Opinion: A harsh truth: Real fixes to Canada’s economy are difficult and politically unpopular

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Claude Lavoie was director-general of economic studies and policy analysis at the Department of Finance from 2008 to 2023. He has represented Canada at OECD meetings and has received many honours, including the Queen’s Diamond Jubilee Medal.

Workers in Canada are less productive than those in many other countries. In the time a Canadian worker produces $1 worth of goods and services, a French worker produces $1.20, and an American $1.30 – a 30-per-cent advantage. And it’s getting worse – in 2000 the U.S. advantage was only 20 per cent. This means our standard of living has deteriorated relative to that of other countries as productivity is directly related to per-capita income.

Canadians work more hours than many in other advanced economies and Canada’s share of people with college or university credentials ranks at the top in the world. So, the reason isn’t laziness or lack of intelligence, and it’s not related to industrial composition either. Canadians are less productive than Americans even across similar industries.

The Canadian work force is less productive because our firms invest less in technology and have less efficient business practices. As a share of the economy, Canada’s business investments in R&D, and on software, hardware and data are less than half those in the United States.

Our productivity problem is not new, and governments have tried to address it. It was noted in the early 1990s and has been a topic that most Liberal and Conservative budgets and economic growth plans have attempted to address since then.

So why have we not succeeded in turning things around? Because it is a hard nut to crack – economists do not have a good idea how to boost long-term growth – but also because some of the identified solutions are politically difficult. Year after year governments implement the same politically easy policies: giving subsidies, limiting environmental protections and lowering corporate taxes. This is despite evidence showing these measures are not very effective in raising productivity. Canada ranks ahead of all Group of Seven countries on the International Tax Competitiveness index and our subsidies to R&D are among the most generous. Yet our productivity continues to lag.

Analyses suggest that the key factors behind our poor productivity include a weaker competition environment and lower entrepreneurship skills. Competition increases productivity by driving low-productivity companies out of the market and encouraging entrepreneurs to pull out their “A” game. Canada needs to become feistier. However, our competition framework leaves a lot to be desired.

Canada’s barriers to foreign competition, particularly in sectors such as telecommunications and transportation, are among the highest in the OECD. For example, in these two sectors we hang tight to rules restricting foreign ownership and limiting the operation of foreign companies. It should be no surprise that the cost of flying between two Canadian cities is usually much more expensive than flying between two European cities or between a Canadian and an international city, where foreign air carriers can operate. Or that our wireless rates are among the most expensive. There are many other examples of barriers to competition, such as our agricultural supply management system and numerous internal trade barriers that are estimated by the IMF to reduce our GDP per capita by 4 per cent.

Excessive government subsidies for small- and medium-sized businesses are not helping, they simply allow poorly performing companies to survive. Canada has a larger share than many other countries of so-called zombie firms – those older than 10 years that would be insolvent without a constant infusion of new capital (often from the government). Letting these companies fail would raise our productivity by an additional 5 per cent, according to Statistics Canada.

Reducing subsidies and changing the competition framework takes time, and will face a lot of opposition from business and labour associations – not politically enticing propositions. As a result, Canada continues to favour an interventionist approach aimed at protecting the interests of incumbent companies. Boosting business literacy in our school curriculum would also help, but the payoff is beyond what the electoral system can deliver and won’t provide a sexy quick fix.

Some of the changes to the competition policy announced in the 2023 Fall Economic Statement and Bill C-56 are good, but many also take us in the wrong direction. Research shows the more independent a country’s competition regulator is from political influence, the more their environment is competitive. Several of the announced changes will make the Competition Bureau even more politically dependent.

We can fix our productivity problem if governments adopt a long-term vision that is disruptive and not political – qualities not evident in our politicians these days. Instead, we’re stuck in a Mobius strip of doing the same thing and expecting a different result: Einstein’s definition of insanity.

Editor’s note: A previous version of this article incorrectly identified doing the same thing and expecting a different result as “Einstein’s definition of insanity”, which was not, in fact, coined by Einstein. This version has been updated.