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October 9, 2013
CanaData delegates told that Canada is slipping in global productivity
Despite creating new public policy, Canadian productivity remains low, economist Don Drummond told the crowd at the recent CanaData 2013 conference.
“We’ve kind of cleaned up our act on productivity...and yet productivity didn’t respond,” he said.
Compared to its history and to big players around the world, Canada is not doing well when it comes to productivity. Canada is at 0.8 per cent productivity, compared to 2.2 per cent in the United States.
Compared to the 1980s and 90s, there is almost no reason for the country’s low productivity.
Drummond pointed out in that time period, the problem rested almost solely with the country’s three levels of government due to “terrible” macroeconomic policies.
Canada had high inflation, much higher than its trading partners, which led to a depreciation of the Canadian dollar.
Canada almost always had higher interest rates than in the United States, typically one or two percentage points higher.
The country also had several tariff barriers, including “tremendously” high interprovincial barriers, which Drummond called “scandalous.”
Since then, Canada has removed several trade barriers, though some still exist, particularly in the procurement sector.
Canada has also dramatically changed the way it taxes corporations. The average tax rate was 40 per cent and is heading to 25 per cent, said Drummond.
He said there is a very tight relationship between competitiveness, productivity and size of firms.
“They do not have the same levels of productivity; they do not have the same capital intensity as large firms. They don’t pay as high wages, they don’t pay the benefits,” he said.
“It seems like a bizarre system to actually create disincentives for a corporation to continue to grow but that is exactly what we do in Canada.”
Drummond noted that productivity is much higher for companies that export and said 50 per cent of Canadian exports come from just 50 companies.
Drummond thought that 2003 to 2007, when the Canadian dollar was high, would have been Canada’s “golden” period to make up the gap in machinery and equipment relative to other countries.
“Canadian corporations were making so much money and they were keeping most of it. The Canadian dollar was appreciating six per cent a year and the U.S. price of machinery and equipment was falling at one per cent a year. The Canadian price was falling at about seven per cent a year,” he explained.
Capital tax was being phased out and corporate taxes had not hit the low they are at right now, but Drummond said businesses should have been looking into the future.
After speaking with a group of business leaders, Drummond discovered that they thought the rise in the Canadian dollar was temporary.
“Small firms started to think around 2007 that maybe this Canadian dollar strength wasn’t a temporary phenomenon,” he said.
“The financial crisis hit and it fell off. Maybe if we hadn’t had the financial crisis and the recession, the business investment would have (increased).”
There has been some business recovery but it has not been very impressive nor has it closed any gaps.
If public policy has changed, he noted, Canadian business practices must be the reason for the country’s low productivity numbers.
He said there are still several closed sectors in Canada such as transportation and telecommunications, which could be remnants of the economic model developed by John A Macdonald, which saw a series of tariffs on commodities, equipment and machinery that set up the corporate structure that still remains in place today.
“Of course you didn’t need to be productive because your customers had nowhere to go. I think to some degree that still goes on,” he said.
He concluded by saying that starting at a pure level of scientific research, it’s going to be a long time before there are answers to the reasons behind Canada’s low productivity levels.
Drummond was one of several speakers at the CanaData 2013 conference held at the Liberty Grand in Toronto on Sept. 26.
Other conference topics included infrastructure investment, global economic outlooks and Canadian commercial construction.
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