FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 6, 1999

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this afternoon. As you know, there's no question about the fact that the finance committee has taken on the challenge to study a very challenging issue, that of productivity. We look to the experts to give us their input to facilitate the study of this very important issue.

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Today we have the pleasure of having with us seven panellists. I will quickly go through their names. We have John Baldwin, director, microeconomic studies and analysis, Statistics Canada; Serge Nadeau, economist, Industry Canada; Jim Frank, vice-president and chief economist, Conference Board of Canada; Fred Bienefeld, research associate, Canadian Centre for Policy Alternatives; Andrew Sharpe, executive director, Centre for the Study of Living Standards; Daniel Trefler, economist, University of Toronto; and Daniel Schwanen, economist, C.D. Howe Institute.

Welcome, everyone. Some of you have already attended other round tables, so you know how this works. You have approximately 5 to 10 minutes to give us an overview, and thereafter we'll engage in a question and answer session.

In past round tables I've also encouraged members of the panel to comment on each other's comments to get a sense of what in fact the challenges of the particular issues being discussed were.

So we'll begin with John Baldwin from Statistics Canada.

Welcome, Mr. Baldwin.

Mr. John Baldwin (Director, Microeconomic Studies and Analysis, Statistics Canada): Thank you very much. Since I was here a week ago I don't need to cover the same material that I covered then, which was the way in which we measure both labour productivity and multifactor productivity.

What I was asked to do today was to briefly review the results of the recent Statistics Canada release that looks at our productivity performance, and I'll do that in an international context. I'll compare our numbers to American productivity growth. These American numbers aren't exactly comparable to ours, but they are their official estimates. These are the estimates the vast majority of the public tend to use when they compare Canadian to U.S. productivity growth.

Perhaps I can refer the members to the blue handout that I have distributed. There is a set of graphs in this that I would like to make reference to rather than use the side televisions. And there are both English and French graphs, one on either side.

As I said last week, the multifactor productivity measure is a measure that a large number of people have been focusing on. It's not the only one, of course. Labour productivity measures also exist, but for a lack of time, I'm only going to focus on one today. Perhaps other members of the panel will do otherwise.

The multifactor productivity measure is simply the difference in the rate of growth of output minus the rate of growth of input. So if you have an increase of 6% in your outputs one year and it took you an increase of 5% to produce that output, the difference between that 6% and 5% is what we measure as multifactor productivity growth. As one person referred to it in the last panel, it's the free lunch.

It's not free. It's coming from all sorts of real inputs: it's coming from R and D; it's coming from highly skilled workers; and it's coming from changes in management on the shop floor. Those aren't differences in inputs that we're capturing. So the difference in the rate of outputs minus the difference in the rate of inputs is the increase in multifactor productivity growth.

On the first graph I've given you, I show you what Statistics Canada was saying about the performance of the Canadian business sector before and after the revisions.

Last time around I talked about what gave rise to the revisions at Statistics Canada. I don't need to repeat that.

You can see that the story we were telling at that time was that for the Canadian private business sector relative to the U.S. private business sector, these two economies were growing at basically the same rates.

I told you last time that we had revised our numbers and we had shown that there were slightly higher productivity growth rates now for the business sector.

The second graph shows you the comparison between Canada and the United States after we'd made those revisions. Business sector multifactor productivity, Canada new, and U.S. new, shows the blue line, which is Canada, the red line, which is the United States. The blue line shows Canada had a slightly higher productivity growth rate, especially over the post-1985 period.

Those aren't large differences, and when I say “slightly”, it should be regarded as modifying those differences quite significantly. The difference on average is only about 0.3%. That's well within the standard of error that you have to give to these numbers, because of the difficulties in estimating them accurately.

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In the subsequent graphs I've added essentially the inputs that go into the productivity numbers to give you some idea of what's happening to these two economies. Multifactor productivity growth rates are simply these differences. Most people would like to know what's happening to these economies in terms of their outputs and inputs. So, for edification, I've given you the first graph, which shows the two economies were growing rather similarly in terms of value-added over most of this period of time. Value-added is a measure of GDP growth.

In the next one I show you what's happening in terms of labour growth over this period of time. Once more, until the most recent period, you can see that Canada was growing more rapidly than the United States in terms of its labour productivity, but they do have a similar trend over this period.

The next graph, which is figure 23, looks essentially at what's happening in terms of the capital services that go into the measurement of multifactor productivity. In fact, capital services are an input that is used in this formula. Once more, you can see very close similarities in these two economies.

So we have rather a similar growth in multifactor productivity over most of this period of time. And we have other similar growth in all of the inputs that go into the formula for multifactor productivity: the output growths, the labour growth and the capital services growth, except for the very most recent period in which labour growth slows down quite substantially. I alluded to that last time when I noted that per capita GDP growth had fallen relative to labour productivity in the most recent period.

If you skip over the next graph, which is figure 24, I'll turn to the manufacturing sector, because there is a fair amount of interest not only in what's happening in the overall business sector but also in the manufacturing sector. I'll briefly go through the changes that have occurred in the numbers as a result of our revisions.

The first graph, which is entitled “Since the mid-eighties, the US manufacturing sector outperformed its Canadian counterpart...”, shows you what we understood to be happening before we went through the revisions. You can see the U.S.A.'s old number goes substantially above the Canadian triangular blue number. The gap has become very large.

Turning now to the subsequent graph, entitled “Significant revisions have taken place in the US manufacturing sector...”—and I didn't talk about this last time—you can see that the Americans also make revisions in their numbers periodically. They make revisions in their numbers for the same reasons we do. They have to redo the bases that they use to calculate real rates of growth. They have to bring their weights up to take into account the changes in industrial structure.

When the Americans brought their weights up to date, and in this case it was up to date as of 1991, you can see that they revised their productivity numbers down by a huge amount. In fact, almost two-thirds of the change and the difference between Canada and the United States is accounted for by this dramatic downward revision in the U.S. I talked last time about the small upward revision that we produced in Canada.

Together, those yield the second last graph I've given you, whose title says that since the mid-1980s the revised estimates of the manufacturing sector continue to show a gap, but it's smaller. So in the manufacturing sector, contrary to the numbers we put here earlier for the business sector, we show there to be still significant differences.

The very last graph I have for you deals with these differences at an industry level. Instead of looking at the manufacturing sector as a whole, we calculated the annual rate of multifactor productivity growth from 1990 to 1995 in 17 different industries, going from transportation equipment down to food and beverages.

There are three major points to be made from this graph. The rates of growth for the United States, as you can see, are in the dark red bar; the rates of growth for Canada are in the purple or blue bar. There are two industries in the United States, electrical and electronic products, and commercial and industrial machinery, which have phenomenal rates of multifactor productivity growth. The same picture holds if you do this with labour productivity growth.

The rate of growth of these two industries absolutely dominates all other U.S. industries at this period of time. It also dominates the same two Canadian industries. So most of the gap over this latest period is coming from very rapid rates of growth in a very narrow computer-based sector in the United States. In the same computer-based sectors in Canada we do not have as rapid growth; in fact we have quite a different industrial structure in those industries. We don't tend to have large chip plants, we have small assembly operations.

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In the other industries, all other industries outside of these computer-based industries, or the industries that heavily involve these new computer manufacturing plants, sometimes Canada wins, sometimes Canada loses. It's about equal.

That gives you a brief rundown of the differences between Canada and the United States at an aggregate level. I want to leave you with the caveats that the two countries do use slightly different methodologies. Indeed, as you turn to try to make productivity comparisons across a wide number of countries, there are a number of problems.

As I indicated before, productivity has to be calculated as differences in rates of change of output minus rates of change of inputs. Different studies tend to use different inputs. In some countries, for example, they tend to use as rate of change of input for labour the rate of change of the number of persons actually employed. In Canada we use the rate of change of hours worked. If your employment is going up because you get a substantial number of part-time workers, then your rate of growth of employment will go up much faster than the rate of growth of hours worked and you will get differences across countries.

If you're going to look at comparisons across countries, you also have to worry about whether or not corrections are being made for labour quality in the measure of inputs. In some U.S. calculations they do make a correction for labour quality. In the overall business sector they actually make a correction for quality, which tends to reduce the rate of growth in their numbers relative to how we calculate it. That's one of the reasons I said I don't see a significant difference in the gross business sector between Canada and the United States. In fact, when I take out from their numbers the correction for quality, our two rates of growth in the business sector are just identical.

In other countries, for instance the OECD, they tend to use employment numbers rather than hours worked. When you use employment numbers the rate of productivity growth, at least for Canada, is biased downwards because part-time employment has been growing more rapidly than full-time employment.

You also have problems when you come to measuring capital stock. Capital stock, after all, is simply the sum of all investments that have been made in the past. In order to come up with some measure of capital stock you have to know something about how long the investment lasts and how rapidly it depreciates. Those are very difficult issues to ascertain. We have a special survey that comes up with those numbers. Other countries do not have surveys and often make arbitrary assumptions in these particular areas, and the way in which they therefore calculate their capital stocks and the rates of growth of capital stocks will be quite different from those that we generate.

Finally, when you make these comparisons across countries, you have to be very careful about the degree of disaggregation that occurs. You can actually get quite different numbers if you start at a very aggregate level as opposed to starting at a disaggregated level and working up.

In conclusion, when one makes these international comparisons, they have to be made with care and one has to take into account these differences to the extent one can. And it's not easy to do so.

Thank you very much.

The Chairman: Thank you very much, Mr. Baldwin.

We'll now hear from Mr. Andrew Sharpe, executive director of the Centre for the Study of Living Standards. Welcome.

Mr. Andrew Sharpe (Executive Director, Centre for the Study of Living Standards): Thank you very much. It's a pleasure to be here again to speak today.

My comments are going to address the four questions that were given to us. First, I want to make several observations about international comparisons of productivity.

The first observation is that from an international perspective Canada has done very poorly in terms of productivity growth over the last, say, four decades. From 1960 to now, we have had the lowest rate of labour productivity growth, defined as output per employed person, in the OECD except for New Zealand and the United States. Those are the data from the OECD. We're not quite sure about the quality of the OECD data now, but certainly that's what their numbers currently show.

This lower productivity growth than other countries has meant that our relative productivity level has declined significantly. By that I mean in the immediate post-war period we had the second highest productivity level to the United States within the OECD, and now because other countries are growing faster than us, they've surpassed our productivity level. Currently, in addition to the United States, France, Italy and Germany have higher output per employed person levels than we do. We however are still ahead of the United Kingdom and Germany in terms of the G-7, but we have declined relative to our major competitors in terms of our level of productivity.

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My third point is that our slower productivity growth to a large degree reflects the catch-up of other countries toward the technological leader. The leader in the post-war period was the United States. It had the highest productivity level by far. Countries like Japan, and many of the European countries, were very low in the immediate post-war period because of the Second World War. There was tremendous potential for those countries to catch up to the American level, and many of them did that very well. They haven't surpassed the American level, but they've certainly caught up.

We caught up in the immediate post-war period, but over the last two decades we haven't caught up at all to the United States. We've remained at about 80% of output per employed person compared to the United States, and we haven't improved our position vis-à-vis the United States.

The fourth point, and this emphasizes a point that John Baldwin just made, is when we're looking at international comparisons of productivity we generally talk in output per worker terms. However, a better comparison is output per hour, because the annual hours differ across country as reflecting differences in proportion of part-time employees, the number of weeks of holiday, of vacation, the number of holidays a year, also the use of overtime and just the average usual hours. And if one adjusts for hours our productivity level increases by 2% vis-à-vis the United States. In other words, the number of hours Canadians work per year is about 2% less than the number of hours the Americans work.

The difference is even larger compared to the European countries. For example, the French work 10% fewer hours per year than the Americans, the Germans 14% less, the Swedes 15%, and Norwegians 23% hours less a year than the Americans. That means that their output per hour is increased by that equivalent amount vis-à-vis the United States.

The final observation before I go on to the four questions is referring to the manufacturing sector, which is essential for our international competitiveness. I mentioned that we've done poorer overall in terms of productivity growth in the post-war period overall in.... That also applies to manufacturing. In fact, it's even worse there. At least we've kept up with the United States in terms of our business sector productivity growth, but within manufacturing, at least within the last two decades, we have had a slower rate of output per hour growth than the United States and that has consequently resulted in a decline in our manufacturing productivity level from about 90% of the American level in 1977 to about 74% of the U.S. level in 1997.

Our manufacturing sector appears to be a problem, although there may be a number of factors behind that, and I believe panellists will be following up with some factors that would explain the difference.

I'll turn now to the four questions that were raised by the finance committee.

The first question referred to the impact of currency rates on productivity comparisons. First, I would point out that to make productivity comparisons—I believe that means level comparisons—it is completely inappropriate to use the exchange rate. The exchange rate fluctuates all over the place, for a variety of reasons, and if you use the exchange rate, for example, comparing Canadian and American productivity it would imply the last couple of years has seen a massive decline in Canadian productivity vis-à-vis the U.S. productivity, which is not true at all. The exchange rate overshoots all the time its fundamental value.

