Prepared for the External Advisory Committee on Smart Regulation
September 2003

Introduction

This paper has been developed for the External Advisory Committee on Smart Regulation to serve two objectives:

1. To identify key developments or changes in the global environment that will be important in framing a regulatory strategy for the 21^st century:
   1. Globalization and changes to business,
   2. Advances in science and technology, and
   3. New roles for citizens and consumers.

2. To set out some of the implications and challenges for regulation as a result of these three key developments.

The paper provides a brief summary of selected developments. It is not an exhaustive study of any of the chosen topics. It is intended to illustrate the scope and degree of change that policy makers and regulators will increasingly encounter in the next five to ten years, and the pressures these changes will bring to bear on the regulatory system and on Canadian governments, industry and citizens. It is not the intention of the paper to suggest that the developments described will be completely new to regulators but to highlight the increasing pace and complexity of global changes and the challenges for regulation presented by these developments.

The paper was drafted by the Secretariat to the External Advisory Committee on Smart Regulation, with contributions from the Office of Technology Foresight, National Research Council (Chapter 2: Advances in Science and Technology) and the Office of Consumer Affairs, Industry Canada (Chapter 3: Forging New Roles for Citizens and Consumers).

Other participating federal departments included Agriculture and Agri-Food Canada, Canadian Food Inspection Agency, Environment Canada, Finance Canada, Foreign Affairs and International Trade Canada, Justice Canada, Health Canada, Canadian Heritage, Industry Canada, Natural Resources Canada, Policy Research Initiative (Privy Council Office), Regulatory Affairs Division (Privy Council Office), and Transport Canada.

The paper also draws on input and discussions with private sector firms and associations.

I. Globalization and Changes to Business

Globalization is multi-faceted: It has economic, social, political, and environmental aspects. A complex international system is evolving, and within this system Canada has two complementary objectives: to position itself to prosper and be competitive internationally, and to ensure that the new system evolves in a way that reflects Canadian values and benefits the wider global community.

In his recent book, The Lexus and the Olive Tree: Understanding Globalization, Thomas Friedman argues that globalization is not new. What is new is the degree and intensity with which the world is being tied together into a single globalized marketplace and village. According to Friedman, globalization is the inexorable integration of markets, nation-states and technologies to a degree never witnessed before—in a way that is enabling individuals, corporations and nation states to reach around the world farther, faster, deeper and cheaper than ever before.

Globalization means increasingly open markets and greater economic integration. It means greater trans-border sharing of knowledge, consumer trends, social movements, environmental causes, and political agendas. It means more trans-border movement of disease, pollution and crime. Recent events—Iraq, SARS, mad cow disease—have underscored the extent to which it presents new challenges for ensuring the health and safety of citizens.

The net result of these developments from a regulatory perspective is two-fold. First, globalization has resulted in the blurring of the international and the domestic arenas (i.e., intermesticity). Policy and regulatory environments are increasingly international. Most of our current stock of regulations was developed for a domestic market, but our economic space is now larger, our domestic agenda now more influenced by international events. Second, the challenges facing governments, business, and citizens are increasingly complex. The demand for new and different regulatory responses is growing, even as the issues are becoming more interconnected and challenging to understand.

This chapter will focus on key economic developments, in particular impacts of global competition, the resulting changes to business, and challenges for the regulatory system. It is intended to help frame some key questions: How do we transform the regulatory system in Canada so that it maintains its traditional protective role but also enables innovation and productivity growth—key goals for Canada in the 21^st century? How do we ensure that Canada's regulatory system evolves in a way that contributes to a better global marketplace (i.e., where the environment, health, safety, justice are protected) and yet allows our domestic regulation to be a strategic asset for Canada? What are the impediments to achieving that transformation?

Impacts of Global Competition for Canada

Markets need regulations to function effectively. Regulations create the basic system of property rights that allows the orderly exchange of goods and services, and provide the rules regarding consumer and environmental protection. An efficient and effective regulatory system is a carefully constructed balance of social, economic and environmental goals. Maintaining and improving this balance is a fundamental challenge in responding to the forces of globalization.

