Gwyn Morgan is the retired founding CEO of EnCana Corp.
Bank of Canada Governor Mark Carney recently stated that Canadian business has "disappointed" by failing to take advantage of the country's relatively superior economic and policy environment to improve lagging productivity. Days later, his predecessor, David Dodge, told a Liberal Party of Canada think-fest: "Without productivity improvement, we will condemn ourselves to a standard of living which is in decline relative to the rest of the world."
Mr. Dodge also pointed out that productivity improvement is "a necessary condition" for governments to continue financing social programs. He could have correctly added that, without higher tax revenues from private sector productivity growth and cost savings from more efficient program delivery, provincial and federal governments have no hope of eliminating deficits.
If productivity improvement is so crucial, why are most Canadians mystified about what it means? It's generally defined as the rate at which goods and services are produced, especially the amount of output per unit of labour. The mathematical definition is "the ratio of output to input." Some labour leaders cynically describe it as a capitalist plot to exploit or lay off workers.
Canadians are entering that time of year when escaping to the country presents the opportunity to observe modern road repair methods. Huge graders, compactors and paving machines make short work of kilometre after kilometre of road improvements.
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Investor Education: Productivity
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Contrast that with road repair methods my wife and I witnessed in Cambodia. Hundreds of workers toiled with picks and shovels, pushed wheelbarrow loads of gravel and, on their hands and knees, pounded that gravel into the clay roadbed.
Needless to say, the "ratio of output to input' is many times higher for Canadian than Cambodian road builders.
This example also makes a few other things clear: Capital investment for modern equipment means vastly higher worker productivity in Canada, and superior equipment also means immensely better working conditions.
The higher productivity of Canadian road builders generates what economists call "surplus value," which flows to governments through taxes and to shareholders through profits. In Cambodia, road building is a dead-weight social program cost.
The Canadian "output" - the road - is a heck of a lot better. That makes every business that uses the road more productive, and taxpayers who drive on it much happier.
Such an outcome hardly seems consistent with the idea that productivity is a capitalist plot to get rid of workers. But isn't it true that modern equipment and a better-trained work force mean fewer workers are needed? That would be true if neither companies nor the economy were growing. In a low-productivity economy, even well-qualified workers often remain out of work or accept lower-paying jobs. Economic growth driven by high-productivity enterprises creates more, not fewer, higher-paying opportunities for qualified workers.
All of this leads to what I'll call Morgan's Laws of Productivity:
A country's economic success is directly proportional to the productivity of its private and public sectors.
A company's financial success is directly proportional to the efficiency of its equipment, processes and people.
Any business activity where input costs are greater than output value destroys shareholder value and competitiveness.
Any government activity where the input costs are greater than their output value to society destroys taxpayer value and reduces money available for public infrastructure, social programs and services.
In a productive society, the standard of living of each citizen is determined by the degree to which they possess the education and skills most required. This in turn determines a country's overall standard of living.
In 2008, Canada ranked 16th out of 34 OECD countries in labour productivity, 12 places behind the United States - our biggest customer and our biggest competitor. Since then, the Canadian dollar has rocketed to near parity with the greenback, further increasing the U.S. competitive advantage. No wonder Mr. Dodge calls productivity improvement the most pressing problem facing all levels of government.
Given the importance of productivity to our future, it's in every Canadian's self-interest to understand what it really means. The best definition I've read comes from a most unlikely source, the website of the National Trade Union Congress of Mauritius:
"Productivity is a process of continuous improvement in the production/supply of quality output/service through efficient, effective use of inputs; with the emphasis on teamwork for the betterment of all."
Now, we're getting somewhere.