Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 13 - Evidence - Meeting of May 12, 2005
OTTAWA, Thursday, May 12, 2005
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:47 a.m. to examine and report on issues dealing with productivity.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Good morning, everyone. The committee is delighted that men and women across Canada will be watching on the Internet this round table on exploring productivity and competitiveness in the Canadian marketplace; as well, our proceedings will be time-delayed on CPAC, which CPAC is pre-occupied by other issues. We think this is more important, but CPAC has chosen to cover other issues outside of the city. Welcome.
I shall being by saying a few words about what we hope to accomplish yesterday and today on these round tables. This is an experiment for us. We are trying to collapse a lot of hearing time into a short period of time. We are familiar with the territory but we are really looking very closely at new and interesting information that might help us in our study.
We have all heard about how important Canada's productivity and global competitiveness is to our economy and our standard of living. Over the past 60 years, our growth has accounted for somewhere between one quarter and one third of our standard of living. We believe that increasing productivity is the only way to increase our living standards — there are other factors, but that is the key.
There have been numerous studies on productivity. We have seen and gone through a number of them. We have prepared ourselves for this round table and we welcome the additional studies that our witnesses have brought today.
We in the Senate are taking a comprehensive approach to our examination of productivity issues. We are bringing in some of Canada's foremost experts on the subject, including our witnesses today, with special expertise embodied as well by members of our committee. As well, we are looking for the public's input to better understand the role the federal government should play in helping our industries become more productive and more competitive.
Before we begin, I should like to remind those who are watching this live over the Internet and later on CPAC's broadcast that we want your input, too. Productivity is a factor in every region of the country. If you have a comment on something you are seeing or thoughts on improving Canada's productivity, we invite you to send us an email at www.banking_banques@sen.parl.gc.ca. That address is being put on the screen right now, and it will be put on the screen several times over the course of the morning. We want Canadians, experts and our public alike, to email us your views and any views or evidence you may have about what you hear today. We did receive a very solid response from our hearings yesterday.
To you, witnesses, if you disagree with each other, with any of the senators here or with the previous witnesses, we should like you to respond as well by email so we have your contemporaneous responses to the issues.
[Translation]
If you have any comments or suggestions on ways of improving Canada's productivity, we invite you to write to use at the address appearing on the bottom of the screen.
[English]
Our first participants are Paul Darby, who is with the Conference Board of Canada; Jim Stanford, Economist at the CAW, and John Baldwin, who is with Statistics Canada. We have looked at a number of your graphs. Thank you for all of the information that Statistics Canada has provided to this important study.
Mr. Darby, please proceed.
Mr. Paul Darby, Vice-President and Chief Economist, The Conference Board of Canada: Good morning, honourable senators, and thank you for the invitation to attend here.
It is important to recognize that the Conference Board had begun to look at productivity issues about seven or eight years ago in some detail and some depth. That may suggest that we are newcomers to the game. However, the issue around productivity for us arose from the analysis or the observation that U.S. incomes seem to be outstripping Canadian incomes. The gap between U.S. income and Canadian income per capita deflated, and there are issues around what exchange rate we should use to compare the two incomes. Given the uncertainties around those measurement issues, it did seem to be rather obvious that there was a growing and important gap between U.S. incomes per person and Canadian incomes per person.
That in itself is not necessarily a terrible thing, but it does give rise to a certain sense of anxiety potentially about the future and it raises questions as to why this gap might be growing over time. The gap had normally been there historically, but it has become extremely significant and ever growing in the last 15 years or so.
Nervous about that increasing gap in standards of living, which is a logical leap from income gap, we began to try to investigate, in a fairly potentially crude fashion but nevertheless one that was statistically robust, what might be the causes of this income gap.
We had a number of culprits, one of which was productivity. Given the measurements we had at the time, there seemed to be a significant difference between U.S. and Canadian productivity. We began to ask ourselves questions about what could have given rise to the so-called productivity gap. There are a number of potential determinants here.
One of the determinants, which we have looked at most recently, had to do with the hypothesis that, in Canada, we may be looking at a more rigid society, a more regulated society, one with more barriers to competition than existed in the United States. There has been discussion of the wave of deregulation that took place in the United States and issues around the degree of unionization in the United States, various explanations as to why this productivity gap is not only persisting but growing between the U.S. and Canada.
An example of barriers to competition would be Canadian firms hiding behind tariff walls and as a result being less productive than their U.S. counterparts but remaining in business nonetheless. The so-called non-tariff barriers to trade would be the costs to Canada in terms of higher input costs and potentially lower productivity from internal barriers to trade around regulations, safety standards and input standards. One of the most important ones was the procurement rules. Governments would only buy from you if you were operating within their jurisdiction.
We have done some work most recently at the Conference Board of Canada to try to get some sense as to the extent to which these barriers to trade, either internal or external, could be giving rise to lower productivity in Canada.
I would note that they have to be relatively high barriers to trade. The United States is not immune to having its own internal and external trade barriers. For example, we can think of the Buy America program, which is an excellent indicator of a non-tariff barrier.
We have finished the research. It is interesting because the results suggest, in some sense not surprisingly, that it would appear that for a large segment of Canadian industry these barriers are not that important in terms of explaining differences in productivity. This is true especially for the service sector and for the non-tradable goods sector. In many ways, they are insulated from productivity in terms of the United States, particularly over the time period we are looking at, simply because it is not easy to trade these goods. Hair cuts are hard to trade. Construction activity is hard to trade — it is hard to build a house in Canada in the United States.
However, we did notice that there is a core group of manufacturing industries, about 16 important manufacturing industries, that account for about 20 per cent of Canadian output, where it seems certainly to be the case that barriers to competition and barriers to trade do lead to lower productivity. If there were significant barriers to competition in these industries, the productivity numbers would be altered. For example, if Canada put up significant barriers to trade, we would have lower productivity in these manufacturing industries.
The implications are interesting in the sense that it would be possible to improve Canadian productivity in manufacturing in this core set of industries by lowering the barriers to trade and opening them up to increased competition. That is not, however, to ignore the corollary to that. If the barriers are high in Canada relative to the United States, you may also be looking at adjustment costs as many Canadian firms find themselves unable to compete. Obviously, there are some non-trivial issues in terms of policy implications.
It would appear that, over relatively short periods of time, at least five to seven years, barriers to competition in much of the service sector or in the non-tradable goods sector do not seem to have a lot to do with how competitive the Canadian industry is.
Mr. Jim Stanford, Economist, CAW Canada: Thank you for the invitation. This is a crucial topic. I am pleased that the committee and the Senate are considering it. It is central to our prosperity as a nation moving forward. It is our hope that your deliberations will be more productive than the deliberations going on in the other House these days.
The Chairman: We thank you for that gentle compliment. It is, and it will be.
Mr. Stanford: I am glad to hear that.
I am a union economist. I want to stress at the outset that ``union'' and ``productivity'' are not necessarily contradictory terms. CAW in particular is one union where ``productivity'' is not a dirty word. We have emphasized very proactively the need for productivity growth as a key ingredient in competitiveness. We have taken some innovative steps to attempt to bring productivity-enhancing investments and other productivity initiatives into our auto plants and other facilities where our members work.
Perhaps the best example of why productivity matters is seen in Canada's auto industry. It is one of the only manufacturing segments we have where average productivity is higher in Canada than in the United States. That productivity advantage combined with the labour cost advantage is crucial in explaining why our auto industry has done much better than the American industry at preserving jobs, increasing output and expanding an economic pie that our members are then, thanks in part to the union, able to get a slice of. That is a great example of why productivity matters. We would like to see that positive experience replicated in other parts of the economy.
I will very briefly cover some of the broader themes that have emerged in my own research on productivity, some of which will go against some of the conventional wisdom that you have probably heard about productivity and its determinants.
I certainly accept that Canada has a productivity problem and that it is getting worse, in relative terms, over time. Our productivity performance over the last three years has been abysmal. You cannot look at it solely in a short-term versus long-term sense, but the fact that average labour productivity has not grown in Canada for the better part of three years now is stunning. Despite all the talk we have been having about productivity and some of the efforts we have been making to improve the situation, we are currently in the midst of one of the most significant productivity slumps we have experienced in our entire post-war era. Turning that around is crucial.
The link between productivity and social well-being that is often taken for granted in these discussions is not an automatic link. I fully accept that productivity is an important determinant or a constraint on our living standards over time, but the data is clear: An increase in productivity does not necessarily or automatically translate into an improvement in living standards. Likewise, you can improve your living standards as a society without increasing your productivity. It is quite wrong to take the two as synonymous, although much of the commentary either explicitly or implicitly does.
In addition to the issue of growing our productivity, there is an equally important issue about how the gains from productivity growth will be distributed and shared in society. The slide on page 14 shows a significant change in recent years in how our economic pie is divided. We see a decline in the share of GDP that goes to labour, broadly defined to include wages, salaries and fringe benefits. Even with the inclusion of CEOs' and money managers' salaries, labour's share of the pie has declined steadily over the last 20 years by a cumulative total of 8 percentage points of GDP, and it fell below 50 per cent of the pie last year for the first time since the early 1950s. This reflects the cumulative influence of all the pro-market and pro-business policy changes that have been implemented in Canada over the last 20 years.
This change in how the pie is allocated explains the co-existence of productivity growth in Canada over the last 20 years with stagnation in pre-tax incomes of the majority of Canadians. In coming up with a productivity agenda that will work and get social buy in, we must be explicit about how the gains from productivity growth will be shared, because we cannot just assume that a trickle-down effect will occur.
Reliance on competitive market forces is not a magic bullet that will solve all of our productivity woes. In much of the commentary, the words ``productivity'' and ``competition'' are basically treated as synonyms. The facts are clear if you look at case studies or at the aggregate data. Companies can respond to intensification of competition in ways that are good for productivity, but they can also respond in ways that are bad for productivity, including through shutting down entirely. Mr. Baldwin's research has shown the importance of exit to the productivity growth that has occurred in Canadian manufacturing.
The idea that removing trade barriers will enhance productivity is simply not valid. Trade barriers can obviously protect unproductive practices, but merely throwing open the doors to international competition does not necessarily help productivity. Page 22 of our presentation shows that Canada's relative productivity performance compared to the U.S. has deteriorated dramatically since we joined the United States in a free trade arrangement back in 1989. The debates at that time stressed that the assumed convergence of productivity to U.S. levels would be the main source of the economic and social gains that were supposed to result from free trade. The assumption was made that opening markets and reducing tariffs would result in increased productivity, and that obviously has not happened.
A similar argument exists in terms of tax cuts. When you hear Conservatives or business lobbyists commenting on any budget these days, federal or provincial, they always say they are very disappointed at the lack of measures to address Canada's productivity performance. That is doublespeak to say they are always disappointed there were not more business tax cuts. The assumption is that business tax cuts will lead to enhanced investment, more incentive for entrepreneurship, and hence more productivity. The very substantial business tax cuts that have been implemented federally and provincially in Canada since 2001 have reduced the tax burden on business by about a quarter of what they used to pay; nevertheless, these cuts have had no visible positive impact whatsoever on business investment spending in Canada or on productivity growth. We are stagnating as badly as we ever have at the very time we have implemented the biggest business tax cuts ever across the board. The link is not there.