Therefore, we have to use what's called purchasing power parity exchange rates, which is the exchange rate that reflects the equal purchasing power for a basket of goods in two countries. According to the OECD, the purchasing power exchange rate right now with the United States is about 85¢, so the numbers I gave you based on our productivity level at 80% of the United States is based on an exchange rate of 85¢.

Some people think our purchasing power exchange rate with the United States is about 90¢, according to the PENN table. If we did that, then instead of having an 80% differential with the U.S. we would actually be around 85%.

One's estimate of the purchasing power parity exchange rate means that there's a lot of uncertainty associated with the level of our productivity. If one believes one has a high PPP, then there's less of a gap. If one believes there's a low PPP, there's a greater gap.

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Also, there's a lot of discussion now that you want the behavioural impact of the exchange rate on productivity. Do the changes in exchange rate affect behaviour, and does that have an effect on productivity? One could argue theoretically the effect of the exchange rate on productivity could go either way. For example, one could argue that a depreciation would result in increased aggregate demand, and that would result in greater exports and greater economies of scale and have a positive effect on productivity. Or one could argue that depreciation would lead to lazy manufacturers. It's easy to sell abroad, therefore you're not as concerned about cutting costs and you become lazy and experience lower productivity growth.

So both those channels are theoretically possible, and conversely, an appreciation, some people argue, is good for productivity because it leads to more cautious monitoring of costs. On the other hand, you could argue that appreciation is bad for productivity growth because it results in slower aggregate demand.

I would argue that it's an empirical question and we really don't know which of these channels is more important, but I would argue that the demand effects are probably more important than this lazy manufacturing hypothesis.

The bottom line I think is there are much more important determinants of productivity growth than the exchange rate, so I don't think it's a key variable in our overall productivity performance, particularly over long periods of time.

Turning to the second issue of the impact of fiscal policies on productivity, again there are different definitions of fiscal policy. If we define fiscal policy as just the general fiscal policy, then I guess the channel between fiscal policy and productivity is through the effect of fiscal policy on aggregate demand and the effect of aggregate demand on productivity through faster demand growth. It means faster output growth, it means economies of scale, learning by doing, increasing returns to scale, a very positive effect on productivity.

What's happened in recent years? As we all know, Canada has had an extremely contractionary fiscal policy. I was looking at the numbers in the most recent economic outlook and I couldn't believe them. If one looks at the primary balance, which is basically the balance excluding interest payments, basically in 1998 our primary balance was 6.9% of GDP, nominal dollars. That's basically the general government primary balance. That is the highest primary balance of any of the OECD countries in 1989, and moreover, it's the highest balance that any country has ever experienced in the last 20 years. It probably goes back even further than that, but the data in the publication only went back to 1982.

Moreover, we had a primary balance of negative 2.6% in 1993, so we had a turnaround of almost 10 percentage points of GDP in terms of our primary balance between 1993 and 1998, which is basically a complete turnaround in our fiscal situation. That, of course, has been a negative factor in terms of economic growth and explains why economic growth was so weak in Canada in 1995-96. Since then there's been a stabilization and economic growth has picked up.

So from the point of view of fiscal policy, of course one could argue those changes were necessary to get the deficit under control, but that's a different issue we don't want to talk about today. But in terms of our overall productivity performance, they certainly haven't contributed to our productivity performance at all.

If one looks at fiscal policy in terms of basically a spending policy, then one could get into the debate about which spending policy of government is more effective in improving productivity—R and D, infrastructure spending, and so on. That's a very broad question and I don't really think I have time to get into it today.

If fiscal policy encompasses as well tax policy, which I think the committee is very interested in, again it's a very complex question. I don't really have time to go into it in detail today, but I would argue that there's not a strong link between the personal tax system and productivity, for a number of reasons.

First, if personal taxes were cut, for example, people may actually work less. If they have a target income, they basically would actually work less, or if they work longer hours because there are lower marginal tax rates, that's going to have no effect on productivity defined on an hourly basis.

One could argue that if we don't cut taxes people will move to the United States. Again, if people move to the United States and those people have the same average productivity as all Canadians, there's no effect on productivity; both their output and their labour input goes abroad, so in that sense it would have no effect on productivity.

I think there is a stronger link between the corporate tax system and productivity through profits, because one could argue lower corporate taxes would increase profits and those profits would lead to increased investment, and of course investment is the key determinant of productivity. However, the link there doesn't always get made, and there are much more important determinants of investment, such as profitability, interest rates, and expectations. So, again, I think the link is not particularly strong.

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Turning quickly to the third issue of the impact of the relative sector composition of the economy on productivity, what does it mean when we say an industry is productive or not productive? When we say an industry is productive, normally we mean that there's a high value-added per worker. That high value-added per worker means that the salaries and profits in an industry are high, whereas a low value-added per worker is just the opposite, that is, low wages and low profits.

However, in terms of productivity growth over time, what we're talking about is more of a physical concept in that there's a high rate of growth in the physical quantity of output over time. I'll give the example of agriculture. According to the data, agriculture is not a productive industry because value-added per worker is extremely low. On the other hand, over time agriculture has had massive productivity gains, reflecting technological progress in that sector. But there has been a massive decline in the relative price of agricultural goods, and therefore the wages in agriculture are very poor.

On the other hand, service industries, where it's extremely hard to increase output per worker, can have extremely high productivity levels because of high wages, monopoly rents, or whatever.

In terms of industrial structure, what we've been trying to do is to move workers from the low productivity sectors, in terms of their level, to the higher productivity sectors, and that's actually happened. A major source of productivity growth has been the transfer of resources from low-productivity-level agriculture to higher-productivity-level manufacturing throughout the 1950s and 1960s. Linked to that, as happened in the 1970s and to a degree in the 1980s, is that most of the jobs have been created in low-productivity-level service industries, and that's actually had a negative effect on aggregate productivity growth. So these sectoral reallocations of labour are a very important component of the overall productivity equation.

Finally, very quickly, on the point about the impact of the trade agreements on productivity, I think overall trade has had a very positive impact on productivity, again through demand effects; greater economies of scale; longer production runs; and, very importantly, greater competition within a country. International competition can have a downward effect on costs and improved productivity. In fact, the GATT agreements of the post-war period greatly fostered international trade and contributed to the productivity growth. Equally, the Auto Pact in the 1960s contributed to productivity growth. I would argue that the free trade agreement in principle also contributed to productivity growth. We haven't see a faster productivity growth in manufacturing in the 1990s after the FTA, but there have been a large number of factors that have offset the possible positive effects of NAFTA on free trade.

One final point about trade agreements is that it's very important to make a distinction between trade diversion and trade creation. If we have trade agreements within, say, North America and that means more trade within North America but less trade with other economies, that trade agreement may not have a positive effect on our overall productivity performance because it's just diverting trade instead of creating additional trade. That's why I think a multilateral approach to trade agreements would be preferable in terms of its impact on productivity, rather than a bilateral approach.

I'm sorry, I've taken a couple of minutes longer than I should have.

The Chairman: You did quite well. Thank you.

We'll now hear from Serge Nadeau, an economist from Industry Canada. Welcome.

[Translation]

Mr. Serge Nadeau (individual presentation): Good afternoon, and thank you, Mr. Chairman.

Over the next ten minutes, I will talk about productivity in general terms and more specifically compare Canadian productivity to that of the United States. In contrast to the previous presenters, I will emphasize levels of productivity rather than rates of increase of productivity.

My presentation is based on a document called Improving Productivity: The Key to Higher Living Standards,

[English]

Improving Productivity: The Key to Higher Living Standards, which previously has been distributed to you. Also, I've selected a few slides from that presentation, which now are being shown on the TV.

Let me start first with the definition of productivity. What is productivity? A very general definition of productivity is the following. Productivity is a measure of the efficiency with which people, capital, resources, and ideas are combined in the economy. We can talk about multifactor productivity and labour productivity, but, roughly speaking, any measure of productivity attempts to measure the efficiency with which some inputs to the production process, such as labour and capital, are used.

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Efficiency is underlined in this definition for a very good reason. To use a phrase that is becoming a cliché among economists, productivity is not—I repeat, is not—about people working harder. It's about people working smarter, in other words, working more efficiently.

Why are we interested in productivity? The answer to this question is quite simple, and most economists would agree on the answer. Productivity is the most important long-run determinant of a country's standard of living. The higher the productivity, the larger the economic pie. Higher productivity gives us more choice. Higher productivity makes possible investment in other elements of the quality of life besides income. Higher productivity allows for more investment in education and health. As this chart shows, there's a very strong relationship between labour productivity and wages. As the labour productivity in our country goes up, so do wages.

How does Canada fare? By international standards, productivity in Canada is quite high, and also the wages in Canada are quite high. The issue is that we should and can do better. In fact, we can do better if we compare ourselves specifically with the U.S.

Before going further, why would we want to benchmark ourselves against the U.S.? There are several reasons for that. It is, of course, our closest neighbour, and it is the country, it's safe to say, that most Canadians compare themselves with. It is also our major competitor and, arguably, it has the most dynamic economy in the world.

Benchmarking ourselves against the U.S. doesn't mean we need to do everything the U.S. does. However, it tells us how much larger our economic pie could be. According to the figures here, which Andrew discussed a bit, the economic pie could be much larger. In fact, depending on the purchasing power parity figure used, whether it's from Statistics Canada or the Conference Board, which in this case is about 83¢, the income per capita in the U.S. is 25% to 30% higher than in Canada. That's between $7,500 and $9,000 per capita.

To make it more concrete, what does it mean? This is reflected, of course, in terms of what Americans can afford compared with what Canadians can afford. The best-selling car in Canada is the Honda Civic, with a sticker price of about $15,700, while in the U.S. it is the Toyota Camry, which is priced at about $21,000. I've chosen cars, but I could have chosen houses. The size of houses is larger in the U.S. than in Canada. I could have chosen the degree of ownership of houses. It's higher in the U.S. than it is in Canada. Here I'm using income per capita. I could have used disposable income per capita.

The point I want to make with this slide is that the standard of living in the U.S. is much higher than in Canada, or you could say that the income per capita is much higher in the U.S. than in Canada.

Furthermore, this income gap has not closed at all over the last 40 years. In fact, it has widened over the last 20 years and especially over the last 10 years. As has been discussed in this committee before, the widening of the income gap over the last 10 years is due to lower performance in terms of employment growth in Canada compared with the U.S. The point of this chart is to show that we had a gap of about 25% in 1961, and in 1998 it's also about 25%.

What are the reasons for this gap? There are basically only two reasons for the income gap between Canada and the U.S. One is lower employment in Canada. According to our studies, lower employment in Canada explains about 4% of the income gap with the U.S. over the last 10 years. The remainder, that is, 96%, is explained by lower labour productivity in Canada.

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Concretely, what does this mean? It means that on average, over the last 10 years, if Canada had had the same productivity as that of the U.S., every Canadian would have received, whether in cash or in services, $5,600 more per year. That's on average, year after year.

Over 1998 we know that the situation is quite different. In particular, we know the employment situation in the U.S. is much better than that in Canada. The unemployment rate in the U.S. is at a record low. Therefore, the lower employment in Canada explains a larger portion of the income gap between Canada and the U.S. In fact, it explains about 17%, but the remainder, which is still quite sizeable, 83%, is explained by lower productivity in Canada.

This says to me that even if the employment or labour market was as hot in Canada as in the U.S. we would still have an income gap of about $6,000. In other words, what this suggests is that while the employment problem is significant, this pales in comparison to the productivity problem.

As mentioned earlier by Andrew, our level of productivity for the whole economy is quite a bit lower than that in the U.S. It is about 15% to 20% over the 1980 to 1998 period. Also, as Andrew mentioned, the situation is even worse in the manufacturing sector, where it has gone, according to my figures, from a gap of about 15% in 1990 to a gap of about 25% in 1997.

Regionally, what's happening?

[Translation]

Our weak productivity performance relative to the US holds regionally as well. Alberta and Ontario show the highest levels of productivity in Canada. Alberta's figure is about 20% higher than that of the Atlantic provinces.

But even the provinces with the highest performance have levels below the US average and are lagging behind by close to 10%.

Jim Frank will probably talk about the impact of our lagging productivity on our international competitiveness. Based on unit costs, we have gained around 12.7% over the last decade. Unfortunately, this improvement is entirely due to the depreciation of the Canadian dollar. If our dollar had remained at its 1990 level, our competitiveness would have decreased by about 4.4%.

Although our wage increases, at 20.5%, have been less than in the United States and at a historic low, they have been much faster than the increase in labour productivity. This cannot be sustained in the long term.

[English]

So what is the concluding message here? From my presentation I would like to conclude that productivity, sustainable competitiveness, and standards of living go hand in hand.

