Since 2015, Canada’s GDP per capita has risen below 0.2 per cent a year and is reported to have actually declined in recent quarters.Fred Lum/The Globe and Mail
Peter W.B. Phillips is distinguished university professor emeritus at the University of Saskatchewan’s Johnson Shoyama Graduate School of Public Policy.
On the face of it, there is lots to worry about when it comes to the Canadian economy. But some take that concern further, suggesting the country is economically broken, approximating something of a basket case – an argument that deserves closer inspection.
Take research and development, where Canada invests only about 1.6 per cent of its annual GDP down from more than 2 per cent in 2017. That ranks about 26th in the world, below the 2.7-per-cent average in the Organisation for Economic Co-operation and Development, and less than a third of the effort in South Korea and Israel.
This is probably part of the reason Canada’s labour productivity (real GDP per hour worked) fell to 77 per cent of U.S. levels in 2020 from 82 per cent in 2000. In contrast, European countries and Australia improved.
Most disturbingly, the growth in GDP per capita has softened. Between 1981 and the end of 2014, it rose an average of 1.7 per cent per annum, much in line with growth in the US. Since 2015, Canada’s GDP per capita has risen below 0.2 per cent a year and is reported to have actually declined in recent quarters.
None of this sounds good. But the difficulty is that these are highly aggregated numbers that say little or nothing about the dynamics and diversity in our advanced industrial economy.
Are we innovative? Looking at our investments suggests not, but the reality is not quite what the numbers suggest. Governments and universities in Canada invest as much or more than in most other countries with much higher R&D numbers. This effort puts Canada in the top tier of research performers in basic research, where we contribute anywhere from 2 per cent to 6 per cent of the world’s output, compared with our 0.5-per-cent share of the world’s population and 1.9-per-cent of the world’s economy.
Statistics Canada regularly surveys firms about their innovative activities, including exploiting new technologies, products, markets and organization innovations. Almost four in five firms in all sectors report adopting either new product or business process. Almost all sectors have more than two-thirds of their enterprises innovating steadily, which puts us on par or better than our competitors.
So if the firms we have we are competitively investing in R&D and our firms are generally innovative, why are the outcomes so poor?
Let’s start with productivity. Oliver Loertscher and Pau Pujolas, professors at McMaster University, have done a deep dive into productivity growth and concluded that its observed stagnation in Canada in the past 20 years is almost entirely because of the oil industry. When they netted out the oil components of the economy and looked at productivity in the rest of the economy, they found it rose at about the same rate as in the past and compared with the U.S.
Indeed, the main reason Canadian businesses invest less in innovation at less than half the rate of their counterparts in other countries is the sectors they compete. Canada has a strong comparative and competitive advantage in primary production, including agriculture, forestry, fishing, mining, energy and related supporting sectors. Our gap is almost entirely owing to our small share of those global sectors that invest 5 per cent to 15 per cent of their gross earnings in R&D, including computer hardware and software, pharmaceuticals, automobiles and aerospace.
This here is indeed a problem, but it’s not the big deal it’s made out to be. In fact, in the sectors in which Canada dominates, domestic businesses invest much more in innovation than the global average, which is less than 1 per cent of sectoral GDP.
Finally, we can’t ignore that GDP per capita has stopped growing and may be in decline. But the bigger part of the story is that, since 2015, virtually all of our population growth has been owing to immigration, a mix of refugees, economic migrants, family reunification, students and temporary foreign workers. As a result, Canada has the fastest growing population in the G7.
This, too, has been cited as a problem in itself – that the immigrants Canada is bringing in lower the country’s GDP per capita instead of raising it. Even if that is so, though, the fact remains that the numbers do not reflect some calamitous drop in living standards. Combining headwinds in the economy with a swelling population inevitably lowers GDP per capita.
We should recognize that much of what we are doing is working. The U.S. News & World Report rated us the second “best” country out of 80 developed nations in 2023, and the World Happiness Report this year shows Canada ranked 15 out of 144 countries assessed.
So, while we have things we can and should fix, Canada is not a basket case.