Ontario’s economic problems are structural
Here’s how we deal with them
The head of the International Monetary Fund put the choice starkly to world leaders last week — muddle along with sub-par growth, a “new mediocre,” or aim for a better growth path, a “new momentum.”
Christine Lagarde could have been describing Ontario’s economic challenge — declining growth potential, rising government debt and worsening business productivity and competitiveness. And, she could also have been setting the table for the discussions at the upcoming Ontario Economic Summit, where the theme is “From Recovery to Growth” and the mantra is: We cannot look to others to solve our collective problems. It has to be a team Ontario effort.
That Ontario has a serious growth problem is rather difficult to deny, or debate, but whether it is cyclical or structural is the more crucial question for business and policy makers. More precisely, with our major export market in its weakest recovery since the 1930s, do we face a grinding cyclical challenge that ultralow interest rates, a weaker dollar, some tactical government spending and a U.S. rebound will eventually resolve? Or, is Ontario experiencing the wrenching structural forces of globalization, demographics and technological change that the global recession exacerbated but a U.S. recovery will not cure? Getting this diagnosis right will shape Ontario’s economic prospects for decades.
Let me put forward the case for a structural-reform lens to rebuilding Ontario’s growth engine. In so doing, a good reference point is the Ontario Chamber of Commerce’s Report Emerging Stronger 2014. Consider four principal arguments.
First, we compete today in a two-speed world and, unfortunately, we do most of our business in the slow lane. Diversification is key to growing our exports, and our overall economy, because our traditional markets in the OECD countries, which account for 90% of our trade, have shifted out of the fast lane of global growth. To quote the Great One on trade and investment diversification: “Skate to where the puck is going to be, not where it has been.”
Emerging markets in Asia and elsewhere are where the puck is headed — growing at multiples of OECD growth. Ontario’s diversification imperative is crystal clear in our trade statistics: Canada’s nonenergy merchandise exports (the bulk of which are Ontario) accounted for 18.7% of all American imports in 2000, fell to 15% by 2007 (before the U.S. recession), and are lower still today at 12.5% — a massive decline in our U.S. market share and the level of our exports.
Second, productivity and innovation define competitive-ness today, and we’re far from the front of the pack. With productivity levels that rank us in the mid-teens among OECD countries, and business innovation performance that is worse still, we need to make the leap to the major leagues of innovative countries, not just skate a bit harder in the minors. Part of this is in the hands of our companies — firms in Ontario on average spend far less than their American competitors on research and on innovation. Part of this is the relative absence of a “start up” business culture in Ontario compared to Silicon Valley, Boston, Israel and others. And part of this is an absence of a global mindset — only 10% of Ontario smalland medium-sized enterprises export abroad and yet that is where growth is hiding in plain sight.
Third, government has to be a partner in rebuilding Ontario’s growth potential, neither the solution nor a bystander. Like the private sector, government has to become more innovative and productive in the delivery of government services, in the management of the regulatory system and in our procurement practices. Like exemplar governments are doing elsewhere, it has to rein in the growth of its debt and make tough choices in so doing. But unlike others, government has a unique capacity to convene, to align and to lead. And we are going to require that convening, aligning and leading across all sectors of the Ontario economy if we are to urgently and materially rebuild our potential for higher
Part of the issue is the relative absence of a ‘start up’ business culture in the province, compared to Silicon Valley, Boston and Israel
growth and better paying jobs.
Fourth, education is at the epicentre of how well economies and societies respond to the forces of globalization, technological change and demographics. To be competitive in this profoundly changing world, we need improved educational outcomes geared to the jobs of tomorrow, more differentiation in our educational offerings and a greater focus on excellence, and the status quo will not do the job.
Ontario has long been a global success story, blessed with a pluralistic society, a hard-working labour force, great businesses and bountiful natural resources. The challenge is to realize this potential, for the benefit of all Ontarians, and this means rebuilding our growth engine not simply tinkering with it.