There's been a recent debate about overproductivity growth figures, and I believe it may have obscured the real issue here. The real issue, from our point of view, is this. A country's level of productivity is a fundamental determinant of its standard of living. Canada's level of productivity is significantly below that of the U.S., and this is the key determinant of the large standard of living gap between Canada and the U.S. From our point of view, we should and can do better.

Thank you, Mr. Chairman.

The Chairman: Thank you very much, Dr. Nadeau.

We'll now hear from Daniel Trefler, an economist from the University of Toronto.

Welcome.

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Mr. Daniel Trefler (Economist, Institute for Policy Analysis, University of Toronto): Thank you. Do you have a copy of the handout?

The Chairman: Yes, we do.

Mr. Daniel Trefler: This is a most unusual event for me. I'm not used to coming to Ottawa. I'm not used to being in the finance committee's auspices, and I'm certainly not used to agreeing with all the economists around me.

So let me reiterate the great work being done by people at Industry Canada, by people at StatsCan, by John Baldwin.

In levels and in growth we have a productivity problem. I'll show you just one last set of numbers. You must be getting a headache from all these numbers. This one should be fairly easy.

It's just a further confirmation of a point already made. If you look in the last 15 years at our average weekly earnings, I want to give you yet another measure of how lacklustre our performance has been. There's an article of faith among economists that productivity is the hallmark of growing incomes. Average weekly earnings in manufacturing, based on survey data and completely independent and unrelated to any of the data used under the productivity analysis, also show lacklustre growth, about 0.25% per year for 15 years in average weekly earnings.

If we go to the T-4 slips from the government—those are fairly accurate, I hope, otherwise somebody is fibbing—T-4 earnings in Canada show lacklustre growth.

Look at the young folks. I'm glad I'm an old man. It's a very disappointing picture, especially if you're young.

After hearing what's been said, stop me if I shouldn't go along this path. I'm very hesitant because the emphasis is very clear: we have a problem.

I don't know if you're going to get this. This prescription may not help, but it's cheap. I want to give you some ideas about what's going on and what we can do about it.

So the first question is why is there a gap? There are so many stories out there. I put these little empty boxes there. Perhaps you can check them off as yes or no, depending on whether or not this is a source of the productivity gap.

Is it foreign ownership? John Baldwin has made it very clear in some of his other research work that it's not foreign ownership. Canadian firms owned by Americans perform wonderfully, much better than their Canadian counterparts.

Is it the fact that Canadian firms tend to be smaller than U.S. firms? We know small firms aren't very productive and we know that the U.S. is heading towards “big is beautiful” and Canada is heading towards self-employment. So we're heading to the low end of the productivity spectrum; they're heading to the high end. Could that explain things? No. It doesn't seem like it's going to be a story.

The under-investment in plants and equipment, is that a story? We know that U.S. firms adopt computers and other innovative technology in the workplace much more so than Canadians. Could that be a problem? Could be. It's certainly true that they do this. The trend is not clear in that. To keep it simple, it might be that technology adoption in the workplace is simply not up to snuff with our U.S. counterparts.

There is one question about the Canada-U.S. Free Trade Agreement. I suspect that's why I was asked to talk since that's my area of expertise. A big part of the public debate about the productivity gap came, to my mind, when Jeff Rubin, the chief economist at CIBC Wood Gundy, came out and said that the free trade agreement was a big letdown. It did not raise productivity in Canada.

• 1620

Being young, I thought, boy, what better iconoclastic statement than for me to show to academics that free trade doesn't do anything. So I went to investigate it and I slowly discovered that Jeff Rubin and his ilk were out to lunch, unfortunately.

Here's the bottom line. If you compare high-tariff industries with low-tariff industries, you have to ask whether the productivity grew more rapidly for industries that had a big tariff cut after 1988 than for the industries that were unaffected by the agreement. The answer is definitely. And not only did their productivity rise, it rose a lot, by about 0.5% a year faster. Half a percent is an amazingly large number.

Just think, the difference between the United States and the United Kingdom in terms of productivity growth after World War II was about 0.25% per year. And by 1980 England was the basket case of Europe and the United States was sitting on top of the world. So a 0.5% gain per year from the free trade agreement is remarkable, to my mind.

So let me talk, then, about policy. It's important to know what caused the gap if we want to talk about how to address the gap, because there are all sorts of cockamamie ideas out there that are not supported by the detailed evidence we have available to us. We're not seeing them here today, but people like Serge Nadeau and John Baldwin are quite capable of trotting out some much more detailed numbers in what they're presenting to you today.

So what do these detailed numbers tell us? Should we panic about foreign direct investment? Those rascal Americans are buying up our economy for cheap. Definitely not. They tend to be more productive than Canadians; let them buy us out if it's going to raise our productivity. Certainly, there's a host of other social issues there, but in terms of the narrow focus of productivity it's not an issue.

What about R and D? An important feature of what John Baldwin showed you is that U.S. growth is being driven by the innovative computer-based and biotech sectors. The U.S. is an innovative powerhouse; it always has been. We're setting ourselves a very high benchmark. It's a benchmark that even countries like Germany and Japan only in their heydays were able to meet. Generally speaking, most countries cannot compete with the U.S., because the U.S. is such an innovative powerhouse.

So the question is, can we do anything to promote innovation in this country? I think we can. We have some policies in place already, but I want to guard against any rash decisions to pump money into improving R and D expenditures in this country in some sort of universal way.

We can't let bureaucrats decide who are the likely future winners in the R and D races. That's not what bureaucrats are good at. I'm not good at it, for sure. That's a job for the stock market and for specialists. Let's not get too heavily into the game of R and D, of Parliament Hill becoming the R and D experts, the people who know where the next Microsoft is going to be.

In the last [Editor's Note: Inaudible] ...don't do this. What about the tax decreases being proposed? These are obvious fundamentals. We're looking at a very large debt. The larger the debt load Canada carries, the higher the interest rates. The higher the interest rates, the more investment is choked off. The more investment is choked off, the less Canada is able to compete with the U.S. having high tech in the workplace.

Today the economy's all rosy. We have low interest rates, low inflation, no great crash on the horizon. Let's think that those are real possibilities over the next five years. If the debt stays large when that crisis happens, interest rates are going to go up, we're going to choke off investment, we're going to choke off productivity growth. Let's keep a cool head about this. Let's not think about tax decreases.

So what should we be doing about this? It's easy to say what not to do. If innovation is a key, we'd better retain trade policies that keep us connected with the most innovative economies. There are lots of reasons to want a free trade agreement with, say, Chile. Fine. But if we're interested in productivity, we need integration with Europe, with the Germanys, the Italys, the Japans, the United States, not overall integration, but integration that's going aid us in essentially stealing and free-riding on their innovations.

• 1625

The issue that keeps cropping up is of preventing brain drain. Again, cool heads, please, prevail. We're talking about brain drain of a very small number of people, just a few occupations, and it's not the whole occupation that's threatening to leave; it's the young people in that occupation. So let's not start talking about big tax cuts that are aimed at keeping thousands and thousands of CEOs in this country.

Looking around this room, there are lots of people here who could double their salary by leaving this country. They could pick up the phone tomorrow and double their salary and leave. Do they do it? No, they don't do it, because they're settled; they have roots here.

If we're thinking about stopping brain drain, let's stop it for a narrow group of people, young graduates of professional institutes that turn out programmers and engineers and scientists. That's a cheap program. We could pour oodles of money on these people, and it would barely affect the government deficit. Give these people $50,000 a year tax free, and they'll stay here.

How much will it cost us? Think about it. How many are we trying to keep here a year, 5,000 or 10,000 people? It's not much more. At that rate, how much is this policy going to cost us? Tops, it will be half a billion dollars. People are talking about a tax cut to keep these people here that will cost us multibillion dollars. Let's get the money straight to the people we care about, and let's not talk about a universal program that's going to benefit a broad spectrum of very rich people. Be very careful about that.

Again, R and D subsidies have to be carefully designed, otherwise you're going to be throwing a lot of money on companies that would have been successful anyway, that give us a very nice proposal for why they should be publicly funded and end up succeeding all the more so on our backs. Let's be careful about that.

The last set of points is to put productivity in a broader setting. All the productivity issues we've been talking about here are very narrowly focused on almost an assembly line approach, how we can reduce costs on the assembly line. But we have to think on a broader notion of productivity, and we have to think about the fact that youth unemployment is incredibly high, and even if they get a job, their wages have not been going up at all. These are the people who are going be the future of Canadian productivity growth, not now, but in twenty years from now when they'll be prime working age. They're being marginalized from our economy. They will not be producers 20 years from now. Canadian productivity will be in the doldrums 20 years from now. We have to worry about these people.

Here's one of the nice things where government policies can really come together. We want to keep those young people trained so they can produce 20 years from now. We want to help an educational system, especially for the young.

When you think about how we are going to keep people in Canada, what's going to really persuade them to stay here is what we already offer to people. It's why people around this table stay in Canada; that is, we offer a remarkable quality of life.

I go to the United States, and a few times I thought maybe I should just move, but the first thing I think about when I'm taking the airplane to the United States is, where on earth am I going to find a good public school system for my kids, and where on earth am I going to find physical security unless I move to the boondocks?

We offer incredibly attractive cities in this country that prevent brain drain. We should continue to think about—and the federal government has stepped out of this area—making sure quality of life in our cities is sufficiently good that people want to stay here. They can get a public education, they can feel physically secure, and they can say, this is a place where I want to set down roots; I may not make quite as much as I would in the U.S., but I'm going to have a higher and better quality of life. That's what we should focus on.

We'll have a little bit of time to talk afterwards. But I like this one. God's commandments, the first draft: Thou shalt not do things that are bad; thou shalt be nice to each other. Moses response is, “It's good, I like it; but I know these people and they're going to want specifics.”

• 1630

Thank you.

The Chairman: Thank you, Mr. Trefler.

We'll now hear from Mr. Fred Bienefeld, a research associate from the Canadian Centre for Policy Alternatives.

Mr. Fred Bienefeld (Research Associate, Canadian Centre for Policy Alternatives): Thank you, Mr. Chairman.

It's a privilege to follow such an entertaining speaker. It's also slightly problematic, since I find myself somewhat in disagreement with him over the first half of his talk and in total agreement with him over the last part of it.

I want to aim my remarks at a slightly different level, and I must say, I begin with a good deal of sympathy for the difficulty that policy-makers face with this cacophony of advice and competing and conflicting evidence.

The productivity debate is particularly problematic and particularly intense because it reveals, in a very significant degree, some of the most fundamental problems with economic analysis.

Economic analysis has to begin with a clear and, hopefully, concrete definition of efficiency, but for all the implication residing in so much mainstream analysis that there is such a definition, the truth of the matter is that there is no such definition. The definition most analysts are using, often implicitly, sometimes explicitly, is a definition that is essentially rooted in the competitive equilibrium, which is essentially an indefensible definition, as economic theory and the theory debates will acknowledge.

Economists have tried to escape that dilemma by moving into something they call “positive economics”. Positive economics seeks to escape the dilemma by saying it stands or falls by its ability to test hypotheses against the empirical facts. At that point, the fact that the theory that generated those hypotheses may include some rather unrealistic assumptions is no longer relevant; it's no longer a critical objection. The issue is, can we test hypotheses in a falsifiable manner against the facts? That, in theory, is an escape from the problem; in practice, unfortunately, that only works and is only possible if such falsifiable testing is in fact possible.

As we look into the problem, we find the measurement problems are enormous. The kinds of problems we've been talking about here with the measurement of productivity, the enormous differences in the ways in which we can measure the inputs and the outputs, the fact that we have to take into account the prices of the outputs, are themselves in need of interpretation. Andrew made the point in relation to exchange rates. We can make the same point in relation to prices within any given economy. Prices fluctuate. During the real estate boom in Canada, price distortions in this economy were enormous, and that affects our measures.

We're constantly dealing with quantities that we are measuring in ways that are deeply problematic, and my first point is to say that once one understands...and I expect, given what I've heard this morning and given that you've been at this for some time, you have now come to a pretty thorough understanding of this fact. I believe those discussions and some of the early presentations here are very valuable, but I also believe in the end it has to be understood that the issue is not and cannot be resolved at this level. There is no correct solution, and opinions will differ markedly and often intensely.

Richard Harris, one of our rather prominent neoclassical economists, has recently described a particular measure of productivity that came from the OECD as, and I quote, “a complete pile of crap”, which gives an indication of the extent of the disagreement we're dealing with here.

In a wonderful book on public policy called the Policy Paradox, Deborah Stone tells us that numbers in public policy are like poetry. She has a wonderful phrase in which she says “No number is innocent”, and in the productivity debate we come to realize this particularly clearly.

If the answer is not going to be found by improving our detailed measurements of productivity, and if we realize in the end that statements like “productivity is the basis of our living standards” are in fact mere tautologies that really don't tell us anything....

