Productivity Growth Important for Canada's Future

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By Peter G. Hall *  
Vice-President and Chief Economist Export Development Canada 

Productivity growth is key to Canada’s future. It ranks as a top economic priority for business, government and indeed, the general public, as well it should. After all, together with the labour force and our national capital stock, it’s one of the three foundational economic pillars. Not one of them is in great shape – adding up their collective trend performance gives future growth of as little as 1.5 per cent. An about-face in productivity growth could change the picture for the better – but is it likely?

Since 1996, OECD labour productivity has grown 1.5 per cent annually. At the same time, Canada’s average growth was 0.9 per cent. That’s just half the US pace, opening up a 15 per cent productivity gap over the past 16 years. Our inferior growth at best suggests considerable room for improvement, and at worst poses a substantial threat to our long-run competitiveness.

Are we already seeing the effects? Our thin, 1 per cent annual export growth record since 2000 seems to suggest so, but productivity performance at least shares the blame with the surging loonie. Indeed, recent currency stability has vastly improved sales to our traditional customers. Also, in the face of dollar duress, Canadians successfully ventured into fast-growing emerging markets, lifting their share of total exports from just 4 per cent to 11 per cent in under a decade.

As impressive as this is, we are falling behind the rest of the world. Other OECD nations are outpacing our annual growth by 5 percentage points annually. More recently, Canada has been keeping pace, but can we maintain it? Productivity growth is key, and many remedies have been prescribed. It’s possible in all the debate that we are looking too hard for solutions on the inside. Can it be that trade is not just an end of improved productivity performance, but a means to achieving it?

Efficiency in a globalizing world means thinking about innovation not just at the product or process levels, but also in terms of the global allocation of production. Innovative firms are diversifying production globally, with great results. Increased efficiency vastly increases market potential. Higher sales raise the requirement for head office support – higher value-added positions that pay well. Productivity gains in such a scenario are simple math – higher output per worker in the home country.

Do the data support the argument? Look at the countries that have embraced this model. The U.S. has myriad multinational firms, with foreign affiliate sales three times the level of exports. U.K. firms have foreign affiliate sales five times higher than exports. Both nations boast superior productivity growth. Others that follow the model aren’t sporting the same productivity stats, suggesting that extensive international operations are necessary but not sufficient to achieving higher productivity.

Although on an up-trend, Canada’s foreign affiliate sales ratio is just 1:1. A more extensive offshore production platform could give productivity a needed boost. Such a move would not be at the cost of good, existing Canadian jobs. In fact, with looming labour force pressures, importing offshore labour without actually moving it could help Canada to process business we would otherwise have to refuse.

The bottom line? There is no question about the importance of productivity to Canada’s future competitiveness. But whether we embrace the importation of productivity remains to be seen.

© EDC

OCTOBER 2017

Vol. 12 - No. 3










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