The Globe & Mail – Monday, October 3, 2005 Page B1
Ralph Goodale was hot to trot about productivity as he strode into a cabinet meeting in late June.
The federal Finance Minister figured he had the big idea to drive his next
budget. More critically, he was determined to turn around
Yet some ministers around the table were wary of the word
"productivity," which usually means output per working hour but is
often equated with lost jobs through mechanization. Then, one of Mr. Goodale's colleagues spoke up. David Emerson, the Industry
Minister and a former senior forestry executive, had seen the B.C. lumber
industry go from a basket case to one of
He explained that productivity is more than producing more widgets, or board feet, an hour. It means better employee skills, spreading innovation and generating value in an unforgiving world economy.
Mr. Emerson's colleagues got onside, but the cabinet debate defined the political challenge as the Liberal government tries to raise productivity from a cliché to a cause in the build-up to Mr. Goodale's "productivity budget" of early next year.
Beyond the political sales pitch, this is an issue whose time has come if
But Mr. Emerson acknowledges that the cabinet is still groping for a way to articulate the dry academic concept. "We are looking for a way to describe it that is not phony and doesn't frighten people."
For many economists, the most frightening aspect is that
In fact, the widening productivity gap with the
If it does not narrow,
"Productivity is our economic destiny," argues Andrew Sharpe, executive director for the Centre for the Study of Living Standards (CSLS), a think tank for which productivity is a core research area.
"People don't understand productivity but they do understand if you have a job with a good level of pay, it's better over the long run," says Jack Mintz, an economist who heads the C.D. Howe Institute.
In fact, economists are somewhat bemused by the Liberals getting the productivity religion -- many of them have been beating the drum for years. But the idea gained momentum in the fall of 2003 when Liberal policy guru Peter Nicholson wrote an article for the CSLS's International Productivity Monitor.
Mr. Nicholson, a close confidant of Paul Martin who had just returned from
the Organization for Economic Co-operation and Development in
He raised an alarm for the future. As demographic changes reduce the number of working-age people, Canada faces the prospect of lower incomes unless a smaller work force can produce more output per person -- in other words, raise its productivity growth rate.
Mr. Emerson agrees that the Nicholson article was closely read in
government, but the real tipping point came over the past six months as the
competitive threat from
Also, there was a feeling that the Liberal government had benefited from a decade of strong economic performance, allowing it to invest in an active social agenda. Now the government could no longer count on growth to feed that machine. It was also time for former finance minister Paul Martin to restore the economic credentials that made him Prime Minister, and shore up support on the right.
But productivity is a tough concept to sell. There is not even agreement on what definition to use. The most commonly used measure is the growth in labour productivity, measured in real GDP output per hour of work in the economy.
But many economists prefer to track increases in volume or quantity per hour, which is more isolated from relative price spikes of the kind experienced in oil and gas. Others prefer multifactor productivity, which measures the impact of labour and capital inputs.
Different countries use somewhat different measures, making it hard to make
comparisons. Furthermore, statistical bodies, including Statscan,
have a habit of revising estimates. During the late 1990s,
It is hard to make public policy around numbers that seem so dodgy. But Mr. Sharpe argues productivity growth is a good idea no matter what the precise numbers say.
The most feverish debate is about how to get to higher productivity. Andrew Jackson, senior economist of the Canadian Labour Congress, agrees that productivity is a fine thing, but there are good and bad ways to boost it. The bad way is slashing jobs; the good way is investing in innovation and enhancing employee training.
He also rejects the idea that corporate tax cuts are the magic elixir that
will solve
Ellen Russell, economist with the Canadian Centre for Policy Alternatives,
says the government has yet to make a compelling case that productivity should
lead the policy parade. She believes that before rushing into a new agenda,
"Every time the alarm goes off saying productivity is the only answer, I start digging around and I can't quite see the fire."
The simplistic approach is that Canadian companies have to innovate more,
and that is often equated with research and development -- another area in
which
But Mr. Sharpe says what is important is not pure R&D but the adoption
of advanced technology, wherever that technology is produced. Only a small
minority of companies in
Yet until very recently,
But the record of the past decade has been generally weak, particularly in
crucial high technology. The Information Technology Association of Canada
recently pointed out that Canadian companies invest only 43 per cent of what
Mr. Emerson says "we need to think about embedding technology and innovation right throughout the economy and not get so focused on clusters of what we think of as high-tech companies with people in white lab coats."
Some critics maintain that Canadian managers lack energy or imagination, and
have failed to adopt progressive practices. Mr. Mintz
disputes that. He argues that rational managers have been investing outside the
country, drawn by lighter tax rates on capital investment. His research shows
But others say it is more complex than blunt tax changes. They see knowledge
barriers among small to medium-size companies, which make up a large part of
There are other problems.
"This is not a good strategy to be on top of the world," says Mr. Mintz, who is particularly appalled by the number of growth companies that are doing income trusts. "The basic assumptions are you've eliminated tax and you're not doing much investment," Mr. Mintz sighs.
Even the windfall of higher energy prices is not a big productivity booster. Upward spikes simply spur companies to start bringing marginal fields on-stream. These may generate strong profits in the short term, but according to the economists' strict measure of volume per working hour, these fields are not highly productive.
Perhaps the best model for change lies with Mr. Emerson's old industry,
softwood lumber, which experienced a major productivity boost in the late 1990s
and early 2000s. Industry
"It was a disaster, and we were under-investing in the mills and it
looked like the forest industry was toast," he said. But the industry
experienced an attitude change that made it stronger -- so strong it has
incited increased
"It raises a fundamental question as to what degree do you need a near-death experience to cause companies to do things in a fundamentally new and better way," he says.
That will be the question as the Goodale-Emerson
tandem sets out this fall to make productivity a household word. Times are
good, and higher oil prices are lining the coffers of some of
More bang for the buck
GDP per hour worked, annual growth rate (%)
|
|
|
|
|
|
|
|
Euro Zone* |
|
1996 |
4.9 |
0.2 |
0.4 |
2.5 |
1.9 |
2.9 |
1.3 |
|
1997 |
3 |
4 |
2.3 |
2.4 |
1.6 |
1.7 |
2 |
|
1998 |
3.6 |
1.6 |
2.8 |
1.4 |
2.4 |
2.8 |
1.4 |
|
1999 |
1.3 |
2.3 |
1.8 |
1.5 |
2.2 |
3 |
1.4 |
|
2000 |
0.3 |
3.2 |
3.9 |
2.5 |
3.4 |
2 |
2.3 |
|
2001 |
3.5 |
1.1 |
1.2 |
1.7 |
1.3 |
1.9 |
1 |
|
2002 |
1.4 |
2.2 |
3.3 |
1.5 |
2.1 |
2.5 |
1.4 |
|
2003 |
2.7 |
0.8 |
1.1 |
0.8 |
2 |
2.6 |
0.7 |
|
2004 |
0.9 |
0 |
1.6 |
1.2 |
2.5 |
3.2 |
1.2 |
*EU 15 excluding
SOURCE: OECD
In Report on Business
The ROB's series on productivity continues:
Tomorrow: The construction industry - laggard or anomaly?
Wednesday: The automotive industry - compete or die?