Walid Hejazi is an associate professor of economic analysis and policy, and Daniel Trefler is the Douglas and Ruth Grant Canada Research Chair in Competitiveness and Prosperity at the University of Toronto’s Rotman School of Management. Their paper, Implications of Canada’s restrictive FDI policies on employment and productivity, was recently published in the Journal of International Business Policy.
Canadian consumers have long understood that they overpay for certain services. With the start of the summer travel season, Canadians will soon be returning with tales of how they flew within Europe for less than the cost of a taxi to the airport in Toronto, Vancouver or Montreal. They will recount their sticker shock at seeing advertisements for cellphone data plans that seemed to be missing a zero from the price.
In this country, cellphone plans, airline flights and banking services are all more expensive than in most other industrialized countries. These services have two things in common: They are dominated by a small number of large incumbent firms, and those firms lobby hard for barriers to foreign competition. As a result, Canada is ranked among the most restrictive countries in the Organization for Economic Co-operation and Development when it comes to protecting domestic incumbents from foreign competition.
Our recently published research shows that these barriers are not only costly to Canadian consumers, they also take a toll on the entire Canadian economy in terms of lagging productivity, fewer jobs and lower earnings.
Here is our main takeaway: Restrictions on foreign entry have cost the Canadian economy a whopping 137,400 jobs. Or, for those who prefer dollar figures, they cost Canadian wage earners $10-billion each and every year. The restrictions also slow down productivity growth, creating a drag on the economy.
What accounts for these results? When the telecom sector is not operating efficiently, this causes higher prices and reductions in the quality and depth of services offered. All individuals and businesses that require internet and telecom services are forced to absorb these inefficient outcomes.
When the air travel industry is protected, the cost of travel is higher, and business and other travellers are forced to waste valuable time connecting in inconvenient hubs, all of which eats away at global connectivity and productivity. It is also a hindrance to the growth of a robust domestic tourism industry, as it is cheaper for Canadians to fly to Orlando than Halifax or Calgary.
When banking is protected, borrowing costs are higher and credit is less available, particularly for more risky ventures. While our analysis identifies job losses that result from protecting banking, at least the industry gives back in exchange for protection. It saved Canada from the worst of the 2008 global financial crisis. This has branded Canada well. In that sense, a case can be made to maintain some protections in banking.
A similar argument cannot be made for either telecom or air transport. It is time the government lifted restrictions on foreign competition in both these sectors. These restrictions are outdated and cost the Canadian economy significantly in terms of productivity, employment and wage earnings. The restrictions also transfer wealth from consumers to incumbents, limiting broad-based prosperity.
Our fear of foreign competition in telecom and air transport is the result of well-honed messaging by industry giants. But this also makes us afraid of soaring into the ranks of the world’s most competitive economies. It’s time we put aside our fear of flying. And then, maybe one day our flights to Halifax and Calgary will cost less than the taxi to the airport.