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Improving Productivity for keeping the living space of Canadians
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Improving Productivity for keeping the living space of Canadians
Frank Mar 12 2017 in Waterloo, Ontario, Canada
In 1897, German geographer and ethnographer Mr. Friedrich Ratzel who coined the term of living space, which theorized as the natural expansion of strong states into areas controlled by weaker states.
In the Era of market economy, the living space has turned to market space from geographic space; people compete for living space by competitive products and high quality manufacturing.
However, low productivity has been in destroying manufacturing of Canada, without competitive products, the living space of Canadians has been in destructing.
Mar 12, 2017, the article Improving
Productivity for the Prosperity of Canada inspired me to think of many
shocking reports about extreme low productivity of
Canada.
July 31, 2012, Brains alone can't boost productivity: Canada has suffered from chronically slow productivity growth for nearly three decades. Between 1985 and 2010, labour productivity growth in Canada fell to less than half the growth of the 1962 to 1984 period.
1968 –1984, it was Dr. Pierre Trudeau served as the 15th Prime Minister.
Aug. 13, 2012, 'Big data' could help solve Canada's productivity problem: Canada has not only lagged behind the major economies of the world in raising productivity, but also are grappling with a “D” in innovation and a competitiveness ranking of 12th out of 17 industrialized nations.
Aug. 07, 2012, Future success of manufacturing will require government support: Manufacturing accounted for less than 13% of national GDP last year, down from 19% in 2000. More than 500,000 manufacturing jobs, delivering above-average wages and productivity, evaporated in that time. From a balanced trade position in manufactures, we now incur a $90-billion annual deficit in international manufacturing exports and imports. That’s the main factor behind the emergence of a large and chronic balance of payments deficit in recent years.
For the improvement of productivity, there have been many comprehensive studies with convincing solutions, however, the productivity growth continues to slow in Canada; why?
The reason was simple and obvious: the solutions were not proper targeted. The disease was on head, they acupunctured on the acu-points for treating the diseases on foot.
In the comment followed Oct. 1, 2012 article Canada’s productivity lags U.S. in ‘virtually every instance: Deloitte, a German immigrant revealed the pathogenic source of Canada’s low productivity.
Bernard comment in 2 years ago: “being an immigrant from Germany I can tell you my perspective of lacking productivity in Canada: looking around in the office I see people dropping in sometimes between 9 and 10 am. Not much later they are off for a coffee break. Then there is lunch break and another coffee break. Leaving around 4pm, because there is some important fishing or hunting or other outdoor stuff on the agenda.”
“Any more questions about productivity?”
“I mean, I really appreciate work-life balance. But what I experience is overdone.”
After read above comment, I think of a few years ago in Toronto, in a government agency; there a lot of people were waiting in line. From the perspective of the number of idle office chairs, there should be a lot of people who were work there, but only there two staff were servicing for the customers. Finally, there are other two staff came in, the people who were waiting in line were pleased for that was able to speed up. However, the two came-in staff has not sat down yet; the original two in working immediately got up and left away.
Long time waiting in the government agencies seems a common matter in Canada, which is not due to short in manpower, but only due to the poor work ethic.
Above problems were not fatal, if Canada was really rich enough, to feed some lazy were not a problem at all; the fatal problem of low productivity is in killing manufacturing, is in killing the main pillar of real economy, is in killing the foundation for Canadians survival…
The cause of poor work ethic was from poor social governance, which was that electorate kidnapped legislators of democratic players dared not perform strict governance.
Under such unchangeable malfunctioned social governance, we have to explore some roundabout ways to make a better life for hard working Canadians.
Feb. 9, 2017, I summarized an article Germany's trade surplus hits new record high again and again. Why?
May 28, 2012, in the article The DNA of the Success of German Manufacturing, I have indicated the secret, now excerpt as follow:
Germany
may be one of the few rich countries relying on the hard working rather than
that of natural resources, which has attracted many international dignitaries
to explore the secrets of its success. However, most of them were focused on
the macro policy with ignoring the micro details.
The
significant one of being ignored is the legislated management on
rationalization proposals (RP) in German Companies. Their RP is not only
pointing out the existing problems, also proposing appropriate solutions and company extracts bonus to proposals
provider according to the net cost savings after implementation of RP in
the first year.