If I were to identify the one factor I believe to be the most important to future productivity growth, I would emphasize fixed investment spending by business in plant, and more important, in machinery and equipment. Investment spending helps in its own right to increase productivity through the effects of capital deepening; however, more important, it is new investment spending that embodies the broader technological and organizational innovations that are crucial to total factor productivity growth. Page 23 shows some evidence, and there is more out there, of the positive link. When businesses are investing more, average labour productivity is growing.
I am very open to innovative ways to stimulate more investment spending by business in Canada. I do not accept that across-the-board business tax cuts are an effective way to do that. The evidence is clear that they are not. There are many other more focused, more targeted measures that we could consider, including changes in the depreciation schedule, issues like investment tax credit or even sector-specific investment supports, as we have seen recently in the auto industry.
I believe the impact of the Canadian dollar's appreciation on investment spending in business will be negative. Common sense wisdom is that our productivity performance was poor in the past because lazy or inefficient Canadian producers were subsidized by a weak dollar, but the evidence empirically shows the opposite. Our business investment spending has slowed since the dollar has taken off in the last two years. It is cheaper to import capital equipment, but there is much less incentive to do so when the dollar is at 80 cents or higher because of the competitive disadvantage that that imposes on Canadian producers.
I should like to raise the impact of sectoral mix in our economy on our overall productivity performance. There has been a significant shift in our economic makeup in the last two, three and four years because of the rising dollar and booming global commodity prices. We are reallocating labour and capital and entrepreneurial attention away from value-added manufacturing towards export-oriented energy product projects, number one, and non-tradable sectors, number two.
In terms of the impact of that shift on our long-term economic stability, it is negative. The impact on productivity moving from manufacturing to energy will be awash, because energy is also a very high productivity sector like manufacturing; however, shifting into non-tradable services, which tend to be the least productive area of our economy, would have a negative impact. Part of our productivity agenda should be focused sector-specific strategies that identify high-productivity dynamic industries and ensure that Canada gets a healthy share of those.
I will leave it at that and look forward to our discussion.
The Chairman: This has been called a round table; it is really a rectangular table. The theory of a round table is that it will allow other witnesses to respond. I noticed some of the body language from Mr. Darby as you were speaking. Perhaps he would like to respond after we hear from Mr. Baldwin. You will be given another opportunity to respond before I unleash the senators on all of you.
I should like to say something about Statistics Canada. It is one of the great institutions in our country. It is free of politics. It is prepared to change its assumptions when they are critically attacked. Statistics Canada does a tremendous amount of work. It was evident yesterday and today that many of the disputes we are having are not about the statistics but about how we read those statistics. Most of the statistics, Mr. Baldwin, come from you and your organization. Welcome, and we are listening to every word that you have to say.
Mr. John R. Baldwin, Director, Micro Economic Studies and Analysis Division, Statistics Canada: The role of Statistics Canada is not to comment on policy, so I will not engage in the debate with my two colleagues as to whether or not policies are in the right area.
The Chairman: You can take off your government hat and let us have the benefit of your views, Mr. Baldwin.
Mr. Baldwin: Not as long as I remain an employee of the agency.
The Chairman: We will protect you. There is immunity, but please proceed.
Mr. Baldwin: The presentation I prepared for today calls upon the background statistics that my group produces on productivity and tries to shed light on some of the issues that are constantly put to us as to the state of productivity.
The presentation I left with you today does not focus on short-term performance. I can go into a number of reasons for that at a later date. It attempts to pull together data over a very long period of time that is gathered in a consistent way to answer some of the questions that are often posed to us.
In doing so, it may answer some of the other questions that have been addressed around the table this morning. The first four or five slides deal with very general issues about the rate of growth and productivity in Canada over relatively long periods of time, and sub-periods, and how that is related to some of the economic aggregates in which we are all interested.
It starts by indicating the relationship between GDP growth and productivity, where we define productivity as labour productivity. We get more growth in output, or GDP, if we put more input into this system or if we manage to do things more efficiently if we get more output per worker.
You can see that over time the rate of growth in GDP — the blue bar on the graph — has been declining since the early 1960s. The rate of growth of hours worked was more or less constant over the first three decades, the 1960s and 1970s, but it went down in the 1980s, and the rate of growth of labour productivity fell as the rate of growth of GDP fell. There is a close relationship between your total output and what was happening on the productivity side.
The second graph deals with a slightly different concept, that is, GDP per capita growth. Sometimes the public confuse the difference between productivity growth and GDP per capita growth. There is a close relationship between the two. GDP per capita growth depends upon GDP per worker growth and the number of people that we have at work in the population. Some people call the latter ``work intensity.'' That graph shows what percentage of total GDP per capita growth you have because of growth in labour productivity and the growth in work intensity. The more people we have at work, the more hours they are putting in.
You can see that most of the growth in GDP per capita over the decades has come from labour productivity, but that is not always the case, and that is important to remember when interpreting data and statements.
In fact, I can recall people in the early 1990s saying that we must have a very dramatic problem because our GDP per capita growth has declined. In fact, productivity growth had not declined. The state of the economy meant far fewer people were working, and our work intensity in some sense was less. Some people interpret that to mean that we are not working hard, people are shirking and it should not be done. Whether you get a job is critically dependent on the macroeconomy and how well the economy is growing.
Chart 4 depicts the extent to which real wage rate growth tracks productivity growth. Economists have several models that suggest that it should, and the interesting question is whether it does. Over most of the decades that we have in this graph, you can see that it does. When real productivity growth or productivity growth falls, the real remuneration falls. They generally follow one another. You see some evidence that is relevant to a comment that Mr. Stanford just made. The real productivity growth has gone way ahead of real growth and wage rates over the 1990s, especially in the post-2000 period. There has been a shift in the post-1995 period in the nature of the extent of the ability of the economy to pass on those productivity gains to remuneration as measured in the national accounts.
Slide number 5 says that if labour productivity is related to all of these good things, where does it come from? Can we interpret and look at some of the underlying causes? We choose only one here, and that is capital intensity. As the amount of capital that workers have available to them goes up, labour productivity tends to go up. We ask over time whether or not the capital intensity component of labour productivity growth has changed, and we see here that it has generally declined. In the post-2000 period, it is at its lowest since 1960.
Those are broad general pictures of the relationship between productivity, its changes over time and some of the macrovariables that people are interested in.
Equally important to Canadians as they examine their productivity performance is how we do relative to the United States. The issue of productivity gap has been with us since the Economic Council of Canada — which no longer exists — in the early 1960s began to produce studies of the performance of the Canadian economy. Indeed, public discussion has consistently referred to gaps and problems. Productivity growth is always important to an economy, as I have just shown. The term ``productivity gap'' is endemic to the Canadian consciousness in terms of our worry about where we stand relative to the rest of the world.
We have put together slides 6 and 7 that give you a long-term overview of how the Canadian economy has done relative to the United States, using what we define as the business sector in Canada, leaving out the government, health and education sectors.
You can see over very long periods of time that Canadian GDP growth has grown more quickly than the Americans. We had several decades, for example, the 1960s and the 1970s, where we did a lot better. You can, see starting from a base of 1961 equalling 100, that Canada was well ahead of the Americans by the mid-1970s. We regressed slowly to the Americans, especially quickly in the early 1990s.
If you look at the hours worked, we have done consistently better than the Americans. We have been putting to work more and more people working more hours over this period of time.
If you look at labour productivity relative to the American business economy, you can see that we forged ahead, as we were forging ahead generally in the 1970s. We began to see the Americans catching up in the 1980s. They catch up by the early 1990s. During the 1990s, we track alongside the Americans.
Of course, we have tended to focus for many years on rates of growth. We do so because our statistical system is set up to determine what the rate of growth of productivity. We have not tended to look at the difference in the level of productivity in Canada and the United States.
The statistical agency responds to outside pressures to move resources to new areas. Over the last two years, because there has been so much interest in the difference in the level of productivity between Canada and the United States, we have begun to look at the extent to which there is a gap. We have put together new data that, as much as possible, allows us to measure output and inputs in exactly the same way. The Americans have several different statistical agencies that produce several different estimates of labour. They are not all the same. There is a great debate in the United States as to which is the right measure that should be used in these exercises.
The Chairman: Mr. Baldwin, put those on the record for us. It would be very interesting for us and our listening audience to know the difference between them. We have seen statistics, and they are confusing because they do compete with one another. Could you tell us what are the two or three different basic statistical models?
Mr. Baldwin: The Americans have different statistical agencies. Within those agencies, they, as we do, have different ways of measuring similar phenomena. In the United States, the Bureau of Labour Statistics is the one that estimates many of the labour numbers. Even within the Bureau of Labour Statistics, there are alternate ways to measure how many people are at work.
For our recent exercise, we sat down and took the American data sources — which are the ones use — and used the methodology that we use to come up with the estimate of hours worked. With those estimates, we then produced a measure of relative labour productivity. When we did that, we obtained an estimate of the gap that was somewhat lower than the majority of estimates we see from very good Canadian analysts.
We found no difference in terms of our estimates vis-à-vis GDP per capita. On page 9 of the handout, we found that GDP per capita is 83 per cent of the U.S. in 1999, but Canadian productivity was a good 94 per cent of the United States.
That accounts for only 33 per cent of the gap between the GDP per capita of the two countries. The remainder is essentially the gap in hours worked per person, per member of the population. That depends upon how many people in the population are at work, which depends upon demography, whether you have a large group of elderly or young people. It depends upon the extent to which the population wants to work, whether they choose leisure over work, or whether they are able to work. You can find different interpretations of the reasons that we have a difference in these two factors in Canada and the United States.
It also depends upon the number of hours worked per person who has a job. There, you find that the Americans, when we use a source similar to ours — and we believe it is comparable, therefore, in terms of comparisons — work considerably more hours per person than we do. I have had my colleagues in the academic world tell me that this indicates that the Americans are just more intense or, alternatively, that they just do not have their priorities right. There are various interpretations of that particular fact.
Slide 10 takes slide 9 on a one-year basis and looks at what is happening. Slide 10 gives you a view of the gap and what has been happening to it over the past 20 years. The green line on this graph shows the difference in the level of real GDP per hour worked. What is the level in Canada compared to the United States? It is somewhere between 90 per cent and 100 per cent, and it is relatively constant.
The other components of the difference in GDP are hours worked per capita. I have explained that this has nothing to do with laziness or other things. It has to do with all of these other things that make up the labour market.
Most of the difference over time in our GPD per capita has come from a very dramatic change in hours worked per capita, or what I call the other part of the economy. Is that important or do I find it interesting? I find it very interesting. In fact, to change the topic a bit, we produced a study two years ago that looked at what would happen if you looked at growth rates in the 1990s in Canada and the United States and you removed what I call the non- corporate sector from all these estimates. We have far more self-employed in this country. Self-employed individuals tend to the less productive in the GDP sense. They are a very important part of the economy, but a large number of people joined the GDP-producing economy in the 1990s who made very little contribution.
I believe they were only semi-employed. It had something to do with the state of the economy in the 1990s. If you remove them from the comparison of Canada and the United States, there was virtually no difference in growth rates in this period of time. If you argue that this group of people, who effectively could not get a level of remunerative work similar to everybody else in the economy, were underemployed, the problem in the 1990s was underemployment, not anything to do with the corporate economy that was investing and introducing new technologies, et cetera.
