Jim Balsillie is an entrepreneur and philanthropist. He is the co-founder and chair of the Council of Canadian Innovators, Centre for International Governance Innovation and Digital Governance Council.
With a cost-of-living crisis gripping Canadians, interest in Canada’s productivity has suddenly seized policy makers, commentators and the pundit class alike.
The Bank of Canada’s Carolyn Rogers has called declining productivity growth an “emergency” and said that “it’s time to break the glass.” Think tanks, academics, banks, business councils and consulting firms have published report after report. This September, two policy shops released their productivity papers within 2½ hours of each other.
The University of Calgary held a two-day conference on the matter last month (Oct. 16-17). Canada’s Productivity Summit follows the Public Policy Forum’s conference in May, which evidently didn’t live up to its name: “Fixing productivity once and for all.”
And nine years into its mandate, which produced historically worsening economic outcomes, the federal government is creating a working group to “examine productivity and inform the government’s economic plan.”
Never mind that weak Canadian productivity has been an issue for 40 years, the lowest among OECD member countries. Canadian wages have not only been steadily falling behind those of our peers, they are shrinking for men.
The odds that the government’s new working group – or any of the other policy brainstorming sessions – will produce ideas that lead to an increase in our GDP are low. That’s because in Canada productivity has not only been studied to death, it’s been studied to puzzlement. The real emergency is our repeated use of 20th-century economic logic and our inability to talk about productivity like it’s 2024.
We live in a knowledge economy, where value is derived from intangible assets. This economy is epitomized by the global race for intellectual-property (IP) ownership and control of data, transforming global markets into a new landscape, where ideas are owned, data are the new natural resource and algorithms are the new machinery and equipment. Canadian discourse on productivity and our policy making need to reflect that reality.
Instead, discourse on the productivity crisis remains stuck in the 1970s, awash with diagnoses and solutions that have no bearing on what moves the productivity dial in the 21st-century economy. If we have any chance of fixing Canada’s productivity challenge, first we must fix how we talk about it.
Take, for example, the commonly repeated prescription from the C.D. Howe Institute and others that Canadian companies need to “invest in new machinery and equipment” to improve their productivity or, as the chief economist of the Conference Board of Canada says, “work with a backhoe versus a shovel.”
These arguments apply to the production-based economy of decades ago, where the use of technology increased a worker’s output. Using excavators to dig ditches is certainly more productive than lining up rows of labourers with shovels to do the same job.
But in the contemporary global economy, simply investing in new equipment and machinery is not a source of productivity gains because the same machinery, equipment and capital are also available to low-cost countries. For Canada, deploying this strategy, let alone with government subsidies, is a race to the economic bottom.
What equipment and machinery do the pundits want e-commerce champions Shopify SHOP-T and Lightspeed LSPD-T to buy to increase their productivity? These companies generate and own their advanced, proprietary technologies and collect rents from others that use those technologies.
The same principle applies to traditional industries such as agriculture and automotive manufacturing, which have also been transformed by the knowledge economy. Bayer and John Deere own and control the critical IP and data for farmers. EV battery technology is owned by large foreign multinationals despite the fact critical technology was invented by publicly funded Canadian researchers. Investing in new machinery and equipment brings productivity gains to the owners of technology, not those who buy it.
That is why we saw a 40-year global race to own valuable IP. And data with algorithms applied operate much the same way as IP. Companies that do not control data are controlled by those that do.
Another frequently cited explainer for Canada’s low productivity is lack of competition. Consulting firms such as Deloitte frequently lean into it. This is true for domestic oligopolies, particularly financial services, telecommunications and grocers, whose protected domestic markets allow them to charge oligopoly rents for their products and services.
Increasing competition in these domestic services is smart public policy because reducing their oligopoly rents would bring the benefit of improved consumer welfare through some combination of lower prices and enhanced services. Still, it is wrong to conflate the benefits of domestic consumer protection (”cost-of-living” strategies) with the strategies needed to capture productivity-enhancing economic rents in the 21st-century global knowledge economy. Cutting needless costs is important, but it can only go so far.
