benchmarks to track how successful you are.

The Chairman: You made that point earlier on and I took note of it. We did have two meetings. Its representatives came in at a various times and were very keen. They're just starting some of their baseline studies. They're very interested in pursuing this and gave us some insight. We had a very good technical discussion on this, so your point's well taken.

I'd like to go on to Mr. Lastewka, who is a vice-chair of this committee and is also doing some work independently on the commercialization of some of the work that's done in science and technology. Mr. Lastewka.

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Mr. Lastewka (St. Catharines): I really appreciated hearing the witnesses this morning. I think you've hit many things right on. I was just passing one of our recommendations to my colleague here, who is also on the special committee of the Prime Minister.

I would like to talk about two items that have been bothering me during all of these deliberations. One is the item Mr. Godfrey brought up. Whenever we had witnesses in, met with them privately or whatever, there were many references to the fact that you really need to understand the system. We got into discussing the map, and when I asked questions around this table about the procedures and the system of research and development in science and technology in Canada I was told I shouldn't be using those words; I should be using the words ``fabric of our country in research and development''.

Mr. Mustard made some comments on the system and so forth. Somehow we need to be able to explain it a little more to Canadians. We need to understand that not all people have two degrees but they need to understand the system, because we are helping them in many other ways. They're getting the fruits of the work but they're also the ones who will quickly criticize us for spending money on universities, government labs, various companies and investing.

You mentioned we're way below what other countries do as far as spending money goes. But when I ask the witnesses whether someone can help me, as a parliamentarian, explain it to colleagues... Let's say we had to explain it at that town hall meeting the other night on the CBC. What would you show those people?

Dr. Mustard: Are you asking me that question?

Mr. Lastewka: Yes, sir.

Dr. Mustard: Then if I may put my slide projector on, I'll show you a little chart that has proven to be an extremely powerful teaching device. My friend Dick Lipsey helped create it.

It identifies the sector of society that is the instrument of primary wealth creation. A person in Sudbury can understand that, because the upper left quadrant represents Falconbridge and Inco. If Falconbridge and Inco close, all of those other components are affected. It identifies the issue of what we call primary wealth creation. Adam Smith called it productive labour.

By the way - my colleagues on the left won't like me when I say this - Adam Smith described physicians, of which I'm one, as unproductive and menial servants. He said the health care system - represented on the right in the slide - is actually dependent on how well the primary sector works. We're seeing that in spades in this country at the moment, because the failure of our left side to work has decreased the wealth base of the country, which makes it difficult to sustain the right side.

You can take public servants through this and they resonate with it - they'll understand it. You can take teachers through this and they can resonate to it and understand it, but you have to take a little time to get them to understand it. We do not do a very good job of understanding that the new concepts of economic growth really say that Adam Smith was right and there is a primary wealth-creating function in society.

You can spend a lot of time on that diagram with audiences and they can see themselves in it. Then they can see why the upper left quadrant is important and are able to differentiate the work in the upper left quadrant from the people in the lower left, such as financial institutions that make money playing with money but really don't advance the wealth of the country because they don't invest in the upper left box.

I just show that to you because we have found it to be a very powerful tool for audiences to relate to and understand in the context of what we've been talking about.

I don't know whether that's helpful to you. Do you want me to clarify that a bit?

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Mr. Lastewka: I'd like you to clarify it a bit. It's kind of the starter. In understanding our total research system in Canada - our innovative system in Canada - I find more and more people are asking questions on that, and I'm trying to find a simple way to explain that to people.

Dr. Mustard: The next point that comes from that - and my colleagues on my left should speak about this more than I do - is that you're moving into an economy that is no longer based on objects. It's based on ideas. That's an important differentiation, and people can understand that. Ideas require the creation of ideas, the flow of ideas, and the use of ideas, which require the kinds of things that Dick Lipsey's talking about concerning the inside of that black box. I showed you Kline's illustration of how that works.

It's important for people to understand that this process is non-linear. It's interactive, and that's enormously important to understand. Nortel wouldn't be where it is if it hadn't been able to operate its research enterprise as a dynamic interactive system. People can understand that because you can use many examples, depending on your audience, to get them to see that.

Then the question becomes how do you sustain that and how do you allow the institutional structures to emerge to make it possible for that interaction to occur? Governments can't design the systems, but the systems can emerge if you create the environments where people can create them. So you must go through a series of examples that allow you to do this. I will use the one I'm most in tune with, which is Ballard Power Systems. This is simply taking membranes, putting platinum on them, stacking them up, and applying hydrogen and oxygen across. The end product was electricity, a bit of water, and some heat. It doesn't pollute the environment.