Work conditions, this other part of the economy, is important.
What is happening in more recent years to bring up hours worked per capita. On slide 11, I give you a hint of what is going on. Look at the employment rate of 55 to 69 year olds. It has gone from to 34 per cent to 44 per cent over a very short period of time. People are working again.
The Chairman: Welcome to the Senate. That is what we do here.
Mr. Baldwin: A very valuable part of society.
The Chairman: Thank you.
Mr. Baldwin: I will go through the latter part of the deck quickly.
We find that there are substantial differences in GDP per capita across provinces. Again, a good proportion of that has to do with the intensity of work. Alberta has the highest per capita GDP. It has the highest productivity, but it also works more hours per capita than anybody else in the country. That part of the equation should not be ignored.
The very last part of the deck refers to some of the issues that Mr. Darby and Mr. Stanford referred to — that is, the importance of competition and other things that are going on in the economy. We not only provide aggregate statistics on productivity, but we have a substantial number of studies that use specially constructed data bases to investigate issues surrounding what is driving these macro numbers. We have found that there is an immense amount of job turnover in the economy, as a result of firms declining, closing down, others opening up and growing. Well over 50 per cent of the total productivity you get from something like the manufacturing sector comes from the shifting of resources from those that are in decline to those that are growing. This is not a world in which everybody makes small incremental improvements. It is a world where some people find ways of doing thing a lot better and they grow. In a world where you do not allow that process to develop, you have less productivity growth.
In fact, the data we have that relates not only to these changes but also to trade liberalization shows that this process of trade liberalization has been closely associated with dramatic changes at the micro level that have enhanced productivity. We find that the changes due to trade liberalization have allowed plants to specialize more, that it has led to changes in technology investments, and all of these at the micro level have been closely associated with productivity gains.
We also find, as we point out in slide 17, that a lot of this has occurred in the foreign-controlled sector. The foreign- controlled sector and manufacturing in foreign-owned plants have contributed the majority of growth in manufacturing.
In slide 18, we show that it is large plants rather than small plants where the majority of gains have been occurring. Therefore, you have within this big aggregate called the Canadian economy, or even industries, very dramatic changes occurring with some growing more rapidly than others and some making greater contributions in the more recent past.
The Chairman: Before I turn to the senators, perhaps a brief comment from Mr. Darby and Mr. Stanford, then I will turn to Senator Angus.
Mr. Darby: Thank you, Mr. Chair. It is important to indicate that as usual Mr. Stanford has hit upon some of the most important issues with respect to productivity growth in our society. I should perhaps comment briefly on his remarks.
It is interesting to note that the share of income in the economy going to labour has not kept up at all with the share going to capital. We have at this point, if you look at profits as a share of national income, really record high levels. That is not necessarily a bad thing. Profit is income as well. There are, though, issues around where is that profit, how is that profit being used, how is the income from those profits being used? Is it being reinvested in Canada, is it leaking abroad? It is important to recognize that at this point in our history we are looking at a relatively low share of income going to labour and a higher share going to capital. That raises some interesting questions in terms of future direction.
We do sometimes notice historically that, when that is the case, we get a significant amount of investment. However, that is not guaranteed by any means. As Mr. Stanford points out, that does depend on entrepreneurial considerations with respect to the returns they can expect on that investment. They have to feel that Canada is a good place to invest that money.
The free trade agreement definitely ignited much of this debate. We were looking for substantial gains in productivity as a result of the free trade agreement, but according to the data those gains in productivity do not seem to have been generated. There was much soul-searching that took place in the economic communities through the mid- to late 1990s. Where are these fabulous gains in productivity we were expecting from the free trade agreement?
In the context of Mr. Baldwin's remarks, it is important to underline the fact that we do not have the counter factual in front of us. Where would our productivity have been if we had not signed the free trade agreement? It could have been worse than we observed. The debate still rages. From the data that Mr. Baldwin has put forward, I believe we would still want to argue that productivity is higher with free trade than it would have been had we not gone the free trade route, but the jury is out.
Mr. Stanford: On the subject of profits growing as a share of GDP, I would agree with Paul, I do not see that inherently as a bad thing. It all depends on what is done with the profits. My concern is that they are not being reinvested sufficiently. Slide 16 in my deck shows the evolution of what is called here a reinvestment rate. That calculates the share of after-tax corporate cash flow in the non-financial sector, so non-financial corporations, what are their after-tax profits, plus the depreciation allowances, which were a non-cash charge, and what portion of that are they reinvesting in fixed capital assets in Canada? That is slide 16 of my deck, titled ``Reinvestment Rate.'' It shows the evolution of that proportion. If it is above 100 per cent, it means they are investing even more than all of their after-tax cash flow. What we have seen there is a decline over the last 15 years, and, again, that ratio last year fell to 67 per cent. That is the lowest in history. As a proportion of their after-tax cash flow, corporations are investing the lowest proportion ever, even though corporate taxes have been cut dramatically over the last five years.
Senator Angus: Gentlemen, that was very interesting and quite different from what we heard yesterday. I may have misinterpreted.
Certainly, listening to Mr. Baldwin, we do not seem to have a problem of a big gap in productivity with the U.S., although it could be nomenclature here, some of the terms. I should like to question you, Mr. Stanford, if I may.
This committee has been told time and again in the last six or seven years, when we have had a dollar, vis-à-vis the U.S. dollar, down as low as 62 cents. The conventional wisdom as imparted to us at this committee has been that the low dollar — when I say ``low,'' anything 75 cents and below — has masked relatively poor productivity in Canada vis- à-vis the U.S. When the dollar started to get up to 80-plus cents, it became a problem because it became unmasked and our shortcomings in this country in terms of productivity were evident. You mentioned the impact of the Canadian dollar as being negative on productivity — I believe you said that. I am having trouble understanding it. I felt that it is positive in the sense that — I mean a higher Canadian dollar — that it points out the fact that we have issues.
If I can just add my second question — because it is also addressed to you, Mr. Stanford. I was surprised to hear a man, even though he is a professional economist who does work for the labour union movement, advocate more spending on machinery and equipment in plants and innovation, whereas it has been my understanding that the labour movement has been not an advocate, at least, of increased technology, because it takes away jobs. I am not arguing with you, but I am interested in those two things. Could you comment, please?
Mr. Stanford: Certainly. In terms of the dollar, this is an example, again, where the conventional wisdom relies too much on a faith that if you are forced to compete in a wide-open law in the jungle setting, then you will be forced to become more productive. That was the same assumption underlying the claim that free trade would lead to a convergence of our productivity. I take Mr. Darby's and Mr. Baldwin's evidence, and from others like Daniel Trefler, which shows that in some industries productivity could have been worse without free trade. Certainly the assumption that our productivity will converge once we are exposed to the full force of international competition was blatantly wrong.
It is the same with the dollar. In essence, a low dollar was like a tariff. It subsidized inefficient behaviour in Canada. That was wrong on several counts. First, even if it did subsidize Canadian producers, individual Canadian producers still have an incentive in terms of enhanced profit margins to become more productive. There is still a carrot there, even if you are not being kicked in the pants to the same degree. Second, it assumes that there is no competition within the Canadian manufacturing sector, which in most instances is completely wrong. They are out there killing each other. Whether the dollar is 70 cents or 80 cents, Magna, the Woodbridge Group, Linamar and Budd in the auto parts industry are all still trying to kill each other, and they all benefit from the same dollar.
Senator Angus: They are export industries.
Mr. Stanford: Yes, and in manufacturing as a whole.
My concern about the high dollar is twofold. First, the direct negative impact of the high dollar on investment spending is clear. Investment spending has fallen dramatically in the manufacturing sector since the dollar started rising. They are not even investing enough in Canadian manufacturing to offset depreciation now. That means that the net capital stock in manufacturing is now shrinking. Even though capital goods are cheaper, as everyone emphasizes, there is no incentive to put them here.
Second is this mix issue, the sectoral mix issue that I mentioned. I will refer you to slide 28 in my deck, which shows a clear inverse relationship between the level of the dollar and our share of continental manufacturing employment. Take the total manufacturing employment in North America and measure our share. I accept your definition, senator, of what is a low dollar, which would be anything below 75 cents; I am with you on that. When the dollar is low, we expand our share of North American manufacturing employment. When the dollar is above 75 cents, it shrinks. Manufacturing is an industry with higher average productivity than the rest of the economy, certainly higher than non- tradable industries. In auto, for example, average productivity is more than twice as high as the average. If you lose those jobs, it will pull down your average performance. Through both of those mechanisms, the high dollar will be negative for our productivity performance.
On your second question about spending on plants, there may be a Luddite tradition in some sectors of the labour movement, but in this world economy you have two choices — become more productive through capital spending and lose a few of the jobs as you go, or your plants are shut down and you lose all of the jobs. In that situation it is clear that we must embrace new technology and embrace capital spending. That has been our approach in the CAW and it has worked for the most part.
Senator Angus: I think the CAW is very enlightened, chairman. I wish their brothers and sisters had the same outlook.
Senator Harb: Mr. Darby, on page 15 of your written submission, in your conclusion, you talked about the overall explanation for the Canada-U.S. productivity gap. You state that ``policy-makers must look elsewhere in addition to barriers to trade.'' Perhaps you could explain where ``elsewhere'' is. As well, tell us what other factors might be used to explain the service sector productivity gap.
Mr. Baldwin, the climate in Canada creates the situation where many sectors — for example, the construction sector in the winter, as well as the fishing sector among others — are out of commission for a period of time. As well, we have a market of 30-million people that is widely scattered, creating the situation that it is difficult for small and medium- sized companies to do business throughout the country, as compared to the U.S., which has a market of close to 300- million people.
In your presentation, you stated that productivity seemed to improve with respect to plant growth. Can that be attributed to the fact that these plants are selling on the international scene rather than the Canadian scene?
Mr. Darby: In terms of looking elsewhere, it is important to underscore that we still believe that for this core group of manufacturing industries these barriers to competition are important. However, that is only 20 per cent of the economy. With regard to looking elsewhere, there are two items we would like to put on the agenda. Mr. Stanford has already talked about one of them, and that is investment. We would like to see programs and policies in place that would encourage productivity-enhancing investment in Canada. We have, in some instances, data that suggests that we do not do as good a job on investment, particularly in small and medium-sized enterprises. Mr. Baldwin has been pointing out that much of our productivity gain has been taking place in large and often foreign-owned enterprises. You would be amazed at the extent to which there are differences in capital intensities in small and medium-sized enterprises in Canada. Also, that capital investment is often much older than in the United States. One is to encourage capital investment, particularly in the small and medium-sized sectors.
The second factor is education, which may be a bit of a cliché. We are quite well educated in Canada, but we can always do better. We need to continue to highlight not only formal training in schools but further lifelong learning and on-the-job training. That is a great place for policy dollars to be spent.
On the issue of why the service sector might be less productive than in the United States, which seems to be the case across the board, I will say two things. First, I do not know the answer, for which I apologize. Second, we have severe measurement issues here. Mr. Baldwin could talk about that at great length. We have a terrible time measuring output in the service sector, and I am not sure that we can have as great confidence in the productivity data in the service sector as we do in the manufacturing or mining sector.
