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Productivity: The Canadian dilemma

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Productivity: The Canadian dilemma

Mark Carney, the Governor of the Bank of Canada, has thrown the gauntlet down to the private sector. He claims that the federal government and the Bank of Canada have done everything possible during the past 25 years to lay the foundation for the private sector to generate high rates of productivity growth. Carney has now challenged the private sector to take the risks to be innovative and make the investments required to elevate Canada’s productivity performance. In the absence of higher rates of productivity growth, Canadians’ standards of living will improve very modestly.

Is Carney right? Has he finally figured out the root problem for Canada’s productivity dilemma? YES!

As an undergraduate, I read several studies that addressed the productivity issue. The small size of our domestic market and the legacy of trade barriers were singled out as the primary reasons for the productivity underperformance of the Canadian economy relative to the United States. Free trade with the U.S. would be the solution to our problem.

More than a decade later, another round of studies examined the same productivity issue. The findings and policy suggestions were almost identical. Privatization and deregulation were added to the policy mix. Despite the logical flaws in these studies, they did lead to a free trade agreements, initially with the the U.S., and then with both the U.S. and Mexico. Selected deregulation and privatization initiatives also were introduced by Ottawa. For a short period of time during the latter half of the 1980s, it appeared that the policy makers in Ottawa had hit upon the magic formula. Canada’s productivity did improve relative to the United States.

But alas, the golden era did not last long. During the next 20 years the following suggestions have been put forth for improving our productivity performance – the elimination of government deficits, reduction in government debt, lower tax rates, and increased funding for education, training, infrastructure and R & D. While it has not often been stated explicitly, we have been led to believe that government alone has been responsible for our dismal productivity performance.

Indeed, decades of government intervention and hundreds of billions in government spending and tax incentives have not enhanced the productivity performance of the Canadian economy.

That is why it is refreshing to hear Mark Carney finally place some of the blame on the private sector. The root cause of our relatively deteriorating standard of living lies with the private sector. Innovation is critical for productivity growth, and innovation stems from risk taking and entrepreneurship. The people who create new ideas, the people who translate these ideas into products and companies, and the people who organize, finance and run these companies are the key to solving our productivity dilemma.

However, outside the resource and real estate sectors, risk taking and entrepreneurship are rare commodities. And our financial system is not geared towards working or prepared to work with new generations of risk takers.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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