Canada’s Productivity Conundrum (and What to Do About It)

April 18, 2024

Canada faces a persistent productivity puzzle, underperforming despite its natural wealth and skilled population. Recent data from the Coalition for a Better Future’s March 2024 Scorecard Report reveals concerning trends: on a per-capita basis, Canada’s economy is not just stalling but contracting. Real GDP per person has declined over the past year at a rate unseen in six decades outside of a recession, signaling that we are producing less per person today than in 2018. Furthermore, business R&D spending, a critical driver of innovation and productivity, remains low. As a share of real GDP, business R&D hovered at about 0.6 per cent last year, well below that of our peers like the U.S., where businesses spend three times as much relative to the size of the economy.

Although it’s not often discussed, productivity is crucial for a country’s economic health and standard of living, determining how efficiently resources are converted into goods and services. It influences wage levels, job creation, and the ability to compete on a global scale. High productivity leads to economic growth, increased incomes, and enhanced societal welfare, making it a vital aspect of national success. Ultimately, more economic opportunity has a multiplier effect, and Canada needs to restart its economic engine.

In 2022, Canada’s productivity was only 72% of that in the U.S., highlighting a significant gap and underscoring the urgency of addressing this issue. This blog delves into the intricacies of Canada’s productivity challenges, informed by insights from key figures and authoritative reports. Through this exploration, I aim to uncover the underlying factors of this productivity gap and propose strategic solutions to bridge it.

Exploring the Complexities of Productivity

Earlier this week, in an address in Halifax, Deputy Governor Carolyn Rogers of the Bank of Canada laid bare the intricacies of Canada’s productivity challenge. She articulated the nuances of capital intensity, labour composition, and multi-factor productivity (MFP) as pivotal elements underpinning economic output.

Capital intensity, Rogers illustrated, is akin to the transformative leap from using shovels to employing snowblowers in clearing snow. This evolution symbolizes not merely a change in equipment but a significant enhancement in worker output and efficiency. It’s about providing the workforce with advanced tools that precipitate a quantum leap in productivity.

The composition of labour, as discussed, is equally critical. The workforce’s skill level and the quality of training it receives are directly proportional to the value created in the economy. This paradigm underscores the necessity of nurturing a well-trained workforce capable of leveraging the intricacies of modern business and technology landscapes to foster value creation and innovation.

Multi-factor productivity, or MFP, encapsulates the efficiency in utilizing both capital and labour. Rogers emphasized the importance of fostering competitive markets, achieving economies of scale, and adopting advanced management practices. Moreover, the integration of cutting-edge technologies like AI and machine learning is imperative for enhancing MFP, optimizing resource use, and propelling innovation.

Rogers advocated for strategic focus on high-value industries, underscoring the potential in sectors like technology, energy, and aerospace to elevate overall productivity. She suggested that enhancing efficiency in existing jobs and extending robust support to high-productivity sectors are essential strategies to address Canada’s productivity challenges. These sectors not only drive innovation but also contribute significantly to economic growth, warranting continued support and incentives to sustain their development and impact.

The Pioneers of Productivity: Champions of Change

As cities across Canada, including Ottawa, navigate the intricate pathways of economic progress, the insights from leaders like the Minister of Innovation, Science and Industry, François-Philippe Champagne offer a beacon of guidance. At a breakfast with Mayor Sutcliffe last month in Ottawa, Minister Champagne spoke about the evolving global economic landscape and the requirement for a strategic approach, one that cities like Ottawa are poised to adopt with its sights set on sustainable and inclusive growth. This approach is not just about fostering economic development but ensuring that it is balanced, considering the environmental, social, and economic factors that define our era.

Sustainable growth forms the bedrock of modern economic development strategies, advocating for a harmonious balance that can withstand the tests of time and change. Inclusiveness further enriches this strategy, offering a canvas where every segment of society can contribute to and benefit from economic prosperity. It’s within this inclusive framework that innovation and entrepreneurship flourish, driving the economic engine forward with fresh ideas and bold ventures.

Public-private partnerships stand out as vital cogs in this economic machinery, embodying collaboration that bridges the gap between government support and private sector dynamism. Such partnerships not only leverage financial and operational resources but also foster a shared commitment to economic success. These public-private partnerships have become a major economic driver across the world in recent years where governments are now often required to court industry through incentives due to the highly competitive nature of economic development.

Often, governments are being accused of picking winners and losers, of which the unintended consequences are not totally understood. How this strategy evolves in the coming years, particularly with so many democratic countries voting in elections, will be something all experts will be monitoring.

“Globalization is being challenged. Politics are increasingly driving economics, rather than the other way around. Macroeconomic uncertainty is becoming the norm. The economic landscape is changing.” — Honourables Anne McLellan and Lisa Rait.

Of course, public-private partnership are not the only method to improving productivity. For example, the Cluster Development Model creates a synergy among businesses and institutions, enhancing a region’s competitive edge. Similarly, the transformation of urban areas into smart cities through urban renewal initiatives underscores a commitment to efficiency and modernization, vital for attracting investment and stimulating economic activity.

The Export-Oriented Industrialization (EOI) approach and the Triple Helix Model further illustrate the diversity of strategies at play, emphasizing the importance of specialized exports and the innovative collaboration between government, industry, and academia.

To gauge the success of these strategies, rigorous impact assessment and measurement are indispensable. Economic Impact Studies, Cost-Benefit Analyses, and Key Performance Indicators (KPIs) serve as the navigational tools that guide decision-makers, ensuring that economic development efforts are both effective and aligned with broader goals.

Minister Champagne spoke eloquently about the need for economic regions like Ottawa to focus on talent acquisition, development and retention. He went on to speak to the appeal of “livable cities” (perhaps synonymous with smart cities) of which Ottawa is one of the best in the world. But possibly the most important comment was the need for those implicated in economic development to tell a compelling story (over and over and over again).

In the face of a highly competitive and politicized global environment, cities like Ottawa must leverage their unique strengths while also preparing for the future’s economic landscapes. It is imperative to not only showcase established industries but also to anticipate and cultivate emerging sectors. The narrative for Canada on the global stage is changing, as well as in local markets, and it requires a compelling story that aligns with the needs and aspirations of modern industry.

Charting the Path to Productivity Excellence

The journey to resolving Canada’s productivity impasse is multifaceted, demanding a holistic and strategic approach. It calls for a concerted effort to cultivate high-value industries, align educational outcomes with market needs, invest in modern technological infrastructure, simplify regulatory frameworks, and strengthen international trade ties. These initiatives, grounded in economic development best practices, are essential for rekindling the productivity flame and propelling Canada toward a future of sustainable economic growth.

As noted by Anne McLellan and Lisa Raitt, “In the current global economic climate, cities must not only champion their established sectors but also remain agile, ready to adapt and lead in new growth areas. This dual focus is essential for sustainable, inclusive development.”

The narrative of Canada’s productivity is not merely a tale of economic metrics but a clarion call for collective action and strategic foresight. As we navigate this complex landscape, the insights and data provided by economic leaders and institutions offer a compass for our journey. By embracing these guidelines and fostering a nationwide culture of innovation and efficiency, Canada can unravel its productivity puzzle and stride confidently into a prosperous future.