Mr. Baldwin: A number of factors would explain the differences in the gap that I have discussed. By the way, the fact that the gap is not quite as large as some people might have claimed does not mean that productivity is not important. We would all do better with more productivity. However, part of this gap is explained by scale effects. We have smaller markets, and we have several studies that show that 2 or 3 percentage points could be accounted for by that.
Is growth coming from the international sector? We have a number of studies that have looked at the extent to which plants, as they entered export markets and grew during this decade — and they are the ones that were growing, in answer to your question — enhance their productivity more quickly than others. The answer was that those are the ones that did so. Not only did they jump their productivity levels as they moved into export markets — a discontinuous increase — they grew much more quickly after they entered those markets. As well, they introduced new technologies more rapidly after they entered those markets, strongly suggesting a learning effect as we opened up our borders during this period of time.
There is still the issue that Mr. Stanford raised earlier of why the aggregate numbers do not move up higher in Canada relative to the aggregate numbers in the United States. We will look at that. I strongly suspect that there are some differences in the way the manufacturing sector in the United States is measured as opposed to ours over this period of time. All of our micro data that looks at the Canadian experience shows dramatic improvements in those firms and plants that were moving into export markets and were engaging in international trade. By the way, they were primarily the foreign-controlled plants. We get a big difference over this period of time between the domestic and the foreign, not only in terms of the productivity but in terms of what investments were being made in technology. The domestic plants fall behind in the early 1990s and they barely keep up throughout the 1990s with the foreign plants. There is something affecting them during this period of time.
Senator Tkachuk: Mr. Baldwin, not being an economist, I got a little lost in your presentation. Hence, I will have you help me sort this out.
When talking about productivity, we suddenly got into hours of work. I suppose we could get into minutes. In the end, whether a person works 30, 40 or 50 hours a week, it is the amount of wealth that person produces that makes the economy productive. In other words, if 10 handicapped people in my plant who worked 50 hours a week produce more product than a person who works 40 hours, and the wealth that person produces over a year is due to the amount of work that they do, are they not more productive?
Mr. Darby: We have tended to measure productivity on an hourly basis — the output for every hour you work. There is a difference between productivity and wealth, or income. You can become rich without working very hard if you are sitting on an oil well and oil prices are $100 a barrel. If you have a natural endowment and what you are producing is scarce and selling for a lot of money on the world market, you can become rich without being terribly productive. We are not all in that happy circumstance. As Mr. Baldwin points out, in general, for the Canadian economy, which is a fairly broadly diversified economy, there is a good link between how much you produce in every hour you work and how much income you have.
You can also choose to become richer by taking more work and less leisure. However, that does not make you more productive; it just means that you value the income from work, or just work, more than you value having a nice soak in the pool.
There are obviously returns to leisure. I enjoy my leisure time. You can have different attitudes toward how much you enjoy leisure and how much you enjoy the fruits of labour and income. These are choices that you make that affect the total amount of income or wealth that you might have.
Nevertheless, when we talk about basic, raw productivity, we tend to talk about how much output you get for every hour you work. There is a difference between that and income and wealth.
Mr. Baldwin: To add to what Mr. Darby said, productivity is measured narrowly and it has all of the problems of any summary statistic that is measured narrowly. There are many other statistics and things I would look at when I was trying to evaluate the success of an economy. The amount of wealth that is being produced is another one. The amount of leisure time that is available to us is another one. The health and well-being of Canadians are others. You could have no change in productivity and you could have a substantially worsening situation in terms of GDP per capita because prices are falling.
We have gone through periods of time when commodity prices were not booming as they are at the present time and GDP per capita did very much poorer in that period of time though productivity was more or less constant. That was no fault of Canadians, other than the fact that we concentrated our output in markets that were highly volatile. There are many things one needs to look at.
The narrowly defined measure of productivity that we have just described is only one of them. It is relatively narrowly defined, and it is meant to capture the efficiency with which we turn our inputs into outputs — and that is all.
The Chairman: I have a point of order from the deputy chair.
Senator Angus: Do you all agree on the definition and how it is measured?
Mr. Darby: I think we would all agree. We would also want to be careful in noting that, first, it is difficult to measure accurately, especially in terms of the levels of making comparisons, as Mr. Baldwin has pointed out. Second, we would tend to agree also — and challenge me if I am wrong — that a broader measure of productivity, which we tend to call total factor productivity, is the more appropriate theoretical measurement of productivity, because it also tries to capture how productive your capital is, how productive your other inputs into the production process are. You might have very productive labour but be using your machinery in an awful way and not getting the overall productivity that is appropriate.
Labour productivity, as difficult as it is, is still much easier to measure often than capital productivity. Mr. Baldwin could wax eloquent on that issue I am sure, but it is important to recognize that the best measure, if we could get it, would be a broader measure of productivity that takes into account all of the inputs.
Mr. Stanford: I agree completely that we need to focus on productivity per hour, not total output, because otherwise we get into a very misleading world in which you look like you are getting richer just because you are working longer. That is absolutely erroneous.
Senator Tkachuk: Even if you are getting richer.
Mr. Stanford: You may be getting richer by one measure, but whether your life has improved is a very different issue. You get into the comparison between the Americans and the Europeans on this score. The Americans work longer hours now than any other industrialized country, including Japan. Therefore, they have the highest GDP per capita and everyone assumes they are the productivity leader. In GDP per hour, the Europeans match the Americans. The fact is that they socially have decided to take a bigger share of those dividends in time off. Europeans get six or seven weeks off per year; in the United States, there is still no minimum legislated vacation period. That is an important choice that gets lost if you focus on total output rather than total output per hour.
In regard to labour versus other measures of productivity, labour productivity makes more sense. It is more concrete — hard to measure but possible to measure. Total factor productivity is so amorphous; the measurements of it are next to impossible.
Second, we are all human beings. We are actually trying to measure our improvement as human beings, not dividing by the amount of capital. We are not machines yet. It really is labour productivity that affects our well-being.
Mr. Baldwin: The world has evolved over 20 years — however, people still focus primarily on the labour productivity. A constantly asked question is this: Can we improve the measure and take into account other resources that are going into the process? Most statistical agencies in the world have moved beyond labour productivity measures to try to take into account the amount of capital that is being made use of in the system, the quality — the educated level of the workforce, if you will — and other changes that are occurring in the production system. That is being done because of the request by users to have information in those areas. Statistical agencies react to that.
Do I find when I talk to users of this data that they have an easy time of understanding it and, therefore, make use of it? No, it tends to be used for a specialized community. There is a demand for the more complex measures of productivity, but most people still focus on labour productivity.
Senator Tkachuk: The witnesses mentioned the fact that our productivity did not increase significantly because of free trade. That is possible; I do not know. However, in 1988, our dollar was as high as 84 cents, and then it dropped dramatically in the 1990s down to 65 cents. It seems to me that that would have gotten rid of any way to measure whether Canadians would have been more productive with an 84 cent dollar. When the dollar drops to 65 cents, exports become much cheaper very quickly. What possible incentive would there have been for Canadian industry to become more productive?
I find the arguments about the low dollar being a good thing for us difficult. We would be able to use the low dollar to continually go down — to increase our employment and everything else — and get down to 50 cents or 40 cents or even 30 cents and then we would really have a good economy. Would that not explain most of why we did not become very productive?
The Chairman: All of you have answered that, in part, so please be brief.
Mr. Darby: I would suggest that the low dollar did, at least in that core group of manufacturing industries that we have examined, have a negative impact on our productivity. Our productivity would be higher at a dollar that is higher.
Again, you are talking about social issues around those higher productivities as well. When Mr. Baldwin talks about a lot of our productivity gains coming from the less efficient firms closing, you have to deal with the social implications of that.
I would still argue that, under certain constraints and limits, but certainly in general, the low dollar did mask some productivity problems in the manufacturing sector in Canada.
Mr. Baldwin: The academic studies in this world — these are not ones that I have been engaged in — have tried to separate out the various influences that affected the Canadian economy at this period of time. There was a change in the exchange rate. There was, in the early 1990s, a very significant recession. You can see in some of the charts that I have produced that most of the gain in Canadian GDP growth relative to the American disappears in those late 1980s and the early 1990s.
We had been way ahead. Effectively, that long hiatus brought them up and moved them ahead of us. That was a very severe recession that lasted for a long time.
Finally, there was a dramatic change in technology occurring at this point in time. There was the introduction of massive changes in computerized ICT technologies, and companies had to deal with all of these at the same time. Then, there was a change in tariff rates, as a result of free trade and liberalization.
The academic studies have tried to tease out the impact of each of these. The ones that I am thinking of — and Mr. Darby just referred to Professor Trefler from Toronto who says, ``After I have tried all of this, yes, free trade has a bit of an effect.'' It is a difficult task they face.
Mr. Stanford: One concrete example is the auto industry. When the dollar was falling and low, in the mid- to late 990s, we had a huge inflow of new investment into Canadian auto plants — on average, about $5 billion a year spent on new technology in Canadian assembly plants. That is exactly when our productivity took off significantly above the Americans. In this crucial industry — and there are others like it — a low dollar was absolutely consistent with increases in productivity. We are worried we will lose that advantage now.
[Translation]
Senator Hervieux-Payette: I will speak to you in French, because although your tables are in English, this is such a complex issue that discussing it in English is difficult for me.
Mr. Darby, when I look at most of the tables that show Ontario or Alberta as having the best productivity or performance in certain sectors, when I look at the forestry, wood products and furniture sectors and consider their combined performance vis-à-vis the oil and coal products, chemical and automobile sectors, I conclude that the Canadian economy is quite diversified and that the provinces have different vocations, so to speak.
Quebec and British Columbia appear to have similar parameters, with forestry being a fairly important industrial base, while Alberta has the mining sector. Alberta is also the only major oil producing province.
Is there any kind of direct link between the industry in which the provinces are involved and the geography associated with the sector? Quebec seems to be performing below Alberta and Ontario and much the same as British Columbia. Can we attribute this to the sectors of activity in which our respective provinces are involved? We are not about to become oil producing provinces overnight. I have not heard of any oil wells having been discovered in Quebec.
Is there a direct link between the nature of the sectors of activity in each province and productivity? Do have any statistics that you can share with us, Mr. Baldwin?
Mr. Baldwin: Perhaps 80 per cent of the difference can be attributed to geography.
Senator Massicotte: To geography or to the nature of the sectoral activity?
Mr. Baldwin: To the nature of the sector.
Senator Hervieux-Payette: This is linked to geography. I observed the very same thing in Mr. Stanford's tables. Of course, I would also have to include the financial industry, a sector largely based in Toronto, Ontario. We note that profit margins are much higher in Ontario and Alberta compared to the rest of Canada. Therefore, my hopythesis is based on the fact that there are some realities that we cannot change. Moreover, in sectors where change is possible, we look at productivity figures. However, it will not be easy to change the overall economies of each province. From a geographical standpoint, there are some things that we cannot change. I found it interesting to note that a percentage of productivity levels can be traced to foreign investments. In your opinion, is the Canada-U.S. Free Trade Agreement responsible in part for these foreign investments? Labour costs may be cheaper and we have an excellent health care system. Is it possible to pinpoint the factors that have brought about this increase in foreign investment? A number of barriers to foreign investment remain, including certain types of taxes. Would the level of foreign investments improve if, in addition to having access to the US market, foreign companies were subject to the identical taxation regime as Canadian companies?
