31 January, 2023
Where did Growth go?
Strong economic growth in Canada over many decades has resulted in one of the highest standards of living in the world. It is disconcerting, then, to find that projections are showing drastically slower growth for the next few decades.
Who says this?
The OECD projects growth in real per capita GDP for Canada of below 1% a year up to 20601. It is the worst performing of 38 advanced countries for 2020-2030 and also for 2030-2060. See the graphic below.
They are not the only ones. The Conference Board of Canada2 projects growth in actual GDP to be 1.5% per annum over the period 2021-2045.
What is their rational?
All the forecasts point to a number of short term headwinds – war in Ukraine, COVID-19, inflation, rate hikes, residual supply chain problems. Longer term, headwinds include population aging, increased healthcare costs, and the increasing relative cost of public services. What they don’t mention is the risk of geopolitical tensions that seem very likely to be another longer term impediment to growth. They also don’t mention the increase in regulations (The US government, for example, introduced 12,000 new regulations in 2021.)
The ultimate reason behind these poor numbers is the low rate of productivity increase in Canada.
What about the Fourth Industrial Revolution?
It is well accepted that the long term driver of wealth and prosperity is technological innovation. We are in the midst of the Fourth Industrial Revolution, a major technological revolution that will fundamentally transform the structure of the world economy. New technologies such as microelectronics, quantum information systems, artificial intelligence, biotechnologies and clean energy are quickly being adopted. So why doesn’t this show up in the forecasts? There seems to be a huge disconnect between these forecasts and the Fourth Industrial Revolution.
What’s going on?
One possible explanation is the Solow paradox. In 1987 George Solow, Nobel Prize winner in economics, noted that “the computer age was everywhere except in the productivity statistics”. This could be explained by a lag in productivity following the introduction of new technologies as they are adopted into the economy. That would be similar to lags observed after the introduction of the steam engine and electricity.
Should we be skeptical?
These economic forecasts are based on complex models of the economy. George Box, a British statistician, was quoted as saying “All models are wrong, but some are useful.” So we should take all these forecasts with a large grain of salt. To be fair, they all say that the growth is based on “maintaining the current policy environment”, which is a big caveat.
Are these forecasts useful?
Governments in the OECD seem to have become less interested in growth in recent years. See the graphic below from the Economist3. This shows the phrases from manifestos of political parties across the OECD since the 1960s.
One possible explanation for this is the aging of the population, where older people (who vote in large numbers) are more concerned about pensions and healthcare than economic growth.
But is GDP the right measure?
In recent years there has been a lively debate about the shortcomings of GDP as a measure of economic well-being and attempts to develop alternatives. Some of the shortcomings are:
- It doesn’t account for benefits of technology, for example free apps.
- It doesn’t account for improving quality of goods and services.
- It doesn’t account for environmental degradation.
- It doesn’t account for issues such as income inequality or homelessness.
- It doesn’t account for leisure time.
Numerous alternative approaches have been proposed, including the Human Development Index, the Genuine Progress Indicator, the Green GDP, and many others, but none has gained the traction of GDP.
What is to be done?
The OECD makes five specific recommendations for Canada:
- Strengthen support for vulnerable households;
- Increase the labour market inclusion of women
- Reduce barriers to internal trade;
- Enhance competition in the network and service sector;
- Increase carbon pricing.
Longer term, they recommend changing early retirement policies to encourage longer working lives and link that to longer life expectancy.
The Business Council of BC4 says this will require some hard thinking and expertise about how to raise labour productivity growth and real wage growth through higher business investment per worker, faster innovation adoption, and adjusting the incentives (and disincentives) facing Canadian companies aspiring to operate at scale.
The Canadian Federation of Independent Business stated that regulation cost small businesses almost $39 billion a year, roughly 30% of which can be considered unnecessary.
Many others have made recommendations how to increase growth and productivity in Canada.
Whatever we think of GDP as a measure, or how believable these forecasts are, they are a wakeup call for governments to give higher priority to economic growth. Without stronger economic growth living standards will stagnate and we will be left with insufficient resources to pay for more healthcare and other welfare programs.
- OECD https://www.oecd.org/economy/growth/scenarios-for-the-world-economy-to-2060.htm
- https://www.conferenceboard.ca/e-library/abstract.aspx?did=11368 Conference Board growth forecast 2021 to 2045
- The Economist, December 17 2022, p.66
- BCBC https://bcbc.com/insights-and-opinions/oecd-predicts-canada-will-be-the-worst-performing-advanced-economy-over-the-next-decade-and-the-three-decades-after-that