Globalization is not only increasing competition for firms and industries. Globalization puts countries in much greater competition with each other. Domestic policies are not judged simply by how well they balance different factors but whether they are competitive in attracting economic benefits of the global economy; whether a country is seen to have a favourable business climate. If one country fares poorly in comparison to another, it may mean loss of market share for domestic products or inability to attract foreign investment.

The balance that regulations provide for firms also applies to countries. If countries compete for investment and share in global markets by improving the rule of law, creating an excellent transportation infrastructure, promoting innovation, and fostering a highly educated and skilled workforce, the competition among countries makes everyone better off. The opposite is true if countries compete by failing to develop adequate environmental laws or letting firms create unsafe products.

Impacts of increased trade

Globalization is driving performance levels up for Canadian industry as never before. Integrated markets are a daily reality for firms, whether measured in terms of export opportunities, import competition on the domestic market, currency fluctuations, and the impact of foreign government policies and regulations. Increasingly, Canadian industry must also take into account new multilateral arrangements (e.g., Kyoto Protocol) that can have a profound effect on the performance of a single firm or an entire industry.

Trade liberalization has led to dramatic increases in the movement of goods and services. Since 1950, the world GDP has increased by 500% and the volume of trade

flows have risen by 2000%. In the 1990s, Canada's trade to GDP ratio increased from 51% in 1990 to 81% in 2001. Canada is a trading nation.

One significant development is greater North American economic integration. The Fourth Annual Report on Canada's State of Trade produced by the Department of Foreign Affairs and International Trade indicates that the United States was the destination of 81.6% of total Canadian exports in 2002 ($382.5 billion) and the source of 69.9% of all imports. Canada was the largest U.S. export market, accounting for

23% of US exports. In comparison, Canadian exports to the European Union amounted to $31.1 billion and to Japan $11.5 billion. The result is increasing demands from industry for more serious consideration of international regulatory harmonization, especially between Canada and the U.S. In responding to these demands, Canada will need to address key issues such as the impacts of greater cooperation with the U.S. and other jurisdictions on Canadian sovereignty, and assess Canadian and American values and the extent to which they are different and the same.

Wider horizons, lower prices

The combination of increased trade and advances in technology has allowed enterprising countries to overcome previous disadvantages and become 'overnight' competitors. Canada is a resource rich country with a sound economic infrastructure that for years has given Canada a tremendous advantage over other less well positioned countries. Yet we must now fight hard to maintain markets we once took for granted. Paper that was traditionally produced with trees from northern woods can now be produced in Brazil through a new process using eucalyptus trees. And with new planting and harvesting methods, Brazil can harvest and process in the same day, producing paper that is 20% cheaper than paper produced in Canada. With more and more countries like Brazil becoming net exporters, at generally lower cost, Canada's share of world pulp and paper exports has dropped—from over 40% in 1990 to under 32% in 2003, according to the United Nations FAO Forestry Database.

One reason for this change is that customers' horizons are now much wider than they once were. There is a new willingness to go anywhere for products. The availability of multiple product sources has shifted the balance of power between buyers and sellers. Competitive markets are driving prices down.

Statistics Canada's Producer Price Indexes indicate that, from 1997 to 2003, prices of manufactured goods and services in Canada increased by only 6% overall—less than 1% per year on average, including higher priced industries such as energy and air

transportation. Prices dropped in many sectors: The automotive industry saw a price reduction of 5% per year on average. At the same time, according to organizations such as the Canadian Manufacturers and Exporters, the cost of business is going up—wages, raw materials, energy costs, and mandatory overhead, which includes taxes and regulatory compliance costs.

More efficiency, reduced costs

To succeed in this environment, firms at all levels are fighting for every bit of advantage they can gain and driving out every unnecessary cost. It is why some industries (e.g., forestry) are taking a hard look at Canada's competition policy, which they argue forces them to stay small; too small to be competitive.

More intense competition is also why the regulatory system has lately come under greater scrutiny. In a 2002 survey of Canadian business associations on the specific problems faced by their members in conducting trade and commerce across North American borders, conducted by the Public Policy Forum on behalf of Investment Partnerships Canada, almost all associations consulted raised concerns about

the regulatory environment in Canada. Associations cited the lack of harmonization between Canadian and American regulations, approval processes, long wait times in

Canada, and a "tyranny of small differences" between Canada and the U.S.

