A person walks past the Bank of Canada on April 10.Adrian Wyld/The Canadian Press
Mark Wiseman is a Canadian investment manager and business executive who serves as a senior adviser for Boston Consulting Group and a board member for NOVA Chemicals.
In the wake of strong employment and economic reports in the United States and growing unemployment with flaccid growth in Canada, it is time Canadians wake up to the malaise that has settled into our economy.
As the federal government finalizes its next budget, we should ask ourselves one simple question: What are we doing to address the staggering productivity gap between Canada and other developed countries?
It’s a critical question for our current and future prosperity, albeit one that I fear the budget will do little to answer convincingly.
More than 15 years ago, the Competition Policy Review Panel chaired by L. R. (Red) Wilson released a comprehensive report that identified problems with weak growth, market fragmentation and inefficient regulatory barriers, leaving Canada behind its peers.
Quarter after quarter, year after year, and decade after decade, Canada’s productivity deficit has only grown worse. Today, the OECD projects Canada to be the worst performing of 38 advanced economies over the next 40 years.
Statistics Canada reported labour productivity has fallen in six consecutive quarters and 11 of the last 12 quarters, now at only 72 per cent of that of our American counterparts.
This isn’t a decline. We are in freefall, contributing to more expensive goods and services, and wasted opportunities for Canadian workers. Simply put, we are falling further behind in our standard of living without realizing it. Canada has become a nation of complacency.
To stop the bleeding, the Canadian economy is in dire need of a cultural transformation. Action from policy makers has been non-existent, timid or ineffectual. In tandem, corporate Canada has become beset by contentment and incumbency.
We urgently need bold, complementary regulatory and policy changes that create conditions in which companies must innovate and push boundaries. How do we get there?
First, we must increase competition to force companies to be more productive. Recent amendments to the Competition Act are a necessary first step. But major outdated laws, opaque research and development incentives, and entrenched provincial trade and supply management barriers continue to restrict competition more broadly. Statutes such as the Bank Act, the Investment Canada Act, and the CRTC Act, for example, set the bar obstructively high for foreign entrants at the cost of innovation and competition.
The Wilson report’s most notable proposal was a reversal of the onus on Investment Canada Act reviews, which have been successfully used to shield Canadian companies from outside competition. Foreign investors should not have to explicitly demonstrate that a transaction is “of net benefit to Canada” to move forward. Rather, the government should have to show that it is not in order to block a transaction.
By protecting the status quo, we are breeding large companies indifferent toward innovation – confident they will likely be protected against new contenders, as the telcos have been, or big enough to snap them up, as the banks have been.
The Hamilton Center for Industrial Strategy, a Washington-based think tank, found that in 2021, U.S. companies spent roughly 10 times more than Canadian ones on R&D, on a GDP-adjusted basis.
That is staggering – and the trendline is getting worse. The same study showed Canadian companies’ R&D spending in advanced sectors declined from 68 per cent below the global average to 78 per cent below it from 2013 to 2021, and that Canadian companies’ spending remained behind the global average in all sectors.
We have created a self-fulfilling prophecy of lethargy and insularity, making Canada an unappealing place to invest and one where the ultimate measure of living standards – GDP per capita – will continue to worsen.
Indeed, adjusted for population growth, our real GDP per capita has deteriorated. In the 1980s, we were ahead of the average for advanced economies, but now our performance lags severely. Since 2015, Canada’s real GDP per capita has grown at only 0.4 per cent annually, a full percentage point back of the advanced economy average.
Alcohol products at an SAQ outlet in Montreal on Dec. 7, 2021.Graham Hughes/The Canadian Press
There are many reasons for this outcome, but innovation and competition are key components that are underdeveloped in Canada’s economy versus our peers. Fewer than 2 per cent of Canadian businesses incorporate R&D as part of their business strategy. Government innovation incentives, while costly, have failed to move the needle.
A study from The Logic, a business newsletter, found that a quarter of tax incentive funding through the government’s flagship Scientific Research and Experimental Development program went to foreign subsidiaries rather than Canadian businesses, and the overall R&D incentive system has been criticized for a lack of transparency.
Looking to our agricultural sector, the sacred cow of supply management, through its import restrictions, production quotas and price controls, secures the market for a protected group of settled players, impeding innovation and keeping prices artificially high for Canadian consumers.
In 2022, the government committed up to $4.8-billion to supply-managed farmers who lost market share. Early this year, it injected $89-million into the poultry industry to help sheltered processors adapt to market changes.
Any government that’s financially beholden to the interests of legacy actors will be incapable of embracing the large-scale reform we need to encourage competition and drive meaningful consumer choice and productivity growth.
Yet perhaps the biggest dragon to slay will be liberalizing interprovincial trade.
It’s been more than six years since the provinces signed the Canadian Free Trade Agreement (CFTA), a landmark deal that was supposed to have cleared a path to open trade between provinces. But in that time, progress has been glacial, with provinces continuing to obstruct the function of a national economy through labour mobility and eligibility restrictions.
Only five provinces allow the unrestricted transportation of alcohol across provincial boundaries. In B.C., certain trucks can only be driven at night, but in Alberta, they can only be driven during the day, leaving truckers only a small window of time to cross that boundary.
The CFTA also inhibits work force development. In Quebec, the curriculum for licensed practical nurses does not cover obstetrics or pediatrics, unlike other provinces; and in Alberta and Saskatchewan, the educational requirement for social workers is a two-year diploma, which differs from elsewhere in Canada.
There is a cost to this inefficiency. In fact, the IMF concluded it is equivalent to a 21-per-cent tariff, whereas researchers from the London School of Economics have argued these restrictions cost the Canadian economy as much as US$99-billion a year. Modelling from Deloitte shows that removing these barriers alone could result in an $80-billion rise of national GDP, with Canadian wages climbing by more than 5 per cent.
Federal and provincial co-operation needs to dismantle these barriers. Sadly, if the most recent premiers’ meeting is anything to go by, we can expect timid, absent economic leadership and Band-Aid solutions when major surgery is needed.
The time has come for a wholesale usurping of the outdated measures and special interests that prevent a free market in Canada. Opposition to these changes is predictable, but the consequences of continued, cursory incrementalism are even harsher.
We have sleepwalked into a productivity crisis. If this coming budget were actually about the economy, it should be laser focused on how we sprint our way out.