Mr. Baldwin: We have not done any studies in that area.
Senator Hervieux-Payette: Mr. Darby?
[English]
Mr. Darby: The evidence on what determines foreign direct investment is tough. We have done surveys ourselves, both domestically and abroad, in terms of what factors would seem to explain foreign direct investment coming into Canada. Mr. Stanford makes a good point that, at a lower dollar, our labour costs in U.S. dollar terms are cheaper.
In addition, health care costs do come up as an important issue in terms of comparative costs between Canada and the United States. Americans see the overall labour cost including benefits as often being lower in Canada than the United States, particularly at a dollar that is attractive.
There are other issues around foreign investment that have to do with things such as political stability, and they are important. They do turn up in our surveys with respect to investing in Canada.
Also important, frankly, are the prospects entrepreneurs see for future profitability in various sectors. Investment in the oil and gas sector in Canada is beginning to take off for the simple reason that investors looking realistically at the market see a very good rate of return, given world oil prices. That is potentially the most important determinant of FDI coming in.
There are a number of factors. There was a time in the late 1990s and early in this decade in which, when we looked at our share of inward FDI, it had shrunk dramatically from what we had seen in previous decades, causing us to worry about whether Canada was seen as being an attractive destination. Potentially, because of the higher dollar, that may have changed the views of foreign investors. We are seeing that turn around again in the last year, partly because of investment in the oil patch. That is related to future profitability prospects, given high world energy prices. There are a lot of different factors on FDI, the dollar being one definitely.
The Chairman: Mr. Stanford, would you like to comment?
Mr. Stanford: I am a strong supporter of incoming foreign invest. It must be part of our overall investment strategy, although we need to have tools to ensure that incoming investments do respect Canadian priorities and social benefits and so on. Free trade has been disappointing in terms of its impact on foreign direct investment. At the time of the deal in the late 1980s, it was heralded that being an exporter to the U.S. would bring in a flood of new investment. In fact, it has had the reverse effect. Slide 18 in my deck shows the changing balance between inward foreign investment to Canada and outward foreign investment from Canadian corporations. About $80 billion more in direct investment has left Canada since free trade than has come to Canada. Slide 20 in my deck confirms Mr. Darby's suspicion that much of the investment that has come has been focused in the energy and mining industry.
The health care issue is very important. In the auto industry, we have tried to quantify the value of medicare to the international cost comparisons that a company makes. We think our medicare system is worth about U.S. $4 per hour worked in a Canadian assembly plant. It explains why our health care costs per vehicle add about $150 to the price of a vehicle here compared to $1,500 per vehicle in the U.S. That is a huge factor in attracting incoming investments.
[Translation]
Senator Hervieux-Payette: We have reached a point where we are subsidizing the Americans because they are the ones buying the same vehicles. However, that is merely a comment. You are suggesting that more profits be reinvested. You have not said much about taxation. Would the complete elimination of the capital gains tax create a climate conducive to profit reinvestment?
[English]
Mr. Darby: Absolutely, yes.
Mr. Stanford: There is a tax contribution, but I would go in a different direction. I do not think the across-the-board tax cut has had any impact or that capital gains will have any impact. That is all in the stock market, and not in the real world where we invest.
This is what I would do. I would increase the basic corporate rate again and then give a 100 per cent — I will think big here — depreciation allowance for companies. In other words, companies can write off the full cost of fixed capital investment in the year they make them. There is a huge tax incentive, but you have to do something to get it. Regarding an across-the-board tax cut, you do not have to do anything to get it.
The Chairman: You are more generous that the ITC, who asked for a 50 per cent allowance. You are much more conservative in your tax policies that even the ITC.
Mr. Stanford: Think big.
[Translation]
Senator Massicotte: According to the charts on page 6, Canada's GDP compares favourably to that of the United States. If we were to do the same analysis of the GDP on a per capita basis, would the results be similar?
Mr. Baldwin: I could not say.
Senator Massicotte: Still according to the charts on page 6, we see that the number of hours at work in Canada compare favourably to the figures for the United States.
However, according to the chart on page 9, the hours of work per capita account for two-thirds of our GDP gap. Is that correct?
Mr. Baldwin: The chart on page 6 shows growth trends.
Senator Massicotte: I realize that, but on page 9, in terms of productivity gaps in the GDP, the overall number of hours of work per capita accounts for two-thirds of the gap. Is that correct?
Mr. Baldwin: Yes.
Senator Massicotte: Yet, when I look at the hours of work per capita on page 9, this suggests that Canadians work fewer hours than their American counterparts. As I understand it, on page 9, these are per capita figures, while on page 6, the figures reflect the total population.
Mr. Baldwin: On page 6, the reference is to growth trends in respect of the total number of hours of work in the Canadian economy. On page 9, we compare the levels in Canada and the US.
[English]
We could start and do just as well over time as the Americans on page 6, but be starting at a level that is quite different.
Senator Massicotte: Your starting point is wrong. It is not wrong, but that is the difference.
Mr. Baldwin: We have been behind continuously is what this suggests. We have continuously worked fewer hours and we have had less of our population at work than the Americans.
Senator Massicotte: The trend is similar, but the starting point is different.
Mr. Baldwin: Starting point and end point.
Senator Massicotte: If I jump quickly to Mr. Darby, I am trying to understand your page 6 and your page 9. How do I read this? In other words, some industries I presume are more productive than others. How do I read these pages?
Mr. Darby: On page 6, what we have tried to do — it is based on work done at Industry Canada, so we cannot take credit for the work. Industry Canada has published data on labour productivity by industry in Canada compared to the United States.
Senator Massicotte: How do I read this?
Mr. Darby: Let us take an industry such as textiles and clothing. The data here suggest that in 1999, using an exchange rate of 67.4 per cent, which is roughly what it was in that year, textiles and clothing was only roughly about two thirds as productive as textiles and clothing in the United States.
Senator Massicotte: The labour productivity column is the important one in your view; correct?
Mr. Darby: The labour productivity column is the one we have been focussing on. I prefer multi-factor productivity, but there are measurement issues for sure.
If the number is larger than 1, we would argue that productivity in Canada was in fact lower than in the United States.
The Chairman: Mr. Baldwin, do you agree with that?
Mr. Baldwin: I am not familiar with that table.
The Chairman: If there is any qualification after the hearing, please get back to us on that.
Mr. Baldwin: Sure.
Senator Massicotte: I offer a work of caution. In the report from the Conference Board of Canada, your narrative would suggest otherwise. In other words, you indicate that the forestry industry is more productive than the American industry. I would read it differently.
Mr. Darby: For all of the service industries, we have suggested that our productivity is less than in the United States. This is the ratio of Canadian productivity to Americans.
When Mr. Stanford is talking about the auto industry, the ratio of productivity at this PPP exchange rate is certainly greater than 1, which supports the suggestion that we are more productive than the Americans.
Senator Massicotte: Therefore, if it is higher than one, it is good.
You conclude that any impediment to trade is negative. Specifically, what two or three things would you mention?
Mr. Darby: The most general impediment to trade is the exchange rate. Another would be tariff rates, of which we have almost none left, particularly with the United States. Non-tariff barriers as a result have become the most important. Procurement rules are a real issue. I would argue that perhaps the most single non-tariff barrier left are in fact rules around procurement. Therefore, government agencies, for example, are not buying from producers unless they have plants resident in their political jurisdictions and the Buy America program on the other side of the border is a good example of this.
Senator Massicotte: Could you give us a note indicating what the barriers to trade are — because you conclude that any barrier to trade is negative. Vis-à-vis the exchange rate, are you suggesting that we change the monetary policy?
Mr. Darby: Not at all. It is just a general factor, and we have talked about that this morning at length.
Senator Massicotte: Mr. Stanford's observation was that when the exchange rate was low, our Canadian dollar was low. Obviously, exporters were advantaged. In fact, contrary to some theory four or five years ago, we actually saw a significant amount of investment. Do you agree with that observation?
Mr. Darby: I would agree with that. That is a very interesting issue that we do not necessarily take into account. I applaud Mr. Stanford for bringing it forward. We would have to look at the relative weight in terms of the importance of that investment on productivity versus the weight we would have to give to the fact that less productive firms could continue to survive in that lower exchange rate environment, which gets back to Mr. Baldwin's research on the impact of the free trade agreement on the disappearance of less productive firms. Two or three forces will be opposing each other in this discussion.
The Chairman: We do have evidence from the Bank of Canada — and Senator Massicotte was on the board there. We will try to look at the information on the impact of a lower or higher dollar in terms of its impact on productivity.
Senator Massicotte: We assume that it helps exports, but we import nearly as much as we export. What about importers — were they more productive?
Mr. Darby: I do not have that information, but definitely, yes, it lowers input costs.
Senator Massicotte: Business people argued some time ago that the dollar was too low and, therefore, that is why we are not being productive, we are not invested enough, but we actually saw it differently. If the theory holds, then importers should be doing exactly opposite what exporters do.
The Chairman: Senator Massicotte has put his finger on an issue. There is much conventional wisdom on the rise and lowering of the dollar. The data is not conclusive. We are trying to get at it as best we can. We would be interested in your views be this as well, Mr. Baldwin.
Mr. Baldwin: You should probably wait for the Bank of Canada presentation. We have done a joint study with them.
The Chairman: We have talked to the bank about this.
Mr. Baldwin: We have done a joint study and find very little influence.
Senator Tkachuk: Mr. Stanford, when you say, and others have alluded, that there was more investment in the automobile industry when the dollar dropped, when the dollar was at 65 rather than what it is now, what about the farmer in Saskatchewan who had to pay more for the combine and chemicals he was importing, the person who had to pay more for a TV set? Was that not a transfer of wealth, to compensate for the fact that someone could buy cheaper cars that were made in Canada?
The Chairman: Relate that then to the productivity factor within the agricultural sector.
Mr. Stanford: They were paying way more money.
The Chairman: There is a relationship as well to the productivity factor within the agricultural sector.
Mr. Stanford: Presumably, the farmer in Saskatchewan was selling a fair chunk, if not the majority, of his output to global markets. The deteriorating Canadian dollar translates to an increase in his income, which, if he is adding value in his operation, will more than offset the cost of the combine. If it is a value-added farm — that is, they are producing more than the cost of their combined inputs — his output will be more valuable in Canadian dollars. The cost he paid for his combine will be higher in Canadian dollars, but since he produces more than he pays — since he is running a farm, he has to stay in business — he should be a net winner. Any Canadian producer that sells into global markets will be a net winner when the dollar is lower rather than higher, because of the value-added in the Canadian economy.
Mr. Baldwin: There is an additional complication that we should not ignore when we are talking about the Canadian economy. Much of the discussion that has taken place this morning has been about the extent to which as the exchange rate changes the relative price of capital goods changes, because we are talking about imported capital goods. That is clearly important in the automobile industry, where a lot of the machinery and equipment comes from abroad. Less than half of our total capital stock comes from machinery and equipment.
