30, October 2024
Productivity Summit
On October 16 and 17 the Canadian Productivity Summit took place in Calgary organized by the School of Public Policy at the University of Calgary and sponsored by the Alberta government. It was a large event with over seven hundred participants and seventy speakers. Here are the highlights.
Why productivity is important.
There was a good deal of discussion about why productivity was important. The main benefits of improved productivity are that:
- It lowers inflation.
- It boosts economic growth.
- It improves living standards and wages and salaries.
- It boosts tax revenues.
More broadly, Canada faces a number of very expensive challenges in the next few decades and will need resources to deal with them, that will need to be provided by better productivity. These challenges include an aging population (by 2050 25% of the population will be over 65) and climate change.
It was noted that the word “productivity” has a negative connotation for many people as it sems to imply working harder, not smarter.
Comparisons
Productivity varies a lot across Canada, with Alberta being the most productive province. A major reason for this is the industry composition in each province. Some industries are much more productive than others. The main reason that Alberta is the most productive province is because of the large proportion of the oil and gas sector in the province, which is extremely productive.
Canada is falling behind its G7 and G20 peers. Canada is projected to have the lowest growth in the OECD up to 2060.
Most sectors of the Canadian economy have seen productivity decline in recent years. Two exceptions are the agriculture and forestry sectors, where productivity has improved significantly.
The graph below, from the summit pre-read, compares the output per hour worked in the US and Canada since 2019.
Causes of the problem.
It was recognized that the productivity problem was caused in Canada, and not imposed from elsewhere. It is a longstanding problem that has developed over many years, although it has become more acute in recent years. There are a multitude of causes and contributing factors, many of them interrelated, including:
- Lack of productive investment. It was noted that investment in housing (that is not regarded as a productive investment) is now larger than investment in businesses.
- The large proportion of SMEs in Canada. Small companies are much less productive than large companies, so the large proportion of SMEs (compared with the US) decreases productivity.
- Interprovincial trade barriers. It was estimated that removing these barriers would increase Canada’s GDP per capita by about 4-5%.
- Low spending on research and development. Canada spends about half the OECD average on R&D.
- Low business spending on machinery and equipment.
- Lack of competition in many sectors of the Canadian economy. This removes the incentive to innovate. The supply management program for dairy was mentioned as keeping that sector uncompetitive internationally and raising prices in Canada.
- Large government spending, particularly during COVID. This crowds out private sector investment and raises inflation, so higher interest rates are needed to control inflation and that reduces business capital spending.
- High level of regulation and regulatory uncertainty. Large capital projects need to be sure that regulations are going to be stable for the project duration. In the absence of certainty projects get postponed or cancelled. Most foreign investment in the oil and gas sector has left Canada for this reason.
- Low adoption of IT by Canadian businesses. One example, given by an IT company, was that to adopt AI in a Canadian company took 18 months on average, in the US it took 4 months, and in the United Arab Emirates 1 week.
- There was some ambiguity about this. It was stated that Canada was more or less competitive on the corporate tax side, but uncompetitive on personal taxes.
The solution.
There was no shortage of ideas how to improve productivity in Canada. However, it was stressed over and over again that this is a very difficult problem that involves difficult political tradeoffs, and that to solve it will require building a robust consensus on the need to improve productivity (that does not currently exist). It was critical to build a partnership between government and business. An adversarial approach will not work.
If a consensus cannot be achieved an incremental approach might work.
A parallel situation was the need in the 1980’s to reduce a large government deficit that became a crisis. A consensus emerged after significant leadership from the government to undertake severe budget cuts and that was accepted by the public and the government was re-elected.
An example was interprovincial trade barriers. These have been recognized for many years but the political will to resolve them has not emerged.
Here are some of the ideas to improve productivity:
- Improve the competitiveness of the Canadian economy. There was discussion of the many sectors of the economy that are oligopolies, and how that reduces the incentive to innovate and leads to complacency.
- Make regulations and policies faster and clearer. The need to de-politicize regulations was discussed, as well as removing regulatory uncertainty by, for example, setting regulations for a period of 5 years. One suggestion was to adopt a “consumer first” approach to new regulations and policies, to make sure regulations benefit consumers rather than the companies.
- Review all the industry subsidies to see which ones actually work. The largest program – Scientific Research and Experimental Development tax credit (SRED) – is intended to increase business R&D in Canada, but clearly has not worked, as business R&D has declined in Canada. Poorly designed subsidies can divert jobs from more efficient sectors. The many programs supporting innovation have also clearly not worked as Canada’s innovation has declined.
- Return to a merit-based immigration system. It was noted that temporary foreign workers do not improve productivity as they mostly work in low productivity sectors like hospitality and tourism, and they depress wages and incentivize companies to employ people rather than investing in capital improvements. California is one of the most innovative states in the US as it has a very highly educated population who tend to innovate more.
- The provinces could work together to remove interprovincial barriers to trade. This would increase GDP per capital by about 4-5%.
- Remove barriers to foreign capital coming to Canada. It was noted that Canada does not produce enough savings to meet its own requirements, so foreign capital is essential to promote future growth.
It was noted that the imposition of large tariffs on exports to the US would devastate the Canadian economy.
Conclusion.
Canada’s poor productivity is a serious problem. If it cannot be improved Canada will continue its relative decline compared with other OECD countries. The first step in resolving it is to establish a consensus among government, business and the public that is a problem worth tackling. The difficulties of doing this should not be underestimated.
Peter Josty
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