THUNDER BAY – POLITICS – Innovation and productivity drive economic growth. They allow countries to lead in today’s fast-paced global economy. They can raise living standards for everyone (if distributed fairly!). Nobel prize-winning economist Paul Krugman has said, “Productivity isn’t everything, but in the long run it is almost everything.”
For three decades, Canada has been lagging behind similar countries when it comes to innovation. Until about 1980, Canada largely kept up with productivity and innovation in the United States. By 1984, our relative productivity slipped to 90 per cent of the US – a decline, but still respectable. By 2007, our productivity was just 74 per cent of the US. From 1980 until 2011, productivity grew at just 1.4 per cent annually, compared to 2.2 per cent in the USA. Our Conference Board of Canada has consistently ranked Canada near the bottom of the largest industrial economies in terms of productivity and innovation. This productivity gap costs the Canadian economy billions of dollars and countless jobs each year.
Glen Hodgson, Chief Economist with the Conference Board of Canada, warns that, “If we continue to discount or dismiss the productivity issue, Canadians’ future incomes will be threatened.” It is diminishing Canadian income today, too. Our productivity gap has meant that Canadians earn at least $7,000 less per capita than their American counterparts. This shortfall is triple what it was 30 years ago, and it is steadily widening.
When we take a closer look at the numbers, we find that a lack of innovation is largely responsible for our decline in productivity. Experts say that labour productivity depends on three factors: labour skills, labour-enhancing capital and “multifactor productivity” (commonly known as innovation). In the first two categories, we are actually outperforming the United States. However, when it comes to innovation, Canada has seen zero growth since 1980.
What is the problem with innovation in Canada? Innovation tends to happen in sectors like value-added manufacturing, through research and development. At the end of the 1990s, Statistics Canada indicates that 60 per cent of Canada’s exports were value-added. Today, that number has dropped to just 40 per cent, as we focus on exporting raw crude oil at a huge discount. The Canadian economy has shifted toward increased exports of unprocessed resources, and our productivity and innovation has plummeted.
So, how do we pull Canadian innovation out of its downward spiral, and encourage the kind of value-added production that drives sound economic growth?
First, we need stronger protection for intellectual property rights, to allow Canadian companies to take risks, and to compete in the global economy.
Second, we need to return to funding less applied research, and more basic research. Ironically the world’s truly revolutionary inventions – the telephone and genetic testing, for example – were not born out of a search for profit, but of basic research. Governments are rarely good at forecasting winners!
Third, we need to unleash venture capital to help innovators take new risks. The money is there. Under Prime Minister Harper, Canada has the lowest corporate tax rate in the industrialized world, but it is not being used to innovate. Former Bank of Canada Governor Mark Carney estimated that there are over $600 billion in “dead money,” sitting unused in corporate bank accounts, often shipped out to countries with tax shelters. Tax cuts to large multinationals are useless, unless tied to clear criteria for innovation or capital investment, increasing added value, or at least job creation.
Finally, we need to recognize that environmental protection and economic growth are not enemies. Well-designed regulations and revenue-neutral carbon pricing that does not compromise economic growth could boost innovation and productivity (Google: “Carbon Fee and Dividend” for the best way to price carbon, and reduce both CO2 and poverty). There’s nothing inherently unproductive about resource development, when it is done the right way. Post-secondary research, like the creativity of Dr. Mathew Leitch at Lakehead University in my own riding of Thunder Bay-Superior North, is improving the forest industry and fostering innovation. The commercial production of heavy crude oil, on the other hand, still depends on the “hot water” method, developed in 1925! Investment in clean technology is a key element toward reconciling resource development and sustainable growth.
Canada could be a world leader in innovation, if and when we encourage value-added production in all sectors, including resource development. With smarter tax policies supporting sustainable development, we can capitalize on our wealth of natural resources and make Canada more competitive in the global economy… and more prosperous.