A particular concern of firms is 'accidental' differences—differences that occur not as a result of a deliberate policy choice but from slight variations in approach between jurisdictions which nonetheless have significant impact on business. In discussions with firms they have argued that a regulatory system that does not address the nature of regulatory differences, does not rout out overlap and duplication between jurisdictions, and is not sufficiently responsive to the pace of change penalizes a country in two ways: it drives up costs and creates a sense of uncertainty among investors.

Creating competitive advantage

A key difference between this century and the last is that regulation is increasingly viewed through the lens of competitive advantage: Does Canada's regulatory regime make it easier, or more difficult, to do business in Canada than other countries?

The OECD indicated in its 2002 review of regulatory reform in Canada that Canada's regulatory policies, institutions and processes were among the very best in the world. Yet, one key area where Canada scored lower was inter-jurisdictional cooperation (e.g., lack of progress on the Agreement on Internal Trade). In addition, while economic and administrative regulations scored well in the OECD report, they were deemed relatively less friendly to new investments and trade by foreigners.

In another recent study, on impediments to investment in Canada conducted by Investment Partnerships Canada, the regulatory environment in Canada was the principal concern raised by key foreign investors (31%), ahead of areas such as taxation and incentives (19%) and border issues (12%). The survey covered a wide range of regulations from federal, provincial/territorial and municipal governments. Respondents cited similar concerns as did the study of Canadian associations.

Enabling innovation and productivity growth

If industry has raised the bar on regulatory performance in Canada, global trends

indicate that it is in part because the bar has been raised on them, in terms of

global competition and pressures to innovate and foster greater productivity growth.

In new documentation released by the OECD in May 2003 on framework policies affecting international integration, Canada was identified as having the second most restrictive regime for foreign direct investment (FDI) among OECD countries. By sector, Canada was the most restrictive in innovative areas of the economy such as telecommunications, finance and manufacturing. FDI is sometimes considered an important determinant of innovativeness and productivity, enabling for example the acquisition of new technologies and higher levels of research and development (R&D). The challenge for governments is to ensure that public policy objectives are well thought out and carefully specified (e.g., exactly which industries in what circumstances does the public want to be restricted in their extent of foreign ownership), so as to

reduce unnecessary foreign ownership restrictions and ease the regulatory burden where it is not serving an identifiable public policy objective.

One important link between innovation, productivity and regulation has been identified by Harvard University professor Michael Porter. He contends that well designed regulations serve as a stimulus to innovation and can provide 'first mover' advantages to affected firms and industries. Exactly how this could work for Canada bears close examination. Meeting our Kyoto Protocol commitments will be largely achieved through innovation—new research and new technologies to reduce greenhouse gas emissions and improve our understanding of climate change impacts. The right regulatory regime to meet these commitments (i.e., timely, flexible, outcomes oriented) could contribute to maintaining competitiveness and creating new market opportunities.

New Models of Business

Multinational Enterprises (MNEs)

Three trends have created new challenges for Canadian manufacturers: the search by companies seeking to compete globally for greater economies of scale, global pressures on the cost and speed of innovation, and the need to meet 'just in time' delivery requirements. Post-NAFTA, many large Canadian firms have consolidated their operations to achieve economies of scale and make them more competitive in North American and global markets. A plant that once produced many products for a domestic market now produces only a few products for a continental market (i.e., sole-source plants). One result is that these plants are now in constant competition with U.S. sites to win and retain North American production mandates.

With regard to the cost and speed of product innovation, the key challenge is keeping ahead of technologically capable competitors who can copy or commercialize new technologies or ideas quickly. Companies run the risk of being seen as unreliable suppliers if they cannot ship new products promptly or obtain innovative inputs (e.g., new chemicals) needed to make those products. Being slower to ship a new product to the United States or other major markets hurts competitively.

At a more day-to-day operational basis, 'just in time' delivery requirements have made plants particularly vulnerable to upsets in the supply chain. Just in time affects both the material outputs and the inputs of a manufacturing plant: Plants must be able to meet the narrow delivery windows of their customers and be able to themselves obtain the necessary raw materials in a timely way.