We invest huge amounts in the production process in buildings, in what is called engineering construction. Farmers put a very large amount of investments into improving their land. Because of our economy, we put huge amounts of investments into our railways, into electrical investments and into communications investments. It makes up a much larger percentage of our total economy than it does for most other economies in the world. Most of that comes from domestic resources. Therefore, much of this discussion is not relevant to that and yet that part of our economy is very important and should not be forgotten.
The Chairman: Mr. Baldwin, if you have any statistics on that particular point, please send them to us. That would be useful.
Senator Massicotte: Mr. Darby, it is public knowledge that productivity became unglued from investment, contrary to the previous 20 years, in the last four or five years. What are your thoughts on that? Why is that the case?
Mr. Darby: Again, I am not sure I have the absolute answer or that I have done detailed research required to answer your question directly. In the first part of the 1990s, much of what went wrong, especially with measured labour productivity, has a lot to do with the fact that the Canadian economy was not doing very well at that time. We were in a very bad recession for the first couple of years of that period and then we went through what was called a jobless recovery period.
The Chairman: We have that evidence. Is there anything new that you wanted to add?
Mr. Darby: No. That is the point and the best to that question.
[Translation]
Senator Plamondon: In light of the testimony that we have heard, I get the impression that Canada is becoming a country to which the multinationals contract out work..
You spoke of foreign investment. Let us take the example of a person who wants to invest in Canada in order to set up production facilities. If his company's productivity performance in Canada is not good enough, he will opt to move his production to another country where productivity standards are different than the ones you mentioned. Two countries that come to mind as possible destinations are China and India, for example.
Let us set aside the United States for now. We have examined a number of charts showing the situation in that country. In the textile sector, for instance, the United States is not about to pose a threat to our jobs. However, regardless of the productivity of Canadian textile industry workers, there is a real possibility that we may lose jobs to other countries.
Are we not becoming a nation of subcontractors, from the standpoint of foreign investment? Are we not in the process of losing our assets?
You spoke of barriers, Mr. Darby. I am concerned to hear you label regulations, safety standards and unions as barriers.
At one time, I sat on a committee that was examining the Free Trade Agreement. The committee hoped that this accord between Canada and the United States would give consumers the best of both worlds and better standards for Canadian and U.S. goods. If a certain type of labeling was adequate in the United States, then it could also be approved for use in Canada. Unfortunately, that is not what in fact happened. The lowest common denominator prevailed.
My sense is that from a prospective investment standpoint, Canada is increasingly viewed as the lowest common denominator. From a social standpoint, Canada is regressing. When I hear comments to the effect that health care and safety standards are a barrier to foreign investment, I have to wonder how far we can take our productivity standards which cannot easily be compared with those in place in India and China.
[English]
Mr. Darby: That is an excellent question. It gets back to the point that there are more goals for a society than simply having high productivity or high GDP per capita. You may have a very high GDP per capita, but you may be living in a soup of toxic gases. Regulations can be used as barriers or viewed as barriers to competition, but we put regulations in place for other reasons. In many cases, they would be valid regulations to protect consumers or to protect workers or to achieve desirable social goals.
Yes, I take your point. However, we have to recognize the fact that there is a regulatory burden and that we have to be careful that that burden is as low as possible, consistent with our social goals. We want to ensure that the regulatory system is efficient. We want to ensure that regulations are in place to protect consumers or to protect society or lead to the more efficient working of society, not simply put there to make sure that the competition is not able to play on the same playing field.
Mr. Stanford: Senator, referring to the challenge coming from the emerging market economies — you mentioned China and India, and there are others as well — this is a challenge being felt in textiles today. It will be felt in automobiles, aerospace and other high-technology sectors imminently. We are already seeing it in the auto industry. For example, in Canada, although we have an overall trade surplus in automotive products, we have a $7-billion trade deficit in our automotive trade with emerging economies, Mexico, China, Korea and others. That will grow.
The Chairman: Can you give us those numbers objectively, from another source?
Mr. Stanford: I would be glad to report to your staff.
The other point is that two thirds of that deficit is due to imports of finished vehicles, not component parts. You hear this argument — I read in the paper the other say an individual from Watson Wyatt giving us advice on how to become more productive: Outsource as many jobs to China and India as you can and keep the value-added jobs here. When you are importing the finished vehicle, or the finished aircraft — which we will do soon from China — there are no value-added jobs to keep, except maybe in the auto dealers that are selling them.
The Chairman: We also heard Mr. Stronach say that there was a meltdown in North America and in Europe with respect to automobiles coming from these other sources as well.
Mr. Stanford: This explains part of the puzzling weakness in business investment in Canada that I have alluded to, despite the record profits and despite falling taxes. A lot of companies are saying, I am making good money in Canada for now, but looking forward I will make more money if I go there. It is a huge challenge. It is one where we have to rethink our traditional trade liberalization world view. The dislocations that will result from increased integration with China, in particular, will be too massive for us to tolerate. We will have to break away from that traditional mould, perhaps under the umbrella of those sector-specific strategies that I referred to in my presentation.
[Translation]
Senator Plamondon: Since investment comes from foreign sources, as do decisions, could Canada not demand, as a pre-condition, that machinery be upgraded? When equipment begins to deteriorate and no significant sums of money are invested to upgrade it, workers — at least those in my region — take this as a sign that the plant is on the verge of closing. Workers cannot be productive if they are operating outdated equipment. Furthermore, permanent ongoing training should be in place for workers to keep them abreast of the latest technologies, in the event another company might be willing to invest in the business if the plant shuts down.
[English]
Mr. Darby: The last point is very important. Much of the research we have done has shown that Canada's record on continuous learning, on-the-job training, is very poor compared to other industrialized countries. We do a poor job of continuing to train our workers as they move through life. It is an area where we really have to do better.
Mr. Baldwin: I talked earlier about the importance of capital intensity in contributing to labour productivity growth. There is also literature and some work that has been done looking at changes in the composition of the workforce — the Americans describe this as the quality of the workforce — and the extent to which this has been an important contributor to productivity growth over time. Indeed, in that area, Canada and the United States resemble one another. We have both been improving the extent to which our labour force can work with machines and is better qualified to do that. That has made an important contribution to our productivity growth over time. Whether we continue to do that will depend upon whether we continue the investment in education, training and other things that have done that in the past.
Mr. Stanford: Generally, I accept completely the value of skills and education for society as a whole. It is not really the crucial missing ingredient, however. Whether it has been an industry that has been successful, such as auto, or an industry experiencing a crisis, such as textiles, the actual skill quality of the workforce is not crucial in either case. Canadians are generally well trained, well educated and capable. What is missing in the textile industry is updated capital stock, updated investments in machinery and equipment that can allow Canadian-based facilities to compete globally. That is the most crucial ingredient.
Senator Moore: My question relates to the issue Senator Plamondon raised. We heard comments from Mr. Stanford on the importance of business investment in plant and equipment. In reading the national press this morning, I see we have a 42 per cent illiteracy rate. Where does that fit in terms of the productivity performance of our economy? You just said that skill quality is not a factor. That may be okay for the people who are currently in industry as workers, but what about replacements, people who would like to get in? Education is very important to me and to others around the table. I want to hear more comments from you gentlemen with regard to the role played by education with respect to the economy in terms of basic literacy, ability to work in numbers and the need for lifelong skills and learning.
You touched on it earlier, Mr. Darby.
Mr. Baldwin, do you have anything else to say about that? I do not see how you can say that skill quality is not important. I think it is very important.
The Chairman: Those numbers came from Statistics Canada. They were published today. Maybe you could give us a comparative analysis between functionally illiterate in the workplace, which Senator Moore refers to, and the same number in the United States, if there is that similar number.
By the way, Senator Moore puts it very well: We noticed that all of the witnesses were very light on the nature of education and the role it plays in terms of productivity. You reiterated the same today. We are interested in this topic.
Mr. Baldwin: I am not sure if I am the appropriate person to respond because I said that I thought it was terribly important and our studies show it is important. I did not prepare myself to discuss the release today. I do know something about that literature and the numbers that have been produced.
The Chairman: Please send it to us, make just a brief comment today, and we will hear from the other two witnesses.
Mr. Baldwin: Most of this morning's newspaper articles discussed the tail of the distribution. Only in the last part of the article did they note that Canada ranked relatively high compared to other countries. The mean is not a disaster by any means. However, there is a tail and that tail does look a little different occasionally from other countries. You should also remember that we have an economy that has not always valued some of those skills the same way other economies have and for a long period of time have provided well paying jobs in the resource sector that did not require the same degree of education as elsewhere. That is changing. That is partially what you see in some of these numbers. Over time, we have been upgrading our skills and have done so considerably. That has contributed to productivity growth in those industries where that has occurred.
The interesting policy question to me is whether or not we will have to increase the rate at which we upgrade those skills in the future across the board? We have several studies that are available on our website that look at the extent to which the skill upgrading has differed across industries and where it has been increasing most and where it has been increasing least. I would be glad to send you those particular studies.
Mr. Stanford: I would not for a moment want to suggest that education was not important, especially, if my two daughters are listening today. I completely support allocating more resources to training. I am saying that it is not a lack of skills that explains our poor productivity performance, and we will not solve that performance by embracing this idea that we all have to get more skills. There is a huge portion of our workforce that underutilizes the skills they have today. Our performance in terms of most educational indicators, school enrolment, basic education completion, post-secondary enrolment, compares favourably, typically, at the top, but there are a couple of specialized areas where we lag. Blue-collar skilled-trade apprentices are in short supply in Canada, and we do a lousy job of supporting apprentices. Masters and higher-level education is a factor that Roger Martin's group has emphasized. In general, a lack of skills is not our problem.
Mr. Darby: From a slightly contrarian view, my sense is that lack of skills has hurt us in the second half of the 1990s, and there are issues going forward that I think will only get worse. We have very high rates of post-secondary education, but we do not have comparatively high rates in engineering sciences or technical trades. We are looking at a changing workforce, as Mr. Baldwin has said, that is emphasizing a higher level of skills even in traditional jobs. What concerns me more is that when you do surveys of workers on the job, they tend to rate their literacy skills much higher than objective tasks. In other words, people actually think they know but they do not know.
Hence, I would argue that this is an area that we need to be concerned about going forward, and especially as the nature of work changes.
Senator Moore: If we are talking about enhancing the rate of productivity and providing incentives for investment in plants and equipment, why would we not look at some sort of policy that would provide similar incentives for people who work in the various sectors of our economy? That is just as important an investment, perhaps, as plant and equipment.
Senator Massicotte: Two thirds of the GDP per capita gap is number of hours worked, one third is productivity gap, is that correct?
Mr. Baldwin: Yes.
Senator Massicotte: How much of that one third existed in 1961? How much is historical structure within our economy and how much is lack of efficiency of our companies, if you wish?
Mr. Baldwin: I cannot answer the question. The study that I have referred to and made use of today only looked at the late 1990s. We have not taken it back to that point.
Senator Oliver: Mr. Darby referred to productivity-enhancing investments that are required in Canada both for labour and capital. Could you give us more details on the types of productivity-enhancing investments you would like to see?
Mr. Darby: It would depend by industry, but we are looking at investment in more modern equipment. The plant in some ways has become less important. It is a shell for the machinery that is in place in the plant. We need to pay some attention to the small and medium-sized enterprises. They are somewhat of a forgotten sector, in terms of the kinds of investments they have put in place. We need to ensure that they receive support, so they know the latest technology available to them and learn how they can become more efficient and best use this technology.