Since Mr. Alfred Krupp of
German ThyssenKrupp AG firstly coined the management concept of RP in 1872,
German companies have begun the practices of management on RP. Currently, it
not only is an important component of human resource management but also is one
of the main features of corporate culture of German Enterprises.
As human
nature, as common sense, no matter which race and which nationality, including
myself, when we heard advice from others, the first feeling is to be despised;
the uncomfortable reaction may show on the face, or even verbal unfriendly.
Maybe, it was the reason that German government enforces the management of
rationalization proposals by legislation.
In such a
corporate atmosphere, German business leaders have been emphasizing
people-oriented, and taking the staff as working-capital. They encourage more
employees to involve in optimizing the corporate management by exploring and
exerting every potential to promote the development of enterprises. China
saying goes, three ordinary brains are better than one unordinary one. I think
that, the more eyes observed, the more problems would be found, and the more
brains devoted, the more wisdoms would be produced.
In such a
corporate atmosphere, the sense of responsibility of employees is largely
increased. The enthusiasm of employees for the work is large upsurge. The
spirit of tacit cooperation is cultivated. Every employee could work
positively, initiatively, creatively and actively. The product quality is
largely improved, the production efficiency is greatly increased, and the
upgrade of the products is speeded up. Thereby, the enterprises are always full
of vitality with high competitive ability in hot competing market.
They have
established a sound management system of RP with corresponding incentive
policies and accumulated a lot of valuable experiences. Such as, set up
specialized department and specialized personnel to manage RP, the employees
can easily input and query the contents and the implemented results of RP
through corporate network system.
As the
saying goes, if we hope horse running faster, we must feed it with grass. If we
hope hen laying more eggs, we must feed it with grains. In the same way, the
activity of RP can continue to develop in German enterprises; the reward in
bonuses or materials plays a key role.
The award criteria for RP are basically same in
different German companies. It is according to the net cost savings after
implementation of RP in the first year. It divided into several grades,
specifically, the annual net cost savings within the ? 2,500, according to the
following standard bonuses:
|
Annual net cost savings |
Bonus |
|
250 Euros |
20 Euros |
|
251-750 Euros |
75 Euros |
|
751-1750 Euros |
150 Euros |
|
1751-2500 Euros |
250 Euros |
Annual cost savings are more than 2500 euros,
then, the bonus is 25% of the actual amount of net cost savings. For example,
net cost savings is 5000 EUR, and then the prize money amounted to ? 1,250.
Some RP cannot estimate the direct economic
benefits, but can play an important role in improving safety, preventing
accidents, protecting environment, improving product quality and enhancing
corporate-image, and thus can make indirect economic benefits, then, according
to the grade of lowest, low, medium and high respectively give 20, 75, 150 and
250 Euros or material reward. In accordance with "Personal Income Tax
Law" of Germany, material reward is tax-free. The taxes of bonuses are
paid by enterprises.
If Canada can learn from the
rational practice of Germany, Canadians can certainly make miracle as Germans.
For this concern, in recent years, I wrote many articles to discuss how to improve productivity.
How to save Canada’s manufacturing from disappearing
How to rescue Bombardier from the road-dust of failed RIM
Poor Canadian corporate culture destroys the life of Canadians
Set economic zones to avoid the harm of speculative real estate
Authorize non-partisan Super leadership to assist social governance
The feasible steps for improving Canada's health care system radically
……
Follow was the article Improving Productivity for the Prosperity of Canada.
Improving
Productivity for the Prosperity of Canada
Creig Lamb September 2015
University of Toronto School of Public Policy and Governance
IRPP/University of Toronto Canadian Priorities Agenda
Award-winning student paper
http://irpp.org/wp-content/uploads/2013/09/cpa-lamb.pdf
The IRPP’s Canadian Priorities Agenda project is the inspiration for the capstone seminar in the master’s in public policy program of the School of Public Policy and Governance at the University of Toronto. The course is offered in an intensive format as a core requirement in the final semester of the two-year program. A Canadian Priorities Agenda: Policy Choices to Improve Economic and Social Well-Being is the basic text for the course. It is supplemented by readings chosen by the instructors and guest presenters. The students take the role of judges, and for their final assignment they write a 5,000-word paper modelled on the judges’ reports in the original project, in which they have to make the case for an agenda comprising five policies selected from options presented in the course. Every year the instructor selects the best student paper, and the IRPP posts it on its website.