Small and Medium-Size Enterprises (SMEs)

Small firms are an important source of economic growth in Canada according to Statistics Canada, accounting for roughly half of GDP and more than half of total employment. Further, many small firms are among the most dynamic and innovative companies in Canada (e.g., biotechnology firms). To the extent that they are the suppliers to big firms, everything that affects big companies also affects smaller companies. In addition, cost pressures are that much more intense for smaller firms. Smaller firms are less able to pass on costs the way larger firms can. And larger firms are now requiring them to do more. Ten years ago large firms would provide specifications for products; now smaller firms are expected to do much more of the design work and engineering, and provide servicing and quality assurance as well.

Many small makers of specialized products are selling internationally because they require larger markets to make their product competitive. While often highly entrepreneurial, they face some of the biggest market challenges: They must constantly seek out ways to lower costs and grow—yet they have fewer resources, greater requirements, and smaller capital sources to draw from.

For small and large firms, reducing costs, eliminating duplication and streamlining regulatory requirements on one hand, and harmonizing with the U.S. or Europe on the other, are increasingly important considerations.

Challenges for Regulation

1. As policy and regulatory environments are increasingly international, Canada's regulatory approach cannot be determined in isolation from the challenges and opportunities of global markets. Global integration will create increasing pressure for more synchronized approaches especially between Canada and the U.S., as well as other markets (e.g., Canada and the EU), and benchmarking against international standards. Canada will want to make deliberate choices: When is it smart to harmonize? When is it important to be different? Where is being different effective, and where is it not? What are the issues where national solidarity should be protected?

2. Canada is a small market in the global economy. Regulation will increasingly need to consider how to create strategic advantage and opportunity for Canada and promote innovation and productivity growth—e.g., exploiting niche markets, supporting emerging sectors (e.g., biotechnology). In making these choices, Canada will want to consider its core values. For example, we will want to ensure that we are trying to gain economic advantage in a positive manner that supports the evolution of an optimal regulatory framework for the global economy.

3. Increasingly, Canada's business climate will be judged in part by the regulatory regime and whether it is seen to be efficient, predictable, and flexible. Canada will need to address the perceptions of foreign investors and determine how much is myth and how much is reality? How will we measure efficiency? How will we communicate the results and change perceptions in Canada's favour?

4. For Canadian firms, success in the global economy will increasingly mean keeping pace with global competitiveness and getting ahead of the competition—quicker to innovate, quicker to market. This will in turn put increasing pressure on governments to ensure the efficiency and effectiveness of the regulatory regime: to improve timeliness, eliminate duplicative processes, introduce regular monitoring of the effectiveness of the system, engage the marketplace through innovative approaches (e.g., economic instruments), and create a more flexible, responsive 'smart' regulatory system.

5. Increasingly, Canada-U.S. linkages will open up new challenges and new opportunities. For example, Canada's environmental regime is generally more flexible, less costly and complex than the more litigious U.S. system. Canada could use this asset as a competitive advantage for Canadian industry. Conversely, being an outlier in any one sector could have an adverse affect on productivity and competitiveness.

6. Greater convergence will be highly desirable among federal, provincial and territorial governments and key to creating a more welcoming investment climate. Jurisdictional overlap and duplication can generate unnecessary costs to taxpayers and signal inefficiency to international investors. Cooperation will be particularly important in critical areas such as securities, public health emergencies, environmental protection and energy production.

7. Increased policy and regulatory complexity will demand greater horizontal management of issues and effective coordination and cooperation among disciplines, departments and jurisdictions.

II. Advances in Science and Technology ¹

With the rapid evolution in globalization, over the last dozen years the pace of scientific discovery has accelerated dramatically. A series of technological advances in disciplines as varied as spectroscopy, robotics and computing have enabled the mapping and modifying of genetic information. The boundaries between once-distinct businesses have blurred, from agribusiness and chemicals to health care and pharmaceuticals, to energy and computing. Among the hoped for results will be vegetables that assist the body's defenses against cancer and silicon chips embedded with DNA that can test for thousands of genetic conditions.

