IMPROVING CANADA’S PRODUCTIVITY

I wrote the following about a year ago, and thought it might merit updating and posting here in case anyone who cares about Canada (read: other Canadians) reads this blog.:
I offer this brief prescription as a Canadian citizen with absolutely no economic training or expertise in government policy setting. I’ve spent most of my business life helping small-to-medium Canadian business to succeed, or in some cases just to survive, in the ever-challenging competitive business marketplace in this country. I was galvanized into action by an article entitled Canadian Productivity: The Sky is Not Falling (http://www.bmo.com/economic/regular/canprod.htm) written by a team of economists at the Bank of Montreal. To me, their diagnosis was eminently reasonable and surprisingly understandable, but what was missing, and what I’d like to add to the debate, is what Canadians should do about their findings.
1. As this chart shows, there are four factors that directly affect Canadian productivity, of which two (lower participation rate and shorter work week) are arguably good things (they allow more work-life balance and family time) and one (lower investment in equipment and R&D) is arguably a bad thing. Our high tax rates contribute to both the good and bad factors, so lowering them might improve productivity at the cost of Canadian quality-of-life.
2. Our dependence on industries that are commodity-based (sensitive to price volatility and in the long term trending down in price), and low tech (i.e. don’t lend themselves to automation or other productivity and efficiency improvements), combines with this lower productivity to push down the Canadian dollar, Canadian wages, prices and profits, and hence our purchasing power and economic well-being.
3. Our lack of ownership and control over our own economy, coupled with the propensity of foreign companies to invest in their own country rather than others’, has led to much of our economy being resource-starved and hence unequipped to achieve the productivity improvements that more substantial capital and research investment could produce.
4. Our lack of Canadian management and commercialization savvy has allowed these resource-starved (but low-cost) foreign subsidiaries to nevertheless grow at twice the rate of domestically-owned businesses, further exacerbating the problem.
I have a naÔve belief that most Canadians still want a balance between modest tax rates and good public infrastructure. I also am persuaded by John Ralston Saul’s The Unconscious Civilization that, contrary to popular belief (and sometimes personal perception), our public institutions are not terribly inefficient and provide at least as high a (economic plus social) return on investment as self-serving, predominantly foreign-owned, private corporations. Finally, I have a sinking feeling that, despite the flexibility of a separate currency, our low Canadian dollar is simply entrenching our complacency with an economy powered by the export of raw commodities, and therefore our low productivity.
The objective, I think, should be to see what we can do to address the three red quality-of-life-diminishing elements of this low-productivity ‘system’ (see chart below)without adversely affecting its green quality-of-life enhancing elements. I see three ways to do this:
1. First, we need to acknowledge the hard fact that Canadians are not good at managing and commercializing businesses. We are arguably the most innovative nation on the planet (look at our Nobel success, our medical technology and software track record, and our patent success if you doubt this). But most innovative Canadian businesses, and products, flounder on the path from idea to profitable production, and many of those that succeed are immediately bought by opportunistic foreigners before they mature. While business schools can certainly contribute to improving management and commercialization skills, much more needs to be done at the grass-roots level (most Canadian businesses employ a handful of people and cannot afford MBAs, experienced consultants or professional managers) to upgrade the business skills of full-time entrepreneurs. What we need is a new type of educational institution that offers training not in the classroom but at the business site and in the boardroom, focused on leading operational practices, good financial management, facilities planning, financial and cash-flow management, marketing, raising capital, attracting and retaining talent, and other make-or-break entrepreneurial skills. For businesses in high-productivity industry sectors, this training should be highly subsidized or even free of charge to businesses (the investment of entrepreneurs’ time is onerous enough).
2. Next, we need to grapple honestly with the reality that many foreign-owned businesses are in shabby premises, using obsolete equipment (often cast off by the foreign parent when it upgraded), and buying all their executive skills, research and other intellectual capital from the foreign parent at often-inflated prices (to repatriate the profits to the lower-tax parent country). We have to acknowledge that foreign companies will never put the interests of Canadians (including their own employees in this country) ahead of their domestic interests. There are really only two ways to deal with this.
(a). The first is the old approach of restricting foreign ownership and/or flow of cash back to foreign parents. This can be done by regulation, by taxation, or by import/export restrictions. It’s not popular these days to propose anything that restricts the free flow of goods and capital, but the reality is that we already restrict the flow of the most important facet of production of all – people (ask anyone who has tried to cross a border and admitted they might sell something in another country). Many countries restrict foreign ownership and control across the board without significantly impeding the inflow of capital investment, for this reason:. Multinationals realize that they can exert huge influence over a locally-owned company that sells most of its product to, or through the multinational, even if they own no shares in it at all . This allows the multinational to ‘do business’ in other countries while still allowing the entities in those countries to be locally owned and controlled, and manage their own investments in people, capital and R&D. It has the extra benefit of shielding the multinational from the potential wrath of social and environmental activists if the local company runs afoul of labour or environment laws – they’re just a supplier, we don’t own them. As any contemporary business guru will tell you, this is the age of alliances rather than takeovers, and free trade could continue virtually untrammelled without the need for foreign ownership and control. And once Canadian companies are back in the hands of Canadian owners, both the moral and the economic and regulatory means of persuasion to sustain investment in the business are back in our control.
(b). Although I personally think (a.) is the right answer, there is another, less direct solution. We could mount a global educational program to demonstrate just how high the ROI is on an investment in Canadian infrastructure or research, especially with low purchasing costs and a cheap Canadian dollar. Although I’m sceptical that this would overcome the innate propensity of people to invest at home rather than abroad (even though it’s more expensive to do so), there is a powerful economic argument to be made that an investment in Canadian infrastructure is about as sound an investment as you can make anywhere in anything these days. So far, however, we haven’t even succeeded in making the much easier ‘sell’ that vacationing in Canada is the best value in the world.
3. Third, and last, we need be more discriminating in the way we provide tax credits for investment in Canadian labour and capital. We currently have a tax code with several incentives for both, but they don’t restrict what types of investment, nor what types of business the investment is made in. If we want to shift our economy from primary, commodity-based businesses to more productive industries, we need to stop encouraging investment in dying industries (or ‘flogging a dead fish’ as one columnist recently put it), and encourage only investments in industries, and in research and personnel, that are highly productive (or can be made so with this investment). We need to provide exceptions to this rule, e.g. investment in most facets of the tourism and research industries which are very labour-intensive and hence not as productive as capital-intensive businesses, but which merit investment incentives because of the long-term social (employment and environmental) dividends these industries pay relative to fully-automated, ‘dirty’ and resource-depleting industries.
These three solutions: Better business skills training, foreign ownership restrictions and more discriminating tax credit programs could, in my opinion, increase both Canadian productivity and quality of life. They’re more imaginative and more effective than across-the-board tax cuts. I’m one Canadian that sees US duties on forest products as an opportunity, and the collapsing Canadian dollar as a problem, when most of the experts would have us see these two events in just the opposite light.