“Lack of competitive intensity” is not the reality for Canada’s entrepreneurs. They already compete globally and face intense competition, not just from direct competitors but also because of strategic behaviour from smart countries that work hand-in-glove with their industries to advance their economic interests.
For the United States, these include policies such as the CHIPS and Science Act, the Inflation Reduction Act, sanctions on China, effectively pulling out of the World Trade Organization and using the United States-Mexico-Canada Agreement to reshape the IP and data regime to favour U.S. firms. Meanwhile, the EU Digital Services Act, EU Digital Markets Act and EU AI Act are Europe’s strategic levers to put wind at the back of its innovators. Unlike domestic service oligopolies, Canadian innovators are competing in global markets that feature unprecedented monopolization of IP and data.
Another diagnosis used to explain Canada’s productivity lag is provincial trade barriers. We are asked to believe that what Ontario really needs to unlock its latent dynamism is more competition and a more efficient movement of labour and goods from Saskatchewan and Prince Edward Island.
These barriers have existed since Confederation and should be removed. But the general efficiency benefit from removing needless barriers is at best a marginal issue that would only modestly improve Canada’s productivity and prosperity. Provincial trade barriers don’t explain the dramatic erosion in Canada’s productivity performance over the past 40 years – the same 40 years that coincide with the emergence of the global knowledge economy.
But perhaps the most persistent diagnosis of the root cause of Canada’s productivity challenge is the so-called “lack of investment” by our companies. Canadian businesses are “sitting on dead money,” a former Bank of Canada governor famously proclaimed. The country’s productivity and prosperity, we are told, would increase if our lazy, complacent businesses would invest their cash and feast on gains that are waiting for them in accessible markets.
Yet there is a reason businesses do not invest their money: They do not have the requisite freedom to operate. This is the ability of a business to carry out commercial plans without infringing on someone else’s IP or preventing another company from competing with you absent a licence from you.
Companies that own valuable IP and have requisite data assets scale more easily, pursue or create new markets more quickly and have the capacity to block new entrants completely, including by acquiring early-stage companies on the cheap. Canada’s businesses own dismal amounts of IP, control dismal stocks of data assets and therefore lack the opportunity to invest gainfully.
To meet its productivity growth challenge, Canada needs to create freedom to operate for its firms and the infrastructure to deploy AI. Rethinking foreign direct investment strategies, creating strategic patent and data pools, revisiting how we fund university research and building AI compute infrastructure such as the EU AI Factories Initiative and the EU Cloud and AI Development Act are good places to start.
Above all, our national conversation about productivity needs to stop framing it in terms of “efficiency” and “production,” as the Bank of Canada does, because in the contemporary economy, the objective is not the efficient use of labour but establishing leverage using intangible assets.
In the traditional production economy, productivity is evaluated in terms of “output per worker” and is improved with the deployment of enhanced machinery to lower labour production costs. The goal is to gain more margin by a cost advantage and/or producing a higher-quality product that can command an incrementally higher price. The root economic activity is producing and shipping a product in volume.
But in the contemporary economy, where IP and data are the most valuable resources, the marginal production costs for owned ideas or controlled data sets are at or near zero and the root economic activity is extracting a rent from the marketplace for the use of these intangible assets. In this economic structure, production scale is immaterial and profitability is characterized by increasing returns to scale.
Simply put, enhanced productivity is achieved by extracting more revenue for a given set of owned intangible assets. Think of the semi-conductor company Nvidia Corp., which outsources the production of its chips but has a market capitalization of US$3-trillion with fewer than 30,000 employees – around US$100-million of value per employee.
The overdue focus on declining productivity in Canada is welcome, and we must fix it. But when the nature and structure of the economy changed, Canada’s policy discourse should have changed with it. We cannot fix our productivity problem until we stop laundering ideas, models and theories firmly rooted in the economy of the late 1970s – an economy we no longer live in.