When we get people to understand the issues in that, such as getting membranes, which are materials that will function efficiently for this, people can begin to see that. When you talk about the role of platinum as a catalyst on that, you're into chemical reactions and how you do that. If you get it across, you then get into engineering principles, such as how you take power and put it onto wheels. Then if you have a big bus that you can power with this thing - fuelled by hydrogen - this works. So it's getting real examples out and telling the stories with those examples of what it takes to get to where you are...

We do not do a good job of telling those stories. My colleagues can tell you some very good ones out of the biological sciences story. We haven't done the storytelling we can really do to get people to understand this.

So I think the two key issues are understanding where the power source is for primary wealth creation and the stories of how you get there and the length of time it takes to get there. I've just given you one example of a big bus being powered by hydrogen. It kind of attracts attention, even when the Prime Minister drives it.

Mr. Lastewka: I'm glad you discussed telling the story, because that's my next question.

Last year I, with a number of my colleagues, tried to pay as much attention as possible as we talked about National Science and Technology Week in Canada. I happened to be in different parts of Canada every day that week. I saw very little promotion, very little information, and very little informing of the public on science and technology. Mr. McLennan, I think, mentioned that we have to do a better job on public information. It needs to be done by province, because people think of their province, their community, and what's happening, but they need to know what's happening in science and technology right across Canada so they understand what's happening in other areas of Canada at the same time.

You did mention that politicians think of it in four years, and I understand that. When I was campaigning three years ago - soon to be four - and I talked about environment, technology, and things for the future, or when I talked about research and development, I was a lone spokesman in the wilderness. But immediately after the election, did I ever have a lot of support about science and technology and the desire to get grants from groups, including universities.

What is your plan in terms of informing the public or having a rebuttal to some things, such as when The Globe and Mail spends three pages talking about how bad our country is and why people are leaving rather than digging a little deeper and explaining that we should be making some investments?

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Dr. McLennan: Thank you, Mr. Chairman.

To go back to your first question, if I may, what would I show people in the town hall meeting? What would I tell them? First of all, I would show them this graph. The results of a survey released by, I think, the Department of Finance last August showed that of all the things Canadians are concerned about, the two that topped the list were education and health care.

The second thing I would show them is this graph. I would continue this education process. If I might digress for a minute, I think using the World Wide Web is an excellent idea. Every young person in this country under the age of 25, especially those under the age of 20 and probably those under the age of 10, are computer literate. They understand the World Wide Web. They can pick off anything in a few minutes.

I might add, Mr. Chairman, that CBHR has a web page. We are using the web page as a communication vehicle. We put all of our documentation, studies, and reports on there. We use it as a way to assess how we're getting out to the community, to our constituency, and so on. I really reinforce what Dr. Mustard was saying. I think that is a mechanism that could be used much more by government, by academe, and by industry to communicate the benefits.

I'll go back to this graph. We need to improve the science culture in Canada. It's not that we all need to be scientists, but we need to educate the whole public about the benefits of science, whether it's biomedical research or behavioural science research, to try for example to teach young women that they shouldn't smoke. You've seen the recent data on mortality from lung cancer in women. The graph goes straight up, and it's got a 20-year time lag from the year they started smoking. That's just one example.

I'll go back to the generating wealth argument. It's not the role of industry to do all the basic research. They can't, and they won't. They have a specific agenda. I will go back to the key point, which is that it's the role of government to provide this environment, to maintain the environment for R and D, to maintain the environment so small businesses can get established, and to get rid of some of the red tape in the regulations.

With respect to the time lag you talked about, basic research takes about zero to five years before you get the small and medium-sized companies going. Then there's another time lag - two or three years - for the growth companies, a longer one for the mature companies, and so on. There's a time cycle in there, and that helps people understand that when you invest in research, you're not going to get the results in one year, four years, or maybe even five years. It might take 10 or 15 years, but you have to make that start. You have to make that investment to realize the potential down the road.

In Canada we have created a lot of wealth in the past, of course, because we've been a resource-based economy. That's over. Knowledge and information is the new technology, and as we've been saying this morning, there are a number of sectors.

We spoke very clearly, I hope, about the health research sector. There are other sectors, I agree, but I think the health research sector is one in which we can get in and make some changes in the system so that we can capitalize on our investment on that. We can capitalize on the investment we've made in young people in this country with training. Give them jobs, they become taxpayers, and so on. But there's more than that. We get the benefits of the research. That's what I would tell the people at the town hall meeting.