The Chairman: Thank you, gentlemen. Your testimony was very compelling.
I should like to welcome our next panel. We shall begin with the representative from C.D. Howe Institute.
Please proceed, Mr. Guillemette.
Mr. Yvan Guillemette, Policy Analyst, C.D. Howe Institute: Thank you for inviting me to address the important topic of productivity in Canada. I have prepared a brief statement. The C.D. Howe Institute and others have done work on this topic over the past few years that can help shape policy. Let me draw what I believe are the most important points from that research.
First, in a 2003 commentary for the C.D. Howe Institute, I discussed some evidence to the effect that population aging may exert a drag on the future rate of productivity growth. We also know that aging will slow down the growth in labour input to a halt and could possibly slow down the rate of capital accumulation through its effects on savings. These projections make it all the more important and urgent to focus on raising productivity in this country.
A central determinant of labour productivity is the rate of innovation, new ideas and technologies that improve the efficiency with which firms and workers use the capital at their disposal. Governments in Canada have understood that innovation is important, and today Canada has one of the most, if not the most, generous systems of tax assistance to R & D in the world.
Despite that generous tax assistance, the latest OECD numbers put Canada's R & D spending as a share of GDP just below 2 per cent. That is about middle of the pack compared to the other OECD countries, and less than half the levels of the leader countries like Sweden.
A study by Rick Harris, to be published next week by C.D. Howe Institute, discusses why this may be the case. Harris identifies a number of roadblocks that stand in the way of raising R & D spending in Canada. They include the relative openness and small scale of the Canadian market relative to the U.S. market and other big economies, the forces of agglomeration acting upon private-sector R & D activities within North America, and the state of Canada- U.S. economic integration, which has so far, not been extended to include the U.S. innovation system.
In my view, the second factor, agglomeration forces, is especially crucial. Because the forces of agglomeration of R & D activities are so strong, and because of the natural advantages of the U.S. in attracting such activities within North America, it may be far more beneficial for us to focus on facilitating R & D transfers from the U.S. rather than offering costly tax breaks to attract these activities here. There are studies that demonstrate large spillover effects from the U.S. R & D into Canada. According to one prominent study, the average value of a dollar of U.S. R & D to Canadian productivity is 78 per cent of the value of a domestic dollar of Canadian R & D. As Rick Harris from the study I cited earlier puts it, ``Given that U.S. R & D spending is about 40 times that of Canada, this implies that U.S. R & D spending is at least far more important for Canadian productivity growth than is Canada's own R & D spending.'' We cannot do much, policy-wise, to stimulate R & D spending in the U.S, but what we can do is facilitate transfers of technologies from the U.S. to here through the spillover effects that I alluded to.
It is now a well-established research finding that one of the main channels through which foreign technology spills over into Canada is foreign direct investment. Therefore, one of the most important things that Canada can do to profit from U.S. R & D is to facilitate investment by U.S. and other countries' multinationals in Canada, in particular. However, investment from other countries investment is not only a channel for international technology transfers, but the amount of physical capital as we have heard from the three other witnesses is itself a determinant of labour productivity because capital goods embody the technological advances that arise from innovation. Therefore, it is crucially important that Canada become an attractive investment location. Unfortunately, it is not.
Canada's share of the world foreign direct investment, FDI, stock is lower now than it was 10 years ago. Canada's share of North American FDI is lower now than it was 10 years ago. Canada's share of whatever foreign direct investment the U.S. is exporting abroad is lower than it was 10 years ago.
As my colleagues Danielle Goldfarb and Bill Robson show in a short paper released just last week that I have distributed to all of you, not only our foreign investment performance but our overall investment performance lags behind other OECD countries and especially behind the United States. Business investment in machinery and equipment per worker was roughly 10 per cent lower in Canada than the average OECD country from 2000 to 2004, and roughly 17 per cent behind the U.S. for the same period. That is Can. $1,800 less in investment per Canadian worker than the U.S. That is in figure two on the handout have you.
There are many reasons for that. I would pinpoint two areas in which we can most easily take action. The first is the restrictions we still have on foreign investment. We still have foreign ownership restrictions in a number of sectors, for example, that serve no useful purpose. We have screening requirements on foreign investment. These reduce our attractiveness as an international investment location.
Taxation also plays an important role. Unfortunately, Canada still has one of the highest effective tax rates on capital among industrialized countries. According to the latest estimates from my colleagues Jack Mintz and Duanjie Chen, our business investment taxes are still the third highest in the world, in a sample of 20 industrialized countries. Only China and Germany have effective tax rates on investment higher than us. Reducing taxes on investment would stimulate both domestic and foreign investment. In a study last year, Mr. Mintz and I estimated that each percentage point reduction in that statutory corporate income tax rate in Canada could increase the inflow of foreign investment in Canada by more than $1 billion a year.
There are many ways to set about raising productivity, but in my opinion the low-hanging fruits currently lay in the tax system. We have made progress on improving the investment climate over the past decade, but other countries are also making progress and we must keep pace. In the U.S., President Bush has appointed a panel to draft a fundamental tax reform proposal expected by some to recommend an overhaul of the tax code that would drastically cut, if not eliminate, taxes on savings and investment. We do not need to wait to respond to U.S. changes. We can act now, or as soon as we have a functioning government.
Mr. Wimal Rankaduwa, Associate Professor, Department of Economics, University of Prince Edward Island, as an individual: Honourable senators, thank you for giving me this opportunity to appear before you. As I mentioned, I work as an associate professor of economics at the University of Prince Edward Island. I also work as an adjunct professor at Dalhousie University in Halifax, Nova Scotia. I plan to make a brief presentation based on a recent study, copies of which have been given to the committee already. This study reviewed the relationship between standard of living and productivity in Prince Edward Island relative to Canada and the United States.
The study used an accounting framework that relates the standard of living to a set of economic variables affecting overall economic performance and economic well-being of the people in the region. These variables include level of productivity, employment rate, participation rate, working age population rate, among other variables. In this study, I tried to identify gaps in the standard of living and productivity relative to Canada and the United States that prevails in the Prince Edward Island economy.
Some factors that may have contributed to these gaps were also examined. The study was done for the regional office of Industry Canada. I will present some of the main findings of the study in these opening remarks. I will be focusing on P.E.I. because it highlights the issues of the Atlantic region.
The period covered by the study is 1981 to 2001. The findings of the study can be summarized as follows. Prince Edward Island's standard of living improved at a faster rate than the Canadian average from 1981 to 2001. Despite these improvements, there has been a persistent standard of living gap on the island relative to Canada. The gap was about 33 per cent. Prince Edward Island's standard of living is 33 per cent below the national average. That is what it means.
Relative to the United States, the gap is about 43 per cent. If you take all of the states and provinces together, P.E.I. ranks the second lowest in terms of standard of living.
Senator Tkachuk: What is the lowest?
Mr. Rankaduwa: The lowest is Newfoundland and Labrador. There have been slight changes in recent years.
We looked at both per worker productivity and per hour productivity. I realize that the previous discussion focused much on per hour productivity. However, it is very important, if we are looking at the standard of living in the region, to look at the per worker productivity. Therefore, it is important to look at both per worker productivity and per hour productivity.
Prince Edward Island has only about 75 per cent of national per worker productivity, about 25 per cent below the national average when it comes to the per worker productivity. Relative to the United States, this gap is about 37 per cent. Actually, in terms of per worker productivity, P.E.I. has the lowest. It is the same when we look at even the per hour productivity measure. P.E.I. has only about 72 per cent of national per hour productivity, which is again the lowest in the country. Although the productivity per hour relative to Canada has increased over time, a gap of 28 per cent persisted over the period of 1987 to 2001.
In this study, we have identified the productivity gaps as the single most important contributor to the standard of living gap that P.E.I. has. This goes for all the other provinces in the region and for the region.
Senator Angus: The Atlantic region?
Mr. Rankaduwa: The Atlantic region, yes.
Employment rate was one of the variables we looked at. P.E.I.'s employment rate relative to Canada also remained below the national average. It was about 5 per cent below the national average.
One of the reasons my presentation is important for this committee is that in this presentation I ask for a regional focus in policy making. In the discussion that we hear about productivity, what we always hear is the concern for the national level of productivity compared to the United States. If you look at a region like the Atlantic region, you can understand how far below the region itself lies. If you are talking about a national productivity policy or productivity strategy, we should be taking into account every corner of the country. Promoting productivity in these low productivity areas will definitely contribute to the promotion of the national level of productivity. Therefore, the reason I am talking about P.E.I.'s productivity here is to ask you to focus on recommendations that take into account the regional and provincial concerns.
When we look at the industrial productivity gaps in P.E.I., we see gaps in construction, trade, provisional and technical services, education, accommodation and food services, health and public administration. In these areas, the productivity gaps have increased. In the productivity differences between Canada and the U.S., it is always highlighted that there are some high productivity industries in the United States and in Canada those high productivity industries do not perform well. When it comes to a region like the Atlantic region or Prince Edward Island, what we see is many sectors, not just those potentially high productivity industries, but many other sectors do not perform to expectations. That is of major concern.
In the previous discussion, speakers were talking about ways productivity can grow. Sometimes productivity can grow because the productivity within the industries itself has grown. The productivity can also grow because of the changes in the employment composition or the industrial structure of employment changes. In other words, when the employment share of high productivity industries increase, the productivity in the nation will also increase.
In our study, what we have seen is that when it comes to P.E.I., the slight increase in productivity was mainly due to the increase in productivity in the industries, not because of the shifts between industries. This clearly shows that there is a potential for improving productivity within these sectors and enhanced overall productivity in these regions.
We have looked at possible reasons for these productivity gaps. Among them, one of the variables we looked at was spending on research and development by various sectors in the jurisdiction. If we are making policies to promote productivity, those policies must be geared not only toward the short term, but also the long term. When you look at the long-term policies, we see that it is very important to invest in resources, which include human resources, which can generate higher productivity in future. In economics, people generally refer to investments in human capital as promising vis-à-vis improving productivity in the future.
The Chairman: I apologize for interrupting, but given the shortness of time I would ask you to wind up your presentation — because you have given us a very extensive written brief.
Mr. Rankaduwa: One of the main reasons that productivity gaps may be higher is due to very low spending on R & D in these areas.
There are other reasons as well, which I will address if related questions come up in the discussion.
The Chairman: I want to thank you for your written presentation. It is an excellent brief, and one that gives us a different perspective.
Senator Moore: Chair, before I ask a couple of questions, I want to put on the record that during yesterday's round table on productivity, Mr. Bruce Winchester, of the Atlantic Institute for Market Studies, provided information that I thought was quite inaccurate with regard to ACOA. He mentioned that, for example, the repayment rate figure of the loans put out was only 15 per cent. I did some homework last night, and the fact is the repayment rate is 92 per cent.
I will have a written paper prepared and submitted to the clerk of our committee.
The Chairman: Senator Moore, that would be terrific if you could do that. Could you also send a copy to Mr. Winchester, so that he can respond to your comments?
Senator Moore: Absolutely.
