Dominic Barton: Small country, big impact

February 27, 2017
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Text on screen: [Canada 150 logo]

Text on screen: [Converge 2017
Bright Minds. Bright Future.]

Text on screen: [Carrefour 2017
De l’esprit de l’avenir.]

Text on screen: [What kind of Canada do we want in the next 50 years?
Quel avenir souhaitons-nous pour le Canada d’ici 50 ans?]

Text on screen: [February 6-7, 2017
6 et 7 février 2017

Dominic Barton, global managing partner, McKinsey Company:

Merci, Dominic.  Thank you.  Algonquin, so thank you for teaching us many things this morning. Je suis très heureux. I am extremely pleased to be here with you. My French is not terrific, so I’m going to speak in English. Isn’t very good either, so you’ll have to put up with me.

But it’s a – it’s a great privilege to be here today, and I just think it’s wonderful, and I really congratulate you, Paul, and the whole group in Universities Canada in getting this together because I think – you know, this is – when I think about you – most of you out here, this is your future. I was trying to calculate will I be around in 2067? I’m kind of hoping I will, but I think it’s going to be a bit of a stretch in there. So – but I think it’s wonderful to be dreaming and have ambition as we look ahead.

What I wanted to do for the next 20 or 25 minutes was just really cover three areas. One is just to set the stage a bit about, you know, where we are in the world because I think the world is – is in a very different place, certainly than it was when I was finishing my university and where it was, the beliefs we had about how things would move, what were the drivers that would change things? A lot has changed, and I think it’s going to change even faster as we move ahead.

And as I often say when I’m – especially when I’m doing recruiting and so forth, I just want to say that I’m jealous of you because you are going to be leading in I think literally the most exciting times in human history because of all these changes that are going on. And I don’t say that lightly, and I’m going to talk a bit about some of those changes.

And after talking about that, I think I would like to spend a little bit of time talking about where – what’s our endowment in Canada? What do we have and what is the basis by which we can lead forward because I think the world needs a lot more Canada in it, especially now. And we have an incredible amount of resources—natural resources, our human resources—that I think should require us to be ambitious in terms of what we would like to do. So I want to talk a little bit about some of the endowment that we have, some of the challenges that we have.

And then end with some views about where we think we should take things forward. Some of these are personal. Some of them are with the Growth Council, and I’m working very closely with Suzanne Fortier. I think, by the way, it’s no coincidence that when the Finance Minister put the group together, a big chunk of the people in the room were university leaders, because it’s talent that’s going to be the basis for how we drive – drive things forward. So that’s a bit of the overview of what I want to try and cover.

So let me jump right into the – the kind of the forces at work, and for those of you who’ve heard me before, it’s going to be the same which, you know, unfortunately, is boring, but at least these are forces that are pretty steady and they’re, in my view, like gravity. And there are three of them that I just wanted to lay out. Each one of them, I think, is significant enough to make this next 50 years literally some of the most exciting in human history.

The first is this power shift that’s going on. We are seeing an economic power shift from the west to Asia and Africa, and it’s very much happening in your lifetime. We are going to see about 2.4 billion new middle class consumers coming into the system in the world over the next 10 to 15 years. We have never seen that scale of a middle class consumer group coming into the world before. That’s about a thousand times larger than what we saw in the industrial revolution. It’s the scale and the speed with which it’s happening. And it’s primarily Asia—China, India, Indonesia, Bangladesh—but it’s also Africa—Nigeria. We often think about Africa as a – you know, the dark continent where not much is happening. There’s a lot happening, and it’s going to be very important for us in Canada, our – the relationships that we have with that region of the world.

Nigeria, as I like to tell colleagues in consumer goods industry, has more babies born this year than all of Europe combined. So if you’re Procter and Gamble or you’re Unilever, you’re going to be irrelevant unless you’re in Nigeria now, not 10 years from now or 15 years from now.