The Chairman: Dr. Gauthier.

Dr. Gauthier: To answer your question from a practical point of view, in 1988 I was one of the founding members of the Royal Society of Canada's advisory committee on public awareness of science. We basically collaborated with Industry Canada to strike what became the National Science and Technology Week and this whole series of events.

I'm still very sensitive to the importance of public awareness of science, and that's what you are alluding to as well. I suggest at this point that the best way to do it on a real and concrete basis is in your environment and your community when you meet with your people.

To use a very concrete example, we use biotechnology here - and we use BiochemPharma in Quebec, but you can use Vascular Therapeutics in Hamilton, Ontario - to show how these companies evolved. What was the basic pool of knowledge that was necessary to bring together investors to create the companies, to develop the products or services, to make profits, and to create jobs out of it? That's the best way. But give examples that are meaningful to your people, local people, so that they can see there are success stories around and we can build on that.

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The second point is that I don't believe the general public is that far away from understanding the importance, for example, of science and technology in creating jobs.

I would like to come back to the poll referred to by Dr. McLennan that was released by the finance department in August of this year. The other important question in that poll was what among six choices the people believe would be the initiative most likely to generate jobs in Canada. Of the respondents, 28% said investment in science and technology, as opposed to infrastructure, as opposed to investment in buildings and what not.

So they have a perception that this is an important area, which is good ground for you and us to build on. The point is, how do we concretely make them understand the relationship between science and technology and the economic growth itself? But they have a feeling that it is important, and obviously that poll has shown it.

They said, of course, health and education are primary items of concern, but what I'm telling you is we must go to the local level.

The great discoveries that are being done now in our sector and in other sectors get people easily excited, and the media do convey that message very well. What they don't convey, though, is the link between those great discoveries and the who and how of the funding mechanisms, and basically why it is fundamentally important for the economy. The communication exercise is not complete. That's what I mean here. There is a missing link.

Mr. Lastewka: I don't want to mislead the witnesses. I come from the science and technology field, and the reason I keep asking this question on what you're doing, what your organization is doing to get that message out.... I have no problem selling it in my area. I use local examples that I was involved in for 30 years with General Motors.

But it seems to me that many of the organizations say it's the government's job to get that message out, and I don't believe so. I believe it's the message of all of us involved in science and technology. That's the gap that I'm -

The Chairman: To reinforce this, it struck me - and I didn't do an extensive trip; I just went down in the States before I started this work on the committee - that in the United States when you talk about science and technology they ask, where do we get on board? In Canada it's called, is that going to be my job?

There is a different attitude here that hasn't permeated. The headline doesn't read - I'm going to use this as an easy example - ``Banks are on an exciting new way of handling paper''; it reads ``2,000 jobs lost in the banking sector.'' So none of us know how to adjust that fear right now that permeates the debate.

I think it locks step with what you said about the public opinion polls. Yes, the people believe in investment in science and technology. You're talking to true believers about that. It also says the greatest fear is unemployment. What comes naturally to anybody who heads into a field is, of course, this is lock-step in this direction. But I think the public's perception is that they haven't all been winners when we're talking about science and technology. Are there any comments on that?

Dr. McLennan: Why are the young people so damn mad at us? I wouldn't blame them.Dr. Mustard mentioned that they're blaming my generation and my parents' generation for not taking care of the store. They read that there won't be a Canada Pension Plan; there won't be old age security; it'll all be clawed back from them, and so on. Well, we're coming through an era of two decades in Canada where everybody went to the government with their hands out, and we borrowed ourselves into oblivion, as the point was made earlier, and we all understand that now.

So, yes, the young people have to look after their own pension plans and so on. I can understand why they're frustrated. I can understand why they're mad at us. But we need to take advantage of this now and show them how we can reverse this trend and how we can generate new wealth in Canada.

We have the option to do it. We have the tools to do it. We need to facilitate the process as parliamentarians and as researchers and academicians, and so on. We have a cadre of highly skilled people in this country. We must work together now to turn this around. The potential is there.

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The Chairman: Do the other committee members mind if I pursue a couple of things?

As a federal government, if we made a recommendation that there should be a national education program - small ``e'', given the provincial concerns - to promote science and technology, would the other partners come in? If the federal government put in some money, based on your experience, do you think major companies like Nortel would contribute so that we really put this front and centre for Canadians? There's no use for the federal government going alone in promoting this, and there's no use in us coming out with a report that slaps the wrists of provincial education institutions. That's just going backwards. How do we put this together so that we can really get out there and promote it?

