Epic productivity failures threaten Canadian prosperity

Montreal—There’s been a lot of attention focused on Canada’s productivity lately and the consensus of opinion appears to be that we’re terrible at it.

A new research paper produced by Montreal-based Institute for Research on Public Policy (IRPP) supports that assertion, suggesting that without substantially revamped business and policy structures, Canada is doomed to perpetual epic failures on the productivity front.

Unfortunately for us, labour productivity growth is a fundamental determinant of longer term real income and living standards of every Canadian. And the fact that we have not been able to improve our productivity costs Canadians thousands.

Indeed, only labour force participation growth and the huge price increases for Canada’s natural resources have saved our collective bacon. But the ability of these sectors to buoy our productivity is waning.

Someshwar Rao, IRPP research fellow and author of the study, Cracking Canada’s Productivity Conundrum said in an interview that we can no longer rely on these two sources because Canada’s labour force growth will begin to slow dramatically and the strong demand for our resources has already pushed prices for resources to a point where they will no longer contribute substantially to productivity growth.

“The conundrum is that slow productivity growth has not only been a fact of Canadian life for the past three decades and continues to worsen, but it has also been impervious to numerous policy initiatives intended to improve it,” Rao says.

Rao found that labour productivity growth in Canada slowed to just 0.7 per cent per year in the 2000s, less than half the rate in the 1990s and far below the 2.7 per cent annual growth in the U.S.

When you break out the productivity slowdown in manufacturing industries, the news gets even worse.

Between 1987 and 2000, labour productivity in the manufacturing sector averaged a less-than-stellar 3.2 per cent annual growth.

U.S. productivity growth averaged 4.0 per cent during the same period.

But when you look at the years spanning 2000 through 2008, things get substantially worse for Canada, which logged a miserable 0.9 per cent productivity growth—an abysmal record for a sector that represents 13.9 per cent of GDP (as of 2008), second only to the financial sector.

In contrast, U.S. labour productivity grew by 4.4 per cent each year.

“The global economic slowdown highlights the need for new sources of growth looking ahead,” says Rao, in a press release. “Policies that create greater incentives to innovate, such as further liberalizing trade and investment and exposing protected industries to more competition, are just as important for boosting productivity as direct support for innovation.”

Rao says several factors have combined to create the productivity sewer Canada now finds itself in, and the first place manufacturers should look is in the mirror.

“First and foremost, as a result of insufficient investment in R&D and the equipment that embodies new technologies, Canada remains a laggard in innovation and the adoption of new technologies compared with other industrialized countries” Rao said in a release.

But it’s not all your fault.

Rao says Canada’s disproportionate ratio of small and medium-sized businesses don’t have the minimum critical mass and scale to profitably implement the newest, most advanced techniques and technology.

The federal government can help mitigate this structural impediment by abandoning its focus on the scientific research and experimental development tax credit in favour of increased direct support for business’ R&D programs.

He doesn’t stop there.                                                                                                   Continued on next page

Rao wants trade and regulatory policy altered to increase competition from domestic and even international companies, which would spur innovation and productivity by promoting “creative destruction,” the process of inefficient firms shutting down and more productive companies taking their place.

“A healthy dose of domestic and foreign competition in Canada will increase incentives to adapt and stimulate investment in physical and human capital, R&D and improve resource allocation, all key drivers of productivity growth. Competition and good trade and investment policy go hand-in-hand in stimulating innovation and productivity growth.”

The study is dense with statistics and historical data. Download Cracking Canada’s Productivity Conundrum free of charge from the IRPP’s web site.

Click here to go back to the Manufacturing Leadership report on productivity.