• 1035

It was very interesting that Daniel, at the end of his talk, suddenly talked about the United States and his choices by saying that when he got down there his impression was that living standards, at least for him, would not be higher. The numbers, in other words, that suggest there's such a huge gap lie, or they tell a story but only part of the story.

Then we have to look a bit more closely at this process. As economists would say, we have to move into different methodological terrains. These are highly respectable: Douglass North, Oliver Williamson, the new institutional economists, the Austrian school. They've always made their debates on the basis of historical comparisons, looking at social and economic systems as a whole, not at individual numbers to which we attach totally unreal weight, and then find they're not reliable and there are other numbers that tell a completely different story.

When we look at social systems and the way in which these economies have actually been performing, I would say it's simply impossible to describe, for example, the United States as a wonderful success story just forging ahead and showing the lead to the world. The United States in the last 30 years, for the first time in its history, has gone through a period when substantial growth in GDP has been associated with a steady decline in real wages and average family incomes for the great majority of the population. The security of people's lives has clearly deteriorated, the economic insecurity they suffer has clearly deteriorated, and the conditions under which they work have clearly deteriorated for most people.

So the real definition of efficiency that we and you as public policy persons need to think about is a definition that asks how can human effort be translated in the economy into improved standards of living? How can that transformation occur more efficiently? It has not been occurring very efficiently either in the United States or in Canada.

That leads us to a different methodological terrain, where models count for much less and history counts for more, where we start making comparisons between different kinds of economies and the kinds of trajectories they've experienced over significant periods.

Here I just want to make very brief reference to a couple of studies that I think do this in a very instructive way and are ultimately important for policy-makers to deal with. It's a paper written by Paul Romer, a leading new growth theorist in the United States, published in the World Bank's proceedings of their annual conference on development economics in 1992. The paper contrasts two development models, as he puts it.

One model is aimed at the capacity, as he puts it, to use ideas. He uses Mauritius as his example. He says in such a model you basically create conditions that make it attractive for capital to come, and such a model can yield a certain kind of success. It has yielded a certain kind of success for Mauritius.

Unfortunately, he argues very persuasively, this success is very limited. Mauritius comes to be trapped in what is effectively a low-wage situation. Its economic success and its economic future depend on its ability to make labour available on more advantageous terms than its competitors. Romer concludes that this not only means its real wages are likely to be stuck, but they are likely to even have to decline from a very low level, as large labour surplus countries enter into the markets in which they exist at the moment.

This he contrasts to the Taiwan model, as he calls it. This is a model that aims at the creation of ideas. Picking up from Daniel, I could translate that into developing the capability of generating and appropriating technology rents. Developing an ability to generate and appropriate—that means domestic factors of production must be in a position to get the benefits of that higher productivity.

Here it's very instructive to look at the world economy over the last 40 years and to discover that what's most interesting and important about those east Asian economies that now are in such serious difficulty is that they achieved a transformation that is virtually unprecedented in history. But its real significance lies not in the fact that they achieved relatively rapid growth, but in the fact that they achieved that transformation and growth in a context where real wages froze dramatically over the entire period, and their competitiveness was maintained despite those wage increases.

• 1640

If we really want to study the question of productivity in this broader sense, we need to absorb and learn the lessons of those societies. Our societies in the recent past have performed in a way that raises very serious questions with regard to the meaning of efficiency, and even of growth, in our context.

The Chairman: Thank you very much, Professor Bienefeld.

We will now hear from Jim Frank, the vice-president and chief economist of the Conference Board of Canada. Welcome.

Mr. Jim Frank (Vice-President, Chief Economist, Conference Board of Canada): Thank you, Mr. Chairman and members of the committee. We're very pleased to have this opportunity today to discuss some of our views on the issue of productivity. Some of the remarks I will make today will be somewhat similar to what you've heard from my colleagues. They are partly based on research that was released just yesterday, which you may have seen in the papers.

The Conference Board has been making a big point about the importance of productivity improvement since we released our report in 1996 on Canada's performance and potential. We said our productivity was a fundamental factor underpinning and maintaining our high quality of life. We said our privileged position among the world's countries was not guaranteed into the 21st century.

Since 1996, each year in our report on Canada's performance and potential we've continued to compare, measure and discuss the meaning of productivity. We hope our remarks today will help move the level of understanding further and get Canadians to focus on improving our performance, especially in the manufacturing sector, which is so important to international trade.

We want to help Canadians understand that as a country we can only consume what we produce, and what we produce depends on our productivity. Further, we want to help Canadians understand that to increase our productivity we will have to look at a whole range of changes in what we do and how we do it.

At the Conference Board we are firmly convinced there is no single or simple solution to improving our productivity. There is no quick fix. But we're also equally convinced Canadians want to do better and can do better.

Before I address the points I want to make today, let me say a few words about the Conference Board. We are a private sector not-for-profit research organization. We're funded mainly by businesses and governments, but also by other organizations and associations. Our mission is to be the leading private applied research institution in Canada dedicated to enhancing the performance of Canadian organizations in the global economy. That lies behind our interest in productivity.

First of all, let me just compare a chart that is somewhat similar to the material you've heard about earlier. It looks at the relative performance of GDP per capita between Canada and the United States. This is just one measure of our relative performance. It's one measure of productivity one could use.

Since 1988, you can see, this ratio has been falling and we are certainly sitting right now at about 80% or 81% of the U.S. level of income per person. They're simply more productive than we are, and this measure, although highly aggregated, sends a fairly simple message. We don't want to talk about measurement problems just now—there's been enough of that—but one word is in order.

To get this measure of GDP per capita, we have to use a measure of purchasing power parity for the exchange rate, to adjust Canadian income into U.S. dollars. The PPP rate that's in this chart is now at 87¢. You could use 83¢, 84¢ or 85¢—somewhere in that range—and it would be sensible. If we were to evaluate our performance using the market exchange rate, which is the one you hear about every day in the newspapers, we would be sitting at about 62% of the U.S. level. The point here is we're well below the United States on either of these types of messages.

Let me turn to some of the issues around productivity that I'd like to talk about. There are five messages that I think are important here today, keeping in mind this industry—manufacturing—comprises about 15% of our output, and is the industry that is perhaps most susceptible to international competition, particularly opposite the United States.

The first message is that labour productivity growth in manufacturing through 1999—and I'm doing forecasting here to some extent—will be below that in the United States for six years in a row. You can see that.

• 1645

Second, unit labour costs are out of line, in terms of growth rates, with our major competitor, and our underlying competitiveness is therefore being eroded in this sector.

The third point is that without a falling dollar, we would not have come close to our 1990s trade success.

The fourth point is where we become operational at the Conference Board, because our main focus in life is to try to help people improve their performance. We think businesses in all sectors should seek to learn how their own productivity can be measured and improved, and should benchmark themselves against other organizations and their competitors.

The last point, just to repeat, is that the controversy around productivity growth records should not be allowed to distract us from the critical need to improve our performance. I think there's consensus around that.

In 1996, the board's first report on Canada's performance and potential pointed to the shortcomings in manufacturing productivity performance. It pointed to the importance of productivity as the underpinning of what we all want: a high and sustainable quality of life. We benchmarked Canada against the United States and other countries, and showed we had room for improvement.

This message was repeated in P and P 1997 and in P and P 1998. This is what was released last fall to Canadians generally, and nothing has really changed since 1996. Our new estimates show labour productivity in manufacturing through 1999 lagging United States for six years in a row.

But so far, the debate in Canada is coming up short on the real issue. We're not addressing the interplay between productivity, cost, and the exchange rate on our manufacturing competitiveness. It is why productivity is only one part of a very complex story.

The other parts relate to our costs of production and, of course, the exchange rate. So chart 2 shows we've had a mixed performance compared to the United States. In some years we drove faster on an output-per-hour work basis, in some years slower. Most of the time we've been growing slower than the U.S., especially in the last six years.

The pattern of growth shows the importance of the period being covered and the impact of the business cycle. If you take years when productivity actually fell—and the growth rate was negative in two years here—or years when it was rapidly growing, we would get somewhat different results.

The period 1990 to 1999 was the peak of the business cycle in both countries, but on balance we've lagged the United States in the 1990s and recorded growth at about 2.2% a year average, compared to American growth of 3.1%. We have lots of room for improvement if we want to do better.

Let's just look at the cost side of the equation. On annual growth in compensation per hour worked for all employees and manufacturing, in Canada this has been increasing about 3.4% a year; in the United States about 3.8%.

Let me just combine all of this together briefly and I'll come back to a few other points in this chart. This is a complex chart, so let me walk you through it.

The bars summarize the changes illustrated in the first two charts. In the third bar of this chart we find our labour costs per unit of output are growing about 1.2% a year in Canada, compared to about 0.7% in the United States. This is simply the difference between compensation per hour worked and output per hour worked in each country. It means the compensation cost of producing goods has risen more quickly in Canada than in the United States on a sustained basis through the 1990s. Our cost increases are out-stripping our productivity increases. Our ability to sell abroad, as well as sell at home, in the face of competing imports is deteriorating.

Chart 4 contains another important message. The Americans are generating higher productivity growth, and it is relatively close to their compensation growth. These compensation gains are therefore more sustainable. This is less true in Canada. We can take no pride in the fact that our compensation increases almost match those in the United States. They're still running too fast relative to our productivity performance.

The final part of the record of the 1990s is also shown in this chart. It relates to the impact of exchange rates on trade and competitiveness. Even though our dollar rose a bit in the early 1990s, it has fallen about 2.4% a year since 1989. Thus we've seen our unit labour costs in U.S. dollar terms decline by 1.3% a year, while unit labour costs in the United States grew by 0.7%. So you can see the fourth bar there below the line for Canada is a negative. There's a decline on average each year.

• 1650

We know we've had great trade performance in the 1990s and that employment and manufacturing increased significantly, but the above analysis suggests strongly that it is not sustainable. Too much of this has been built on a devalued currency.

It is also logical to conclude that this situation is hiding a fundamental problem of weakening competitiveness among our manufacturing industries. This is the part of the debate we have been concentrating on at the Conference Board.

As we end the 1990s, it seems clear to us that we've built our house on a somewhat unsafe foundation. Our lower dollar has allowed Canadian manufacturers to avoid controlling their costs relative to their productivity. This is indisputable, and shows up in unit labour costs rising faster in our country than in the United States.

I want to wrap up with a few comments on where we go for some improvements, and this is a different sort of spin on the issue from number crunching and approaching it from the perspective of where we have been.

Over the last couple of decades, there's been a lot of research in economics and the sources of productivity growth, and why our manufacturers seem to underperform compared to those in the United States. The basic conclusions were reported in P and P 1996, and relate to the following broad areas.

First of all, the pace of change in the industrial structure was slower in our country than in the United States. We did not move as quickly into faster productivity growth industries as the Americans did. Furthermore, the contribution of R and D spending to industrial growth has been lower in Canada than in the States. Our innovation processes, our industrial structure, our ownership structure, and the pace of innovation in Canada could all stand improvement. Generally, they are seen to be slower than in the United States.

Further, the U.S. economy is simply more flexible because of its size, diversity, and strong trade linkages to other countries. The U.S. dollar appreciation over recent years has forced U.S. companies to innovate and change quickly.

Now, these analyses are basically economic analyses at the macro level, and they focus on the structure of the economy and its industrial mix. They don't focus on the microeconomic factors that affect the productivity of individual firms, which at the end of the day is where we're going to find solutions. This research is found in the management literature, where organizational effectiveness and management innovation capacity are the central topics of discussion.

In P and P 1998, we pointed to the importance of human resource management techniques that align the incentives of people with those of the organization and help create what we called “an environment of inventiveness at work”.

Innovation systems that foster risk taking and ensure that new ideas are quickly brought to market are non-trivial elements for the modern manufacturer to develop in any country. Highly productive organizations are those that are able to create additional economic value through innovation in products, processes and organizational structures, and behaviours. These are among the areas of organizational effectiveness that we have referred to as the “softer but harder” things that underlie higher productivity.

In the final analysis, we have not found a single, simple solution. It is clear that many factors affect our overall ability to produce goods efficiently, and these include organizational effectiveness as well as the policy framework within which organizations operate, which is set by governments.

I want to conclude with three broad cuts on this.

At the organizational level, the ability of people to put all the pieces together efficiently depends on their basic skill sets. In P and P 1996, P and P 1997, P and P 1998, we talked about this. Education, a reduction in dropout rates, on-the-job training, and adult literacy are things that matter at the organizational level. The importance of attitudes toward doing an honest day's work for an honest day's pay can't be discounted.

Secondly, in the context of Canadian management, the ability of management to innovate and to bring forward new products is probably the most difficult element in the productivity mix to measure and evaluate. Management has to be quick about finding new markets, has to be able to change rapidly, and has to have the confidence and capacity to compete. The capability of management must not be overlooked as we seek ways to boost our performance.