So there’s this economic shift that’s moving on. Cities literally coming from nowhere to being 10 to 15 million over, again a 10 to 15-year period. And we know what those cities are. We’re going to see half of the most significant companies on Earth will be in emerging markets, not in the west. When I left university, UBC in 1984, 95 percent of the billion-dollar-plus companies in the world came basically from North America, Europe and Japan, sort of the triad power. Today, it is about 60 percent, and it’s going to drop down to about 40 percent. You see the companies that are being – the industries that are being formed as we move ahead.

And so I think, again, when we think about what we need to do in Canada in playing a role in that world, it’s a very different world than it was 20 years ago. And where we build our trade relationships, the linkages between our students and universities, the linkages between our cities, where should they be pivoting?

And all I would say is that most western organizations—businesses, universities, governments—are moving at way too slow a speed. And I look at McKinsey in the mirror when I say that. We, too, even though we talk about it a lot, don’t take our own medicine. We’re not moving as fast as that world – world is.

So right now, one of the areas I spend a lot of my time is along the Silk Road. That’s the – that was the largest trading route on Earth for about 800 years. Today, it’s the fastest-growing trading route on Earth, and it’s a place that we’d better get familiar with over time—Uzbekistan, Azerbaijan, all of these, Pakistan. All these places are going to be – are going to be critical as we look ahead, and then Africa.

So that’s one of the big forces that’s out there. It’s happening quickly. We need to be connected as we – as we move ahead.

The second force, which I actually think is even bigger or more profound is technology. Larry Summers would say we’re right now in Chapter 1 of a 100-chapter book. So we’re in the early stages of a technology revolution, and it’s affecting everyone. I mean the big slogan now in business is: “Everyone’s a technology company.” There are – there are mining companies—Barrick Gold is one—that would call – they call themselves – they’re a digital company, right, in terms of what they do.

And this – this transformation in technology, which is affecting everyone—medicine, it’s affecting material science, it’s not just the internet and commerce, it’s everything—I think is driven by three relentless drivers.

One is just computing power. If you even think about the difference between the current iPhone and the original iPhone, you know, nine years ago, the current iPhone is 150 times more powerful than the one it was nine years ago. And I used to say in previous talks the average cell phone—and that was the original iPhone—had more computing power than NASA had when they sent the first man to the Moon. That’s what we’ve got. That’s the kind of the power we’ve got there, and we’re – and it continues. It doesn’t stop as we look ahead.

The second is connectedness. Today, you know, we have roughly three billion people that are connected by various different means, by phone primarily. And we’re going to have another three billion be connected in the next seven years, right, as we move ahead. So we have a much more connected world than we’ve ever had. And we also have things that are connected, 17 billion things. You know, this is equipment, trucks, airplanes, hardware is connected. That’ll go to about 26 billion. And that connectedness allows people to make huge transformations in how they think about their organization. I don’t just say business. I don’t care what organization you’re in, the fact that we’re more connected allows you to do things in a very, very different way—typically flatter, more networked and faster moving than we’ve seen before.

And the third driver—and these are all kind of related—is data. In the last two years, we accumulated more data as humans than we had in our previous existence in its entirety. That’s the slope of that curve on data. As I say, about 95 percent of that data is useless, but five percent of it is useful and with the power of computing now and machine learning, we’re able to use more of that. And this is where, you know, artificial intelligence is coming now. And I think Suzanne said there’s been many generations of artificial intelligence. I won’t – you’ve been in multiple – you’re in the new generation, Suzanne, of this, but there’s been many generations of it. And I think what’s changed is actually the computing power that’s allowing people to be able to do predictions, for machines to do predictions in a way they haven’t.

And this, by the way, I think there’s some really interesting ethical issues. One, just a bit of a sidebar. I read a book over Christmas by Nick Bostrom on artificial intelligence and the notion of ethics in artificial intelligence, right? Because when you think about – you know, this may be the last invention of humankind. I know I’m getting way out, you know, because if this thing we develop solves for everything, you know, we’re kind of done. But how do you make sure it’s got the right values? You know, what – how do you control that? How do you deal with that? That’s a very big set of ethical issues. What’s the willpower of this? Will there be competing – there’s some interesting – these are – it’s again where the importance of philosophy is going to be in our system today. It’s not – for those of you who are in commerce, please take philosophy courses because you’re going to need it as you – as you look ahead.

