Spurring innovation and improving post-secondary education in Canada will be crucial to boosting sluggish productivity growth, which is the most significant long-term threat to the economy, a new report warns.
Slated to be presented in Ottawa on Wednesday morning, the Organization for Economic Cooperation and Development’s latest Economic Survey of Canada draws attention to a complex problem that has long been a thorn in the side of Canadian economists and policymakers.
The dilemma laid out in the report is a familiar one. Despite rising per capita income, a growing labour force and soaring commodity prices, Canada’s overall growth in productivity -- defined as the amount of labour, capital and natural resources required to produce one unit of GDP -- has waned.
As the oil boom and high value of the loonie have pushed wealth westward, Canada’s productivity growth has been relatively flat in recent decades, and has actually dropped since 2002. Meanwhile, as the OECD observes, productivity growth south of the border has risen by about 30 per cent in the last 20 years -- a gap that is causing Canada to lose competitive ground.
“Canada is blessed with abundant natural resources. But it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and an equitable distribution of the fruits of growth,” study author Peter Jarrett, head of the Canada division at the OECD Economics Department, said in a press release on Wednesday.
But if the OECD recommendations are any indication, lifting productivity growth won’t be easy.
As the report observes, “Innovation is an exceedingly complex, lengthy and risky process.”
To this end, the OECD suggests increasing business investment in research and development (R&D); opening up “sheltered sectors” such as network industries and professional services to more competition; and replacing “inefficient” tax credits to small Canadian-owned private firms with more targeted direct grants.
To this end, the OECD suggests increasing business investment in research and development (R&D); opening up “sheltered sectors” such as network industries (Internet, telephone, etc.) and professional services to more competition; and replacing “inefficient” tax credits to small Canadian-owned private firms with more targeted direct grants.
“Business grant programmes have rarely been evaluated or culled, which has led to a
proliferation of small and fragmented schemes at both federal and provincial levels,” the report maintains. “This points to the need to consolidate programmes and improve business access to them.”
At the same time, the OECD calls for improvements in both quality and access to post-secondary education “to maintain the supply of highly skilled workers as the population ages.”
“Financial assistance to students should become more targeted and granted on a means-tested basis. This would help reduce the barriers for financially disadvantaged students and promote more socially inclusive growth,” the organization said.
Overall, the assessment of the economic outlook is relatively positive. Noting that Canada emerged from recession in relatively good shape, the report praises the “well earned reputation for fiscal probity,” and “appropriately accommodative” monetary policy. It predicts more than two per cent economic growth in both 2012 and 2013.
But the OECD identifies several other possible trouble spots, including record levels of household debt and growing income inequality, maintaining that as governments rein in deficits, “care will need to be taken to ensure that adequate social supports remain in place for vulnerable segments of society.”