As these technologies evolve they will affect the economy and social organization in fundamental ways. It will be important for government to continue to protect Canadians' health and safety, while ensuring that citizens benefit from the opportunities created by new knowledge. Not only will regulations have to adapt, but the very institutional structures that support them may need major transformation. Policy adaptiveness and response will be of increasing concern to Canadians. The importance and urgency for regulators derives from three characteristics:

1. Fundamental. The technologies relate to very fundamental processes. Biotechnology modifies life forms. Nanotechnology permits the direct manipulation of atomic structures to create previously unknown chemicals and materials, not to mention amazingly small devices. Information technology mimics, and in some cases surpasses, human intelligence.
2. Replicant. Each of these technologies has some capability to "reproduce" itself. Modified life forms reproduce in the normal biological manner. Nano-devices are likely to duplicate themselves via nano-assembly.
3. Distributed. All of these technologies can be used by individuals. Unlike the big, centralized industrial technologies of the 20^th century these operate at a low, distributed level. This gives them both power and the possibility of misuse.

The Science, Technology, Application Triad

Although the impetus for regulatory change is often new technology, technology does not exist on its own. There are three inter-related components at work:

1. Science, which is verifiable knowledge about the natural world.
2. Technology, which is the capability to transform energy and materials.
3. Economic application, by which we determine if the application of technology and the expenditure of energy and materials creates enough utility to be "worth" the effort.

These components interact with each other continually, a fact that is of interest to regulators because the means by which knowledge, capability and utility can be regulated are different.

It will be important for regulators to understand the sequences by which science, technology, and application influence each other, to lead to more effective regulation.

Technology Pipeline

Canadian, American and European governments have recently independently assessed the future of scientific advancements. The most complete study was released in June 2002 by the U.S. National Science Foundation and the Department of Commerce, entitled Converging Technologies for Improving Human Performance.

The report sets out a range of disciplines, in which many appeared to be converging and overlapping in ways that are producing significant synergies. The possible capabilities that could be generated include (see also Annex 1):

• Tiny bio-sensors that could reside in and monitor the human body
• Gene therapy, the ability to control the genetics of humans, plants and animals
• Highly targeted pharmaceuticals specifically designed for an individual host and released on an as-needed basis to the appropriate body part
• Personalized health profiles and intelligent systems predictive modeling
• Direct linkages between brain and machine, then brain-to-brain
• Understanding of complex network behaviours and structures
• A better understanding of ecological systems (species adaptation, nutrient systems and bio threats)
• Sustainability priorities for industrial and social practices

Science and Technology Dynamics

The rapid pace of discovery and the emergence of so many technologies is not accidental. There are two important dynamics at play: convergence and consilience. These dynamics occur as a result of our expanding ability to observe and understand natural phenomena. This expansion takes place at both ends of the measurement scale, from the very small to the very large. The diagram below illustrates this point. The standard disciplines (physics, chemistry and biology) occur at what could be called human scale.

We can now observe matter down to the atomic scale. The ability to observe and work with energy and materials at these smaller scales has resulted in an integration of sciences. This unity of understanding is known as convergence.

Similar advances have been made at the gigascale. The tools of gigascale science are computers, databases, networks and satellites, which permit us to capture and analyze large amounts of data. Those working at the cutting edge of systems modeling and artificial intelligence are discovering new ways of understanding the universe. The models show us how low-level phenomena generate larger, ecological-level, phenomena. The unity of understanding at the systems scale is called consilience.

At both the nano and gigascale, new disciplines are emerging that cross traditional boundaries. At the nanoscale level, technologies to build semiconductors can be

adapted to build medicines. At the gigascale, graphical information systems designed to monitor weather can also be used to observe the spread of diseases. The technology and methods developed in one area find uses in the other, with a resultant increase of the pace of discovery in both areas.

Implications for Regulation

These new technologies often have both social and economic impacts. In many cases, how the technologies evolve can be at least partly determined by new and existing regulations. The following sections give examples of possible new capabilities of new technologies and some of the challenges they will increasingly present to regulators.

