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The Progressive Economics Forum

Drummond’s Productivity “Puzzle.”

Don Drummond confesses that he has been wrong to believe that changes in public policies – such as free trade, cuts to corporate taxes, low inflation, the  introduction of the GST, balanced budgets and reductions to inter provincial trade barriers (aka the neo liberal agenda) – are the key to improving Canada’s dismal productivity record.

For many years the author believed that Canada’s weak productivity performance reflected inappropriate public policy. Despite most of the public policy agenda that was put forward to improve productivity being implemented. productivity growth in this country since 2000 has actually deteriorated. This suggests that the private sector bears more responsibility for Canada’s productivity malaise than previously thought.

It is indeed striking that growth of labour productivity in the business sector in Canada 2000-2010 averaged just 0.74% percent per year, about the lowest of any advanced industrial country and weak enough to drag us down to only about 70% of the US productivity level (compared to over 90% in the early 1980s.)

As corporate taxes have been cut, as free trade deals have expanded, as inflation has been firmly contained and as public debt has fallen, so has the growth rate of productivity slowed.

Drummond proceeds to call for a micro economic research agenda focused on firm behaviour.

That seems a trifle weak.

I commend to his attention the many past posts on this blog on the productivity issue (including this one on an earlier TD Bank productivity study from your’s truly.)

Our dismal productivity performance post 2000 is not puzzling at all when set in the context of the inherited weaknesses of our industrial structure:  the structural weakness of advanced manufacturing and associated  low levels of investment in innovation, high levels of foreign ownership, and a tradition of low value-added resource dependency. These weaknesses – which have been thoroughly explored and documented within the rich analytical tradition of Canadian political economy – have been exacerbated since 2000 by a new wave of de-industrialization, our reversion to a low value added energy and minerals driven economy, an over-valued exchange rate, and “Dutch disease.”

Above all, our dismal productivity record reflects a consistent refusal by governments to directly intervene in the economy to raise investment and shape comparative advantage.

The solution lies less in more research than in the promotion and development of active sectoral development and managed trade policies of the kind which Don Drummond has hitherto refused to contemplate.

 

 

 

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Comments

Comment from Jeff Dean
Time: January 4, 2012, 2:59 pm

Corporate tax cuts haven’t spurred investment and tax increases won’t stop them. The reason is that most (though not all) corporate profits are economic rent – price in excess of the necessary cost of production. I don’t know the stats, but I bet that most profits in Canada are in the privatized rent-yielding industries of banking (where money creation and interest has no real cost of production), real estate (the land portion of property appreciation has no cost of production), natural resource extraction (where natural resources are a free gift of nature), and telecom (where lack of competition drives prices higher than the necessary cost of production).

The issue is to distinguish between profits which are economic rent and profits which are necessary to incent economic activity.

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