Productivity progress: Are we heading for an F?
It’s report card time and the subject is economic performance. Canada gets a B from the Conference Board of Canada in its comprehensive analysis of the factors that determine the provinces’, and thus the country’s competitiveness against 16 peer nations. Like a parent with an underperforming teen, the Ottawa-based research firm says our performance is okay, but we could do better.
Some western provinces are coming along nicely. Alberta and Saskatchewan are A+ economies, ranking higher than any advanced country in the Conference Board’s analysis, as is Newfoundland and Labrador to the far east. BC rates a B while Manitoba is coasting with a C.
But our overall deficiencies are “worrying.”
One key area in need of remedial work is …productivity growth.
Say hello to Canada’s chronic weakness. The Conference Board’s “How Canada Performs” report card notes between 2002 and 2012, the US posted labour productivity growth of 1.7% to Canada’s 0.8%. And Canada’s five-year performance has been lower than other advanced economies for many decades.
Only two provinces – Manitoba and Nova Scotia – get a B, seven get a C and Newfoundland and Labrador gets a D for worst growth than even the lowest performing international peer.
This uninspiring performance is holding Canada back. The Boston Consulting Group’s analysis of 25 major exporting countries puts us in the “losing ground” category, almost entirely because of lagging productivity. BCG estimates a Canadian worker produces 60% as much as a US worker. The average growth rate for 25 countries was 27%, compared to Canada’s 1.3%. And the gap with the US is widening.
So what to do? The usual response is more R&D and policy changes that reduce the cost of doing business. The Conference Board focuses on three areas.
One is human capital, and we have that nailed.
Another is capital intensity. Countries that invest in machinery and equipment generally have higher productivity growth. Canada’s investment as a percentage of GDP is among the lowest of other advanced economies (even with the federal government’s temporary accelerated capital cost allowance for new investment in machinery and equipment).
Resource-based provinces (Alberta, Saskatchewan and Newfoundland and Labrador) are more capital intensive per worker, while the rest, including Ontario and Quebec, trail.
The Conference Board recommends harmonized sales taxes, investment tax credits, reduced corporate taxes and reduced regulatory burdens to help provinces boost investment.
Innovation is the third area. Again, Canada is way behind its peers, but public policy and business culture would help improve our standing. The Conference Board recommends credits and programs that encourage business to invest in R&D, investments in public infrastructure, and reduced barriers to trade and labour mobility.
Of course, addressing the productivity issue is not just a government concern, and some manufacturers appear to be getting the message. PLANT’s 2014 Manufacturers’ Outlook report, sponsored by Grant Thornton LLP, shows 90% of the respondents (mostly SMEs) agree – 44% of them strongly – that it’s a major issue. Yet for almost half of them, access to external financing is their most challenging constraint, which provides some insight into why SMEs have been slow to invest in machinery and equipment.
As Conference Board vice-president and chief economist Glen Hodgson warned last year, until productivity becomes more of a national priority, the gap with the US (and the rest of the world) will continue to widen over the long term.
That’s going to get us an F.
From PLANT West, May-June 2014.