The Truth About Canada (14 page)

In sharp contrast, Canada leads all OECD nations in higher education R&D expenditures as a percentage of GDP. Only Finland, in second place, comes close.

However, business R&D as a percentage of GDP in Canada is well under half the rate of the United States, and only about one-third the rate for high-tax Sweden, while the federal government’s R&D contribution is below the OECD average, and is expected to be lower still in 2008.
²

Want to know where the basic problem lies? The 2006 OECD
Economic Survey of Canada
puts it gently: “Federal and provincial governments have a more generous array of tax credits and grant programmes designed to encourage business R&D expenditures than most OECD members. Nevertheless, business expenditures on R&D as a share of GDP remain lower than in many OECD countries.”

As giant new annual corporate profit records have been set, corporate R&D spending in Canada as a percentage of revenue has, since 2001, remarkably been declining instead of increasing. Incredibly, the highly profitable oil and gas sector spent a pathetic 0.36 percent of corporate revenues on R&D in 2006, while the industrial average for corporations in Canada was 3.5 percent.

A good reflection of how poorly we do in R&D can be found in patents. In a list of countries, Canada was in 30th place in patents granted per million people during the years 2000 to 2005, far below the OECD and European Union averages. Measuring the number of patent applications per billion dollars of GDP, Finland, Japan, and Switzerland were all at four or over, Sweden and Israel were over three, while Canada was at
fewer than one per billion dollars of GDP. Measured another way, by the number of patents filed by Canadian residents per $1-million of R&D spending, Canada is ranked 26th.
³
Yet another way to measure patents granted is by the number granted per million people. Here, the Canadian record is just awful, at 35 in 2004. This compares with 874 for Japan, 738 for Korea, 281 for the United States, 275 for Sweden, and 222 for Finland.

In the information and communications technology (ICT) index, which measures per-capita usage of telephones, the Internet, personal computers, and mobile phones, Canada is down in 16th place. When it comes to the percentage of households with a home computer, in 2004 Canada was in eighth place among OECD nations, at about 69 percent, far behind Iceland at almost 86 percent, Denmark at over 79 percent, and Korea and Japan at just under 78 percent, but well ahead of 17 other OECD countries, including Australia, the United Kingdom, New Zealand, and also the United States (just over 65 percent).

The percentage of households with access to the Internet also varies substantially in OECD nations. Heading the list is Korea at 86 percent, followed by Iceland at just under 81 percent. Canada, at just under 70 percent, is just above the level of the United States, but well ahead of many other countries, including Ireland and Italy (both at 39.7 percent), Austria, the Czech Republic (19.4 percent), France, Greece (16.5 percent), and Hungary (14.2 percent). Japan was just under the Canadian level in 2004, as was the United Kingdom, at 56 percent.

When it comes to the share of ICT equipment in total manufacturing value added, Canada is in 15th place, far, far behind such countries as Finland, China, the United States, Japan, Germany, Korea, the Netherlands, the United Kingdom, and even Mexico, but ahead of 14 other OECD countries plus Russia, Brazil, and South Africa.
⁴

If we look at high-technology exports as a percentage of total manufacturing exports — that is, the exports of aircraft, computers, pharmaceuticals, motor vehicles, electrical equipment, and so on — Canada is way down in 39th place. We’re well below the OECD and EU averages, and even below Mexico. Despite the perpetual corporate rhetoric about our need for innovation so we can be more competitive, our high-technology
exports as a percentage of all our exports were lower in 2003 than they were in 1991, and well below the levels for 2000 and 2001.

Some comparisons. The United States’ high-tech exports as a percentage of total manufacturing exports amounted to 35.8 percent in 2003. The United Kingdom was at 34.7 percent. The OECD average was 24.5 percent, the EU 22.1 percent. Canada’s high-tech exports as a percentage of total manufacturing exports were a very poor 12 percent.