— Paul Krugman, The Age of Diminished Expectations, 1990
Introduction
In the long run, productivity1 is the most important driver of a country’s economic growth, prosperity and overall living standards.2 Despite its significance, productivity has been declining in Canada relative to international comparators. According to the OECD, from 1995 to 2012, Canada’s average annual productivity growth rate ranked 26th of 35 countries.3 This trend is even more pronounced when comparing Canada’s productivity to its closest trading partner — the United States. Between 1985 and 2000, business sector productivity growth in Canada lagged behind that of the United States by an average of 0.8% per year. Between 2001 and 2011, this productivity gap doubled to 1.6%.4
Addressing Canada’s poor productivity performance will become increasingly important in the near future. Currently, Canada faces a number of economic challenges that will inhibit future growth. To overcome these challenges, the country will need to raise its productive capacity to maintain real wages and income.5 This proposed policy agenda is designed to cost-effectively improve Canada’s productivity to ensure the country can continue to thrive and prosper in the long run.
In the near term, Canada has relatively favourable economic prospects.6 However, the two main contributors to Canada’s recent economic success — rising commodity prices and strong employment growth, are in decline.7,8 First, it is unlikely that commodity prices will experience the 300% growth that occurred during the 2000s.9 The recent decline in global oil prices, which saw the price of a barrel of oil drop 60% in 2014-15, is a clear indication of this.10 Second, Canada’s population is rapidly aging. This has resulted much slower labour force growth.11 According to Statistics Canada projections, the labour force participation rate is expected to drop from 67% in 2010 to between 59.7% and 62.6% in 2031. This would be the lowest participation rate since the 1970s.12
Based solely on labour market projections, if Canada’s productivity fails to increase, real GDP growth will “slow to less than two-thirds its historical pace over the 2017–2050 period.”13 In this scenario, per capita income would be $24,900 or 30% lower than it otherwise would be without population aging.14 Slower GDP growth also means a shrinking revenue base for governments at all levels.15
The opportunity costs of not addressing Canada’s productivity are high. Using data from two separate models, closing the average annual productivity gap between Canada and the United States would:16 • Raise per capita income by 28% or $18,900, by the year 2050,17 • Increase annual real GDP by $399 billion by the year 2030,18 • Generate an additional $65.3 billion in revenue for the federal government, $91 billion for provincial governments, and $18.7 billion for municipal governments by the year 2030.
Selection Criteria
The goal of this policy agenda is to improve Canada’s productivity to ensure the long-run economic prosperity of the country. The primary selection criteria used were: (1) Fiscal Sustainability: The policies chosen should cost-effectively improve Canada’s productivity. They should also generate revenue and create short- and long-term economic impacts. (2) Efficiency: The policies should address market failures and distortions to allow for a more efficient allocation of scarce resources.
(3) Appropriate Role for Government: The policies should not exceed the appropriate scope of government action or intervention.
Policy Proposals
Option 1: Pass
provincial legislation to allow municipalities to opt into a 1% sales tax
increase dedicated to transit and infrastructure.
