Another Indicator of Canada’s Deindustrialization

I recently came across a fascinating working paper from the good folks at the Levy Institute, which provides some new data on Canada’s rather subservient role in world commerce:

Product Complexity and Economic Development,” by Arnelyn Abdon, Marife Bacate, Jesus Felipe (corresponding author), and Ustav Kumar.

The authors work at the Asian Development Bank.  They used an interesting empirical methodology to rank thousands of goods according to product complexity.  Then they analyzed the trade patterns of all countries in the world, according to the product complexity embodied in each nation’s exports.

The conclusion, no surprise, is that more developed countries export a portfolio of more complex products.  Indeed, the process of development itself is focused on the use of physical capital and technology to enhance the complexity (and productivity) of output.  The paper shows a very strong empirical link between product complexity and per capita incomes: again, no surprise here, but interesting to see it put so bluntly.

What was interesting was how abysmally Canada ranked according to this interesting methodology.  For example, one section of the paper identified the 10 most complex products traded widely in the world market, and then identified the 5 largest exporters of each one.  The U.S. appeared in this list 10 times.  The others were Japan (9), Germany (8), U.K. (7), Netherlands (4), France (3), Belgium (3), and then Sweden, Israel, Ireland, Italy, Switzerland, and even Malaysia (all with 1 apiece).  Canada does not appear at all on this list of largest exporters of the most complex products — the only G7 country noticeable by its absence.

Elsewhere, the authors rank countries by the complexity of their exports. Interestingly, the five most complex are Japan, Germany, Sweden, Switzerland, and Finland.  What all these countries have in common is their reliance on pro-active industrial development strategies (of various forms) to deliberately promote a larger domestic presence of innovative, high-value, globally-oriented industries.

Canada ranks as the 14th most “complex” exporter.  Our development strategy since the Macdonald Commission in the mid-1980s has relied on openness, deregulation, and proximity to the U.S. market.  Look at where that’s got us.

Worse yet, the analysis in the paper was based on average annual data from 2000 through 2007.  Canada’s present slide into deindustrialization began in earnest in 2002 (when the global commodities boom and the loonie both took off, and the U.S. started into its lasting post-9-11 economic funk).  So if anything, I suggest, this interesting paper understates the degree of Canada’s relative economic decline according to this central indicator.

I believe that heterodox economists in Canada have an opportunity to present a compelling, comprehensive, and timely critique of the neoliberal approach to economic development, in light of the accumulation of so many indicators of Canada’s qualitative failure: abysmal productivity growth, massive current account deficits, weak capital spending (everywhere but the tar sands), deindustrialization, and the failure of our companies to develop innovative, globally successful products.  (Yes, yes, yes, we have RIM.  That’s the exception that proves the rule.  We used to have Nortel, too.)  The Sector Development chapter of this year’s Alternative Federal Budget will discuss some ideas in this regard.  But I suggest that collectively we can and must take this argument to a higher, more aggressive level.

13 comments

  • “Elsewhere, the authors rank countries by the complexity of their exports. Interestingly, the five most complex are Japan, Germany, Sweden, Switzerland, and Finland. What all these countries have in common is their reliance on pro-active industrial development strategies (of various forms) to deliberately promote a larger domestic presence of innovative, high-value, globally-oriented industries.”

    I came to the same conclusion in my dissertation based on a much simpler methodology using dats from the OECD STAN. I looked and high and medium tech manufacturing as a percent of total manufacturing on a value added basis. Canada’s performance was poor. As in despite all the goodies handed out to Canadian corps since the early eighties hi medium tech shares remained unchanged by 2005 (compared to 80-81). And it was mi-tech production doing the heavy lifting not hi tech.

    I suppose one could argue it would have been worse without the goodies.

  • Does it necessarily follow, given the low complexity of Canada’s exports, that this country must offer fewer ‘interesting’ jobs for people who bother to invest in training and education?

  • @ Bill correlating interesting jobs and product complexity may not be a correlation that I would put money on.

    Is Education and training correlated to product complexity? Good question and it is a long answer. I guess that depends on the designers of the production process for the complexity that is output.

    We kind of get into a Braverman debate here, which is related to job interest as well. If it is a deskilling that the designers are after, well then, I am sure they will achieve their goals, at least part way- that is until the complexity breaks down and refuses to function and goes offline. On the other hand, there is complexity that is designed to bring the worker into the complexity, upskilling the worker and making use of both the brain and the machine, which compliment each other. (at least in the future I see for the high value adding production process of the future)

    So it is difficult to say whether export outputs of product or service complexity is correlated to both job interest aka quality of worklife, or training and education requirements.

    I am not sure there has ever been an accurate survey of the production processes at the establishment level of the business enterprises across the nation. The workplace and employee survey tried and I would say was the first attempt at developing such a statistical profile. And indeed I would say one could extract some useful proxies on such measures.

    @JIm
    “The Sector Development chapter of this year’s Alternative Federal Budget will discuss some ideas in this regard. But I suggest that collectively we can and must take this argument to a higher, more aggressive level.”

    Your statement is the key to the future of Canadian workers. If as you make the case, we do not develop some form of industrial strategy to make inroads into generating a whole lot more industrial capacity for outputs that would be classified as complex, then the middle class in Canada is doomed.