Let's start with Dr. Mustard.

Dr. Mustard: Let me suggest that I think the instrument here should be slightly differently framed than the way in which you posed it. My sense, with some experience at it, is that if you take the historical framework about how nations create wealth, and the role of science and technology in the effect of deep and broad technological change - which is really what we're in at the moment - people can see that and relate to that. The place where you can introduce that is in high school education. If you then relate that to how it has powerfully influenced the health and well-being of people in society, people can also relate to that. You then can structure the black box within that, because you have the hooks that capture young people or any generation in terms of doing that.

I think there's a case for this to become part of the curriculum of the high schools, and I've talked to several school boards about doing this. I don't think you can impose it on the provinces, but I think you can work with national groups, of which I suppose mine is one. That has some capability of trying to get this into the system. Once you put it into a high school system - and it incorporates a lot of things that are very important in the final years of high school - you actually are affecting the parents, because the kids will go home to the parents as you do that.

If you use your electronic highway, if you make that available to do this - and you have SchoolNet, which is an important base to penetrate into with this - you could make things go very powerfully, I believe. I think that form of education would have a very big impact on society because the children will affect the parents, and the parents will affect the grandparents. But if you go at the parents, their minds are already a bit locked. Children might have a way of breaking the parents' minds open a little bit.

I know the opportunity is there and it's very rich. I think this is the way the federal government can work with national groups that have the capacity to do this. It could override some of the political barriers and could actually start to move the agenda forward for you.

The Chairman: The last question that I have is on an idea raised in Mr. Dupré's brief that we didn't pursue. Is it time for a committee like this to recommend a big solution to this problem? Should we, for example, move towards a large foundation and get the federal government behind a major new thrust in research? Should we avoid making it an extension of an existing program, but instead put out in front of the public a newly funded foundation to generate national interest in science and technology, and bring the partners in to deliver it?

I have a two-pronged question. If we were going to recommend putting more money into science and technology in this country to recognize the thesis that everybody's brought to us - as well as your chart, Dr. McLennan, about the declining investment and so forth - do we do it as an extension of existing institutional arrangements? Or do we say that what we have to perhaps do in part is put some money behind a new coalition, expressed through a foundation, as a way of doing this, and that the federal government should use this opportunity to put its money on the table, but should do things slightly differently from the way it has done in the past? If you had $200 million or $300 million, would you say to set up a foundation and do things slightly differently, or would you say to give it to the NRC, give it to the universities, give it to all the guys already doing work because they know what to do with the extra $200 million?

Does anybody have an off-the-top-of-their-head response?

Dr. Mustard: Could you explain what you have in mind when you say ``foundation''?

The Chairman: I'm just wondering if there doesn't need to be both a symbolic push and then one backed by real funds, a push in which we put out a new commitment or recommit ourselves to basic research.

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I'm not personally convinced - and this is solely my own view - that we should necessarily go back into the existing institutional arrangements. I have some reservations about some of them, but I'll pass on which ones I have reservations on for now, if you don't mind.

Do we say, listen, there are people who, if they are given the proceeds on a couple hundred million dollars, would know exactly what to do and how to promote basic research? Perhaps it shouldn't be done as an extension of the granting councils or Industry Canada or the politicians sitting on the industry committee, but there is a way of doing this out there and perhaps we should think of a new way of doing it.

Dr. McLennan: I would be pretty cautious about creating another foundation, if I understand the type you're talking about. When you look at our situation, we have a tremendous number of excellent scientific projects, projects that have been peer reviewed by experts around the world. People say these should be funded, and we don't have the funds to do them.

So I don't think the answer is to create yet another foundation and yet another government program. I think we do two things. We need to fund this basic research pump I keep talking about. That's the first major focus, and that's the unique role the government can play. Then let the experts use that basic research investment to do what they're trained to do.

You know, we spent 18 or 24 months in this country on a science and technology review. There were local meetings, provincial meetings, and a culminating national meeting. We came up with a strategy that has been endorsed by several government committees. The House of Commons finance committee in their last couple of reports have reinforced those major observations. I don't want to repeat myself, but it's worth emphasizing that the game plan is there in the S and T action plan. I think what we need to do now is to implement that plan and then monitor how it works, rather than to set up a new foundation.

The investment in basic research leads to small companies getting started and creating jobs. That restores the social fabric; the deterioration we talked about. That restores our competitiveness. Those are the key elements we need to focus on.