Thirdly, given the venue here today, I thought I should say something about government.

The impact of government policies is obviously important, because they affect the framework within which business is carried on. Governments can and often do get in the way of entrepreneurship by imposing regulations and legal processes that hinder change and innovation among enterprises of all sizes, not just big ones. They can erode the incentive to compete by providing protection and limiting markets. They can tax inputs like labour and equipment, and thereby deter investment.

• 1655

Thank you for listening. I want to wrap up with just one more paragraph.

We believe that wise Canadian leaders will concentrate their efforts on productivity improvements with a vengeance. They will work hard to find sound measures in their organizations, measures that are relevant to their businesses and can be benchmarked against those of other organizations. Otherwise, their jobs will be at risk. This is true whether you are a labour leader, a president of a company, or a waged or salaried person. We think that building a culture of productivity improvement is going to be a huge challenge for Canadian industry. Yet I think it's the only task that will ensure we can meet our goal of a high and sustainable quality of life.

Thank you very much for listening. I look forward to the discussion.

The Chairman: Thank you, Dr. Frank.

We'll now hear from the representative from the C.D. Howe Institute, Mr. Daniel Schwanen. Welcome.

Mr. Daniel Schwanen (Economist, C.D. Howe Institute): Thank you very much.

I'm very happy to be here. It's going to be a challenge to add to what's been said by six excellent presenters before me.

We've heard, certainly, about the importance of productivity. I think it's been well covered. It's linked, perhaps tautologically, but nevertheless it's a good synthesis of what's happening in terms of market outcomes in our economy. There are important non-market outcomes in society and in the economy. Nevertheless, when we talk about wages and anything ranging from wages to government revenues, these are in fact, as I'm sure you've heard before, inextricably linked to our productivity performance.

We've also heard that we ought to be careful about comparing numbers internationally. Nevertheless, there seems to be a consensus that on the types of measures that are generally accepted, we are, in terms of levels, behind the United States. Also, the United States being of course the main market and competitor, needless to say, the competitor factor is often forgotten.

We've also heard that in terms of growth rates, in spite of a lot of policies that were certainly almost explicitly in some cases directed at improving our productivity—for example, free trade, low inflation, even fiscal restraint—we certainly haven't seen a pickup, if you like, in Canada's performance relative to that of the United States. That's pretty clear.

Jim Frank mentioned the fact that part of the problem was that Canadian industry was perhaps not as nimble in terms of moving into higher productivity sectors of the economy. They aren't as nimble as perhaps U.S. industry is. I'd like to add to that.

I've done some...I suppose you'd call it detailed back-of-the-envelope calculations, so it's still work in progress. But still, I took Canada's industrial structure, divided it into 61 industries, and superimposed that.... So the breakdown of Canadian industry, as we have it in this country, relative to the U.S.—overweighted in cars, because they're shipping more of their stuff down to Mexico, and we still have quite a high weight in automobiles, for example, and of course in resources and resource transformation.

I superimposed the Canadian industrial breakdown over the U.S. industry-by-industry productivity growth to get a vague sense of how much of that underperformance or lack of catching up on the part of Canada was due simply to the fact that we were unable to move into sectors of fast productivity growth. If the U.S. had had our industrial structure, they would also have had a lower aggregate productivity growth.

This is very much back-of-the-envelope, and it is one of those everything-else-being-equal sorts of scenarios. But I came up with a number that suggested that in the past 10 years we have lost up to 0.4% per year in terms of real productivity growth simply by being in the wrong sectors. If the U.S. economy had had the same sectoral composition we had, they as well would have fallen behind their own actual performance.

• 1700

We're not here, I think very strongly, to copy the United States. We're not here to be always in the same sectors as they are. Nevertheless, there is a question as to whether we are nimble enough to move ahead in sectors that record fast productivity growth or, in some cases, faster price growth, which also gets factored into standards of living in international markets. Right now, we seem to be stuck again in automobiles and resources, far more than the United States is.

So I think that's a very important factor and perhaps a context in which to put our problem. It's a very fundamental problem of the dynamic of the Canadian economy, and that is whether we are nimble enough to move into high-productivity areas, which are perhaps areas we've never heard of. We don't necessarily have to copy the United States, as I was saying.

There are a number of international dimensions to the productivity issue that have been raised and that I'd like to address, again hoping to simply supplement what has been said. First of all, there is the free trade agreement, which was supposed to help our productivity in manufacturing. Has it done so? I think the work by Daniel Trefler and Andrew Sharpe seems to concur. The suggestion is that in fact the FTA has helped improve our productivity, that is to say, it has been a positive factor in our productivity performance. Obviously, the implication is that there are other factors that have held us back. We can isolate the FTA as a positive influence, but overall we haven't really moved.

I went a little bit further than the aggregate and asked whether the FTA had actually helped Canada to at least take some steps toward specializing in those high productivity growth industries in the U.S. market. Again, this is a work in progress, but I do have some numbers that suggest that we as an export nation have specialized in the U.S. import market, vis-à-vis all the other countries, in those areas that actually registered fast productivity growth. So free trade has actually helped us move toward areas such as the food industry, where we've specialized a lot more in the U.S. market. We've made major inroads there. That's an industry that has seen fast productivity growth, faster than on average in Canada. It's the same thing for the paper industry, where we've made inroads in the U.S. markets for boxes, fine papers, and so on, excluding pulp and paper.

By the way, this is not related to the dollar. I used the revealed comparative advantage measure, and it's not related to the dollar. It's not related to the fact that the U.S. has been sucking in imports. This is really, truly us and where we specialize in the U.S. market relative to other countries.

So that's another sector of the economy that has been experiencing faster than average productivity growth.

It's the same thing for textile materials and chemical products. We have made major inroads in the U.S. market in an area that again was liberalized by the free trade agreement. These are all areas where before we were facing tariffs, and now we're not facing the tariffs. This is also an area that has seen faster than average gains, much faster than the overall economy. It's the same thing for office telecommunications, precision instruments, and various equipment and tools.

Pending a formal review of these numbers—again, this is a work in progress, and I'm certainly going to circulate this to a lot of my colleagues here to get their opinion—I think it's fair to say that you can trace some beneficial impacts on productivity growth, not just overall but sector by sector, where we've actually increased our specialization in those high productivity areas under free trade.

• 1705

Then the question becomes, if free trade has been helpful, why are we being held back? Part of that is that we are still, as I mentioned, heavily dependent on those sectors that even in the U.S. haven't seen that much productivity growth.

Secondly, there is the lazy manufacturers' hypothesis. Is it really a serious hypothesis that our manufacturing productivity has suffered because our manufacturers were able to hide behind a cheap dollar and they didn't have as much competition as a result? They could go the lower price route in the U.S. market at the expense of Canadian incomes, rather than improve the efficiency of their operations. It's a serious hypothesis, and there are serious people who certainly formulate that hypothesis.

There's a note of caution here. It doesn't really fit with the observation that there are very significant differences between sectors in how well we are performing vis-à-vis the United States. If the low dollar really had a major influence on retarding productivity growth in Canada, given the export orientation of most of our manufacturing sector, you would tend to see this effect across the board. Instead, our productivity performance seems to be lagging in only a few sectors. If you believe in this hypothesis, you also in a sense have to believe that some sectors are lazier than others. I'm not exactly sure how that fits, given that there is still quite a bit of fierce competition across a wide range of manufacturing products or that all sectors should have been affected equally by the lower dollar. I'm simplifying a bit here.

There has been mention of whether we're attracting too much or not enough foreign direct investment. Dan has mentioned that from the point of view of whether we have too much foreign direct investment. I think he clearly has been saying no, because foreign firms in Canada have a very good productivity performance relative to Canadian firms. Therefore, I turn around and ask, do we not have enough foreign direct investment? I don't think so. I don't think we're lacking in attracting foreign direct investment. If we are, it's probably a symptom of the unattractiveness perhaps of investing in Canada, given the productivity performance. But it's not really a cause of our low productivity performance that we don't have enough foreign direct investment in Canada.

Everybody has seen the charts. I'm going to take a little bit of a poke at some of the charts that have been put out that show that Canada's share of total foreign direct investment stock has actually fallen over the past 20 years vis-à-vis the U.S. and Mexico.

There has been a great input into North America of foreign direct investment from European and Japanese sources over that period. Very little of it is in fact in relatively green field investments, but a lot of it is in acquiring existing firms, a lot of them in the U. S. market. The U.S. market 20 years ago was underinvested by foreign investors. The U.S. tended to be an exporter of capital, not an importer, and that has changed a lot.

I've been doing this calculation that if we had maintained our share of foreign direct investment stock over that period, today foreign direct investment in Canada would be equivalent to well over 50% of the GDP. So we'd have double or triple the level of foreign direct investment we have now. So, clearly, there's a problem there.

When we look at foreign direct investment trends, I think it's simply a factor that Canada was already well invested, if you like, by foreign investors 20 years ago, and since then, investors have moved a lot more into acquiring existing businesses, for example, in the U.S. market, which was underinvested.

I don't think we should pay too much attention to the FDI explanation per se, especially since, from research Don Daly and others have done, compared to U.S. firms operating in Canada, which tend to be large, our large Canadian-owned manufacturer and other firms tend to have much more of a comparable productivity performance. So when you compare large Canadian firms against large Americans firms, there's a lot more comparability there.

• 1710

Where there doesn't seem to be a lot of comparability, again from the research I've seen from others, is in the small-sized firms. The U.S. small-sized firms are a lot more dynamic; they move a lot more quickly to become mid-sized firms.

We have more of an hourglass economy here in Canada. We have lots of small firms, perhaps coincidentally a lot of firms that arrive at the $200,000 income level and they don't grow beyond that. And whether it's because they have access to a larger market, whether it's because of other factors such as the entrepreneurial culture, the tax system, whatever the factors, they seem to be growing firms faster and better than we do.

So there is research indicating that our problem is there, rather than if you compare a large Canadian plant with a large U.S.-owned plant.

Let me go quickly through some other factors that have been mentioned. Do we have a problem with what Arnold Harberger, who is a key student of the growth process , calls the yeast factor? He divides productivity growth between the yeast factors of R and D, education, the social capital, and perhaps even the infrastructure and the mushroom factor. The mushroom factor is the fact that actually a lot of the productivity in growth seems to be mushrooming from sector to sector, even with sectors that have similar R and D intensity, where employees have similar educational backgrounds. What you'll find is that there are periods of time where one sector suddenly jumps ahead of the other and the others just can't seem to follow up.

Within sectors of the economy there's considerable research showing that within any given sector it's also the fact that some firms move ahead, regardless of whether they have the same R and D intensity, regardless of whether they have a similar human capital background.

There's some research by Pierre Tremblay at CIRANO showing that this even holds if you compare paper mills in Canada and paper mills in India. You will have exactly the same pattern. For given R and D, for a given educational background of employees, for the same competitive environment, some firms will do well and some firms will not. And that's what Harberger calls the mushroom factor. That goes back to the issue of the organization of the firms and what factors prevent firms from actually experimenting. I could talk more about that if you wish.

Basically looking simply at the yeast factors, I'm not convinced that we are that terribly much at a disadvantage. Of course, there are numbers showing that Canada's R and D spending is lower than that of other nations. Again, there are numbers showing that for large firms this is not the case. So that is the case, therefore, by implication, I assume, for small firms. Again, it seems to be a problem of small and medium-sized firms, not necessarily that large firms in Canada are not R and D intensive.

According to some studies, we have here in Canada the most generous tax incentives for R and D almost in the world, or certainly amongst the G-7 nations. So there is evidence that where we lack a domestic, indigenous R and D capacity, Canada has a capacity to absorb technology from the rest of the world, partly as a result of our high FDI ratio. This allows us to supplement our lack of domestic R and D by adopting innovation from abroad, if that's what firms want to do here.

I could go through the same kind of reasoning, albeit with a little less certainty. I'd have to defer to the work that experts in these other areas have done. Infrastructure, education, social capital...are we really lacking in the yeast factors relative to the United States in these factors? And I would tentatively conclude not really, or not enough to explain that productivity gap.

So we're back to issues of how can we move the composition? How can we give firms a proper environment that will allow them to move into those productivity areas as opposed to being stuck in the low productivity areas? How about examining the factors that prevent small-sized businesses from growing into medium-sized businesses and becoming as productive as their U.S. counterparts, because apparently that is quite a big chunk of the problem.

• 1715

Dan Trefler actually quite rightly mentioned our assets, social, educational and otherwise. How do we turn our assets into productive activity here in Canada and employ Canadians, rather than perhaps sell all that nice research abroad?

In terms of R and D, we've seen an improvement in our trade balance in terms of the royalties and the R and D and the patents we've sent abroad, as opposed to the ones we've purchased from abroad, to the extent that we can believe the numbers.

