Canada's Productivity

There is always lots of discussion about how Canada’s productivity lags other developed economies. Sometimes this criticism is warranted, other times it is not. In order to get a better idea of how Canada’s productivity has changed over the past 20 years I compared Canada with the other G7 countries.

An aggregate production function is specified with three inputs: capital, labour and energy. Output is measured by GDP (constant 2000 US$), capital is measured by gross fixed capital formation (constant 2000 US$), labour is measured by the number of people in the labour force, and energy is measured by energy use (kt of oil equivalent). The data set covers the period 1990 to 2010. All data are from the World Bank online data base. Data envelope analysis is used to estimate the efficient frontier and Malmquist total factor productivity (TFP) indices. Malmquist index values greater than one indicate a productivity improvement. 

The chart shows total factor productivity (TFP) for the G7 (average across countries) for each year. Between 1993 and 1998, TFP was trending downwards. During this time period there was lots of discussion about how information technology was re-shaping our lives, and presumably making us more  productive, but the effect was not showing up in the productivity numbers. Productivity recovered somewhat during the early 2000s. Between 2006 and 2009 there was a big increase in TFP but this increase was lost in the face of the Great Recession. For the sample period as a whole, however, TFP is around 1 which indicates no increase in productivity over this 20 year period. This is not good for economic wealth creation.

Looking at the individual country performance shows Canada to be the laggard in TFP (but not by much). Canada was ranked last in 9 out of the 20 years studied. Canada’s average value for the Malmquist index was slightly below 1 indicating, on average, a slight drop in productivity. For the other G7 countries, the average value was 1 or greater, but overall, none of these countries showed much in the way of productivity growth. What is interesting about this table is that, while Canada might be expected to be the laggard, some other countries would be expected to be leaders. This does not appear to have happened. 

Either the message on the importance of productivity isn’t getting through to business, or not enough high value jobs are being created, or high value workers are not getting paid their marginal productivity of labour. Moving forward, productivity growth needs to increase if we are to enjoy high living standards.

Canada's Broadband Performance

I often get frustrated by slow internet download speeds and wonder how download speeds in Canada compare with other parts of the world. Here is a chart comparing Canada's broadband performance with some other countries. Download speeds in Canada are a little below those in the US, but the real surprise is that download speeds in Canada and the US have not changed much over the past 4 years. South Korea, Lithuania. Latvia, and Switzerland are some of the countries that enjoy download speeds at least double what we have here in Canada. I view slow download speeds as a barrier to increased productivity. As more content switches to an online format, it is important to have high speed access to this content.

Are Companies Hoarding Cash?

Bank of Canada Governor Mark Carney created a stir on August 22 when he said that too many Canadian companies are hoarding cash rather than putting it to productive uses to help create economic growth.

Bank National has responded with their own report on the cash holdings of 327 publicly traded Canadian  companies that the bank follows (see here). Their research finds that these companies are holding about $55 billion in cash. A lot of money, but no where near the $500 billion or so that has been quoted by skeptics.

South of the boarder, we have a much clearer picture on how much cash US companies are hoarding. Thanks to publicly available Federal Reserve data we know that US companies are sitting on a little over $2 trillion in cash (see here). The interesting thing is that, in an historical context, this is not that much. Cash as a percentage of total assets actually bottomed in 1981.

R&D Spending in Canada

In relation to my previous post on global competitiveness, and how important R&D spending is for global competitiveness, here is a chart showing R&D spending as a percentage of  GDP for some OECD countries.


According to the OECD (see here):
"Expenditure on research and development (R&D) is a key indicator of government and private sector efforts to obtain competitive advantage in science and technology."

As the chart shows, Canada spends less than the OECD average on R&D. Canadian spending on R&D peaked in 2001, just before Nortel Networks imploded. Since then, however, the trend has been down. In 2010, R&D expenditure as a % of GDP was 1.8% for Canada and 3.8% for Finland. The private and public sectors in Canada need to spend more on basic R&D. With the recent troubles that RIM is having I fear that private sector spending on R&D in Canada is about to take a further hit.

Canada Slips in Global Competitivness

The World Economic Forum has released their latest global competitiveness ranking. As was the case last year, Switzerland  tops the list followed by Singapore. Switzerland's top ranking is due to strong innovation performance, labour market efficiency, and a well functioning business sector. Switzerland has some of the best research institutions in the world and their is strong collaboration between the research centers and business. Switzerland has the second highest rate of patenting per capita.

Canada is ranked 14, two spots lower than last year. Canada  has slipped 5 places since 2009.Canada scores high in health and primary eduction but investment in education, research and development and entrepreneurship are weak. Since these factors are key drivers to the wealth creation process, Canadian governments and businesses would do well to invest more heavily in education, R&D, and entrepreneurship.

European countries do fairly well in this ranking which is a bit surprising given all of the debt problems in the Euro zone. Among the BRICs, China ranks 29, Brazil 48, India 59, and Russia 67.