Is Canada a hewer of wood and drawer of water? – Blog #28

3, May 2022

Is Canada a hewer of wood and drawer of water?

Canada is often described as a resource based economy, or, less kindly, as a hewer of wood and drawer of water. But is this really true?  As a resource based economy Canada is often compared to countries like Australia, Norway and Russia. But look at the graphic below.

This shows a measure for each country called the Economic Complexity Index.1 The Economic Complexity Index is a ranking of countries based on the diversity and complexity of their export basket. High complexity countries are home to a range of sophisticated, specialized capabilities and are therefore able to produce a highly diversified set of complex products. Low complexity countries export more undifferentiated commodities and simpler products. The reason this index looks at exports, rather than total production, is that exports are seen to be a measure of international competitiveness, and allow better international comparisons.

So, Canada is far from being a hewer of wood and drawer of water. We have a much more complex export mix than Australia, Norway and Russia.

Broadly speaking, richer countries usually have more complex exports.  The highest ranked countries according to this index are Japan, Switzerland, Germany, South Korea and Singapore. The US ranks #11 out of 133 countries.  The lowest ranked countries are Venezuela, Cameroon, Papua New Guinea, Liberia, Guinea and Nigeria.

The comparison with Australia is particularly interesting as Australia is often seen as a twin for Canada. Canada ranks #36 out of 133 countries in this ranking (and is growing more complex), and Australia ranks #88 (and is growing less complex.) That is a huge difference, and is explained by the fact that a much larger proportion of Australia’s exports are “simple” compared to Canada. Well over half of Australia’s exports are commodities such as iron ore, coal, petroleum and gold. The corresponding number for Canada is roughly half that, with exports of petroleum, gas, gold, lumber and wheat. Canada has significant exports of complex products such as cars, car parts, ICT, machinery, medications and plastics.

The researchers place the diversity of tacit knowledge—or knowhow—that a society has at the heart of its economic growth story. Research from the Growth Lab finds that countries whose exports are more complex than expected for their income level, grow faster. So, according to this approach Canada would be expected to grow faster than Australia.  This is true, with Canada’s growth to 2029 estimated to be 3.06% per year, compared with 2.17% for Australia. (These estimates were made before COVID-19, so take them with a grain of salt.)

The Harvard Growth Lab has an interesting view on economic development. They see that countries grow by diversifying into new products of increasing complexity. So the more complex your export mix the more opportunities you have to grow into adjacent areas. Some examples from Canada could be:

  • Oil and gas firms getting into other energy sources such as geothermal energy, that exploits their drilling and energy expertise;
  • Automobile firms getting into electric vehicles, that exploits their manufacturing expertise.
  • Forestry firms using drones for reforestation exploiting their expertise in forestry.
  • Energy firms getting into hydrogen production to exploit their expertise in natural gas and related technologies such a carbon capture and storage.
  • A historical example is Shell getting into GPS technology to know where they were drilling, and subsequently spinning off the business, that seeded the formation of the Calgary GPS cluster.

Conclusion.
Canada has a much more complex economy than we realize. The idea of using the diversity of tacit knowledge to diversify into adjacent areas is an interesting one that should receive more attention. It’s probably a much more robust approach that trying to attract unrelated businesses to set up here.

Peter Josty

  1. Harvard Atlas of Economic Complexity https://atlas.cid.harvard.edu/