So I think the fundamental question is how to turn these assets into productive economic activity here in Canada. That's where I'm happy to limit myself to the international factors. I really don't think it's due to the remaining trade barriers.

There are actually major remaining trade barriers between Canada and the United States in procurement, anti-dumping and rules of origin. We shouldn't overlook these factors. The simple fact is there's a lot of small firms that prefer to pay a tariff and actually go through the paperwork of proving that their products are North American so that they can qualify for zero tariff under the NAFTA.

So there are trade barriers remaining between Canada and the United States. They do prevent Canadian firms from growing. We shouldn't overlook these factors, but I don't think they're crucial. The remaining liberalization is not as much as we've had under the success of free trade agreements with the United States.

I don't think the dollar, as I explained, is a major factor, but that question is still out there. Perhaps our openness to FDI isn't enough, but where we have remaining barriers it's because we have overriding policy reasons. We may want to discuss what those policy reasons are in terms of culture and telecommunications and so on.

In general, Canada's openness to foreign direct investment has increased in the past few years, and in fact other countries such as the U.S. also have barriers to foreign direct investments. When you compare those factors and the yeast factors, which I mentioned, between Canada and the United States, I'm not so sure those really explain our poor productivity performance, or at least explain why we're not closing that gap. And that leaves us with more domestic factors, and I'm happy to defer to others as to whether taxes and other factors are in fact the actual barriers to growth rather than international factors. I'll limit my comments to the international factors.

The Chairman: Thank you very much.

We'll proceed to the question and answer session. We'll begin with Mr. Epp, with a 10-minute round.

Mr. Ken Epp (Elk Island, Ref.): Thank you very much. I found the presentations very interesting. I have some fairly serious questions.

I get the impression that when we talk about productivity it's almost elusive in its definition. I know we began our round table sessions the week before last by trying to define what “productivity” is. Yet still I see different graphs, different numbers from different presenters that show quite disparate conclusions. Perhaps it just underlines what I remember reading a long time ago, that if you took 100 economists and asked them a question on any significant economic policy, you'd probably get between 200 and 300 answers. Perhaps that's the problem.

The question that I want to ask now goes right to Mr. Baldwin. He was talking about multifactor productivity, but all of the graphs talked about growth rates, instead of the absolute value of productivity, which somehow I don't think anybody has been willing to define here. We're not talking about productivity. Just a minute, we are. That's the word we're using, but invariably the presenters are all talking about growth rates in productivity. Therein lies a potential mathematical glitch in our understanding, not only among those of us on the committee but also among Canadians.

For example, I could be in a car race. If I increase my speed from 100 kilometres an hour to 120 kilometres an hour, that's a 20% increase. So I'm clearly doing better, by your measures, than the guy who's going 200 kilometres an hour and increases his speed by only 20 kilometres an hour, which is a 10% increase. I'm better than he is. Certainly, I'm showing a better improvement. But in absolute values my productivity and my moving towards a goal are way behind his. If I also go back one step before that and actually look where we are on the racetrack, accumulatively he's already 40 kilometres ahead of me. So for me to somehow twist that using a statistical sleight of hand, if I dare use those words, to show that I'm really well-off, I'm doing fine, is clouding the issue.

• 1720

I'd like your responses to that, starting with Mr. Baldwin, but to the others as well.

Mr. John Baldwin: We have referred in our graphs to the rate of growth for productivity, because as I indicated last day, we feel we could measure reasonably accurately the extent to which we're making progress in this area. And those are the numbers we've placed before you. Are we making progress relative to what we've done in the past? We can probably measure that reasonably accurately. Are we making progress relative to the progress that other countries are making? That's more difficult, but most people around this table have made attempts to do so.

As I discussed last day, that measure, even by itself, is only one of many that you'd want to use to evaluate how well off you are. And you've heard others around this table say we want to know in absolute form where we are relative to the Americans. To use your analogy, we want to know where we are in the racetrack.

It is indeed important to know whether we're behind by one lap or two, but it's also important to know whether we're increasing our speed relative to the Americans. If we're not, we're clearly never going to catch up, and if we're declining relative to the Americans, we're obviously going to fall behind.

Those are all important pieces of information to put together, in my opinion, and it's important for most people to make those evaluations.

What others have talked about here today is using a broader measure of productivity and measures that are not as easy to put together by statistical agencies. When Fred and Jim talk about the innovation system, they're talking about far more comprehensive pictures than simple aggregate productivity measures can produce. And those comprehensive pictures would come from more than simple rates of change in productivity. They're also going to come from more than simple level differences between Canada and the United States, either in terms of output per worker or GDP per capita.

The profession, whether they be neo-classical economists or observers of the economy, almost 20 years ago began to ask whether there wasn't a more comprehensive picture that could be put together of the type of innovative activity that we feel we're trying to capture with productivity measures. There are attempts being made to move beyond the simple and aggregate productivity numbers to understand the nature of the dynamics occurring within industries, and we've had numbers of references to those.

My own research division within Statistics Canada has moved to try to understand whether small firms are a problem or whether large firms are saviours by looking at the microeconomics of change within these systems.

The science and technology group at Statistics Canada and in other statistical agencies around the world have moved to try to put together a more comprehensive view of the innovation stance of firms and of their countries. They are trying to piece together what it is that contributes to this broader view of what we need for progress, the extent to which Daniel was referring to, the extent to which some firms grow and some firms don't.

Individual surveys and research, both inside and outside governments, have tried to focus on the nature of the conditions that would seem to contribute to a more broadly defined measure of success, whether that success is growth by the firm or by innovation. And in that sense I think any of the narrower productivity numbers that are being used are useful, but only useful in this larger context. Innovation and nimbleness is what we're generally talking about here; how new products are produced, how they're introduced quickly and how we take advantage of it. And that requires a broader view.

• 1725

Mr. Ken Epp: Just before the other answers are made, I—

The Acting Chairman (Mr. Paul Szabo (Mississauga South, Lib.)): I think Mr. Frank wanted to make a brief intervention on the same question. I think it's useful to you.

Mr. Jim Frank: Yes. In the interests of brevity, very quickly, I don't think there is any serious disagreement among profession people who work in this area as to what we mean by productivity. We mean output per unit of input. And the simplest way of measuring output is usually valued-added. It says what is produced in an industry, net of the inputs and the outputs in that industry. It's the value-added of an industry like manufacturing.

The inputs I used in the piece I presented here is hours worked. It's the simplest, albeit there are lots of problems if we want to look at those around measuring hours worked and quality adjustment and so on. Where there has been so much hand-wringing, if you like, over the last number of months on this issue, comes because the measurement of inputs, particularly capital, is extraordinarily complex. And it's even more complex when you try to do this among and between countries with different depreciation systems, different accounting systems and so on. It's just a very complicated exercise.

I believe that what Stats Can has done in the area of multifactor productivity is the right thing to do. That is, in principle, how one wants to measure this stuff. The concern I have as an observer of this is that the whole exercise of trying to understand what productivity means, how we should go about trying to improve our performance, gets lost in the argument about decimal numbers.

I'm very conscious of the fact that data get revised literally monthly, if not every few years, sometimes in large ways, sometimes in small ways. And our understanding of these issues improves and so on. But I think where there's general agreement is that by and large in Canadian industries we are less productive, our growth rates are slower than the United States in recent years, and our levels are lower than the United States. Some industries are doing just as well or better than the Americans, others are not.

It's a very complicated issue and it's fraught with all kinds of differences of opinion on the importance of the concept, how you go about measuring it and so on. So what you're hearing today I don't think is so much differences on what the concept is as it is differences in how you measure particularly inputs, capital being the main one.

Mr. Ken Epp: I want to come to your question, and again I want to go back to Mr. Baldwin because I want an answer from him.

When I'm driving my car I can judge my acceleration either directly or indirectly. I can take my speed and after a certain interval of time look at my speedometer again, take the difference and compute the average rate of change in this speed, and that's an acceleration. I can also put in an accelerometer, which works on gravity, and with that it doesn't matter what speed I'm going, I can find my rate of acceleration.

I want to know from you, are you judging the rate of change of productivity directly by looking at two levels of productivity from one time to another, thereby admitting that you can actually measure the productivity, or are you using some indirect measure?

Mr. John Baldwin: I'm not sure I understand the question.

When a statistical system looks at the rates of growth of productivity they are not comparing a level at two points in time. They're asking whether or not it accelerates.

Does that help to answer you question?

Mr. Ken Epp: You're measuring it indirectly then?

Mr. John Baldwin: You're measuring it indirectly then, if that's your definition of indirectness.

Mr. Ken Epp: Okay. And do you know what you're measuring?

Mr. John Baldwin: We're measuring what Jim and the others have defined as changes in the effectiveness of an economy to produce something from its input structure. And we're looking at the rates of change of the output that are being produced relative to the rates of change in input, to answer that question.

Mr. Ken Epp: Okay.

• 1730

The Acting Chairman (Mr. Paul Szabo): We may get a chance to come back. I think we're going to move to Mr. Riis.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): Thank you very much, Mr. Chairman. This has been an absolutely fascinating afternoon and I wish I had a chance to ask everyone a couple of questions.

John, can I go back to you and your graph 24. What struck me was Daniel coming last year talking about the various sectors and how we need to look at where we're stuck as an economy, and how some sectors are old-fashioned, very slow to get up to speed in terms of high tech and so on. I noticed, John, on your graph, the Americans are fairly steady going up and Canadians are kind of lumpy here; we're down and up and down and up, quite a variation. Why is that, do you think? Why have we seen these rather major swings compared to the Americans?

Mr. John Baldwin: The major swings come from two factors, both the relative severity of the recessions and the way in which businesses are responding both in terms of their investment and in terms of their hiring policies. If you look at the picture that is given in the early 1990s, what you have is a relative decline in the amount of capital that's being used compared to labour over a long period of time; it's very similar to the early 1980s. The reason for this is that for a fairly long period of time the manufacturers coming out of these recessions are hiring rather than investing. Essentially, that's a very easy answer. Why that's occurring, and why it takes such long lags, is not clear.

Mr. Nelson Riis: Jim, I found your presentation summarized a number of points others were making. On page 8 you talk about the unsafe foundation to our house, with it being buoyed up by our lower dollar and then making us feel perhaps inappropriately confident in the market. However, you go on to talk about the microeconomic factors that affect the productivity of individual firms, and how we need to focus more on there, and then you go on to talk about the mushroom and the—what was the other one you had?

Mr. Jim Frank: Yeast.

Mr. Nelson Riis: The yeast factors and so on.

Jim, you identified for us, from your judgment, the kinds of areas we need to focus on as a country if we're going to increase our productivity, whether it's the education, the management skills and so on. If you had been at this table, say, six or seven years ago, which I suspect you probably were, you probably could have come up with that same list then. This is not a magic list; it's boring stuff, we've known this for a long time. Why is it, in your judgment, or perhaps in the judgment of your colleagues, we are so slow in the uptake on this? This is a pretty simply lesson that you're reminding us of once again. Why is it that we're not moving more on training and education, and investing in the innovation culture?

Mr. Jim Frank: I honestly don't have a good clean answer for you, Mr. Riis.

Mr. Nelson Riis: Give me a dirty one, then; it doesn't have to be clean.

Mr. Jim Frank: It's something I have thought about a lot, because when I first came to the Conference Board in 1976 the first research I worked on was measuring productivity between Canada and the United States in manufacturing. The reason I was interested at the time was that we were coming out of the anti-inflation program, there had been enormous inflation in Canada and in the United States, our performance was dreadful, and everyone was concerned about how we were going to turn this around.

After working at it for a number of years and speaking to literally thousands of business people, I maybe abandoned it or lost interest in it because it became so complicated and difficult. The more I worked with individual organizations, the more it was clear to me there's something besides just counting capital, how many dollars have you put in, what kind of education do you have, and how much training do you have. There's an element of the nature of the organization and its effectiveness, and how people work together, how they are incentivized to go in the same direction and so on.

So over those last 20 years that's where I've come to on this issue. I think the preponderance of experience, at least in my world, suggests to me it is very much a leadership, a management, and an organizational effectiveness issue, and you have to go at the micro level to find answers to it.

We can be smug about it, we can poke fun at economists and how they measure this stuff, we can poke fun at management consultants with their flavour of the month books on these issues, but at the end of the day it's darned hard work to improve your performance on an ongoing basis because your competition isn't sitting still.

• 1735

The irony of the whole exercise is when we brought this up again in 1996 in our P and P report, I was surprised at the reaction. People started to talk about this again, so here we are today. This a topic for cocktail conversation, of all things. It's great because I think Canada has to somehow find ways to improve the level of our performance—to go to your colleague's point—as well as the rate of growth.

It's not going to be easy. It goes to all of those things that are bread and butter issues, such as educational levels, on-the-job training, mobility of people, incentives within the country to excel and succeed. None of this is rocket science.