So technology is just – is changing everything we do. We’ve looked at about 13 different technologies—I won’t bore you through all of them—but that we think will have the potential to literally change the economy in terms of trillions of dollars, right, not hundreds of millions of dollars. And this is everything, the machine science, the genomics, obviously the e-commerce. And so this is something we’re going to have to grapple – grapple with. And I think a lot of our institutions are not prepared, including companies, including governments, for the speed with which this – this is coming.

The third – so that’s the second force. The third force is what I would just call the need for a new societal deal. The impact of technology and this power shift are so significant that a lot of our social contracts that we’ve had for decades are not going to be as relevant as they have been. We’re going to have to invent new ways to deal with that.

One of the things that I’m most worried about—Dominic Giroux mentioned this—is the notion of job displacement. You know, when we’re looking at Canada on the Growth Council, we see 40 percent of Canadian jobs today could be automated in the next 10 years, literally automated, right? That’s an – that’s an incredible number and an incredible speed. And the question is are we – are our institutions ready to be able to deal with that disruption because it’s always easy if you’re highly educated and you’re on the leading edge of the technology, it’s a wonderful world, actually. It’s an increasing returns to talent world, which means you’re going to see much more income inequality we would see over time.

And even in places – you know, a lot of talk’s given, for example, about the rejuvenation of Pittsburgh, right? Pittsburgh was a steel city in the United States. It’s now one of the leading medical research places in the world. There’s been a complete rejuvenation. So from the outside, it looks wonderful, you know, as humans we’re able to rejuvenate ourselves. There are very, very, very few steelworkers who are doing medical research. They’re unemployed. They’re on the side. And there’s a new group that’s come in, and it’s not a very stable platform.

And so the need for new social contracts, how are we going to deal with people that 45 to 55 years old, the skills that they’ve developed over time are no longer relevant. How are they going to be able to deal with that? How are we going to think about lifelong learning? So I think it’s wonderful, again, that Universities Canada is doing this. I think we’re – the idea that you’d go to university once or you’d somehow finish by the time you’re 28, I think people 50 years from now are going to have a bit of a laugh about that and say, “Seriously?” I think we’re going to be going to university multiple times over our career. It may not be for four years or three years. It may be for three months, it may be for two – but I think we’re going to have to be reeducated at a rate we’ve never imagined before. So that’s just one dimension of the kind of the changes.

Just think, too, about you know, there’s research right now that would show that you can – that we can get a human body to still function basically to about 176 years old with all of the artificial limbs and so forth. The challenge we have is with the brain where – so we’ll have a body walking around with not much in it. Maybe I might be one of those guys down the road, but there’s – but so – but there’s a lot of work. But think about again what, you know, our life span is changing, what that means to – you know, how long is one expected to work? You know, what does a family mean and how do you take care of people? These are big issues that you are going to have to deal with more than me as we go through, but they’re coming.

So this need for a new social contract. That’s why I think one of the most exciting areas to go into, and I say this as a businessperson, is public – is the public sector. I was saying before at the breakfast, that when a – there’s a person, I’ve never even met him, but he’s a hero of mine, Peter Nicholson who gave a speech, I think it was in Atlantic Canada, and the title was “Go to where the gunfire is,” I think something to that – or “Go to where the bullets are flying,” something like that. And apparently, that was a phrase that Napoleon used to say to his generals. Go to where the gunfire is. Go to where the action is. Get involved. And I think you’re going to find a lot of the action occurring in public sector innovation. I think this will be a really exciting time, amongst many others.

So anyway, I’m spending too much time on it. Those are these forces, and I think we need to know about them because as a relatively small country with an amazing endowment, by the way, you know, we have to deal with that. It’s going to be hard for us to try and shape – it’s going to be hard for any country. I don’t think there is any country on Earth that can try and shape those – those three forces. All are going to have to play a role in how we do it.

