Reforms would make ‘ team’ productive

Government in Canada having reached the summit of efficiency, politicians have lately taken to scolding the private sector for failing to do the same. In language reminiscent of war- bond drives, businesses find themselves increasingly exhorted to raise productivity, as if they were letting down the side.

“Governments are doing their part,” Tony Clement, then the industry minister, said, complaining in a typical outburst. “Where’s business? When is business going to do its part?” Often this takes the form of a sporty metaphor. Government has been investing, according to the finance minister, Jim Flaherty: “We now ask the private sector to step to the plate.”

Now, sticklers may point out that the economy is not a baseball team, and businesses are under no obligation to raise productivity, except as it is of benefit to their shareholders. They will make the required investments if it is in their interests to do so, and only then.

Nevertheless, there is a germ of truth in this rhetorical Petri dish. Policymakers have done a lot of things right over the last 20 years. They’ve freed trade, cut corporate tax rates, beat inflation down to near zero. Yet productivity growth in Canada has lagged behind that of most other developed countries. As recently as 2000, Canadian workers were about 85 per cent as productive as those in the U. S. Since then that ratio has fallen to 70 per cent.

So baffling is this “productivity puzzle” that some economists have all but abandoned trying to understand it. Notable among these is Don Drummond, the former finance department economist lately observed redesigning the government of Ontario. Yet even he declares himself stumped. In a recent paper he confesses “everything I have ever done on productivity” is a failure, to the point “if asked today what policy changes should be implemented to promote productivity growth I would need to say I do not know.”

Steady on. Even if governments have made some progress in unwinding past policy failures, they still have plenty of work to do. All the literature on productivity stresses the vital role of competition as a driver of productivity. Yet important sectors of the Canadian economy — for example transportation and telecommunications — remain protected, over- regulated backwaters, sheltered from foreign or domestic competition. Governments at every level continue to hand out billions in subsidies to businesses of all kinds, rewarding inefficiency and distorting investment; billions more are dispensed out the back door, via tax preferences. Income tax rates have been slashed for corporations, but remain as high as ever for individuals.

It’s possible, moreover, that the productivity problem has been overstated, that to the extent Canadian business has failed to invest or innovate, it may not be on account of an inexplicable failure to exploit opportunities to improve efficiency, but rather has more rational causes. There are three ways in which this might be true.

The first has to do with the rapid rise in prices over the last decade for the commodities Canada exports, such as oil. As economists say, there has been an improvement in Canada’s “terms of trade.” One way to raise living standards is to increase productivity: If you can make each thing for less cost, you get more things. But another way is by charging other people more for the things you make. So part of our productivity problem may simply be a reflection of our good fortune as a nation in possessing resources that are in high demand around the world.

The flip side of that, second, is the decline in manufacturing, driven in part by the rising “petro- dollar” of which the Ontario premier has recently complained. Until about 2000, Canada’s productivity growth tracked closely with that of the United States, only falling off after then. Delve into that over- all productivity performance, and you find it is largely driven by sharp declines in the manufacturing sector. Why is that? A recent Statistics Canada study finds that factory production has fallen so far below capacity that firms are using capital less efficiently, abandoning economies of scale they would previously have enjoyed.

A third factor may be the rapid growth in Canada’s labour force in recent decades, a combination of the baby boom and the increasing numbers of women in paid work. Notwithstanding the best efforts of government, Canada’s labour market managed successfully to absorb these newcomers; on the brink of the financial crisis, in 2008, the employment rate hit an all- time record 63 per cent. With so much labour on hand, firms had less need to invest in new machinery: it was cheaper to just take on more workers.

But over the next few decades, the labour force is projected to grow much more slowly, if at all. That’s concerning because if productivity growth does not rebound, living standards will take a hit. But it’s possible that we will see our recent experience reversed, that businesses will respond to the relative shortage of labour by investing in more machinery, thus raising productivity. In other words, it’s possible the problem will fix itself.

Still, I wouldn’t want to bet the farm on it. Drummond figures governments have put in place about 70 per cent of the reforms he would advise. Rather than casting about for entirely new prescriptions, how about we get cracking on the 30 per cent that remain?