Mr. Guillemette, I was interested in the second page of your presentation with regard to investment. You say that it ``is crucially important that Canada become an attractive investment location. Unfortunately, it isn't.'' What are your solutions? You mention the restriction in foreign investment being removed altogether, a revamping of the taxation program. What do you see as the answers?
Mr. Guillemette: There are a number of things. In terms of investment attractiveness in general, the numbers I cited show that, compared to other industrialized countries throughout the word, we still have one of the highest effective tax rates on investment. That is a disincentive to invest, as much for domestic producers as it is for foreign producers. The tax system is the most readily available tool that we have to increase our investment attractiveness.
There are other factors, however, such as foreign ownership restrictions, which in a number of sectors do not seem to matter any more. Why do we have foreign ownership restrictions in the communications sector, for example? That is something I do not really understand. Why do we still have screening requirements for foreign investment in Canada? The Investment Canada Act sets thresholds above which investments must be screened; as well, paperwork must be done. Any investment proposal must be seen. Since the Investment Canada Act was passed in 1989, I believe, not one single investment has been turned down. Why do we still do this?
There are still trade restrictions, not necessarily tariff restrictions, but non-tariff restrictions like rules of origin requirements, which are a disincentive to foreign producers to establish themselves here in Canada because then they have to deal with that or they have to deal with the borders. Border delays are another disincentive.
The tax system is the easiest tool we have to deal with. We have to lower the general corporate tax rate. We are still above the OECD average. The OECD average corporate tax rate is 30 per cent. We are at 35 per cent. We are still above.
We can look at depreciation allowances to bring them in line with real economic depreciations on the number of assets. We are still far off the true rates of economic depreciation. We can look at withholding taxes. We can look at capital taxes that the federal government has pledged to eliminate, but not fast enough. A number of provinces still have capital taxes that they could remove. Ontario is planning to eliminate them by 2012, I believe. For sales taxes on capital inputs, a number of provinces could go to a value-added tax such as the GST, which does not penalize producers when they buy capital equipment. These things are all spelled out in a number of our publications that look at the taxation system.
Senator Moore: Mr. Jim Stanford, who was here earlier, thought that we should be increasing corporate taxes but, on the other side, provide a 100 per cent depreciation writeoff in the year of investment in plant and equipment. Do you have any comments?
Mr. Guillemette: I disagree with the recommendation to increase the general corporate tax rate. The goal is to create a level playing field between different industries, companies and sectors. If you jack up the general rate and then you give special investment tax credits to certain industries, or by sectors, what you end up doing is tilting the playing field between different industries. You do not want to do that. You want a tax system that is as neutral as possible so that investors and capital gets allocated to their best uses.
If you want to talk about fast writeoffs, or 100 per cent writeoffs, or eliminating capital gains tax, if you do only one thing, you end up creating distortions between the tax treatment of dividends, capital gains, and interest payments. We could go to a complete consumption tax system, where we would not tax savings, capital gains, or capital income any more. That is one possibility that the U.S. might be going towards. We could certainly look at that. However, I would argue against specific measures that would diminish the neutrality of the tax system.
Senator Moore: Mr. Rankaduwa, your study goes from 1981 to 2001. Have you looked at anything beyond that? At the University of Prince Edward Island, there seems to be a lot more things happening with respect to research and the establishment of the new national research facility on the island. Have you looked at those things? Is there any turnaround or positive development with respect to productivity on the island?
Mr. Rankaduwa: Spending on research in the recent years was not included in this study. We did not have the data. In listening to Mr. Baldwin, the data available to them is not easily available to anybody else. The data we used here did come from Statistics Canada, but we can get only a certain type of data.
There may be reasons, especially, when it comes to the industry-specific data and privacy concerns — things that are at play.
Senator Moore: Therefore, you do not have any response to the recent developments that I think are positive on the island.
Mr. Rankaduwa: Definitely, they have added to the capacity on the island. However, as I said in the paper, P.E.I.'s spending on research by all the sectors is less than 1 per cent of Canada. It is very low.
The Chairman: Again, what year — because there has been a dramatic change? I was at the University of Toronto recently, where 10 years ago they were giving $50 million annually for research but it is now $500 million annually. There has been a dramatic ramp up in research in natural sciences, engineering, ecology, and so on. It is important that we keep our data up to date. If you have up-to-date data for P.E.I, it would be useful.
Senator Tkachuk: He lives there.
The Chairman: There has been a huge ramp up in this last two or three years in this particular sector. I used the Toronto example, but it must be the same right across the country.
Senator Angus: Mr. Rankaduwa, with respect to P.E.I., you went to great lengths to tell us how bad it is there. Could you give us some reasons for that? I know it is in your brief, but what are the four main reasons?
Mr. Rankaduwa: If you look at the region, the provincial governments are concerned with many issues. I do not think it is an exaggeration to say that at no time in recent history, at least, were all the governments in the region so concerned with promoting productivity and trying to increase the inflow of skilled worker into the region. Productivity promotion is a major concern, and must be part of the overall strategy in the region.
If you are talking about policies in the Atlantic region, from the union side, they are arguing for higher wages. We have a major shortage of skilled workers. One reason we cannot attract skilled workers is that the wages and salaries are not high enough. However, raising salaries would amount to discouraging investments coming into the province. Immediately, there are some conflicting goals when it comes to policies.
The Chairman: Resolve that for us.
Senator Angus: I want to get to the reasons. I will put it to you this way. Senator Moore was a little bit upset, but I do not think with justification when he hears this. It was suggested by Mr. Winchester yesterday that there is a disincentive in Atlantic Canada to be productive and to work, according to him, because there are so many different government assistance programs available. I know I am generalizing.
Let me give you an example in Prince Edward Island. Near the Summerside end of the island, where there used to be an air force base, the government, working with federal agencies such as ACOA, has encouraged industries to come in, particularly, in the aeronautical field. These are government-assistance programs. To my personal knowledge, this has, in turn, has created jobs, where the people are learning skills and where the outputs are very exceptional, on the early returns, at least. I am not ready to accept the fact that government aid and assistance programs are not a good thing in areas, especially greenfield areas such as you have described. Can you comment on that, please?
Mr. Rankaduwa: The government's support for the industries may help in the need for increasing employment in these regions. However, increasing employment does not necessarily promote productivity, unless we really promote industries where the productivity can be improved. For the most part, industries were supported by these programs mainly because government wanted to increase employment. That is not unnatural, given that the Atlantic region has the highest unemployment rates in the country. That is why I mentioned earlier that it important to understand that there are special circumstances in designing policies for this region. If I can give voice to that, my presentation here has been worth it.
What happens generally is that we always look at the national question and we try to develop policies for the nation, at times without much regard to regional circumstances.
The Chairman: Just on that point, the Federal Reserve in the United States has made studies of regional markets. I was at a meeting in Chicago. We will be looking at this question as we consider your point. Your point has been well made. There is the national macro analysis, and then there is the more micro analysis as we go to regional markets.
[Translation]
Senator Hervieux-Payette: To answer the question as to why efforts are being made to prevent companies from gaining control over communications in Canada through foreign ownership restrictions, I believe the reason has to do with cultural property and the safeguards that are being sought from the World Trade Organization. This is an important Canadian value, particularly since the advent of convergence, where signal transmission can benefit the information technology sector and where the transmission of televised images, or in other words, cultural content, is possible. The two areas cannot be separated.
I had an opportunity to appear before the U.S. Federal Communications Commission. I have to tell you that barriers in place are greater still in the U.S., for security reasons. Those listening to us have to understand the reason for the 30 per cent limit — which can go as high as 40 per cent — on foreign ownership in the telecommunications field.
The presentation by the C.D. Howe Institute contains a table showing ``Investment per worker for provinces, Canada as a whole, OEDC countries on average and the U.S.''. Can you explain to us the figure for Quebec, which is one of the lowest in Canada? The figure listed for Prince Edward Island is very low at $6,100, while the figure for Quebec is $6,500. Figures such as $7,000, $9,000, $10,000 and $11,000 are shown for other provinces. What is the reason for this low figure? What type of investment is an ``investment per worker for provinces''? Are we talking about overall investment, that is local and foreign?
Mr. Guillemette: Yes, this includes investment from all sources. In this case, we are talking about investment in machinery, equipment and infrastructure, about non-residential fixed-capital investments. Why are the numbers so low in Quebec's case? There are two main reasons. First, Canada has one of the highest effective tax rates on capital in the world, and the rate in Quebec is one of the highest in Canada. Despite the fact that Quebec has a lower corporate tax rate, other measures combine to make the effective tax rate higher. Therefore, if we were to consider Quebec as a country and compare it to other nations, the rate is very high. Not that I am suggesting anything!
Second, the rate of growth of Quebec's population is much lower than elsewhere, this according to research done by Mr. Pierre Fortin of UQAM. His study showed that in order to maintain a certain level of capital stock as the population grows, it is critical to invest. Capital stock always means worker capital. Population growth in Quebec is slower than elsewhere and therefore, less investment is needed to maintain capital stock at a certain level. If we look at this capital stock, we can see that Quebec's performance is not too shabby. However, this table shows investment and in that area, Quebec is not faring as well.
Senator Hervieux-Payette: There is a small dichotomy. Yesterday, we were told that only 30 per cent of the workers' funds were invested in the Quebec economy, while 70 per cent were invested in bonds and other securities that do not necessarily impact productivity in the manufacturing sector. Quebeckers already have an amazing amount of money accumulated in surplus savings in pension funds and these funds could be reinvested in some productive way in the manufacturing sector and in other profit-producing sectors, instead of being invested in government bonds. That is what I trying to get at.
Professor Rankaduwa, on page 34 of your document you focus on the ``GDP per worker relative to the United States''. We are not economists. On comparing the State of Maine to the State of New York, can you explain to me why the figure for New York is 128 per cent? Why is it higher than 100 per cent? I thought 100 per cent was the maximum that could be scored. Maine, with a rating of 79 per cent, has an economy similar to that of the Atlantic region, but its rating is 50 percentage points lower than that for New York.
[English]
The Chairman: Please give us a very brief comment. We would ask you to respond more fully in writing.
Mr. Rankaduwa: One hundred twenty-eight indicates that the state has 28 per cent more than the national average of the U.S. itself. That is what it indicates.
Senator Hervieux-Payette: Maine has 20 per cent less than the national average.
The Chairman: Witnesses and senators, thank you very much. This concludes this round table on productivity. We intend to proceed very swiftly and be as productive as possible. We will have draft recommendations ready by next week for senators to consider and, it is hoped, get the report out.
I want to thank our witnesses and the listening audience and others who have sent us material by email. We will consider it all. We will also take into consideration some information that has not been available, and that is the ``World Public Sector Report 2003 on E-Government at the Crossroads'' — which goes to productivity — published by the UN. We will take a look at the 2004 report.
We feel that we have had a snapshot here, and the snapshot is not accurate. We will respond in a report that is a snapshot report, but there is more that must be worked at here, both in the private sector and the government sector. The private sector has a huge job ahead of it to be more productive. The government has a huge job in showing leadership in terms of productivity. Educators and scientists also have a job to do. We are not as productive as we would like to be. We will make some strong recommendations about how to increase productivity in Canada. We are falling behind and we do not like it.
I want to thank the senators for their diligence. We will get the report out as quickly as possible. This session and the evidence on this matter is now terminated.
The committee adjourned.