Measuring our overall manufacturing exports as a percentage of all exports leaves Canada in a dismal 34th place. But what else can you really expect when big business in Canada prefers to invest out of the country or keep its money in the bank or in foreign tax havens instead of investing to help build a more competitive, innovative, and productive country?

In spring 2007, Statistics Canada said it well. For most OECD countries, “growth in labour productivity was highly responsive to business research and development.
⁵

In the next chapter we’ll see how corporate Canada’s failure to turn its record profits into meaningful investment is affecting the standard of living of all Canadians.

15

PRODUCTIVITY IN CANADA

“Business in Canada gets a low mark …
woefully short of international results.”

T
o some, productivity is almost everything. Here’s Jeffrey Simpson of the
Globe and Mail:
“A politician who wanted to talk straight to the Canadian people … would discuss productivity morning, noon and night.”
¹
In another column, Simpson writes, “Without productivity growth, there’s no real economic growth, no real wealth creation, no improvement in the country’s overall standard of living.”
²

Not many economists would disagree. But now Simpson quotes from a study by a Toronto consulting company, Impact Group, which hits the nail squarely on the head, though it’s not the sort of thing you’ll ever hear from the Canadian Chamber of Commerce or the Canadian Council of Chief Executives: “Very few Canadian companies do research and development. Over seven years, only 9 percent of Canadian firms did R&D every year. The remainder did nothing or were ‘at best occasional performers.’ ”

Then comes something I never thought I’d ever see from Jeffrey Simpson: “The impact study doesn’t say precisely why [there’s so little R&D], but here’s a guess. The hidden issue of Canadian economic structure is foreign ownership. Canada remains too much a branch-plant economy, and branch plants don’t do much R&D unless bribed to do so by governments.”

Well yes, but a “hidden issue”? Some of us have been speaking and writing about this hidden issue for decades. The manufacturing industry,
which in other countries does much of business R&D, is over 50 percent foreign-owned in Canada. Why would big transnational corporations, mostly American, transfer their R&D out of their own countries to Canada, even with our big government incentives? And for U.S. companies specifically, why would they even consider doing so, given their government’s post-9/11 security concerns and paranoia.

According to our corporate community, our poor performance in productivity can be chalked up largely to our “high” taxes. (We’ll learn more about that mythology shortly.) But could there be another explanation? Philip Cross, Statistics Canada’s highly regarded chief of current analysis, writes, “As a long-time student of business cycles stated, ‘Of all the components of aggregate demand, it is the investment spending by firms and households that is the prime mover in economic fluctuations.’ … This fact has long been known and recognized.”
³

Right, and we’ve just seen in the last couple of chapters exactly how very poorly corporate Canada measures up in this respect.

How poor is our productivity? According to the OECD, in a list of 24 member nations, Canada was fifth in productivity in 1970, 12th in 1980, 16th in 1990, and 16th in 2000, and between 2000 and 2005 we were 20th of 29 nations in GDP per hours worked.
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By 2006, we had fallen further still, to 22nd place and by 2007 we were 47th in a list of 50 developed countries. Nice little trend.

Canada’s poor productivity performance compared to that of the United States should be viewed in relation to the extraordinarily lavish promises about the certain gains to be made following the signing of the FTA and NAFTA. As with so many other misleading or inflated promises, it hasn’t exactly worked out as we were told it would. Follow the figures.

Between 1960 and 1988, Canada’s GDP per worker was over 90 percent of the U.S. level for 24 of those 28 years, with a high of over 94 percent. In 1988, the year before the FTA came into effect, GDP per worker in Canada was 90.95 percent of the U.S. level. By 2005, after 17 years of free trade with the United States, it was all the way down to only 84.4 percent of the U.S. level.
⁵
By 2006, it was down again, to 82.6 percent. In the first 17 years of the FTA, from 1989 to 2005, the annual
growth rate in output per worker in Canada was lower than that for American workers in 13 of those 17 years.

