Geopolitics and the Productivity Imperative

Key finding: Productivity is no longer a purely economic concern — it has become a geopolitical priority. With Canada's labour productivity roughly 25% below the U.S. and real GDP per capita lower in 2023 than a decade earlier, accelerating productivity through applied AI is the only sustainable path to reconcile higher growth, fiscal stability, and national resilience.

Introduction: A Convergence of Challenges and Opportunities

Canada is at an inflection point where economic productivity, technological revolution, and geopolitical pressures collide. After decades of middling productivity growth, Canada faces a "slow-motion crisis" of stagnating living standards. Our labor productivity per hour remains about 25% below the United States, and since 2000 Canada's productivity growth has averaged barely half of U.S. rates. This gap is not merely an economic curiosity — it has become a core threat to national prosperity and even security. As the OECD's latest survey warns, weak productivity has left per-capita GDP growth "sluggish," underscoring a critical need for reforms to bolster potential output.¹

At the same time, global forces are raising the stakes. Geopolitical tensions and fracturing alliances are forcing Canada to reconsider its strategic autonomy. The re-emergence of economic nationalism — from great-power trade wars to technology sanctions — means Canada can no longer assume unfettered access to critical technologies or markets. In the words of one policy expert, "the United States is no longer a reliable ally, either economically or militarily" in a Trump-era scenario.² Yet Canada's digital and industrial infrastructures still rely heavily on foreign technology (from cloud platforms to semiconductors), "much of [our] communications infrastructure is under the control of U.S. companies", raising "critical economic, political and national security concerns". In this environment, resilience and sovereignty — the ability to thrive using our own capacities and like-minded partnerships — have become imperatives.

The good news is that a unique confluence of factors gives Canada an historic opportunity to reverse its productivity slump and build a more sovereign, prosperous economy. A new wave of general-purpose technologies, led by artificial intelligence (AI) but also including quantum computing and next-generation clean energy, promises to boost productivity in every sector radically. With the right strategy, Canada can harness these technologies to "grow our way" out of economic malaise.³ As a major McKinsey Global Institute analysis concluded, "only the productivity acceleration scenario" — driven by high investment in transformative tech — combines output growth with wealth creation while keeping debt in check. In other words, accelerating productivity is by far the most desirable (indeed, the only sustainable) path to maintain Canadians' prosperity in the next decade.

This briefing argues that Canada can seize this moment by re-framing our approach to nation-building in the digital age — treating productivity enhancement as a strategic imperative on par with national defence. We must be bold in policy vision, because incremental tweaks or copycat moves will not suffice. The pieces are in place for a Canadian productivity renaissance: we have world-class researchers, abundant clean energy, a vibrant startup scene, and a stable, open democracy that can attract talent and capital. Yet antiquated policy frameworks — especially around financing innovation and government procurement — are holding us back, causing adoption of new tech to stagnate and homegrown solutions to wither. Without changes, we risk "missing the boat, again," as transformative technologies get scaled elsewhere and Canada is left importing the future at high cost.

Geopolitics and the Productivity Imperative

Productivity is no longer a purely economic concern; it has become a geopolitical priority. In an era of great-power competition and fragile supply chains, "economic policy is security policy", as the Council of Canadian Innovators recently put it. Simply put, a country that cannot produce leading goods and services efficiently will find its autonomy constrained. Allies increasingly expect Canada to pull its weight — whether in defense spending, clean tech, or semiconductor capacity — and that will require a stronger economic base.

The global context today resembles a period of reinvention: some compare it to the post-1945 era when world orders were reset. Once again, Canada's policy choices now will shape our strategic position for decades. Two trends stand out:

• Erosion of U.S. Hegemony and Reliable Trade. The United States, our largest partner, is turning inward and unpredictable. Trade disputes and technology restrictions are more common (e.g. export controls on advanced chips). An opinion in Policy Options notes that under a second Trump presidency, Canada might face an "era-defining moment" of a fractured relationship and must "think ambitiously about the kind of Canada we want to build" in response. If U.S. policies threaten our access to technology or markets, the only counterweight is to develop indigenous capabilities or diversify partnerships. This is fundamentally a productivity challenge — we must produce innovative outputs domestically or in concert with trusted allies.

• Technological Arms Race (Democracies vs Authoritarian States). The race to lead in AI, quantum computing, and advanced manufacturing is not just about commerce — it's about whose values and systems will prevail. "The world needs AI to be developed within an open, pluralistic, free democracy — and not an authoritarian state", as one analyst argues starkly. Canada, alongside like-minded democracies, has a role to play in ensuring the next generation of critical technologies are aligned with democratic values. That means investing in our innovation capacity and not ceding entire industries. For example, as Peter Leyden writes, the West should focus on winning in AI (the "main transformative technology" of our era) rather than relying on strategic rivals for it. If we lag in productivity and innovation, we risk becoming techno-dependent on others, with all the security vulnerabilities that entails.