Background Canada is increasingly becoming an urban society. The country’s urban population has expanded at an astounding rate — growing 114% from 1961 to 2011. This compared to the 14% growth in the rural population during the same period.20 Canada’s urban population is also highly concentrated in a few key areas. In 2013, 35.2% of Canadians lived in one of the country’s three largest census metropolitan areas (CMAs) (Toronto, Montreal and Vancouver).21
Beyond population expansion, cities in Canada are also growing in economic significance. In 2009, approximately half of Canada’s GDP was produced in the country’s six largest CMAs.22 When people and economic activity are concentrated, urban areas become hubs of productivity growth and innovation. Studies show that this agglomeration allows for businesses to take advantage of labour market pooling, talent, knowledge spill-over and market access.23 This results in greater productivity and increasing rates of return for businesses in larger cities.24,25
At the same time, however, cities in Canada also suffer from aging infrastructure, inefficient transit and substantial congestion issues, and these problems will significantly inhibit the productive capacity of Canada’s cities in the future. The current municipal infrastructure deficit in Canada is an estimated $123 billion.26 To appropriately address this growing deficit, it has been recommended that public infrastructure investments be increased by 62%.27 Studies show that over the next 50 years, infrastructure underinvestment could lower Canada’s real GDP growth by 1.1% per year. This would cost the average Canadian anywhere between $9,000 and $51,000 annually.28 In the Greater Toronto and Hamilton Area (GTHA) alone, congestion is estimated to cost the region $6 billion annually in lost productivity and wages.29
To explain how this happened, it is important to understand broad trends in infrastructure financing. Over the past 50 years, the primary responsibility for financing infrastructure has slowly shifted from the federal government to municipalities. From 1955 to 2003, the federal government’s share of total capital investments dropped from 34% to 13%, while the municipal share increased from 27% to 48%.30 This has resulted in a funding structure where the level of government least equipped to make large capital investments is charged with building and maintaining the largest portion of the country’s infrastructure.31 Municipalities currently own “52 percent of public infrastructure, but collect just eight cents of every tax dollar.”32
Solution To address this issue, it is recommended that provincial governments pass legislation to allow municipalities to opt into a 1% sales tax increase dedicated to transit and infrastructure. Under this option, the provinces would be responsible for developing the new legislation, which would likely specify the size and capacity requirements for municipalities to qualify for this program. The onus would then be on the municipalities to propose and vote on the policy. For efficiency purposes, the tax should be added onto existing provincial sales tax receipts. The revenue generated would then be transferred to municipalities and earmarked for transit and infrastructure projects.
Impact Infrastructure investments can have significant positive impacts on productivity. A recent study showed that, between 1962 and 2008, half of Canada’s total-factor productivity could be attributed to investments in infrastructure.33 Another study found that infrastructure spending in Ontario between 2006 and 2014 increased the province’s productivity by 2.1%.34
Infrastructure investments can also have substantial economic multipliers. The Conference Board of Canada discovered that, for every $100 million invested in infrastructure, real GDP is increased by $114 million. This investment also generates roughly 1,670 person-years of employment. The study also found that the federal and provincial governments recouped roughly 31% of infrastructure investments through increased tax revenue.
Revenue According to KPMG, a 1% increase in sales tax in the GTHA would generate $1.3 billion in revenue ($197.7 per capita) annually.36,37 Using these estimates, if this program were universally adopted by all the municipalities in Canada’s six largest CMAs (Toronto, Montreal, Vancouver, Calgary, Edmonton, Ottawa-Gatineau), it would generate $3.28 billion annually in additional revenue for transit and infrastructure.38 This is $1.08 billion more per year than the federal government’s 10-year municipal infrastructure commitment through the Gas Tax Fund.39 Based on Conference Board of Canada estimates, this investment would boost real GDP in Canada by $3.74 billion annually.
Evaluation This proposal would increase municipalities’ ability to address growing infrastructure and transit needs. It would require no major expenses, but could significantly improve the productive capacity of Canada’s major urban centres.
Increasing municipal tax revenue for transit and infrastructure is also becoming increasingly prevalent in Canada’s policy discourse. This may improve the political feasibility of this option. Metrolinx has formally recommended a 1% increase in the HST in the GTHA to generate revenue for its second phase of transportation projects.40 In Vancouver in 2015, a referendum took place to vote on the proposed Metro Vancouver Transit Tax, which would have led to a 0.5% increase in provincial sales tax receipts in the region.41
Other jurisdictions have already taken a number of strides to broaden municipal revenue bases. Municipalities in France, Japan, Korea and the United States receive over 20% of their revenue from sales taxes. In the Netherlands, over 50% of municipal revenue comes from sales taxation.42
While increasing taxation presents political challenges, from an international perspective, Canada has a very low tax burden. When compared to other OECD countries, Canada’s total tax revenue as a percentage of GDP ranked 21st overall in 2013.43 Consumption taxes are also one of the most efficient forms of taxation since they are easy to administer and do not distort decisions related to savings and investment.44 They have also been found to impact productivity and economic growth much less than taxes on income.45
However, there are risks associated with this option. First, consumption taxes are regressive since they disproportionately impact people with lower income.46 Second, an increase in regional sales taxes can have small impacts on the competitiveness of the region by marginally reducing consumption and comparatively increasing the costs of goods and services.
Option 2: Create an
Industrial Research and Innovation Council (IRIC) with a clear business
innovation mandate.
