4, September 2024
Why improving productivity is such a challenge in Canada.
It is widely recognised that Canada has a serious productivity problem. Yet we don’t seem to be doing much about it. There could be two reasons for this – there is no consensus on the causes (or the solutions) and there are some who don’t think it’s an important problem.
Causes of Canada’s productivity problem.
- Lack of competition. This was well described recently by the Commissioner of the Competition Bureau. There has been a steady decline in competitive intensity in Canada between 2000 and 2020. Without meaningful competition companies grow complacent and that means higher prices for consumers and poorer service. The OECD regularly evaluates Product Market Regulations (PMR) that show how the regulatory regime encourages competition and Canada ranks among the worst OECD countries. The OECD says that Pro-competition regulation in the markets for goods and services can help boost living standards, can raise output per capita by increasing investment and employment, and can encourage firms to be more innovative and efficient, thereby lifting productivity.
- Low corporate spending on R&D. In 2012 the Canadian Council of Academies published a lengthy report on industrial R&D. They concluded that the historically low rate of investment in industrial R&D in Canada compared to other countries is one of the key factors that also accounts for the consistently wide gap in productivity growth between Canada and the United States. Since then the situation in Canada has got worse as the BERD (Business Expenditures on R&D) has declined further.
- Interprovincial trade barriers. The Governor of the Bank of Canada recently suggested that this should be a priority area to fix to help improve productivity. Interprovincial trade represents about 20% of Canada’s GDP. A report by the Business Council of Alberta showed the benefits if these barriers were removed:
- National GDP could rise by $80 billion, or 3.8%
- Average wages would rise by 5.5%, or about $1,800 per person
- Government revenues to fund social programming would increase by 4.4%
- Corporate profits will rise, attracting more investment to Canada
- Canadians will enjoy lower prices on goods and services
- Many workers will have better access to job opportunities across the country.
- Overinvestment in housing. Canada invested 8.9% of its GDP in housing in 2022 compared with 4.8% for the average OECD country. A recent article by Charles St- Arnaud had the title How Canada’s housing obsession is cannibalizing economic productivity. He pointed out that chronic underinvestment is the reason for Canada’s weak productivity. Canadians currently spend as much per year as a share of GDP on renovations and homeownership costs as they do on machinery, equipment and intellectual property investing more in less productive investments than improving the stock of capital.
- Too many small companies (or not enough large companies). In Canada 53 per cent of GDP is produced by small companies, while in the U.S. it is 46 per cent. A recent report from the Business Development Bank showed that the productivity of Canadian SMEs relative to large companies has fallen from 63% in 2019 to 58% in 2023. Several years ago Rob Atkinson from the ITIF Foundation wrote a book titled “Big is Beautiful” in which he made the point that “the best way to boost productivity is to remove obstacles to the replacement of small scale, labour intensive technologically stagnant mom and pop firms with dynamic capital-intensive technology based businesses that tend to be fewer and better.”
There are many other reasons, among them: lack of investment in machinery and equipment, low levels of workforce training, a slow regulatory process for approving new projects, low adoption of digital technologies, culture, poor utilization.
Is productivity really a big problem?
An article from Deloitte is titled: Why productivity is no longer the metric that matters most.
The World Economic Forum states: A growing argument against GDP is that it doesn’t measure the wellbeing of a country and its people. Wellbeing, equality and inclusion are key measures globally of sustainable development – and against this backdrop, the World Economic Forum suggested in 2016 that GDP was “struggling to stay relevant” on its ‘Beyond GDP’ platform.
Gross National Happiness is a concept used in Bhutan.
A report from the Federal Reserve Bank of St Louis describes three alternatives to GDP – the Human Development Index, the Better Life Index and the Genuine Progress Indicator.
Conclusion
Unless we achieve a consensus on the causes of Canada’s poor productivity performance, and its importance, it is unlikely things will change.
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