A condominium development, left, the CN Tower and office buildings in Toronto’s Financial District on Nov. 7, 2022.Fred Lum/The Globe and Mail
Jonathan D. Ostry is professor of economics, global affairs and public policy at the University of Toronto, a fellow at Bruegel in Brussels and a former senior official at the International Monetary Fund in Washington.
At a news conference this month, German Finance Minister Christian Lindner was being probed about government forecasts that suggested economic growth in 2024 would be negative for the second year running. Mr. Lindner conceded that the competitiveness of German industry was not what it was a decade ago, nor what it should be. He said that the economy needed reform – “supply-side policies” – to propel productivity forward.
Soul-searching about productivity has been top of mind in Europe over the past year. At the request of European Commission President Ursula von der Leyen, former Italian prime minister Mario Draghi in September issued his report on the continent’s competitiveness. It proposes a range of measures to reinvigorate European productivity, the alternative to which, it concludes, would be “slow agony” while the region fell further behind the United States and China.
Canada shares with Europe the reality of moribund productivity, especially compared with the U.S., whose recent economic performance has been the envy of all. As in many European countries, Canadians do not question the foundational elements of our social model, including universal health care, quality education and better social mobility and inequality indicators than the U.S. But this model will be difficult to sustain while labour productivity remains stuck well below U.S. levels.
What is the solution? Economists advising governments have a toolbox of policies – structural reforms to liberalize trade, product, labour and financial markets – designed to give wider sway to market forces and free enterprise in the economy and so to ameliorate productivity. It is to such policies that the German Finance Minister was referring in part.
Collecting data on such reforms is complex, as it requires scrutinizing national legal statutes and regulations to ascertain the rules that govern the myriad transactions in an economy. But in painstaking work over a decade, my colleagues at the IMF and I developed a set of such measures for countries covering the lion’s share of global gross domestic product. Our work showed a disturbing plateauing of liberalization over the past two decades, globally and in Canada.
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This is important because there is an evident connection in the data between reforms today and productivity a few years from now. While not the only thing that matters, structural reforms are an important determinant of productivity performance over time. For this reason, they must be the main part of Canada’s productivity strategy going forward.
The specifics in Canada – be they related to interprovincial trade, research and development expenditure, commercializing the fruits of basic research or facilitating the emergence of capital markets that can finance emerging sectors – will differ from those in other countries. But a clear vision of what the priorities are and a time-bound strategy to address the challenges are of the essence.
Productivity does not turn on a dime, so policy needs to respond now to reap a timely dividend. The issue is all the more pressing because, with the demographic and green transitions in train, better productivity performance is the only way to avoid a disastrous collapse in future living standards (the slow agony that so worries Europe).
Enthusiasm for structural reforms has waned in recent years. Some see this as belated recognition that faith in reforms was based more on neoliberal ideology than supportive evidence. I favour a different interpretation, which was recognized centuries ago by Machiavelli when he wrote about the perilousness of “taking the lead in the introduction of a new order of things.”
Today’s policy-makers recognize that reforms generate winners and losers, and that even a small minority of losers can derail support for policies that would raise living standards. This could be costly electorally.
The way forward, however, is not to forego the aggregate gains, but instead to design reform packages with the distributional effects in mind, and to be opportunistic in terms of timing (for example, reforming in good times, rather than in a recession when workers made redundant in declining sectors will find it hard to find a job; and reforming early in the electoral term so that the gains, which take time to accrue, can be banked before the next election).
In short, reform packages need careful design to ensure that efficiency gains are large, distributional shifts that hurt those at the bottom are minimized and voter reactions are taken into account so that the reforms themselves can be sustained over time.
To safeguard its standard of living and social model, Canada needs such a strategy to improve the productivity of its economy.