Background Innovation is one of the most significant determinants of productivity growth.48 Not suprisingly, Canada has a relatively weak innovation climate. The Conference Board of Canada recently ranked Canada 13th out of 16 countries in terms of innovation performance.49 Studies also show that Canada’s weak business innovation is largely responsible for the country’s low productivity performance.50
Investments in research and development (R&D) are important for developing business innovation.51 Canada, however, also lags behind many international competitors in terms business investments in R&D, new technology and equipment.52 In 2013, Canada’s annual business expenditure on research and development (BERD) as a percentage of GDP ranked 20th out of all OECD countries.53 This annual expenditure is also heavily weighted to a small number of large firms. In Canada, 25 firms make up roughly one-third of all BERD.54
The current federal support for R&D in Canada is highly fragmented. Besides the well- regarded Scientific Research and Experimental Development (SR&ED) tax credit and the Industrial Research Assistance Program (IRAP), there are 60 federal R&D programs dispersed throughout a variety of government departments.55 A recent poll found that many of these federal funding programs experience low take-up rates from Canadian firms.56 The most commonly cited reason was a general lack of awareness of federal support for R&D.
Solution
To address Canada’s business innovation problem, the federal government should create an Industrial Research and Innovation Council (IRIC). This agency would provide funding and consolidate all federal support for businesses accessing R&D grants or taking an idea or product to market.58
This agency would have three primary functions. First, it would administer the existing IRAP, which is considered to be the federal governments strongest program for providing direct support and commercialization services for businesses.59 The IRIC would also deliver the federal government’s pilot voucher program. This three-year pilot program was introduced in 2014 to help facilitate the movement of ideas to the marketplace by promoting industry collaboration and connecting businesses to established providers of commercialization services.60
Second, the IRIC would establish a “concierge service” and web portal to serve as a single access point for businesses seeking federal R&D support. As a common platform, the agency would provide advice and assistance for businesses looking to navigate the complex federal R&D landscape. The IRIC would also work to generate public awareness to improve the overall uptake of public R&D programs.61
Third, the agency would work in collaboration with provincial and territorial governments to develop an innovation and talent strategy. This strategy would help businesses to attract and retain highly qualified and skilled personnel to help drive innovation.62
Evaluation and impact The costs of this agency are expected to be relatively small. Initially, the IRIC would require some overhead expenses. However, these costs can be offset through the shifting of personnel from current federal programs.63 A significant portion of revenue could come from the reallocation of existing funds. This includes the $5 billion in annual revenue dedicated to federal R&D support.64 It would also involve the reallocation of the additional $110 million committed annually to the IRAP and the $20 million allocated to the pilot voucher program over three years.65
The costs associated with the IRIC would likely be offset by expected increases in economic activity. Studies suggest that a 1% increase in business R&D (as a percentage of GDP) would raise the per capita GDP of Canada by 12%.
Option 3: Use the Trans-Pacific Partnership (TPP) negotiations to update NAFTA and diversify Canada’s trade with Asia.
Background As a small open economy, Canada is highly dependent on trade. In 2013, Canada’s total two-way merchandise trade was worth $947.58 billion — approximately 55.6% of GDP.67,68 However, unlike many other small open economies, Canada’s international trading relationships are highly concentrated in a few select markets. In 2013, 85% of Canadian exports were sent to the United States, Mexico and Western Europe. Only 11% of Canadian exports were sent to the Asia-Pacific region.69
This current trade focus is problematic since growth in major advanced economies is much slower than thatin the developing world. Real GDP growth in the United States declined from 2.8% in 2012 to 1.9% in 2013.70 Real GDP growth in the Eurozone (France, Germany, Italy, Spain) was -0.5% in 2013. Meanwhile, the real GDP of developing Asia (China, India, Indonesia, Malaysia) grew by 6.5% in 2013. Real GDP growth in China was an astounding 7.7% in 2013.71
Canada can no longer afford to focus its trade efforts on slow-growing economies. Over the past decade, Canada’s position as a global exporter has been steadily declining. Between 2000 and 2010, Canada’s export growth was 5% slower than the global average. During the same period, Canada’s share of the global export market declined from 4.5% to 2.5%. This decline made Canada the second-worst performer in the G20.72
Solution To help improve Canada’s trade prospects in developing economies, Canada should leverage the existing Trans-Pacific Partnership (TPP) negotiations to update NAFTA to diversify trade with Asia.
