Canada’s Productivity Problem

Back in June, the TD Economics group released a major report co-authored by Don Drummond: “The Productivity Puzzle. ” It provides a comprehensive overview of major studies and the empirical evidence, and should help spark some critical reflection. Progressive economists should agree with Drummond that productivity growth is vitally important to the growth of living standards over the medium and long terms, and that our recent record – average annual labour productivity growth of just 0.7%, 2000-2009, down from an average of 1.9% over the 1990s – is nothing short of appalling and should spark a major public debate.

Refreshingly, the report begins from recognition of the “puzzle” that many years of neo liberal or market friendly policies – not least trade liberalization and corporate tax cuts – have had no apparent impact upon Canadian business sector labour productivity growth or the Canada – US productivity gap. (Business sector labour productivity is now just 70% of the US level.) “Numerous reforms  widely believed to encourage productivity  have been implemented over the past twenty years, seemingly to no avail.” The report even accepts that there is something of a case to be made for the argument that the failure is not one of public policy, but a failure of the private sector. “Key elements of Canada’s history and industrial structure may have nurtured a complacent business culture.” (p8.)  The report notes (p27) that commodity specialization may generate high incomes but tends to undermine competitive pressures to innovation and high value added activities.

Canada is found to have an especially weak record in terms of innovation, which shows up in very weak multi -factor productivity growth. This is likely in major part a consequence of our inherited industrial structure, which is weak in highly innovative sectors such as advanced machinery and equipment, and increasingly tilted to capital rather than innovation intensive raw material extraction and processing.  Drummond cites a study by Andrew Sharpe showing that almost all of the productivity slowdown since 2000 is due to lagging performance by the manufacturing sector. He also details very weak Canadian business investment in advanced technology (machinery and equipment and information and communications technology ) compared to the US. Real capital investment per worker in these areas in recent years has been a good 20% below the US level.Business investment in research and development also lags seriously behind other advanced industrial countries.

This would lead many of us to think about how to reshape our industrial structure through sectoral development policies, but  that is not the case here since the focus is, broadly speaking, only on framework policies.  The report totally fails to note let alone draw lessons from the rapid industrial development of Asian countries which has been based on a host of strategic economic interventions, or the major role of defence policy and procurement in the US advanced capital goods sector.

Drummond also fails to consider the idea that “sound” macro-economic policy may have had adverse consequences for productivity growth. He argues that price stability and fiscal rectitude should have boosted business confidence, but perhaps operating below capacity has dampened the need for investment in capital and skills.  The fact that low unemployment in recent years failed to spark real wage growth, a major shift into more secure forms of employment and greater business investment in skills suggests that  we have continued to operate with some slack and that a tighter labour market might have boosted labour productivity growth.

Having rejected by assumption and approach more interventionist micro policy or more expansionary macro policy, Drummond falls back on the usual list of policy prescriptions, albeit with little genuine conviction that there are big bullets to be fired. Thus he calls for further trade and foreign investment liberalization; an end to tax measures which penalize small companies which grow bigger (actually a good point);  and cuts to regional EI benefits (a sticks approach as opposed to a more sensible alternative of extending the scope for positive EI supported active job search which could  help workers move to growing regions.) In a more positive vein, he calls for higher levels of public infrastructure investment and less waste of the skills of immigrants. Ultimately, he falls back on the need for more research to figure out what goes on in the “black box” of the firm, and why some innovate and add value while others do not.

In short, this is well worth a read, but the rigid frame of economic orthodoxy precludes consideration of some promising policy directions.

6 comments

  • It is indeed a frustrating report to read. It must have been even more frustrating to write. That fact that the policy recommendations fly in face of the evident and well documented policy failures speaks to the degree of cognitive dissonance which must be ailing its authors.

    Although the lazy capitalist syndrome hypothesis has a proud pedigree in Canadian political economy I am not sure it really counts as a serious explanation. That it was resurrected by an economist working in the oligopolistic banking sector does seem to indicate that Drummond has a wry sense of humour.

  • Thanks Andrew I will look at the study. In his presentation at the Bank of Canada conference honouring David Dodge, Andrew Sharpe laid out the productivity story. Canada spent over 20 years adopting a series of market friendly policies to enhance productivity. They didn’t improve productivity. But they did increase inequality, as we know from the CCPA work.
    Knowing Drummond (like Dodge) was part of the advisory team to these failed efforts, it makes it interesting to see how he deals with the same issues today.

  • “Knowing Drummond (like Dodge) was part of the advisory team to these failed efforts, it makes it interesting to see how he deals with the same issues today.”

    Like any good technocratic modernizer…another 5 year plan!

    What is more interesting is that starting from the MacDoh commission many on the left took the position that these were not worthwhile initiatives. The question is can we hammer together a coherent explanation as to why the supply-siders of all stripes (social democrat included) got it so wrong? It would be nice to write an elegant tombstone for neoliberalism.

    I think part of the answer is in recognizing that the phrase market friendly is perhaps a solipsism. Perhaps capital friendly, but that is a long way from market friendly.

  • Travis I agree a comprehensive analysis of the period since the 1982 recession is probably the best way to construct a refutation of neoliberalism. However, policy formulation is a social practice. As such it is tough to isolate economic theory (supply side theories of unemployment for example) and simply show how they have not lived up to expectations, and expect people to reject the theory. So much more is at stake for the insiders than simply getting the economics right. It is more about being on the right side, whatever the outcome from a social science perspective. JS Mill talked about overcoming the tyranny of opinion.

  • I wonder how much our lack of industrial innovation is because of our branch plant economy. Any real research is carried on on Ohio or Manchester rather than Red Deer. (Red Deer, ai one time the home to the largest fertilizer producing plants in the world, now owned off shore).

    When a new procedure/mechanism/piece of equipment is invented it is immediately put into the plant in Arizona or Liverpool, while Canada still produces the primary products we can and do not get to see the lucrative, job producing downstream organization.

    I see a major new refinery is planned and approved for North Dakota …. designed specially to accept only Athabasca oil sand crude. The crude, minimally treated, will be pipelined across the north US to them. (by Enbridge, no less)

  • Duncan,

    I was trying more to get at the fact that in most of the economic models we use to think about the economy including within marxian models there is a causal link between profit rates, investment rates and productivity growth.

    In Canada we are seeing healthy profits but not the other two. I think intuitively most of us on the left know that increased profits are at best a necessary but not sufficient condition for increased productivity growth. But what remains is a coherent story of why in Canada productivity has been flat for so long. Even in Marxian models of accumulation at some point absolute strategies accumulation give way to relative (productivity) strategies of accumulation.

    What is it about the structure of the Canadian economy that normal competitive forces do not provoke average investment and technological diffusion rates (as compared to other advanced capitalist countries)?

    As to your point about vested interests I think you are right although I would add that if profits are healthy then from the POV of the owners of capital neoliberalism is working just fine as hegemonic accumulation strategy. Weak unions and relatively high unemployment just means they can keep a greater share of the profits

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