Jack Mintz: By ‘protecting’ Canadian businesses, our governments have made us all poorer

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Why has Canadian productivity lagged so much compared to the United States? Is it risk-averse management in Canada? Too much taxation and regulation? Too little infrastructure and innovation?

These are perennial questions that are highly important to our standard of living, which continues to take at least a 20-per-cent haircut relative to the U.S., with Canadians earning $13,000 less than Americans in per capita GDP. Despite years of economic studies, we still don’t understand why we never catch up.

Perhaps the answer is simpler than we think. For 150 years, and in keeping with the British tradition of state-supported enterprise, we have had a business sector reliant on public ownership, subsidies and regulations that have discouraged domestic and foreign competition. Want a more dynamic business sector? Quit protecting our firms from the vagaries of the marketplace.

As a recent Statistics Canada paper by Sean Clarke and Lydia Couture shows, Canadian manufacturing has grown less quickly than U.S. manufacturing since 2000 (although this has been partly made up recently with faster growth here than in the U.S. in food, beverage and chemical manufacturing).

Tech

What is striking, however, is the significant difference in just one case: Since 2000, U.S. growth has been phenomenal in computers and electronics, which now account for roughly 13 per cent of American GDP compared to four per cent in Canada. The hot innovations today are associated with advanced manufacturing (think: robotics, artificial intelligence, digitization and big data). This heavy demand for computing and electronic equipment in the U.S. reflects a dynamic private sector looking to keep costs down through new technologies.

The growth story is similar in services, which also boomed faster in the U.S. between 2011 and 2016. IT services grew four per cent annually, on average, in the States, but less than half that much, at 1.8 per cent, in Canada. Professional, scientific and support services, grew in the U.S. at an annual rate of three per cent, and again less than half that much, 1.4 per cent, in Canada. You might have noticed that it’s the U.S., not Canada, that’s brimming with large tech firms like Amazon, Facebook, Apple, Netflix and Google.

There is no shortage of theories as to why. Some say Canadian managers are slow to respond to changing trends. Or that business leaders here are less willing to take risks compared to their American peers. That all might be true, but there is little evidence to support any of it. After all, plenty of Canadian companies actually do quite well competing with the Americans, including auto-parts suppliers, banks and conglomerates like Brookfield Asset Management.

Others point to Canadian tax policy as undermining growth. Our business taxes are still less onerous than in the U.S. (although that might change if we see dramatic Republican tax reforms). It is true that the personal tax burden is much higher in Canada for highly skilled labour, which can hurt entrepreneurship as high-earners migrate elsewhere, and makes it less likely for multinationals to locate their brain-centres here. Of course, most workers aren’t highly skilled, or aren’t highly mobile.

The U.S. has no measurable advantage in infrastructure. Neither neighbour has significantly better roads, airports and communications networks than the other‎. And Canada’s education system actually works better, as many companies would acknowledge, so we have a better-trained and better-motivated workforce than in the U.S.

Government protection

In other words, none of this really explains why Canada is so slow at embracing innovation. But here is one argument that makes the most sense, and it will sound a lot like the one arrived at a decade ago by Red Wilson’s Competition Policy Review Panel: Canadian industry is made weaker because the government protects it from competition.

‎One reason so many Americans businesses are adopting advanced technologies is because of the pricing pressures they face. With low inflation and in a highly competitive domestic market, companies cannot pass cost increases, like higher wages, on to consumers. So they’ve outsourced manufacturing services to low-wage economies, reducing American labour demand at home (enter Donald Trump). And they’ve adopted labour-saving technologies, which will become an even bigger factor with a new wave of robotics and digitization.

Not so in Canada. With federal and provincial protection from competitive forces and pricing pressures, costs can be more easily passed to consumers, and that makes it a lot less critical to be innovative. (That lack of pricing pressure also serves the interests of left-wing governments, which can stick new taxes on companies, who can then pass the costs on to unwary consumers).

Innovation lags in our communications, information, finance and transportation sectors because they are protected by law from foreign ownership and competition. Canada’s power utilities are primarily owned by provincial governments (except in Alberta).
Subsidies bubble-wrap our aerospace, arts and cultural industries to safeguard them from tough competition. Health and education services are surrounded by price rules and government control that keep out private participation Then there’s the long list of subsidies and tax preferences for agriculture, forestry products and manufacturing, especially auto manufacturing. In total, I estimate that about 42 per cent of Canada’s business value-added is in protected industries.

Of course Americans are hardly virtuous when it comes to free trade. But it’s their large domestic market that ensures the relentless pressure of competitive forces. In Canada, we instead suffer oligopolies in banking, power, transportation and communications.

But we don’t have to. There are cures to bring us the better competitive health we need. Ending subsidies to bail out insolvent and failing firms would be a first order of business. As would lightening our numerous foreign-ownership restrictions. Provinces need to allow more free trade and mobility for things like skilled workers, log exports and implicit tariffs on wine and beer. And Crown corporations should be privatized (while making sure they don’t end up bought by other countries’ state-owned enterprises).

The longer the question of how to get better economic growth troubles us, the more simple the answer seems. If we want more competitive and dynamic Canadian businesses, we need to make Canada’s business sector more competitive and dynamic.

Jack M. Mintz is the president’s fellow at University of Calgary’s School of Public Policy.

Source: Financial Post