Entering into the TPP negotiations would provide Canada with its first major access to high- growth, emerging Asian economies. The TPP would help to remove trade barriers to ensure a free flow of goods and services between Canada and many dynamic Asian countries.73 The combined GDP of the countries currently involved in the TPP negotiations exceeds $27 trillion. This represents almost 35% of global GDP.
The TPP negotiations would also present Canada with a new platform to make necessary updates to NAFTA. NAFTA requires updating since the negotiations took place before the rise of e-commerce, digital media and third-party logistics.75 Since all other NAFTA signatories are involved in the TPP negotiations, any TPP commitments that exceed those made under NAFTA would take precedent. Therefore, Canada can use the TPP negotiations to simultaneously make improvements to NAFTA and diversify trade with Asia.76
Impact Entering the TPP would have significant impacts on Canada’s economic prosperity. In a 2012 study, it was estimated that the TPP would increase Canada’s GDP by $9.9 billion and boost exports by $15.7 billion.77
There are also significant productivity benefits associated with trade. According to Statistics Canada, manufacturing firms that exported experienced 0.6% higher labour productivity growth than firms that did not.78 These productivity increases are associated with exposure to international competition, product specialization and increased investments in R&D and training.79 Trade diversification can also have significant impacts on productivity. Export variety is estimated to account for over 10% of provincial productivity variation in Canada.80
Evaluation Entering into the TPP negotiations would be cost-effective and administratively feasible. Most of the costly trade reforms the United States will be looking for under the TPP have already been established by Canada as a part of NAFTA.81
However, there are risks associated with this option. The TPP may require Canada to make significant supply management concessions in certain agricultural sectors.82 Many of Canada’s agricultural industries would resist since they would face increased competition and are often not equipped to trade internationally.83 Canada may need to compensate these industries for any concessions that are made, as was the case for Canada’s domestic cheese industry during the Comprehensive Economic and Trade Agreement negotiations.84 The current presence of Japan in the TPP negotiations may alleviate some of these concerns, since Japan has significant domestic rice protection policies.85 However, even Japan has made concessions on three out of five protected agricultural industries.86
Option 4: Fix the
Investment Canada Act (ICA).
Background For the past 40 years, there has been a dramatic rise in global foreign direct investment (FDI).87 From 1970 to 2013, global inward FDI rose from US$13.3 billion to US$1.5 trillion.88 As a small open economy, Canada has been no stranger to these trends. Canada’s stock of inward FDI grew from US$5.8 billion in 1980 to US$67.6 billion in 2013.89 This represents roughly 4% of Canada’s GDP.90
At the same time, Canada’s relative attractiveness for large foreign investments has declined. Canada’s inward stock of FDI as a percentage of global inward FDI dropped from 15.7% in 1970 to 3.4% in 2007.91 One explanation for these trends is Canada’s restrictiveness toward FDI. In 2013, Canada ranked third highest out of all OECD countries in the Regulatory Restrictiveness Index.92,93 A recent study suggested that if Canada were to reduce these barriers, the inward stock of FDI would increase significantly.94
Currently the Investment Canada Act (ICA) governs all FDI in Canada. The act requires that foreign investments over a certain threshold prove the investment will be a net benefit for Canada.95 The test is, in theory, an effective and standardized assessment tool to ensure that Canada reaps the rewards of global capital movements. However, in practice, it has been criticized for its lack of transparency, ambiguity and reliance on subjective discretionary powers.96,97,98 The current structure also places the burden on the potential investors to prove that the transaction would be a net benefit to Canada, which can be a costly and uncertain exercise.99
Recent history In 2008 and 2010, Canada issued its first FDI rejections under the ICA — the rejections of MacDonald Dettwiler and BHP Billiton, respectively.100 During these rejections, the phrase “strategic asset” was used by a number of key officials as a basis for rejecting foreign ownership.101 The phrase is not mentioned in the ICA and its consideration has been denied by the federal government.102 However, the term continues to drive uncertainty, especially since Industry Canada also failed to publicly provide sufficient information regarding the basis for the decisions.103,104
In 2009, the federal government introduced a national security review to the ICA. This provides the legal framework to allow Industry Canada to solicit information from investors that may pose a national security risk. However, this provision fails to clearly define what constitutes a national security risk, further contributing to the ambiguity of Canada’s FDI review process.105
The rise of FDI from State-Owned Enterprises (SOEs) has added more complications to Canada’s already complex FDI regulations. In 2007, Industry Canada released guidelines to ensure that SOEs attract additional scrutiny when applying the net benefits test.106 Following the 2012 acquisition of Nexen by a Chinese SOE, these guidelines were revised.107 Industry Canada then announced that foreign state control of Canadian oil sands corporations would pass the net benefits test only on an “exceptional basis,” but provided no further clarification about what was meant by the phrase “exceptional basis.”