Therefore, improving productivity is central to increasing Canada's resilience and sovereignty. A more productive economy generates the wealth and expertise to support stronger defense, to invest in domestic tech capabilities, and to reduce reliance on any single foreign supplier. It is telling that Europe — facing similar sovereignty issues — has launched massive initiatives to bolster "tech sovereignty," including €1.3 billion in public funding for AI, cybersecurity and related fields. The Netherlands even moved to "halt the use of U.S. cloud services such as Amazon AWS for government data" and build an independent sovereign cloud. These actions underscore the perceived link between control of technology and national autonomy.

Canada should learn from these examples but also avoid their pitfalls. We need to pursue digital and economic sovereignty smartly — not by isolating ourselves, but by ensuring we have the capacity to produce and innovate in critical areas. In practical terms, that means identifying strategic industries (AI, quantum, clean energy, critical minerals, etc.) and making targeted investments and policies to boost productivity and innovation in them. It does not mean cutting ourselves off from global trade or turning away the best technologies — rather, it means using policy to build capacity where markets alone have under-invested, so that we have options. For instance, maintaining a domestic capability in cloud computing and AI infrastructure for sensitive data is prudent, but it should be done in a way that doesn't hamstring the public service from using world-class tools in the interim. Digital sovereignty should be defined by the ability to maintain control over our data and systems — not by an outdated notion that all technology must be nationally produced. In fact, an industry expert recently pointed out that "storing Canadian data in Canada doesn't guarantee sovereignty" on its own — what matters is who has legal and operational control.

Bottom line: Geopolitical shifts are raising the cost of complacency. If Canada remains a productivity laggard, our influence and security will wane; if we become a productivity leader in key fields, we can punch above our weight and secure our interests. This makes a compelling case that boosting productivity — especially via innovation — should rank alongside defense and diplomacy in national priority. The next section explores how productivity growth (or lack thereof) directly affects Canada's economic health and ability to maneuver in this challenging environment.

Productivity: The Key to Unlocking Growth and Prosperity

Canada's economic future hinges on a dramatic acceleration in productivity growth. The reason is simple: our traditional growth drivers are running out of steam. Population is aging (slowing labor force growth), and we cannot rely on ever-increasing commodity prices or housing booms to prop up wealth. Meanwhile, public debt grew during the pandemic and cannot keep expanding indefinitely. The only way to square the circle — to raise incomes, fund public services, and keep debt sustainable — is to get more output from the resources (especially human resources) we already have. In short, we must do more with less, through innovation and efficiency. High productivity is what allows countries to enjoy high living standards; as of 2023, Canada's GDP per hour worked was about USD $74.7, far behind the USD $97.0 in the United States — this gap translates to lower incomes and fiscal room at home.

Leading economists and institutions have reinforced this point. The McKinsey Global Institute's comprehensive study of global balance sheets (assets, debt, and wealth) concluded that productivity acceleration is by far the most desirable — indeed the only truly sustainable — scenario for advanced economies. Under a high-productivity scenario, "economic growth outpaces debt and asset value growth", allowing countries to "grow their way to balance sheet health". In plainer terms, when productivity rises robustly, GDP grows faster than our liabilities, making debts more affordable and wealth more solidly backed by real output. McKinsey warns that all alternative scenarios are grim: a prolonged stagnation, a debt crisis, or high inflation — each of which either crushes growth or erodes wealth. The "best outcome by far," therefore, is to ignite productivity growth. This path would correct many imbalances: it would "allow countries to grow their way to balance sheet health," help resolve wealth inequality by raising incomes broadly, and ease trade imbalances as more economies become productive.

For Canada, this is especially critical. As the OECD notes, our per-capita growth in recent years has been "weak due to sluggish productivity gains", and without a pickup, living standards will stagnate. In fact, TD Economics pointed out that Canada's real GDP per capita was lower in 2023 than a decade prior — a startling statistic that underscores the urgency of a productivity boost. We are effectively treading water. Reversing this trend is central to unlocking the next stage of Canadian prosperity. If we can raise our productivity growth even by one percentage point annually, the compounding effect on GDP and incomes over a decade would be enormous — potentially adding hundreds of billions to our economy. That means more tax revenue (without raising rates), more business profits to reinvest, higher wages, and a larger economic pie to address social priorities.

