Improving productivity: Canada’s daunting challenge

Peter Josty is Executive Director of the Centre for Innovation Studies in Calgary. 

Improving productivity: Canada’s daunting challenge

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 in a report 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 Competition Bureau will host “Canada’s Competition Summit 2024: Market Dynamics in the AI Era” on September 16 in Ottawa.

The Organisation for Economic Co-operation and Development (OECD) regularly evaluates Product Market Regulation that assesses how a nation’s the regulatory regime encourages competition, and Canada ranks among the worst among OECD countries.

The OECD says that pro-competition regulation in the markets for goods and services can help boost living standards, raise output per capita by increasing investment and employment, and encourage firms to be more innovative and efficient – thereby lifting productivity.

Low corporate spending on R&D. In 2012 the Council of Canadian Academies published a lengthy expert panel’s report on the state of industrial R&D in Canada.

The panel concluded that the historically low rate of investment in industrial R&D in Canada compared with 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 worsened 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 percent 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 percent.
• Average wages would rise by 5.5 percent, or about $1,800 per person.
• Government revenues to fund social programming would increase by 4.4 percent.
• Corporate profits would rise, attracting more investment to Canada.
• Canadians would enjoy lower prices on goods and services.
• Many workers would have better access to job opportunities across the country.

Overinvestment in housing. Canada invested 8.9 percent of its GDP in housing in 2022 compared with 4.8 percent for the average OECD country.

Charles St-Arnaud, chief economist at Alberta Central, in a recent article, “How Canada’s housing obsession is cannibalizing economic productivity,” pointed out that chronic non-residental underinvestment – particularly in machinery, equipment and intellectual property – 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 percent of GDP is produced by small companies, while in the U.S., it is 46 percent.

A recent report from the Business Development Bank showed that the productivity of Canadian SMEs relative to large companies has fallen from 63 percent in 2019 to 58 percent in 2023.  Several years ago, Robert D. Atkinson, founder and president of the Washington, D.C.-based Information Technology and Innovation Foundation, wrote a book titled, Big is Beautiful: Debunking the Myth of Small Business, 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 for Canada’s low productivity, 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.
• lack of a culture of risk taking.

Is productivity really a big problem?

An article from Deloitte, “Why productivity is no longer the metric that matters most,” argues: “It’s time for a fundamental rethinking of our approach to productivity: a new mindset and new metrics for a new way of working built around human performance and outcomes.”

According to the Word Economic Forum, a growing argument against GDP is 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.

As an alternative or complement to GDP, 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, its importance and how to fix the problem, it is unlikely things will change.