Biotechnology

Biotechnology presents challenges of the greatest immediacy from the perspective of regulation and governance:

• Biotechnology is reasonably well advanced. Many discoveries are well beyond the lab bench and in commercial production. Additionally, some early genetically modified organisms (GMOs) will soon have expired patents and will move into the public domain.
• Biotechnology has created considerable public controversy and raised numerous moral and ethical issues that will need to be addressed and managed.
• Biotechnology has a strong Canadian presence. Canada ranks second worldwide in terms of number of firms and third with respect to revenues. The U.S. is first – a situation that offers both opportunities and threats.
• It is still early enough in the biotech learning curve to present many significant new discoveries and applications.

Some regulatory issues in biotechnology:

Pharmaceuticals

The current process for assessing pharmaceuticals is not keeping pace with levels of discovery. The main input in the regulatory process is data from producers. However, producers will increasingly be using computer models to simulate and assess drug-body interactions, particularly in the early stages of development. Drug assessment methodology, which is currently based on clinical testing, may have to change to accommodate simulated, rather than statistical drug data.

Genetic Manipulation

Human genetic manipulation will create three capabilities not available today. It will permit the modification of damaged or disease-prone genes, enable the modification of genotypes such that they are transmittable to successive generations, and replace or enhance human characteristics (e.g., strength) beyond what occurs in nature.

Environmental Bio-Sensors

The same bio-nano sensors used in medical applications can be used to detect pollutants. Coupled with low-power, mesh network technology they can give accurate

pictures of what is happening in the overall environment. Such sensors are in principle good for regulation since they enable real-time monitoring of a variety of situations.

Nanotechnology

Nanotechnology is another important emerging technology which deals primarily with inanimate objects. It is quite early in its development cycle—many promising products are still in at the lab stage. One of the primary goals of nanotechnology is to produce new materials. These can surpass the performance of current materials in strength/mass ratios, but more importantly, they can have properties not currently available. There are many regulatory implications of new materials:

• Building, fire, safety and materials components codes related to product performance and integrity may have to change.
• New standards will have to be produced to measure and distribute new materials in a commercial environment.
• Of greater significance is the issue of regulatory obsolescence. If superior products are available, it would make sense to draft safety regulations that would require their use. This might increase safety, but could also render obsolete existing equipment.

Information Technology

Information technology is still a driver behind much commercial and research progress. From a regulatory perspective it is interesting that, historically, the industry has primarily regulated itself. Nevertheless, the growth and evolution of computing science bears monitoring since its impacts can be far reaching. One example is the role of network communications, and especially the Internet, on the financial sector. The field of finance depends on control and oversight, but network technologies as they are currently implemented present many ways to evade controls. Among the many implications, jurisdiction stands out. Where and how can information flow be controlled?

Challenges for Regulation

These examples show how broadly new technologies can span social and economic interests. Each new discovery opens new uses. From the perspective of regulatory

reform, a few general observations can be made:

1. In a quickly changing world, regulation must deal with more than known problems. Regulators must also anticipate upcoming ones. Moreover, if new problems are dominated by new science and technology, it is possible that research and development has progressed far enough to create a new technology, but not far, or broadly enough to understand the full scale of impacts. Strategic regulation attempts to get ahead of problems and anticipate the unintended consequences of new technologies. As such it will require us to:
   • identify shifting trends and dynamics;
   • assess levels of risk, risk tolerance, preparation and adaptability;
   • address key issues such as life cycle of regulations;
   • identify critical knowledge gaps, including underlying science and technology that will be required to deal with new situations;
   • design R&D programs to create the knowledge base needed for regulation.

2. The pace of discovery will be much more rapid than it was in the past, including the speed and immediacy of the impacts of global crises (e.g., pandemics). The volume of regulation workload will increase. Governments will need to address the timeliness and flexibility of the regulatory system to take advantage of new opportunities and support Canadian interests.

   Complexity will also increase. Convergence of knowledge will lead to convergence of applications. Because jurisprudence relies so much on precedence, overlapping applications lead to the possibility of multiple interpretations of existing regulation. Governments will need to address key issues such as whether modifications of the genetic code fall under copyright or intellectual property?

3. New technologies will open up opportunities that have been unknown or impossible. This will create a need for new regulatory regimes which take into consideration far-reaching social and ethical implications. The genomics world gives us the ability to mimic life. Nanotechnology will create self-reproducing, non-biological entities. Before regulations can be created in this schema, totally new paradigms must be generated. This is not business as usual.