Crucially, productivity is not about working harder, but working smarter — leveraging technology, skills, and better management to increase output per hour. That is why the emergence of general-purpose technologies like AI represents such a game-changing opportunity. Historically, breakthroughs like the steam engine, electricity, or the internet have driven huge productivity waves — but often with a lag, and only in countries that effectively adopted them. AI has the potential to automate or assist in vast swaths of work, from drafting documents to discovering new materials. If harnessed properly, it could significantly raise the productivity frontier across industries: one analysis by McKinsey suggests generative AI could enable annual GDP growth acceleration similar to the impact of the 19th-century industrial revolution in terms of magnitude (though spread over many years).

However, to unlock this, Canada needs broad-based adoption. A small cadre of high-tech firms becoming more efficient won't move the needle on national productivity if the rest of the economy lags.

The narrative arc posited in this briefing is that applied AI at even moderate scale could be the lever to finally jolt Canada onto a higher productivity path — but only if we address barriers to adoption and scaling. Right now, despite all the AI research prowess Canada has (we've produced Turing Award winners and top talent), the real penetration of AI into everyday business processes is limited. Many firms pilot AI, but few deploy it at scale. According to MIT and Stanford studies, a stunning "95% of enterprise AI pilots" fail to materially impact the bottom line, with only "5% achieving rapid revenue acceleration" or meaningful ROI. This indicates a major translation problem: the tech exists, but it's not being successfully implemented in operations at scale. Why does this matter for productivity? Because it suggests a huge untapped reservoir of efficiency gains. If even 5% of use-cases can deliver outsized gains (say, a 20–30% productivity boost in those operations), then spreading AI to 50% or more of suitable tasks could raise economy-wide productivity by several percentage points. As an analogy, think of AI as a "force multiplier" for our human workforce: early evidence shows companies that effectively adopt AI are seeing 1.5 times faster revenue growth than those that do not. They also achieve high returns on their AI investments (on average $3.7 in returns per $1 invested, and top performers over $10 per $1). This is precisely the kind of boost Canada needs.

Yet, herein lies a paradox: the areas where productivity gains are needed most (e.g. traditional sectors like healthcare, government services, small-medium enterprises) are often the slowest to adopt innovations like AI. This is why policy matters — the market on its own may not diffuse these technologies fast enough. There is precedent for government action to spread productivity gains: consider how postwar governments drove the adoption of electrification, or how more recently, some governments subsidize SME technology adoption. Given the stakes, Canada should consider national missions or incentives to accelerate the diffusion of productivity-enhancing tech (AI, automation, advanced analytics) across the economy. For instance, setting a target (as a thought experiment) to achieve "AI augmentation in 5% of all jobs within 3 years" could have a transformative effect. That might mean, say, an AI copiloting system available to every government analyst, or every manufacturer integrating at least one AI-driven process on the factory floor. Research suggests even partial automation of tasks can significantly boost worker output — one study found AI coding assistants improved developer productivity by 20–50% in certain tasks. Multiply those gains across a workforce, and the macro impact is significant.

Another central point: productive investment is the vehicle to achieve productivity gains. This involves directing capital to "era-shaping opportunities" — technology, infrastructure, clean energy, defence — that yield long-term productivity dividends. Healthy economies devote a good share of GDP to such investments, as they appear on balance sheets as productive assets (machinery, intellectual property, etc.) that increase capacity. In Canada, business investment (especially in R&D and ICT) has traditionally lagged peers, which partly explains our productivity gap. To turn the tide, policies must incentivize both private and public sector to dramatically step up investment in innovation and capital deepening. As McKinsey notes, about 80% of global productivity growth historically comes from investment in capital and innovation dissemination. For Canada, that means encouraging companies to invest in new technologies (AI, robotics, advanced software) and not just in real estate or resource extraction. It may require creative measures — from accelerated depreciation for digital assets, to co-funding industry innovation adoption programs, to leveraging public procurement (a topic we'll revisit) as a catalyst for private tech investment.

In summary, a sharp increase in productivity is the linchpin for Canada's economic strategy. It is the only viable way to reconcile higher growth with financial stability and rising demands on government. The next sections will examine how we can harness AI as the prime lever to achieve that productivity acceleration, and why our current approach needs rethinking to fully capitalize on this opportunity.

Footnotes

1. OECD Economic Surveys: Canada 2025. https://www.oecd.org/en/publications/2025/05/oecd-economic-surveys-canada-2025_ee18a269.html ↩

2. Policy Options, May 2025. https://policyoptions.irpp.org/2025/05/digital-sovereignty/ ↩

3. "Global balance sheet trends: Impact on growth and wealth," McKinsey, October 2025. https://www.mckinsey.com/mgi/our-research/out-of-balance-whats-next-for-growth-wealth-and-debt ↩