The second issue you're asking about is education. As we've said in our discussions this morning, we all collectively need to work on educating our people about these ideas, about the linkages among investment and research and knowledge generation and the creation of wealth. If we are to compete and survive as one of the G-7 countries we have to generate new wealth. I think we all agree with that. How do we do it? Well, we have to make use of our tools. We have to make use of our high number of skilled young people in this country. We have to find jobs for them to keep them in Canada, so they produce wealth in Canada.

I think the tools are there. What government needs to do is to clear away some of the impediments we've talked about this morning. I was so impressed with the presentations we heard in those eighteen months from the small business people, who stood up time after time... They would put a chart up and tell us, get rid of some of the red tape, get rid of some of the regulations; you're suffocating us. Small business does not have the resources to deal with all this regulation. They want to get at their business and create the wealth their business is trying to do.

We need to remove some of these impediments, and we've suggested several this morning which could be eliminated. I mentioned the pharmaceutical one. I realize there is some sensitivity about that one, but that's just one example: the fact that it takes so long to approve a new drug submission in Canada compared with in the U.K. or the States. These are simple solutions we could put in to expedite the process.

We have to remember we're a small player in Canada, with the pharmaceutical industry. I use that one as an example. Why should they invest in Canada? If they make a decision to invest in Canada, then we can argue about where they should invest. Those of us in western Canada think it should be west of the Manitoba border, but that's a problem within the country. But first of all let's get them investing in Canada. They really are doing much better, and that's probably because we improved the playing field with patent restoration and so on.

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The Chairman: Dr. Mustard.

Dr. Mustard: Your question is an intriguing one. If I interpret the word ``foundation'' to mean institutional innovation, could you create new institutional structures to help the black box to work, the answer is yes, you could. The institutional structures would have to be crafted to take into account the sources of support that want to make commitments to the area. That's extremely important. I think the Canadian medical discoveries fund is an example of that kind of innovation. CMRC is involved with members of the business community.

If you then take your question and ask what things have already emerged out of the woodwork in this country, the medical discoveries fund is one of them. PRECARN is another one. PRECARN is a consortium of industries, provincial funding, and federal government funding, and it works. It may not be considered quite a foundation, but it's an interesting institutional structure that seems to operate across the political and linguistic barriers which sometimes emerge in our country. I think it's important to pick up on your point that we're a small country, and a small country has to find clever ways to use its thin population base to give it a competitive advantage in this area.

If you think about the future of the centres of excellence concept, just think about this. Ten years ago people in universities had no sense of cooperating with each other. That simple strategic goal of setting this up has allowed them to gather and define areas where there is potential. It's bottom up. It really answers your first question, by the way. It tells you where the opportunities are, because you don't have to dig. It's there, because these are the people who can do it.

The federal government's support has been key in getting it to this point. You don't have enough real partnership with provincial governments, and the partnerships with the private sector are not really as strong as one would like to see them, but that's a reflection of the weakness in the industrial base.

You might therefore want to think of an institutional structure that enhances industry's capacity to become real partners in this. A ``foundation'' might be appropriate. You might create a structure with a specific kind of tax structure which would let them come in and from which they would allocate funds, the funds they'll put into this tax structure if they make a commitment to this.

Do you see what I'm trying to get at? I was trying to get at some kind of incentive structure for that.

Initially when I heard your question I interpreted ``foundation'' in a conventional way and I was rather negative about it. But if you'll allow me to talk about it as an institutional innovation, I think it's a very important subject to consider pursuing, on the base of what is already taking place in the country. In that way you might marry a lot of forces together.

If you want to talk about it at some time, I can throw some players in, and colleagues here, to talk with you about how you might crystallize that.

The Chairman: From time to time governments have chunks of money, but not an ongoing commitment. The problem we've run into is once the ongoing commitments were cut back we ran into a lot of difficulty and a lot of hurt relationships. If you have an irregular opportunity to contribute, how does one structure that without totalling upsetting the apple-cart and the creative processes?

Let me go on to Mr. Murray.

Mr. Murray: I have a very quick question about the chart on the trend in budgets for health research. It's for Dr. McLennan or Dr. Gauthier. Does that include research being done by the pharmaceutical manufacturers, or is that the question of MRC grants?

Dr. Gauthier: It is strictly public support in each of those countries.

Mr. Murray: In other words, it could be that in Canada actual health research -

Dr. Gauthier: It's support by MRC and NIH in the States, for example. These are equivalent in both countries, apples with apples.