Solution To ensure that Canada continues to benefit from inward FDI, it is recommended that amendments be made to the ICA. First and foremost, the net benefits test should be revised to increase transparency. Based on best practices in Australia, the ICA should publish the specific factors that are taken into account when assessing FDI. The minister should then publicize the justifications for the decision.109 Second, Canada can also make the process more attractive to potential investors by shifting the burden of proof for the net benefits test away from the investor toward Industry Canada.110
Third, the federal government should further clarify that “strategic assets” are not part of the review process. Canada can assure investors that FDI assessments are based entirely on the potential for long-lasting benefits for the country.111 Fourth, based on best practices in the United States, Canada should provide guidance to potential investors on what might be considered in the national security review.112 Fifth, the federal government should make explicit the specific review process for SOEs as well as the meaning of “exceptional circumstances” regarding SOEs’ acquisition of oil sands corporations. It is recommended that this should not result in a universal prohibition of SOEs in the oil sands, given their increasing role in the development of Canada’s resource sectors.113
Impact Inward FDI can have significant impacts on productivity. Studies show that inward FDI helps to decrease production costs and raise productivity in most Canadian industries.114 Foreign-controlled firms have been found to be generally more productive and have significant performance advantages over domestic firms in Canada.115 These firms also innovate and conduct R&D more in all sectors, which can lead to significant R&D spillover benefits for domestic firms.116,117
A study published by the Conference Board of Canada revealed a positive and statistically significant relationship between the inward stock of FDI and labour productivity in Canada.118 Baldwin and Gu (2005) discovered that foreign-controlled plants contributed 65% of labour productivity growth in Canada’s manufacturing industries between 1980 and 1999.119
Canada’s restrictions toward SOEs may also significantly inhibit growth in Canada’s resource sectors. Chinese SOEs alone saw their assets grow from $US 360 billion in 2002 to $US 2.9 trillion in 2010.120 These enterprises are often attracted to large-scale natural resource investments in countries like Australia and Canada.121 The Heritage Foundation’s Investment Tracker ranked Canada as China’s third top destination for investments.122 At current levels, China could provide 40% of the funds necessary to optimally develop Canada’s oil sands.123 Any restrictions placed on these organizations may dissuade them from continued investments in Canada’s resource sectors, which could slow growth considerably.
Evaluation Making the necessary adjustments to the ICA is a cost-effective solution to improve Canada’s productivity performance. However, there are a number of associated risks. Shifting the burden of proof of the net benefits test would require additional administrative capacity. There is also considerable public concern regarding FDI and its potential to “hollow out” Canada’s industries. Many believe that by increasing FDI, Canada may become a branch economy, with high-paying jobs and profits going to foreign countries.124 While this sentiment is widespread, it is not evidence-based. Foreign-controlled firms have a long track record of developing high-paying, head office jobs in Canada.125 These concerns can be partially mitigated by effectively communicating the benefits of FDI to the Canadian public.
Option 5: Increase
the intake of immigrants to Canada to 1% of the population.