And so when you then look at Canada, I think we’ve got – we have an incredible endowment. We are so lucky. I always use the thought experiment because I spent about six years in Korea, which is one of the most hard-driving, ambitious cultures I’ve met in my life, and I always do the thought experiment. I do it sometimes with my clients. What if the South Koreans took over? What would they do? I can tell you they’d go crazy.

They – I mean you look at the endowment that we have from a natural resources point of view, which are going to be even more important with those 2.4 billion people, we’ve just not even got started yet, and we’re – in fact, those 2.4 billion are going to want to eat, live and be like middle class groups in other parts of the world. We are going to have to use technology to use our resources effectively. That’s what we’re going to – food is going to be an absolutely critical need. We are abundant in our resources, and we’re getting more abundant with climate change and so forth.

We have also, literally, one of the best educated workforces in the world. If you look at our universities and what we do in terms of the talent and what we do in terms of inventiveness. Canada is extremely good on inventions. I brought this book up. This is a book that the Governor General and Tom Jenkins have just published. I don’t know if you’ve seen it. It’s called Ingenious. They’re obsessed, I think in a good way, with trying to get our sort of innovation culture up and saying let’s recognize what we’ve actually done, and there’s a hell of a lot of stuff that we’ve already invented, right, in Canada. A lot of them are actually around ag food, right, but also in other areas.

The challenge we have is we don’t scale them, right? We’re very good at coming up with the ideas, but we don’t commercialize them like we see other countries doing. And so we’ve got great natural resource endowment, and I mean that in terms of the human side as well of where we are. And we have our – I think, you know, today it’s shown, particularly when we see what’s happening in other parts of the world, not just in the United States, but also in Europe, we are kind of the bastion of democratic values, democratic liberalism, and we should never take that for granted. I think it’s something that we’d better – we’d better fight hard for because it can go away quickly.

And one of the things that as I look at what’s going on in the United States right now that I worry about is the chipping away at institutions, chipping away at the system that’s been set up. And it’s – that’s extremely dangerous because I think those places with the best governance and institutions, the respect for what media does in the system, for what the judiciary does, for the different elements of power in a system is extremely important.

I remember Nehru who had in India, right, a young, if you will, democracy, had I think something like an 85 percent majority. He diligently spent time at Question Period with the opposition because he knew how important institutions were for the – for the strength of that democracy over – over time, and that’s something that we’re going to have to make sure we keep working on, but it’s a strength right now. You can feel it in the world. People are, “Thank God Canada’s back on the map.” But we’ve got to work it too because there’s no reason why we can’t also go pear-shaped given all of the job dislocation and what’s happening if we’re not – if we’re not thinking about it.

We have, though, over the last I’d say 15 to 20 years lost our relevance in a number of dimensions. If you think about large organizations, it used to be the case that when you think about the number of companies that were in their – the top 25 in the world in their sector, we used to have 18 in the early 1990s. We’ve now got five. And I’m not saying big is beautiful, but I am saying that, you know, in this world that’s changing quickly, it’s important to have institutions of significance. It is actually important to be ambitious in a good way. I think we should be very ambitious. And there is no reason – again, think about if the South Koreans came here and looked at what we did with nothing what they would build. And I think we have a – we should have way a more global champ. We should just demand it. You should expect it of leaders. This is what – if you’re going to build something, build something that’s of global scale. Don’t play in the backyard. We’ve got to – we’ve got to – we’ve got to – we have all the resources and the talent to be able to do it.

We’re losing out in global trade. It used to be the case that Canada accounted for nine percent of China’s imports at one point 30 years ago. We’re now about one percent. We used to be much more significant in Asia and Africa actually when it was not as important it was today than we are today. We’ve become less relevant in those – in those parts of the world.

And we’re also becoming one of the most aged populations on the planet. We – we are the fastest aging OECD country right now, as I said, except for Japan and Korea, which I would argue have already gone over the cliff on that side. We’re next on the belt.

