Canada’s economy desperately needs shock treatment after this
Boc’s alarm on productivity worth heeding
It speaks to the seriousness of the situation that the Bank of Canada is not so much taking the gloves off as slipping lead into them.
Senior deputy governor Carolyn Rogers came as close to wading into the political arena as any senior deputy governor of the central bank probably should in her speech in Halifax this week.
But she was right to sound the alarm about a subject — Canada’s waning productivity — on which the federal government’s performance has been lacklustre at best.
Productivity has fallen in six consecutive quarters and is now on a par with where it was seven years ago.
Lack of business investment is the main culprit.
In essence, Canadians are digging holes with shovels while many of our competitors are buying excavators.
“You’ve seen those signs that say ‘in emergency, break glass.’ Well, it’s time to break the glass,” Rogers said.
She was explicit that government policy is partly to blame, pointing out that businesses need more certainty to invest with confidence. Government incentives and regulatory approaches that change year to year do not inspire confidence, she said.
The government’s most recent contribution to the competitiveness file — Bill C-56, which made a number of competition-related changes — is a case in point. It was aimed at cracking down on “abusive practices” in the grocery industry that no one, including the bank in its own study, has been able to substantiate. Rather than encouraging investment, it added a political actor — the minister of industry — to the market review process. The Business Council of Canada called the move “capricious,” which was Rogers’s point.
While blatant price-fixing is rare, the lack of investment is a product of the paucity of competition in many sectors, where Canadian companies protected from foreign competition are sitting on fat profit margins and don’t feel compelled to invest to make their operations more efficient. “Competition can make the whole economy more productive,” said Rogers.
The Conservatives now look set to make this an election issue. Ontario MP Ryan Williams has just released a slick, 13-minute video that makes clear his party intends to act in this area.
Using the Monopoly board game as a prop, Williams, the party’s critic for pan-canadian trade and competition, says in every sector, monopolies and oligopolies reign supreme, resulting in lower investment, lower productivity, higher prices, worse service, lower wages and more wealth inequality.
(As an aside, it was a marked improvement on last year’s “Justinflation” rap video.)
Williams said Canadians pay among the highest cellphone prices in the world and that Rogers, Telus and Bell are the priciest carriers, bar none. The claim has some foundation: in a recent Cable.co.uk global league table that compared the average price of one gigabyte, Canada was ranked 216th of 237 countries at US$5.37 (noticeably, the United States was ranked even more expensive at US$6).
Williams noted that two airlines control 80 per cent of the market, even though Air Canada was ranked dead last of all North American airlines for timeliness.
He pointed out that six banks control 87 per cent of Canada’s mortgage market, while five grocery stores — Sobeys, Metro, Loblaw, Walmart and Costco — command a similar dominance of the grocery market.
“Competition is dying in Canada,” Williams said. “The federal government has made things worse by over-regulating airlines, banks and telecoms to actually protect monopolies and keep new players out.” So far, so good.
The Conservatives will “bring back home a capitalist economy” — a market that does not protect monopolies and creates more competition, in the form of Canadian companies that will provide new supply and better prices.
That sounds great. But at the same time, the Conservative formula for fixing things appears to involve more government intervention, not less.
Williams pointed out the Conservatives opposed RBC buying HSBC’S Canadian operations, Westjet buying Sunwing and Rogers buying Shaw. The party would oppose monopolies from buying up the competition, he said.
The real solution is to let the market do its work to bring prices down. But that is a more complicated process than Williams lets on.
Back in 2007, when Research in Motion was Canada’s most valuable company, the Harper government appointed a panel of experts, led by former Nortel chair Lynton (Red) Wilson, to address concerns that the corporate sector was being “hollowed out” by foreign takeovers, after the sale of giants Alcan, Dofasco and Inco.
The “Compete to Win” report that came out in June 2008 found the number of foreign-owned firms had remained relatively unchanged, but recommended 65 changes to make Canada more competitive.
The Harper government acted on the least-contentious suggestions: lowering corporate taxes, harmonizing sales taxes with a number of provinces and making immigration more responsive to labour markets.
But it did not end up liberalizing the banking, broadcasting, aviation or telecom markets, as the report suggested (ironically, it was a Liberal transport minister, Marc Garneau, who raised foreign ownership levels of air carriers to 49 per cent from 25 per cent in 2018).
The point is, Canada has a competition problem but solving it requires taking on vested interests. Conservative Leader Pierre Poilievre has indicated he is willing to do that, calling corporate lobbyists “utterly useless” and saying he will focus on Canadian workers, not corporate interests.
“My daily obsession will be about what is good for the working-class people in this country,” he said in Vancouver earlier this month.
Even opening up sectors to foreign competition is no guarantee that investors will come. There are no foreign ownership restrictions in the grocery market (in addition to the five supermarkets listed above, there is Amazon-owned Whole Foods). When the Competition Bureau concluded last year that there was a “modest but meaningful” increase in food prices, it recommended Ottawa encourage a foreign-owned player to enter the Canadian market. It was a recommendation adopted by Industry Minister François-philippe Champagne, to no avail thus far.
But it is clear from the Bank’s warning that the Canadian economy requires some shock treatment.
Robert Scrivener, the chairman of Bell and Northern Telecom in the 1970s, called Canada a nation of overprotected underachievers. That is even more true now than it was back then.
It’s time to break the glass.