Background As natural increase slows, immigration’s role in maintaining Canada’s labour supply will become increasingly important.126 In 2006, immigration was responsible for two-thirds of Canada’s population growth. By 2030, it may be Canada’s only source of growth.127 While immigration alone cannot fully address the issues associated with Canada’s shrinking labour supply, a growing immigrant workforce can help to mitigate the impacts of significant labour shortages.128
As immigrants continue to grow as a portion of the labour supply, Canada must also make concerted efforts to improve the labour market outcomes of recent immigrants. Studies show that recent immigrants to Canada face a number of hurdles in the job market. In 1980, income-earning recent immigrants (men) earned just 85 cents for each dollar earned by their Canadian-born counterparts. By 2005, this figure had declined to 63 cents to the dollar.129 During the same time period, the proportion of recent immigrants in poverty increased from 24.6% to 36%.130 Immigrants in Canada are also finding it increasingly difficult to land highly skilled jobs, regardless of their skill level. In 2009, Canada ranked 25th of 29 OECD countries in terms of immigrants’ skills matching.131,132
Solution To address these issues, it is recommended that Canada increase the annual intake of immigrants to 1% of the Canadian population. It is also recommended that this increase come primarily from the Provincial Nominee Program (PNP). Based on 2014 immigration targets and the 2014 Canadian population, this increase would result in approximately 100,000 new immigrants each year.133,134
To explain the potential impact of this option, it important to provide some background information on the PNP. The PNP was introduced in 1988 to provide provinces with the tools to respond to local labour demands and skills shortages. The program allows participating provinces to nominate immigrants based on identified local needs.135
While the PNP is growing, other immigration streams remain much larger. Between 2005 and 2009, the Federal Skilled Worker (FSW) program accounted for 76.2% of all economic immigrants to Canada. The PNP accounted for only 17%.136 Despite the smaller numbers, provincial nominees have much better labour market outcomes. Between 1999 and 2012, the mean income of principal FSW applicants remained stagnant at $23,000. Meanwhile, the mean income of principal PNP applicants more than doubled from $15,200 in 1999 to $39,000 in 2012.137 The vast majority (90%) of provincial nominees found employment in the first year. Three years after landing, between 91% and 97% of provincial nominees declared employment.138 Over 70% of provincial nominees believe their job matches their skills.139
The PNP also allows for better dispersion of skilled immigrants throughout Canada. In 2011, 94.8% of immigrants settled in Ontario, Quebec, British Columbia and Alberta. Most of them landed in large urban areas. Toronto, Montreal and Vancouver combined accounted for 63.4% of the country’s total immigrant population and 62.5% of all recent immigrant arrivals.140 While these trends can have positive benefits, studies also show that immigrants who live in large cities earn less and face greater hurdles in terms of locating adequate work and housing than immigrants living outside of Canada’s three main urban centres.141 The existing FSW program largely contributes to this concentration of immigrants: 95% of FSW were found to settle in Ontario, British Columbia or Alberta. In contrast, only 36% of provincial nominees ended up in those provinces.142
Impact Increasing immigrant intake and improving labour market outcomes can significantly increase Canada’s productivity. Dungan et al. (2013) discovered that, by increasing immigration by 100,000 (to 1% of the population) and closing the wage gap between new immigrants and domestic workers, we could raise productivity growth 0.6% above the base case by 2021.143,144 In this scenario, government balances would also be $22 billion higher by 2021.145
Evaluation Increasing immigration with a focus on provincial nominees once again presents a cost- effective solution to improve Canada’s productivity and long-run economic growth. However, there are risks associated with this option. Increased immigration may result in added fiscal pressures should these immigrants fail to integrate properly into the labour market. The federal and provincial governments may also be reluctant to increase the provincial role in immigration. This may decrease the political feasibility of the option.
Assessing the
Options
In the past it was possible to for Canada to prosper despite its low productive capacity. In the near future, however, Canada must address its poor productivity performance to ensure continued economic growth and high living standards. Using the selection criteria of efficiency, fiscal sustainability and the appropriate role for government, each of the policies were selected to help increase Canada’s productivity for as low a cost as possible. This policy agenda rejects the notion that significant impacts require large government expenditures. Those policies that do require additional resources were selected based on their ability to stimulate economic activity, generate revenue, and create a net benefit for the country as a whole.
This policy package addresses a number of key priority areas that will be necessary to raise the country’s productive capacity. The first option focuses on enhancing the capacity of Canada’s urban centres to become hubs of productivity and innovation, The second option will provide Canadian businesses with better, more efficient access to R&D support to improve business innovation. The third and fourth options will help ensure that Canada benefits from the productivity gains associated with trade. The final policy option will help the country to build a more productive workforce by simultaneously increasing its immigrant labour supply, while also improving the labour market outcomes of recent immigrants.