And one of the things that happens with older people—and I feel very comfortable saying that as an older person—is that we – you know, a big driver of productivity and inclusive economic growth is participation in the workforce. And generally as a population gets older, there’s less participation. That simple fact by itself will reduce our GDP per capita growth rate by half over the next 50 years. It’ll go from 1.8 to .8 just because of aging. That is a very big headwind that we’ve got to deal with.

Now again, I think older people can be very productive, and so we’ve got to encourage or enable them to be able to keep working and contributing, and they can, but again, this comes back to the societal conventions about what people do and how they get educated and reeducated. So again, we come from a place of incredible strength. We have some challenges, and the only thing that we need to do is lead and drive things forward.

And so the final part I’d just say is just some thoughts on where we think we should move, and this partly is from the Growth Council, it’s partly from other discussions that we’ve had, but I think that there are at least four buckets of areas that we think we should move on.

The first is – is around innovation. We need to take the capabilities that we have, this inventiveness, and then we have to figure out how we can concentrate and scale up more of that we do. We’re too small of a country to do 35 big things. Even the United States is focussed on 10. So we need a little bit more focus in terms of what we want to do. We’re very inventive, and that’s wonderful, but we do not have the resources, human and capital, to be able to do everything, so we have to make choices, and we have to pick a few, but when I say pick, I want to be careful about that. We have to let the market do it, right? Business has to be involved in that, but once you’ve got business and universities, research, entrepreneurs together—we think there should be three to five of them—you can then be able to double down, if you will.

And they do not have to be regional. They can be national, but we need to focus on three to five areas where we really want to lead. And they can be in technologies, but for sure they have to have some sectors behind them. You can’t have a technology with no sector. There has to be some business by which you’re applying that, and we luckily, again, have a lot of them.

But innovation is going to be a very important shift, how we scale it, how we go from inventiveness to commercialization, and there is no reason why we can’t lead on that side. And we, by the way, are going to attract way more talent than we ever have been able to, given what’s going on in the world. This is an attractive place for top talent students and research. We’re talking – you know, on the university side, Australia’s third largest export are students, right, foreign students that come in to be educated there. And you know, with all respect to our Australian friends, I think we do a better job. So why don’t we think about it that way? So innovation is going to be extremely important in what we do.

The second is looking at our sectors where we have these incredible endowments, and we think we have somewhere between six to eight in Canada that are literally world class, that we should get behind and unleash them. We focussed a lot on ag food because we think it’s been just been an underappreciated area, but it’s one where all the trend lines are saying there’s going to be massive demand, right? It’s going to – the demand will go up by at least 50 percent over the next 20 to 25 years. So how do we unleash that?

Right now, I would argue that in Canada even though we’ve got some very good companies and we’ve got very good research, if I’m very honest about it, we’re a laggard. We’re fifth or eleventh. The Netherlands is ahead of us. New Zealand is ahead of us. And this is isn’t about subsidies at all. It’s – it’s actually about just putting a spotlight on an area and saying there’s a big opportunity here. Let’s get rid of some of the barriers. We do have some regulations. We’ve got some infrastructure problems that we’re going to have to deal with. Let’s deal with that as we – as we move ahead.

So focussing on six to eight sectors to unleash them, getting business, universities, venture capitalists and get together to say let’s take these things forward we think can add significant inclusive economic growth—growth that will create jobs for people as we look ahead.

The third area that we’re looking at is on trade. We need to – we are too focussed on the United States. It’s very important, and we need to actually double down there because it’s worrying what might occur with a reframing of NAFTA, but we’ve also got to diversify. We are way too concentrated. And this is where I look at Stewart Beck here. We – you know, who’s been living it and screaming about it in a very positive way. We need to be thinking about Japan, China and India. We need free trade agreements. We have to have much deeper ties because that’s going to be good for all of us in Canada, being much more linked to that – that part of the world.