4. Technology can also be a tool of regulators. Some technologies will assist regulators by creating new means of monitoring and enforcement. Aspects of human behavior which may have eluded social management may be brought under scrutiny. The availability of these technologies will influence the form of regulatory institutions.

III. FORGING NEW ROLES FOR CITIZENS AND CONSUMERS

A major challenge today for the regulatory system is public acceptance of its legitimacy and effectiveness. On the one hand, the levels of trust of governments and corporations are declining. On the other, expectations are very high for protection, responsiveness, accountability, and choice. To compound matters, Canadians want reduced taxes and increased services.

Addressing these challenges will require a new approach to the governance of the regulatory system, an approach that engages citizens and consumers in its design and operation, and extends the system's efficiency and effectiveness by supporting increased voluntary responsibility of citizens and the business community.

Declining Public Trust

Many recent major studies of public opinion, in Canada and abroad, indicate that public trust in public institutions and large companies has fallen significantly (e.g., the crisis in confidence in the public sector as a result of incidents such as Walkerton, the safety of the blood system, the depletion of the fisheries; and similar lack of confidence in the private sector as evidenced by incidents such as the Enron scandal).

Polls suggest that Canadians today are placing new levels of trust in institutions such as non-government organizations (NGOs) to act in the public interest. These organizations are more active than ever before in rules based activities such as the development of voluntary codes.

Trust issues are being compounded by the complexity of issues that citizens are dealing with on a daily basis. Issues include rapidly advancing scientific knowledge that is difficult to keep up with and understand, uncertainty about the moral and ethical dimensions of technological advances (e.g., cloning), confusion over conflicting claims with regard to such advances, and concerns about the complex interaction between social, environmental and economic dimensions of public policy issues.

Among more informed citizens, there is a sense that the regulatory system has significant capacity gaps (e.g., knowledge and skills base of practitioners), is not able to keep up with the pace of change and frequently is not, by its very nature, able to deal with emerging issues where the appropriate tools and underlying social consensus for action is lacking.

Rise of the Knowledge Consumer

The decline of public trust has intersected with a rise in educational standards and the advent of the Internet and created a new information-enfranchised class within society.

These new knowledge consumer/citizens tend to be opinionated, demanding and empowered, write Darrell Bricker and Edward Greenspon in their recent book, Searching for Identity. The knowledge consumer/citizens demand choices. Also, they have high expectations of governments and business and will hold them accountable for any performance failures.

At the same time, the knowledge consumer/citizen is searching for certainty, in part as a result of living in a world of constant change. For example, citizens want to know that they can rely on government for basic services. This tendency is especially evident in Canadians' expectations with respect to the health care system.

Values

In parallel with a growing loss of confidence in public institutions and the business sector is the emergence of a new set of public values. These values are driving citizen expectations about the performance of public and private institutions and have a direct impact on the perceived effectiveness and legitimacy of the regulatory system.

There is a blurring of the distinctions between the roles of markets and the public sector, and in parallel, a blurring of the public's sense of its role as a consumer and a citizen. In the first instance, the public is beginning to have expectations about the public sector that are similar to their expectations about private markets—they expect well run, responsive services, they want choice and they want efficiency and all provided at the lowest cost possible. This is the citizen as consumer. It is citizen/consumers stimulating government to act more responsively and efficiently.

With regard to the private sector, Canadians are increasingly of the opinion that businesses need to be accountable for the social, environmental and ethical implications of their actions, in a way that goes well beyond simple adherence to the law. As noted in Citizens Dialogue on Canada's Future: A 21^st Century Social Contract (Canadian Policy Research Networks), Canadians now demand more of both small and large businesses as engaged actors in civil society. Businesses are now expected to be social partners to help communities to meet their social and economic goals. This trend has the potential for harnessing of demand side market pressure for more responsible and accountable private sector actions.

