Canada has a productivity problem!

Douglas Porter, the deputy chief economist with BMO Capital Markets, concluded in a study released last week that “A strong dollar actually hurts productivity.” He pointed out: “Most economists have been prattling on about how the strong dollar is going to help our productivity and the evidence suggests quite the opposite.”

In trying to explain the productivity conundrum, Porter suggested the following: “When commodity prices are very strong, it reduces the pressure on the rest of the economy to be as productive as possible.”

If I interpret this line of argument correctly, it suggests that Canadian business, including the big banks, are fat and lazy or just plain stupid.

Also last week, MRB Partners, a Montreal-based investment research group, warned that Canada is suffering from the “Dutch disease”. The commodity price boom has led to a sharp appreciation of the Canadian dollar during the past nine years, and this has made the Canadian manufacturing sector increasingly less competitive. Brian Milner, in discussing the MRB research report in his Globe and Mail Report on Business column today, emphasized:

“In Canada, exporters of manufacturing goods were already uncompetitive before the commodity boom and had relied on a cheap dollar to keep their heads above water. Business was in no shape to cope with the additional competitive strains introduced by currency appreciation.”

This argument appears to reinforce my suggestion that Canadian business seems to be just plain stupid.

While the Canadian dollar has appreciated over 60% since 2002, and the manufacturing sector seems to have become less competitive, the Yen also has appreciated by almost 60% over this same period of time (totally unrelated to a commodity price boom), and yet large parts of the Japanese manufacturing sector have managed to maintain their competitiveness, even with China’s booming economy next door.

What gives?

We have been debating the productivity problem in Canada for 60 years, and free trade, deregulation, privatization, lower corporate tax rates, appreciation of the Canadian dollar, increased funding of education and training, and larger subsidies for research and development all were supposed to solve the problem. Still the problem remains! What are we missing?

Economists and policy makers are missing a very simple point: productivity growth depends on the ability and success of Canadian companies to be innovative so as to create new competitive advantages. This requires that Canadian companies take risks and be able to finance their investments. However, outside of the resource and real estate sectors, there are very few examples of risk-taking by Canadian companies.

Why are the risk takers/entrepreneurs attracted to these two sectors? In part, their history – their appeal to risk takers as a result of past successes; and in part, the availability of capital.

Olympia and York in it heyday had no problems whatsoever raising billions from Canadian banks. Companies in the oil sands have little difficulty raising billions for their projects today. Even junior mining companies have little difficulty raising tens of millions for prospecting and exploration, activities that some times border on pure gambling. Yet, small manufacturing companies and start-up technology companies generally are starved for risk capital in Canada.

A senior executive at one of the big five banks once told me that none of these banks had made one cent of profit on their loans to their large corporate customers during the prior 15 to 20 years. I suspect that they did much better on their loans to small and mid-sized companies.

Until a risk-taking mindset and access to capital spread beyond resources and real estate, Canada will continue to lag in productivity growth.

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.