It seems clear to me that management in Canada has not been as quick to change and grab onto opportunities as American management, for example. I absolutely reject this concept of lazy management, just as I reject the concept of lazy employees. This is not going to help us move forward with this issue.

Mr. Nelson Riis: Could I interrupt, if you don't mind? I don't know if I'm just making this up, but I seem to recall you saying those same things here a number of years ago: our managers have to be more innovative in the way they mobilize their human capital; we need more investment in education and training—blah, blah. So why don't we do it? Why don't we deal with these head-on, or deal with Dan's suggestion that when you look at these various firms allegedly doing similar things, some advance and others don't? You'd think we'd be focusing on looking for the matrix that comes together to make this firm an innovative one compared to that one.

Mr. Jim Frank: A lot of it goes to leadership and management within organizations. I would only point out that if you look at a number of major corporations in Canada that have had troubles recently, they brought in American management to fix the situation. This is very troubling because it suggests somebody from south of the border is able to move into Canada to fix a major corporation in a way we can't. So I believe there's something there.

If I wanted to be really long-term about the issue to satisfy the history buffs, our country has had a national policy of relative protection of industry since the 1800s. We encouraged foreign investment here to serve the Canadian market. That policy basically went all the way up to the FTA.

There was significant liberalization of trade with the Auto Pact, and there is no debate about the productivity of auto workers in Canada being at least as good as, if not better than, those in the United States. Our cost advantage is even better because of the way we finance medicare, principally.

So we can do it; there's no debate about it. But we've had 100 years of developing a management culture around serving a small market. We broke those barriers down in 1989 or 1990 with the FTA. I thought at the time we would see faster productivity growth in manufacturing, because it's the industry we can actually get a better grip on than banks, for example. Yet the numbers aren't coming out the way they should if there were that rapid growth.

I've had to come back and ask myself what would explain that. Maybe it takes a lot longer than we thought for top-end leadership to learn to play a different game.

Mr. Nelson Riis: We have to wait for another layer of leadership to come through the system.

Mr. Jim Frank: Absolutely. Either way, you're bringing new people in who have grown up with a different perspective, namely “I'm not going to just sell my plumbing supplies in Ontario. I'm going to sell them in Texas and Louisiana. Therefore I have to behave differently, seek my markets differently, do different marketing and so on.”

When Canadian Tire went on its venture into the United States as a retailer, do you remember the results? They weren't very good. Do you know who's running Canadian Tire as we speak today? It's an American. Do you know how Canadian Tire has been faring against Wal-Mart? They're doing very well because they overhauled their inventory control systems, they overhauled the culture within the stores and the systems within which they operated, so today Canadian Tire is prospering.

I'm not saying no Canadian executive could have done that, but you get suspicious when you see these things happening.

Mr. Nelson Riis: If you changed the name to American Tire they might sell.

Mr. Jim Frank: Maybe.

Mr. Nelson Riis: Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Riis.

Ms. Leung.

• 1740

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chair.

I really enjoyed all your presentations. My first question is for Daniel Trefler.

I'm interested in your comment. You suggested maybe having special consideration for the younger talented scientists, giving them $50,000 or whatever, to discourage their going away. Then you find that a broad-based tax cut may only benefit the rich. That's a very interesting comment.

Now, do you feel the middle-aged talent is pretty much rooted here? I'm following some of your discussion, or someone else's. Would you see that as an incentive or motivation for the younger scientist or researcher to remain? Would that be enough? I think the baby boomers tend to be more materialistic. You were talking about incentives, you know, tax credits or whatever. Do you think that's the way to deal with our brain drain—so-called brain drain; we're not sure, right? Would you like to answer that?

Mr. Daniel Trefler: There's a context for it. I'm torn, like anybody who's raised children is torn, by self-centred child-raising versus children who understand their responsibilities in the home. My immediate concern in making this proposal is trying to change the tone of the debate from a universal tax cut that could be extremely expensive and affect all sorts of people who we don't really need to subsidize, to giving the money as quickly and in as focused a way as we can to the group that's affected. And I think that group is the young scientists; it's not the middle-aged scientists. A big part of it is just a question of trying to avoid giving away large sums of money that could be used better elsewhere.

As to the issue of how to make the youth more responsive to the needs of this country, at some point it's too late for that generation, I think. We should start thinking about the kids who are now three, four, five and six years old, not the kids who are twenty. The kids who are twenty, by all the training literature, have no incentive to be trained, have no incentive to change their attitudes. They're detached from what's going on around them. They're untrainable. That's what all the evidence points to. Let's admit we made some mistakes, let's hope the mistake doesn't have too drastic consequences. And let's not now make the mistake again for the next group of kids who are coming through the system. Let's address it.

Ms. Sophia Leung: Thank you, Mr. Chair. I'm also really very surprised about the income-per-capita gap. For all those years, there's such a very wide gap between the U.S. and Canada. That's really alarming. Also, you cited that the lower labour productivity is another very big contributing factor. Do you feel that perhaps our system, the labour structure, has induced some of the problems? It's still puzzling for me that the gap is so great. How can we reduce that gap?

Dr. Serge Nadeau: Actually, I must say that at Industry Canada we have not done any research on that—the contribution of labour market rigidities to lower labour productivity. Now, I don't know, maybe some other panellists here have spent more time on that—Andrew, for example.

Mr. Andrew Sharpe: Okay, in terms of labour rigidities, I think in certain industries one can make a case that labour market rigidities may have contributed to poor productivity performance. For example, CN recently has seen massive productivity gains and it has shed a lot of labour. One could argue that there were rigidities in the system through regulations or a variety of reasons, social hiring.... It has resulted in very high productivity gains in that sector. There may be a few other sectors where regulations have resulted in overhiring.

• 1745

But overall I don't think our system of labour market regulation is a key cause of the productivity gap with the United States and our lower standard of living. I think it's linked more fundamentally to our capital stock. We actually have less capital per worker in Canada on average than in the United States, and if you have less capital per worker, you're going to have a lower level of labour productivity. It's linked again to the innovation gap we've talked about. It's linked to a wide variety of factors and industrial structure.

I think we can come up with explanations for our 20% productivity and income gap with the United States. That has existed throughout our history. In fact, it was larger in the immediate post-war period. We narrowed the gap until the late 1970s.

Mr. Fred Bienefeld: To add to what Andrew just said, the World Bank commissioned Richard Freeman of Harvard University to do a study on that very question, to summarize the evidence regarding the claim that labour market rigidities are a major loss of allocative efficiency, because that is very much the bank's position in its dealings with the developing countries.

Freeman wrote a most interesting article in which he said repeatedly that when began this study, he had taken it as a given that he would find a lot of this evidence and he proposed to summarize it in this report. But in the course of doing the study, he was essentially unable to find any significant evidence to support the hypothesis. There was some evidence on that side; there was other evidence that suggested that in fact more structured relationships could be more efficient.

I want to make a very brief point. At many levels, I agree with many of the things that have been said here when discussion is about how to combine education policy and all of these other policies, and the fact that this is such a difficult issue in the end, when one gets right down to it. This is partly why it seems to me that it is very important for us to try to learn by studying systems as a whole, by looking at how they interact.

The World Bank commissioned another study on the effectiveness of investment in education. The study concluded that the effectiveness of investment in education is critically dependent on what the government in question does in other areas of the economy. In other words, there's no simple relationship. Unless you're training a lot of high-tech manpower, unless you're taking steps to encourage and promote investment in the kinds of areas that will absorb that manpower, you will just end up with a lot of educated, unemployed engineers. Some of these things are rather commonsensical and they don't lead to obvious conclusions, but they lead to a different way of looking at the issue.

I'm a little bit uneasy with the emphasis on the comparison between the U.S. and Canada. I think it's quite meaningless at a certain level. The U.S. has a different economy, a different history, different resources. Kuwait is a very wealthy economy on a per capita basis. I think we need to look at our situation and try to look at the relationships between different aspects of our reality and see how we can improve the way in which they function. We can do that by looking at other systems and at how they have developed.

A couple of years ago I spent a month in Denmark, and I have to tell you that I was absolutely blown away. For anybody to tell me that the U.S. has the highest per capita standard of living in the world, that just can't be right. You just have to go to a place like that to realize that the quality of people's lives is a different story, not only for the reasons Daniel pointed out but in all sorts of ways.

I think we need to get a better grip on what it is we want to achieve. We don't want to beat the Americans on some particular statistics; we want to improve the quality of life for people in Canada. Of course, these statistics are important inputs into that debate, but in the end I would urge people to look more at some other kinds of evidence and to pose the question in a somewhat different way; otherwise we'll be hung up on these debates saying Canada must do this or must do that, and Canada isn't going to, because we're in a different situation.

Take the U.S., for example. The General Accounting Office in the U.S. issued statistics in the early 1990s that showed that from 1980 to 1992 the net asset value of financial business in the United States grew by 11.5% per annum. Over that same period, all non-financial business in the United States grew by 0.6% per annum in nominal terms—that means it was shrinking. We're talking about averages here and about economies that are undergoing transformations. With these numbers, some people would argue—and I would be one of them—that the financial sector is severely distorted in the United States now, just as our real estate sector was in the 1980s, and that is going to have a huge impact on these kinds of measures and on these kinds of statistics, and unless we get hold of these things, we will unfortunately be making policy in relation to norms that I think in the end will be very misleading, and we may forget to look at the systemic questions that we really need to address.

• 1750

The Chairman: If I could follow up on that question—

Ms. Sophia Leung: Mr. Chairman, I have a last question.

The Chairman: Could I follow up on your question for one second?

Ms. Sophia Leung: Sure.

The Chairman: I want to go back here.

I think a billion dollars a day gets traded between the two countries. I know my children watch American TV shows. They read American magazines. They're influenced by the United States quite a bit. Their reality is quite different from mine when I was growing up, with, for example, the technological changes that have occurred and the fact that they're on the Internet and they can speak to practically anybody around the world.

It does matter. How the United States is doing is very important to our reality as individuals. I don't want to get into the history of the United States versus the history of Canada, because I've often said that while it's important to know our history, it's also important to make history. You make history by competing, by doing all sorts of things that you need to do.

But I'm not so sure it's that clear. I think it's a little bit more complicated. We as Canadians need to look at what's going on in the United States with a great deal of focus and attention, because it affects us from the very first day.

Mr. Fred Bienefeld: I'll be brief.

I'm not suggesting we shouldn't look at the United States. I've said these statistics are important, but I don't think it makes very much sense to say the United States is at this level and therefore we must achieve that, and if we don't, then that's a failure. That simply ignores all manner of things, and also, it is ultimately based on a comparison that is deeply problematic.

As Daniel said so effectively at the end of his talk. Those statistics don't in fact translate into quality of life, and that's what it's really about in the end. There are statistics on competitiveness that somebody else referred to just a moment ago, that show that the way in which you organize social services, particularly health, in fact gives you a significant competitive advantage in certain areas. What we have to remember always is, yes, we need to make those comparisons, but here are different ways of reaching the objective of trying to close that gap.

I think there's a very valuable discussion right now about the low-wage versus the high-wage road of achieving competitiveness, and if you look at different economies around the world, you can learn important things.

Canada is constrained, I have to admit, and somebody would rightly make the point that given its history and its location, Canada is probably less capable of pursuing certain kinds of more coherent strategies that have been successful elsewhere. I agree that it is a factor that one needs to take into account, but I think the question ought to be posed in those terms rather than in the excessively fragmented terms.

In my view, the U.S. isn't a great success story. Socially, politically, and even economically, one should just aggregate the numbers. The fastest-growing sector in the United States for the last 10 years has been the prison sector, as far as I know.

The Chairman: Okay.

Ms. Leung.

Ms. Sophia Leung: If you believe performance depends on supply and demand, which also closely relates to population, we in Canada have a very small population compared to the U.S. Does that contribute any problem? No one commented about population. That's one thing.

The other thing is, we talked earlier about Canadian Tire. Don't you think Canadians tend to have certain attitudes and behaviour? It's hard for me to define. I travel a lot internationally, and I have a lot of contact with business. They paint a very nice, gentle, stereotyped image of Canadians. We are gentle, not aggressive enough.

I would like your comments on that: population, attitudes, and behaviour.

Mr. Jim Frank: Well, what can I say? We're so gentle and polite that we can have this discussion here and everyone agrees with everyone.

• 1755

With regard to the issue about comparing ourselves with the United States, when we started to do this work on Canada's performance and potential, we asked ourselves, who do we look to? Do we look to Norway? Yes, Norway is important. Japan is important and Germany is important, but it's the United States within which virtually all of us live within 100 miles. We travel back and forth all the time. We look at that lifestyle, and, yes, there are distributional issues, issues of violence, and issues of safety, but we can't be very smug in our country when it comes to these issues, in my view.

I think a structural change hit us in 1990 with the FTA and NAFTA, and I don't think policy-level people, politicians, really understand how profound that change actually is.