    It is the key feature of the economy of the future amongst developed economies. This all flies in teh face of what the tories are trying to sell the general public right now- that oil and a commodity based economy is good enough for Canada.

    It is not the future, or at least one for a worker centric economy. If your only interest is profits, then sure, as long as the oil and commodity boom keeps echoing. But given the fickle nature of markets and pricing on these, it surely is a Las Vegas like approach to economic development.

    GREEN COMPLEXITY- those are the only two words that are needed for successful economic development and they should be on the minds of every policy maker and every Canadian.

  • I’m just a student of introductory economics – but so far, no one has mentioned comparative advantage.

    In other words, Canada is near the bottom of the ‘complexity list’, because its C.A. isn’t in complex things, its clearly natural resources. Therefore, Canada’s position is justified.

  • @Mike comparative advantage is important, and you are right we have that in resources. However, the more successful economies of the future, under the current global economic models, will have a comparative advantage in producing complex goods. This I am arguing would mean the nations and/ or regions that can solve the production problems of GREEN COMPLEXITY will be where the high value adding jobs will locate and cluster around. So you are right in some regards. Comparative advantage contra, soci-economic forces that can produce an educated workforce and attract the complexity mix of capital to go along with that workforce will be at the top of that list.

    Mix in some comparative advantages such as fluid Industrial relations systems, social transfers that can balance a society, higher corporate taxes to pay for the social infrastructure needed to support such a system, and you may just have a winner.

    Keep at it Mike you are on the right track, you just have to expand your thinking on what does Comparative advantage mean. You might want to toss your eco 101 books when looking for a definition, and also steer clear of neoclassical economists for help in concretizing your definition.

    Paul

  • Mike I think the point is that nations do not start with a comparative advantage in complex products. That is, no nation starts with a “natural” endowment of complex products. So where does that capacity come from?

    As an aside, not even economists believe that natural endowments predict trade patterns or the types of goods being traded. They just teach the simple Ricardian model so that you can understand the moral of the larger story they are telling: Free trade is Win Win.

  • Wow – shows what I know! I guess I don’t have an in depth grasp of economics. I’ll keep studying!

  • @Paul, actually, are there any specific econ texts you can suggest? I’m always re-examining things.

  • @Paul: Thank you for your comment.

    In old-fashioned industrial processes, perhaps in automobile factories as they once existed, there were production designers and workers, as separate categories of people. As you say, the designers might have been able to create processes that were more or less ‘interesting’ for the workers. However, looking at it this way ignores the fact that, in current organisations production designers and people in similar occupations are themselves ‘workers’ and, I hope, their jobs are interesting for them. Can we not imagine that, the more complicated we make our industrial processes the more need we will have for injecting human intelligence, and hence greater job interest, at more points in the process?

  • @bill,

    Yes I do hope so and that is where I see a more productive advantage being extracted from design.

    However, consider some authors who I like a lot, Zuboff, Burawoy, or Ulrich Beck, or even braver man, who I do think is quite relevant still. A good lot of production is still be fundamentally designed by those outside of the worker.

    And a good lot of that design is still dominated by the thinking to deskill and extract as much knowledge over production from workers and into the hands of management.

    Even within the newer ‘knowledge occupations’ just look at software design, we are a very long way from bringing into the main, the needs and knowledge of the worker.

    I recall a paper plant once where the older methods were very much dominated by machines and controllers of the machines still played a huge part in the functionality of the machine. Then then the designers go in with automation and ai control. Well the machine controllers no longer could impact the machines. In fact when the system went offline, which became habitual, the machine operators had to disassemble the ai and dump the program into a human readable format to see what the designers had put in place for these huge rolling machines that were failing to line up the printing runs. In the end the went with a hybrid system, but it was hybrid after the fact.

    I still believe that debate is raging on. I have worked in the industry of CPUs and information for quite a few years and so much is still being designed in a traditional mass production approach. Not a lot of progress in the org behavior or
    management field. But a lot of work remains to be done and I still believe unions have a much greater to role to play way beyond setting work rules and monitoring job classes, which in many cases have changed but not in a fashion that is worker or union friendly.

  • @mike,

    I wish there was a book. My guess is to try and mix in some political economy into you studies. Watch all that all that calculus of minimization, Bertrand and Nash equilibriums don’t overtake all you logical development. Trust coming out of such academic comas is quite painful. However, I do think math is good, but don’t tell Bruno Latour I said that. Here is a hint- Apparently the French once had a comparative advantage in door openers, now the door openers do nothing but discriminant more and more against the elderly, and I blame it squarely on the designers.

  • @Mike,

    E.K., Hunt has a series of texts which are quite good.

    Steve Keen has a more or less coherent critique though he does a botch-up in a couple of chapters but worth putting on your shelf and reading through. Particularly chapter 3-4-5.

    Anwar Shaikh has a good paper on comparative advantage “Foreign Trade and the Law of Value, Parts I and II”. Actually he has a series of good papers on his web site.

    And I agree the math is not the problem. As neither is the hammer.

  • Does anyone here like Seymour Melman’s stuff?

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