Three Policies to Improve Productivity Growth in Canada

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much evidence from many countries that competition spurs productivity advance
(Sharpe, 2006b). A highly instructive example is the air passenger travel industry in
Europe. The deregulation of this industry lead to the development of a number of low
cost, high productivity airlines such as Ryanair that have revolutionized air travel. An
example closer to home is the Canadian wine industry. Because of the lowering of trade
barriers survival for this industry required an improvement in the quality of its product, a
challenge which the industry met. In a highly competitive environment, firms must
invest, innovate, and closely monitor costs to survive, with beneficial effects for
productivity. Barriers to competition are the enemies of productivity growth.

Governments in Canada have done much to provide a more conducive economic
environment for productivity advance in the areas of monetary, fiscal, and trade policy.
But some segments of our economy are still protected from market forces, with negative
implications for innovation, investment, and productivity growth. Policies to enhance
competition may in fact be more important for productivity than policies directly aimed
at improving productivity.

B. Policy One: More Rapid Diffusion and Adoption of Best Practice Technologies

1) Moving Toward the Frontier and Closing the Technology Gap

Technological progress is the most important determinant of productivity
advance. At any given time, only a small number of firms or countries are on the
technological frontier, defined at the set of technologies that are the most advanced,
efficient, and cost effective. Other firms or countries can experience very rapid
productivity growth by adopting these best practice technologies and moving toward the
technological frontier. Indeed, the rapid growth in Europe and Japan in the immediate
post-WWII period reflected in large part technological catch-up or convergence to the
United States, the world technology leader in most fields (Wolff, 2000).

Canada, too, is playing catch-up relative to the United States. In 2001, Canada’s
level of labour productivity in the business sector was only 82 per cent of that of the
United States in 2001 (Rao, Tang and Wang, 2004: Table 2). Twelve out of 27 industries
had labour productivity relatives below this average figure.¹⁸ The reasons for these large
industry labour productivity gaps are complex. One factor is that capital intensity (i.e.
capital per unit of labour) is lower in Canada than in the United States.

Rao, Tang and Wang (2004: Table 4) indeed report that total capital stock per
hour worked in the business sector in 2001 was 85 per cent of the US level. The situation
is much worse for machinery and equipment, which is crucial for productivity advance.
Sharpe (2004:22) reports that the ratio of machinery and equipment to hours worked in

¹⁸ These industries (with the productivity relative in brackets) were: textile and clothing (62 per cent);
petroleum and coal (61 per cent); plastic and rubber products (77 per cent); fabricated metal (52 per cent);
machinery and computers (63 per cent); electronic and electrical equipment (44 per cent); furniture (73 per
cent); miscellaneous manufacturing (56 per cent); utilities (75 per cent); wholesale trade (69 per cent);
information and cultural industries (60 per cent); and finance, insurance and real estate (55 per cent).

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