Falling behind

Jay Bryan
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Canada must improve its competitive edge to prosper

Most of the economic comparisons you see between Canada and other countries these days are highly flattering to Canada. Among industrial nations, Canada is a leader in job creation and economic growth.

But that's only part of the story. The other part is that our international competitiveness continues to be unimpressive, a weakness masked by a strong domestic economy and sustained demand for Canadian resources in industrializing nations.

Montreal -

Most of the economic comparisons you see between Canada and other countries these days are highly flattering to Canada. Among industrial nations, Canada is a leader in job creation and economic growth.

But that's only part of the story. The other part is that our international competitiveness continues to be unimpressive, a weakness masked by a strong domestic economy and sustained demand for Canadian resources in industrializing nations.

The latest warning sign comes from a global study of manufacturing competitiveness that places Canada firmly in the also-ran category. We rank just 13th of 26 countries, right behind Thailand, according to a worldwide survey of more than 400 factory-sector executives carried out by Deloitte Touche Tomahatsu and the U.S. Council on Competitiveness.

This is only the most recent in a string of reports ranking Canada as a mediocre performer.

The World Economic Forum's broader-based study of competitiveness - not restricted to manufacturing - last year ranked Canada 10th in the world.

Our own Conference Board of Canada studied 17 countries last year and ranked Canada far from the head of the pack on most of the six economic and social qualities it measured. Education, where we placed second, was the high spot, but on the critically important innovation measure, we were a miserable 14th.

The good news is that we have time to fix our deficiencies. Thanks to its economic strengths, Canada sailed through an exceptionally severe global financial crisis and recession with much less damage than the U.S, Europe or Japan. And so far, we're on track to enjoy a stronger recovery than most.

A big ace up our sleeves is the resource boom that that's been driving up the prices of energy and industrial raw materials for most of the past decade, boosting Canadian prosperity.

This phenomenon faltered during the recession, but not for long, as you can see by checking out prices at your nearest gas station.

With giant nations like India and China racing to join the industrialized world, their hunger for resources seems to know no bounds. That has brought a growing stream of export earnings, enriching Canada's big resource sector and bringing spillover benefits for the rest of the economy.

This story could continue for many years to come, so Canada's outlook looks pretty bright in the medium term.

But it probably won't last forever. And if we don't use the period of resource-fuelled prosperity to invest in boosting the productivity of the whole economy, it's questionable how high our children's living standards will be.

So far, as the Deloitte survey suggests, the record hasn't been impressive. The dollar shot up from the low 60s early in the decade to hover near parity over the past few years, which makes imported high-tech industrial equipment much cheaper, but we've seen little corresponding boost to productivity.

Indeed, labour productivity actually dropped a bit over the past three years, making this country much less competitive compared with the U.S, where it soared.

More recently, productivity began to perk up again, growing by a healthy total of two per cent in the fourth quarter of 2009 and the first quarter of this year.

That sparks optimism among economists like Sal Guatieri at BMO Capital Markets, who hopes this is the beginning of a long-awaited revival in Canadian competitiveness.

But there are still plenty of headwinds. We already know that productivity has since fallen in the second quarter of this year, since economic growth was slower than job growth.

Guatieri hopes that this will prove to be just a hiccup, particularly since new trade figures show that Canadian firms have ramped up imports of machinery and equipment sharply, hinting at future improvements in efficiency.

But Canada will have to make a sustained effort if it is to be a serious competitor outside of the resource sector, warns Benjamin Tal, an economist with CIBC World Markets.

Tal found that our firms lag very far behind their counterparts in the U.S. in capital intensity, a measure of how much they invest per worker. Of 19 industries, Canadian capital intensity is higher in just two, lower in 17.

Organizations: U.S. Council on Competitiveness, World Economic Forum, Conference Board of Canada BMO Capital Markets CIBC World Markets

Geographic location: Canada, Montreal, U.S. Thailand Europe Japan India China

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