A fourth area is – is reskilling. We’re calling it Future Skills Lab, which is how do we make sure that we are able to have Canadians that are always ready to work in this ever-changing world because our current model we don’t think will work. The half life of a skill, if I could call it that, of being a lawyer has, we think, shrunk from about 25 years to about 14 years, right, and that’s going to continue. So what you think you’ve learned isn’t going to last as long as you thought. And we need to have a much better way of assessing what are the skills that we need now, but also in the future.

I mean I’d love to ask you as students do you have a clear view about what are the future skill needs that are out there? If you do, you’re much, much more intelligent or well aware than I was because I had no clue when I was finishing. And I would argue in some ways that was okay when you had a more stable system, but in a fast-moving system it’s not going to be helpful for us. So this notion of assembling the information, allowing organizations to pilot and innovate different ways of training people because I don’t believe it has to be for two year or four years. They could be more bite-sized chunks.

We’re looking at places like, you know, Singapore which is very focussed on this, and what they’re saying is what we are going to do is give every Singaporian over the age of 25 a $500 education account which will be continually topped up. They sort of give a set of amount of courses that you can take, but it’s, again, this notion of reskilling as we go ahead.

Workforce participation is going to be critical and on our indigenous people we heard at the very – very beginning, we have at least four or five segments in the Canadian population today that do not participate like they could in the system. It’s women with children. We’ve flat-lined in Canada, a great place for gender equality. We’ve actually been flat-lining for the last five to seven years. You see very few women also in the CEO role in Canada, which I think is also – it’s economically not good as we – as we look ahead. Low skilled labour, you see a falloff in what’s happening. And then the over-55 group, which is going to become a large group, we have to figure out better incentives to get them involved.

So these are just a number of the areas that we’re looking at. Infrastructure is one we’ve talked about. We think we – no country in the world has built an Infrastructure Bank. It’s crazy because everyone knows it makes sense. We are very hopeful that this government will, but it’s very important to do it because it helps drive productivity. It enables all these other pieces to be able to come in.

Immigration. We feel very, very strongly about increasing immigration, and again, this government, I think, has been very forward-looking on that side. Our view is we’d like to take economic immigration from 260,000 to 450,000, right? And there’s an economic reason for that. It’s not just about being a wonderful country. There’s economics with it, and we have to figure out how to integrate and do that properly, but that’s an imperative. And also for students who come from overseas, to make it easier for them to stay and be citizens.

And the final area that we’ve looked at is foreign direct investment. You know, Canada is – we lag other countries. Our foreign direct investment’s been growing at about two percent a year for the last decade. For the average of the OECD, it’s about seven percent. And so this is a great country to invest, but you’ve got to go tell people about it. They’re not just going to wander into Canada and figure it out. We have to be more aggressive.

So anyhow, I’ve been talking for too long. I hope that gives some indicator. This is more from an inclusive economic growth side of where there are a lot of opportunities for us. The world’s changing quickly.

But the last thing I would just say is again urge be ambitious, and I mean that in a Canadian way, not a sort of an American rash or a brash McKinsey way. I mean that in a way of we should expect a lot. I think there’s a biblical phrase, you know, for whom much is given, much is expected. We have a much is expected. And given everything that we have, I truly believe the only thing that can get in the way from making this 150 years, what Laurier wanted to have happen 150 years ago happen, is our ambition and our focus and our desire to make sure that it’s – it’s inclusive, it’s socially cohesive because if we don’t keep that side of it, it’ll – it’ll break down.

Anyhow, I talked for too long. Thank you very much. (Applause.)

Text on screen: [February 6-7, 2017 6 et 7 février 2017 Ottawa]

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“If you can build something, build something of global scale. Don’t play in the backyard,” said Dominic Barton, global managing partner, McKinsey Company to 100 youth delegates at the Converge 2017 event. He emphasized that Canada must be ambitious to make the most of our plentiful natural and human resources and build prosperity in a changing world. Converge 2017: Bright Minds. Bright Future.

Tagged:  Research and innovation

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