Creating the Space for More Citizen/Consumer Participation in Governing/Regulating

There is an opportunity to manage these developments for the benefit of both the private and public sectors and for citizens and consumers. It involves tapping into another trend prevalent today—the desire for involvement and inclusion in the population as a whole. As evident in current polling data and in the activities of civil society based organizations, people today are willing to become actively engaged in the process of governing, to help make decisions and implement them. This is seen in the practice of NGOs becoming involved in activities such as codes of practice and other similar initiatives (e.g., Forest Stewardship Council, Marine Stewardship Council).

There have also been innovations in government institutions that are facilitating individuals' involvement in government and court decisions of importance to them. The ability of citizens to obtain information from government concerning consumer, health and safety and environmental activities has never been greater, and there are increasing avenues being made available for public participation in government decisions which matter to them (e.g., Commissioner for the Environment and Sustainable Development).

Similarly within the private sector, a number of new institutions and processes have been established in recent years to undertake specialized, public-oriented regulatory functions on behalf of industry. Fundamentally, these new institutions are consumer or market driven. Examples of such innovations include the Canadian Banking Ombudsman (complaint hearing and redress); the Cable Television Standards Council (customer dispute resolution involving consumer representatives); and the Responsible Care Program of the Canadian Chemical Producers Association (environmental safeguards and regulation). In all of these new 'private' regulatory initiatives, there is a specific role created for citizen/consumer advisors.

Developing practical, collaborative solutions

One of the hallmarks of such initiatives is that the major business, citizen/consumer and government stakeholders are encouraged to drop adversarial stances and instead work in partnerships to develop practical solutions that address specific hard issues. Citizens/consumers are forced to recognize the constraints business decision makers face, and business stakeholders are forced to realistically take into account such citizen/consumer objectives as fairness or social accountability for economic decisions.

The results of such processes are often quite imaginative solutions to problems that turn 'zero sum' games into 'win-win' outcomes. Because the burden of governing is shared among parties, there is potential for long term cost savings, as well as opportunities for leveraged market competitiveness and innovation.

The operating environment in Canada seems to be particularly conducive to

development of such 'partnership' or collaborative solutions, compared to other jurisdictions that may have a more intensive (and expensive) regulatory approach coupled with a distrustful, adversarial attitude among business, citizen/consumers, and governments.

Challenges for Regulation

1. In a rapidly changing, complex global environment, with increased trans-border movement of goods and people, governments will need to be vigilant in protecting and maintaining the public trust. Trust is no longer given but earned. With policy and regulatory environments increasingly international, not domestic, governments will need to assess what it means to protect the public interest in the 21^st century.

2. A key challenge and opportunity for governments will be to address the heightened expectations of citizens by building on innovations in the public, private, and third sectors to deepen public engagement in the rule making and implementation process. This approach could help improve the transparency of the regulatory system and increase the public's confidence in the system.

3. Heightened citizen and consumer expectations for responsible and accountable business practice can be harnessed in aid of government public policy activities. An example is the participation of citizens and consumers in the development and implementation of market-driven 'private' regulatory approaches that support public policy objectives.

4. The Canadian approach to addressing the challenges and opportunities of governing in the 21^st century will be characterized by increased opportunities for collaborative solutions involving government, the private sector and citizen/consumers.

Systematic support of this more collaborative and inclusive approach to regulation could have significant benefits. It can help address capacity gaps in the current regulatory system and allow governments to perform more effectively and credibly.

ANNEX 1

The following tables list some possible technologies, along with prospective early arrival dates, based on information in 2001-2002. The key assumptions behind them were: 1) some organization was pursuing the goal, and 2) it was properly funded. These technologies therefore represent feasible but not inevitable developments.

In the medium term, the following technologies are expected to build on the list above.

Longer range technologies with more uncertain horizons for deployment are suggested below. While this may be long range foresight, it is not that far away in terms of legislative eras and government "lifetimes". The preparation of new laws, including consultative processes, can easily take five years or more.

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Endnotes

1 This chapter deals mainly with technology and technological discover, particularly in the life sciences area, as a driver of regulatory change in Canada. While this section notes how emergent technologies place increasing demands on the federal government's scientific research activities, it does not analyze in detail the foundational role science plays in the development of a regulatory regime, including such aspects as problem definition, international cooperation, and risk management. The External Advisory Committee on Smart Regulation will examine the role of science in more detail at a later date.