Mr. Murray: But I'm told we may have had an increase, actually, if you look at what the pharmaceutical manufacturers have been doing over the last few years.

Dr. Gauthier: But this is for basic research. The pharmaceutical industry invests mainly in applied phase III and phase IV clinical research. Here we're talking about support for academic research with public funds in each of the countries. For example, NIH allocates money on the basis of peer review. MRC does it as well. Industry does not run peer review. They have their own ways to assess their objectives with rather applied research; again, the far inside of the circle we have demonstrated here. This is strictly public funding for academic research.

The Chairman: Mr. Lastewka.

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Mr. Lastewka: I want to go further on the networks of centres of excellence that Fraser mentioned. We've heard many good comments about them, that they've put many universities closer together and the stakeholders more focused.

The chairman and I have been talking about this: How do we get over the four-year timeframe, and how can we put money into research such that we don't dip ever again? We have to straighten out that investment, but we also have to prevent it from ever happening again, because we'll pay for it and our children will pay for it because of that. We're looking at ways of how to do that.

Dr. Mustard: I think you have to be bold and safe, and you can make pretty good estimates of this. For a country to have a base for the future, it has to be prepared to expend annually x percentage of its wealth to build that capability, and you have to bottom line that and put that up front. When we tried to argue that 10 years ago, because the advisory structure of government denied the role of science and technology - to be blunt - you could never get this commitment.

But if the Department of Finance is really concerned about economic growth - I don't know who is in the Government of Canada, by the way, because I don't see where it's focused - if you really are focused on building a capacity for economic growth in the future on the subject matter my colleagues have talked about, you have to make an investment commitment that is long term. You cannot do it otherwise, and that's the bottom line you have to put on people. It's not just giving a bunch of people in white coats a chance to dabble. What you're really creating is the infrastructure for the future, and if you're not prepared to make that investment, you won't have a future.

Mr. Lastewka: As the chairman mentioned earlier, when you look around the House of Commons and say, I wonder how many members have really been involved in science and technology for ten or twenty years, when you start counting, there are very few.

The Chairman: Dr. Gauthier, do you want to add something to this?

Dr. Gauthier: The long-term commitment in investment that has just been mentioned byDr. Mustard is very important. Indeed, it is fundamental.

The problem we face, actually, in the midst of expenditure cuts in the federal government is that when, for example, we go to Health Canada's officials and make a case for MRC and tell them the problems that are happening, they basically have no sympathy for that sort of argument in view of the relatively greater cuts they have in their department. That means the type of activities we're involved in are not assessed and evaluated on the basis of their own merit, both for the health of Canadians and for the economy, but are assessed on the respective size of the cuts versus internal cuts happening elsewhere in government, which is extremely bad.

You couldn't have a worse basis to evaluate where to put your investment. That's basically why we need a separate body, and this committee would be a good forum to do exactly that, to bring aboard the arguments from all sides. This is the essence of our recommendation here, of also reassessing or evaluating investments, a $3.5 billion investment in federal science on the basis of, basically, peer review and competition, as we do with the smaller budget of the granting councils.

MRC's budget is only $240 million, for example, and when you consider $3.5 billion of non-peer-reviewed, non-competitive processes happening, you have to somehow strike a balance and have a kind of equivalent system to see who is doing what and what are the cost benefits in all cases, both in extramural research supported by the councils and in intramural research. This would really shed light on the respective importance and how they fulfil the national objectives for each of those sorts of activities.

That's one of the recommendations we have made here. That has never been done. During the science and technology review, I was moderator for three of the regional meetings and one of the moderators of a national meeting. I can tell you that in two places, in St. John's, Newfoundland, and in Montreal, I was moderating the workshop on federal science, and there was a strong, strong feeling out there that this $3.5 billion has to be accounted for and that someone has to be looking at envelopes across the board, rather than within the same envelope, and across the program so that we get the biggest bang for our buck.

That has to happen somehow, and this committee would be a good place to start in terms of following up on the science and technology strategy in a very concrete and tangible manner.

The Chairman: On that note, thank you very much. Is that satisfactory to the other members?

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I'd like to thank our three witnesses. As you can tell, we're probing you very carefully because we're trying to mull over some of our recommendations and trying to get people's reactions. So your appearances here today at the end of our session is very, very important to us, and I appreciate the time and effort you put into this. Hopefully our report will begin to reflect some of these considerations, both the ongoing one and the analysis. From different perspectives, you've given us a lot to think about. Thank you.

The committee is adjourned to the call of the chair. Merry Christmas, everyone.

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