Focusing specifically on business sector productivity, GDP per hour in Canada in 1988 was 86.21 percent of the U.S. level. By 2005, it was down to only 74.41 percent, the lowest level in 51 years! In 2006, we were down again, to 73.95 percent. Between 2000 and 2005, business sector productivity in Canada grew by only 1 percent compared to 3.3 percent in the United States.

In the period from 1995 to 2004, the average annual growth in GDP per hour worked in the OECD was 2.2 percent. In Canada, it was only 1.7 percent. All of the following countries were above 2 percent: Australia, Ireland, the United Kingdom, the United States, Greece, France, Finland, Norway, and Sweden.

Even some of Canada’s foremost economists seem perplexed by the extremely weak productivity growth in Canada. Terms like “an unprecedented divergence” and “a mystery” have not been uncommon. The developments are frequently referred to as “troubling” and “threatening to Canada’s future prosperity.”

Productivity expert Andrew Sharpe of the Centre for the Study of Living Standards points out that

most of the obstacles identified by the business community in the 1980s and 1990s as impeding productivity growth have been removed, yet productivity growth has never been worse.

The obvious question is why.

Growth in the machinery and equipment capital stock and capital-labour ratio has fallen off in recent years, reflecting slower investment growth. This has reduced the rate at which new productivity enhancing technologies are put into operation.

Even the
Globe and Mail
’s editorial page describes the private sector’s investment in the adoption of new technologies as “pitiful”: “Many
experts have blamed the failure to invest in information and communications technology, in particular, for more than half the productivity gap with the United States.”
⁶

David Crane of the
Toronto Star
also has it right:

Productivity is about innovation — about skilled employees working with advanced technologies generating high-value products and services that support good jobs and create the wealth for a successful society. Productivity is not about a race to the bottom, relying on low wages and a cheap dollar for success in the global economy. That is the route to a failed society.

And, to emphasize his point:

One problem in Canada is that businesses are much slower to equip their employees with the latest technologies than U.S. companies.

Innovation is critical in enhancing productivity. Here … business in Canada gets a low mark.

In 2005, the Information Technology Association of Canada said that Canadian companies invest only 43 percent of what U.S. companies spend per worker in information and communications technology. For 2003, it was $1,384 (U.S.) in Canada compared to $3,235 (U.S.) in the United States.

Let’s focus on the foreign-dominated manufacturing sector in Canada. Using 1992 as a comparative base year equalling 100, our output per hour in manufacturing in 2003 was 134.5 compared to 180.4 for the United States and 154.3 for Japan. In 1980, our manufacturing productivity gap with the United States was about 13 percent. By 1989, when the FTA kicked in, it was about 18 percent. By 2001, it had increased to a huge 33 percent. In 2000, labour productivity growth was over 6 percent. By 2006, it had fallen to minus 2 percent.

In January 2006, a
Globe and Mail
editorial on the productivity gap lamented Canada’s terrible record in productivity growth and the negative consequences for our future standard of living. Blaming “the private sector’s pitiful investment in the adoption of new technologies” and the failure to invest in information and communications technologies, the
Globe
advocated yet another round of tax breaks for large corporations.

But wait a minute. Big business has had a dismal record in new investment, not only new technologies but also overall in badly needed new machinery and equipment. This, despite the fact that in recent years corporate net profits have been at all-time record highs.

So if big business has been making record profits year after year and still not investing anywhere near enough to make us competitive in productivity, why advocate more tax breaks for the same gang? It makes no sense, particularly when corporate Canada’s share of national income has been increasing steadily while most Canadians have had to get by with tiny, if any, growth in their incomes. Based on their track record, big business (much of it foreign-owned) doesn’t deserve more tax breaks.

In 2005, at 2.1 percent productivity growth, Canada finally rebounded from the truly dismal record of 2000 to 2004, but by 2006 we were back down at only 1.2 percent. For 2007, estimates were that productivity growth in Canada would again be far below that of Finland, Japan, Germany, Britain, and France, and once again well below the U.S. level.