Manufacturing Does Matter

Andrew Sharpe has published an interesting new study on the marked slowdown in Canadian labour productivity growth from the early 200s.

He decomposes the decline in productivity growth into changes at the detailed industry level, and finds that the majority (53%) of the slowdown in productivity growth between 1997-2000 and 2000-2007  is attributable to changes in manufacturing, with the lion’s share of that being the result of large declines in  transportation equipment and computers and electronics. (By extension, the productivity decline was hugely concentrated in Ontario.)

The major explanation put forward is that large drops in capacity utilization in these sectors – mainly caused by a marked fall in exports as the exchange rate of the Canadian dollar rose against the US dollar – resulted in significant declines in overall efficiency and loss of economies of scale.

It is pretty striking that manufacturing, which now employs just 10% of workers, can be responsible for such a large share of the widely lamented fall off in productivity growth.

5 comments

  • Excellent paper. I hope, but do not trust, that those in the position to effect policy change read it.

    Yes Manufacturing Matters! Canadian (or the west in general), cannot compete against subsidised labour, capital, currency, and regulations. As such sales will decline and productivity will suffer. The answer is not to lambaste Canadian Businesses about productivity but to put them on a level playing field.

    When a country such as Canada, rich in all the natural resources necessary to fashion a screw cannot produce within 60% of the cost of competitor that must import, process then ship the product, we are screwed.

    What we need is an account of productivity of policy, more than industry.

  • I am not sure I agree it was the dollar. With Nafta came more pressure for integrated economies, and as the USA policies led their economy to be hollowed out of manufacturing, so too was the stage set for our manufacturing sector.

    I am sure the dollar had some part to play, but I would not attribute root causation.

    If we ever enter a rebuilding stage, a low dollar strategy, much like the mid 90’s may help sway some productive investment decisions.

    However with the dollar caught up in commodities, pressures for rate increases above the US, consumer debts levels preventing a further domestic consumption boon, then under this integrated economy approach, it will only be desperate measures that may bring the required investment.

    We do have a lead in the educated and productive workforce, so that does give an advantage. Along with other publicly funded social advantages. But it will take more political effort than the ‘market forces’ preached by Harper to bring into being such a desireable climate for investment. Tax cuts are do not get us there, as they go against the whole notion of what we are trying to build, a high quality, high productivity, high innovation manufacturing and service economy.

    To accomplish such goals, we need to build an maintain public infrastructure and we need corporations to pay their share.

    Seems like Harper’s strategy, keep the oil and gas sectors happy, hand out massive tax cuts to the corporate sector and further the financialization of the economy. (which got us into this mess).

  • Paul, the FTA has been in place since 1990. It was introduced when the dollar was high, with huge job losses resulting in the early 1990s. There was a clear period of output and job recovery in manufacturing – despite the FTA and NAFTA – when the dollar fell to a realistic level through much of the 1990s to 2000. I think the exchage rate has been more pivotal to the caanda – US trade balance than the trade regime. Note also that we have a huge deficit with China – effectively at the US dollar exchange rate, and with whom we have no FTA.

  • yes I have considered those points. But I still say, FTA and the longer term integration implications had more to do with the demise of manufacturing than the higher dollar.

    As the USA shuttered it manufacturing, the branch plants in Canada were equally as likely to be closed. And as the US economy declined so too did the Canadian manufacturing base. Just look at forestry, the dollar did play some role but it was the collapse of the US housing sector that did the damage (add in a bad software limber agreement)

    I am not saying the higher dollar did not have an independent effect, I am saying, it was not as much of a causation as the collapse of US manufacturing employment from 2000 onwards.

    However a continued high dollar will have an impact on curtailing future brown and greenfield investment.

    I do agree FTA had its original effect and we seen under the liberals a low dollar strategy to mitigate the negative effects of the FTA. However, as G.W. and the neo cons allowed their manufacturing base to lose more than 40% of its employment, so too did ours. Auto being the prime example. One of the few reasons we did not see even more loss in auto had very little to do with a high or low dollar, it was basically politics.

    Again though, a low dollar strategy, similar to the FTA adjustment era of the late 80 and early 90’s could help rebuild our base.

  • I would not place much hope in ‘educated and productive’ (ie Floridian) camp. They exist because they are protected from competition. Many parts of the world are just a capable of turning out highly qualified doctors, lawyers, engineers, professors, economists, architects, etc. as we are.

    The only difference is that we shelter them from competition here. In addition, many of the intellectual fruits that our native professionals can, and do, create find themselves with nothing more than superficial protection in many other countries. This in turn decreases their value. Lastly relying on the ‘we will design and engineer it and they will manufacture it’ line of thought ignores that engineering follows manufacturing.

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