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Eric Lascelles, chief economist of RBC Global Asset Management
Eric Lascelles, chief economist of RBC Global Asset Management

Eric Lascelles

Shrugging off Canada's competitiveness shortfall Add to ...

Canada’s competitiveness collapse since 2000 has attracted a deluge of attention and distress. What was once an outright competitive advantage has eroded into a 30-per-cent shortfall versus the United States. This is worse than Greece’s deterioration relative to Germany over the same period.

This development is indisputably bad news for Canada. Fortunately, we suspect the problem is both more understandable and less dire than it seems.

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First, let’s face facts. There is very little that can be done about Canada’s gaping competitiveness shortfall. Almost three-quarters of the gap is due to the soaring loonie, which is out of our control.

Of the remaining quarter, it is crucial to understand that it exists despite the best efforts of policy makers, workers and businesses, not because of them.

Canadian governments have unleashed waves of productivity-enhancing reform. The World Bank and others confirm this, consistently ranking Canada above the 90th percentile across a gamut of governance and productivity-supporting metrics. A structurally uncompetitive country like Greece plods along in just the 37th percentile. Canadian policy makers have clearly got the broad strokes right.

Could Canadian workers be the problem? Again, the answer is no. Canada has among the highest rate of postsecondary education graduates in the world, performs well above average (and the United States) in international testing, and has a superior (and more rapidly improving) labour quality than the United States.

Is it the fault of businesses, then? The evidence is more mixed here, but again there is no smoking gun. Canada’s capital investment growth rate is outpacing the United States and properly calibrated figures argue that Canadian businesses already have the higher capital intensity of the two. The universality of Canada’s inferior productivity – across virtually all provinces and sectors – points to macroeconomic underpinnings, not a scourge of complacent CEOs.

Our provocative conclusion is that the stubborn (and growing) productivity gap is the unavoidable consequence of being a nation endowed with resource wealth during a commodity boom.

Can it really be coincidental that fellow commodity heavyweights like Australia and Norway have experienced identical competitiveness swoons? The average resource-intensive nation has endured the same underwhelming productivity growth over the past decade.

Mercifully, Canada’s poor competitiveness just doesn’t seem to matter very much. Despite plummeting competitiveness since 2000, Canada has managed faster economic growth than the United States, more vigorous job creation (including fewer lost manufacturing jobs), and continues to gain on the United States in the UN’s Human Development Index.

Could this charmed existence eventually prove unsustainable, as it did for Greece? The evidence is to the contrary. Canada’s foreign financial indebtedness has not materially increased since the episode began.

Instead of bemoaning poor competitiveness, Canadians should applaud the astonishing resilience of their economy. Yes, during periods of high commodity prices, resource-intensive countries like Canada shed competitiveness. But this is paired with no obvious diminishment to well-being, thanks to the material benefits of the resource wealth itself. Meanwhile, when commodity prices are low, resource firms struggle, but rejuvenated competitiveness puts manufacturing back on the offensive. This is an impressive and likely durable balancing act.

Set competitiveness aside. Canada has other more serious policy problems to worry about.

Eric Lascelles is chief economist of RBC Global Asset Management.

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