One of the things we talk about is this brain drain issue. Are we losing our best and brightest? Who are they? Are they young people? Do we care? Should we give them $50,000 to get them to stay here? The realities are that the flow across the border on temporary visas has increased significantly. When we reported this last year, our P and P people argued about whether it meant anything. The numbers for 1997, which we just got from the U.S. the other day, show 70,000. That compares to 38,000 in 1996. Ladies and gentlemen, it's going north.

Why do people leave? Is it income, weather, or taxes? It's fundamentally opportunities. People do not go to the United States if they don't have a job there. We need high-paying jobs in this country, and we have to celebrate highly paid people, as opposed to saying let's tax them and chase them away. We want more of them, I would think.

So this structural change with NAFTA has opened the borders for Canadians, and it's not old goats like me; it's young people who are well educated, mobile, aggressive, and keen to build their futures. After they leave and try their opportunities in the United States, a lot of them will not come back. Maybe we shrug our shoulders and say it doesn't matter, but I for one am concerned about that, because I believe that if this trend continues in an unchecked way, we're going to lose too many of our best people.

I would challenge you to think, is Ireland better off or worse off because Terry Matthews located here in Ottawa and created Newbridge, never mind Mitel? Just ask yourself. Surely we would want thousands of those people to come into our country.

So I worry about this North American marketplace and that magnet to the south, which, with all its warts, for a lot of people is very powerful.

Mr. Daniel Schwanen: I would just add, if I may, that I think we don't have to adopt the U.S. culture system, but we have to sell to that market. It's our obvious market. The domestic market is too small perhaps. But there are tremendous opportunities, obviously, and our economy depends on selling to the U.S. market to a large degree. If individuals or companies can't do it from here, they're going to go there, because there are greater opportunities now for being mobile.

The only way you can do it from here without having a low-wage economy, which is one way of being competitive but which we don't want, is to actually be more productive. That's really the meaning of this productivity debate.

I completely agree that with our population, obviously, we had a small market here, and that's why we went after these free trade agreements.

I'm not an expert on attitude and behaviour. I think maybe we're exporting more aggressive people, and we're importing gentle and well-behaved people. So maybe that's a plus. I don't know.

But I think, fundamentally, if you want to earn a standard of living that I think Canadians really aspire to, a growing standard of living, you have to be able to be competitive in that U.S. market in a way that is not low wage related but productivity related. Otherwise, you're going to lose firms and people to that market itself because of mobility.

Mr. John Baldwin: Reference was made earlier to the fact that there are occasionally lags in adjustments in systems. Jim and other economists have said that they've been looking for the productivity gains that should have come with NAFTA. We all started looking very quickly a couple of years afterwards and hoped that the numbers would generate them. I think it's worth emphasizing that these attitudes do change slowly, and there's some evidence that even five or six years after NAFTA was put in place, Canadian manufacturers still hadn't completely changed their attitudes.

• 1800

In the mid-1990s we did some surveys on technology adoption, the sorts of technologies that are driving the new economy, such as computer-based technologies, automated robots, and CAD/CAM systems. There was a parallel survey done in the United States. In both surveys the manufacturers were asked to list the impediments they faced. We come back to your earlier question. In both surveys the impediments that manufacturers in both countries felt were the most important had to do with labour markets and problems in getting skilled workers. Incidentally, when we followed up on whether that was a significant barrier, they said no, we went ahead and did it anyway. We trained people. So there wasn't a structural problem in the sense that labour wasn't available. It's just that they needed more skilled people, and these firms went and did it themselves.

But to come back to the issue of population, both countries asked their firms whether the size of market appeared to be a relevant barrier. We're talking about post-NAFTA by five or six years. The Canadians said yes, it's the second or third most important. For the Americans it was right at the bottom of their form. The size of market is not a relevant consideration. But it's still a relevant consideration to a substantial portion of the Canadian manufacturing population. Now, it may be disappearing over time. We'll be able to look at that in new surveys and see whether or not it has changed. But people still perceive that the border matters, despite NAFTA. Whether that's because of barriers placed at the border or just long lags in changes in attitudes is not clear.

Mr. Fred Bienefeld: I just wanted to make one very quick point, and it's a historical point that may be of some interest.

Mr. Frank spoke earlier about the national policy. It's important to understand that the national policy was introduced in this country because for a period of 10 years previously, Canada was hemorrhaging labour to the United States. The border was open, and Canada was losing more people to the U.S. than it was gaining in immigration from Europe. So Canada was actually not happening. It was shrinking.

Looked at in those terms, the national policy was a phenomenal success in the sense that it built a strong, prosperous country, not a marginal country, based on resource rents. But the resource rents were dispersed through the economy through a manufacturing system that was somewhat inefficient by international standards, that's true. We've come eventually to pay the price for that because by the 1970s, the resource sector was no longer able to carry a manufacturing sector with those deficiencies.

So I think we do actually all agree that the challenge for Canada is to find a way of moving that manufacturing sector forward; creating more higher-level, value-added jobs; and developing the capacity to apply ideas in this context. The question is, what kinds of policies and models do we look at? That is what I think was the key to this debate.

The Chairman: Thank you.

Ms. Bennett, do you have any final questions?

Ms. Carolyn Bennett (St. Paul's, Lib.): Yes. First, I just wanted to check Mr. Frank's numbers. I know that when we lose the really great doctor or the really great researcher it's something that bothers us. Last week we heard from Statistics Canada that only 15% of Canadians working in the U.S. were earning more than $50,000 a year. In the macro, I'm not sure that our worst nightmare is actually substantiated in real numbers.

I think with researchers, we have the names and addresses of those people, and we're upset that they've decided to go to find an opportunity. But sometimes it's a Howard Hughes grant or whatever that gives them $1 million without any ties at all, and it's a pretty good thing for a Nobel-streamed scientist to go and get. I'm not sure we're going to be able to do that here.

I've just never heard anybody say they're leaving because of the taxes. Not one of my classmates from medical school has said that. It's the 25-year reunion of my medical school, and I'm just not hearing that from the researchers. They want a stable environment in order to do their work.

There's one other thing I've heard, and anybody can comment. Last week we had lunch with Lemieux, the researcher who just won the Wolf grant in Israel. His concern was that our banks in this country don't know how to finance R and D, and particularly not medical research, so taking ideas to market meant a trip to New York. I would like to know if anybody thinks there's something in our exploration of productivity and how you get ideas to market, whether that's a rumour or it's true. But it certainly was Professor Lemieux's experience.

• 1805

In regard to Mr. Sharpe's comment on VIA Rail, I've always been impressed, certainly in this position, by an honest day's work for an honest day's pay. My experience has been that if people are off on WCB it's not very productive, and that VIA Rail has very innovative programs in terms of preventive back care and gyms and things that actually prevent people from going off. So their productivity may be going up with a smaller workforce, but is it because they have less people off on WCB and that they actually have a more productive workforce?

The last little tidbit is the whole thing around absenteeism. Does Stats Canada have any research on absenteeism? Certainly when we look at the women's workforce, I've seen numbers saying 46% of women taking time off work to look after an elderly parent or a disabled parent, and that this is a huge drain. So a home care plan or.... Businesses that are now getting awards to put in place ways to look after that sandwich generation actually are becoming more productive. And for the witness from my alma mater, I wanted to say that we love hearing about long-range strategies in terms of the zero to six and quality of life issues, because I think that this isn't something that's going to be a quick fix in terms of productivity for this country.

Does anybody have a comment?

The Chairman: Who'll lead off? Mr. Sharpe?

Mr. Andrew Sharpe: I have a couple of comments.

The first one is that I was referring more to CN, which is a different entity from VIA Rail, so I really don't have any particular comments related to the productivity of VIA Rail. On CN, I don't think it was a question of people going on workman's compensation. There's been a large number of layoffs at CN over the last few years and their productivity performance has done very well; so I think there's a link between the layoffs and the productivity performance.

Ms. Carolyn Bennett: But do you have any statistics on how many people are off sick or off on workman's compensation or back...? Then you can get away with this smaller workforce.

Mr. Andrew Sharpe: I don't think that will be a major factor in terms of the productivity performance of CN, because these people are no longer associated with the company. So I don't think it's a major factor. I don't know the statistics on absenteeism in Canada, but I think they have been going up somewhat because there's an increasing share of the labour force made up of women, and women take more time off, generally, to look after small children. Men don't take the same amount of time off to look after small children when they get sick. So there's been an upward trend in absenteeism in Canada, but I don't think it's a major factor in explaining our lagging productivity performance.

On the question of equity capital for small firms, you're right, there's been a—and many people point to it—gap in our financing of equity capital for small firms, particularly in the high-tech sector. We've certainly put in measures to rectify that situation in recent years with the sponsorship of the labour-sponsored venture capital funds, and there's a lot of money sitting in those pools. In fact, there's more proportionately in those venture capital funds in Canada than there is in the United States. People argue that the venture capital funds are not innovative enough in their lending strategies and they're too conservative and so on, so we have to have even more measures to improve the equity financing.

As I say, I'm not convinced that there's a major gap in the financing for small business. There may be, but it's not obvious to me that it's a major impediment to our productivity performance.

The Chairman: Any further comments? Mr. Baldwin?

Ms. Carolyn Bennett: I think it was mainly the biomedical, where it takes a certain expertise.

Mr. John Baldwin: I have a comment on your other question with regard to whether Statistics Canada has any information on the squeeze that is put on women in the workforce and others in the workforce. The social science survey has done a fair amount of work looking at time use and who does the work. I'm not an expert in this by any means, but having listened to a couple of the presentations that have been made, it's quite clear that your impression as to who's squeezed is correct. There is a tremendous squeeze being placed on working women to take care of both the younger generation and the older generation simultaneously, and their time is at a very high demand relative to males.

• 1810

Ms. Carolyn Bennett: Is that ever brought into a productivity debate, all of these women taking time off and...?

I think there was a Liberty Health presentation. These women who can't take business trips, don't do promotions, are late coming to work, are leaving early, are spending too much time on the phone—surely that has some effect on the productivity of this country, in the sense that we bother to measure.

Mr. Daniel Trefler: Yes, especially given your background, the epidemiological evidence of the effects of these stresses on workplace performance is just remarkable. On any gradients you want to look at—health, status, or income—reducing stress in the workforce is going to be enormously important.

I raise these long-term strategies because this is a finance committee, and my chief concern, from what I read in the newspapers, is that we're going to take this productivity nightmare we're facing—and I think it's a real one—and we're going to turn it into a trough for companies to come and take money out of Ottawa. I see that for a long-term perspective where that money has to go is towards the things that are going to improve quality of life in this country, the things that have been on hold, and rightly so, in the attempts to reduce the debt. But at some point we're going to have to come back and re-fix our cities, and re-fix the massive amounts that have come out of education. We're going to have to turn our attention to the young, and not just to the demographic catastrophe that is old age. That's not the only demographic catastrophe. Putting resources into the young is also extremely important, and all the indicators are there.

We have to make sure we don't turn this into an excuse for not putting money into long-term strategies that are going to improve quality of life and, with it, our productivity. That's where I'm coming from.

Mr. Fred Bienefeld: I would add to this that my nightmare is a related one, which is that these pressures will be used to intensify the process whereby trade union rights, workers' rights, will be further eroded in the interests of often very short-term productivity gains.

The issues you raise are precisely the reason that, when Freeman did that paper for the World Bank, he eventually concluded that there was no systematic evidence one side or the other. The flexible labour market model doesn't just reduce costs; it also increases costs on many other fronts, and the really successful models often are models that provide a much more stable work relationship. There were the kinds of issues about commitment to the job and about skill acquisition over time. Those issues are enormously important, and if we aren't careful, we will throw away the advantages of that in order to gain advantages that may prove to be very short term.

There's a lot of literature now on downsizing that has gone wrong, downsizing where companies have discovered that the short-term gains were in fact at the cost of long-term substance and research capability.

The Chairman: Thank you.

Mr. Epp, do you have a question?

Mr. Ken Epp: Yes. I would like to know why none of you have said anything at all about interprovincial trade barriers. You talked quite a bit about the lack of or the removal of barriers between Canada and the United States. It seems to me that the barriers to both the movement of products and goods between provinces and labour movement is significant. Is it not? What's your view?

Mr. Daniel Trefler: It's quite clear that it's an important issue. We're having troubles tracking it, I think, because we don't have good data on interprovincial trade the way we have on international trade. It's also a much more political issue. There are studies on it, but I don't think they're very high calibre, and so it's not for want of interest, but for lack of good information.

The Chairman: Are there any further comments?

Mr. Daniel Schwanen: I think we have talked about the size of the market. That certainly implicitly suggests that the lesser the barriers within Canada, the more of a headstart you give small Canadian companies that want to expand, because naturally they will expand within their own culture, and that includes legal and political culture.

If you're in Ontario, you do business more easily with somebody from B.C. than with somebody from, say, for the sake of argument, Louisiana. That is actually proven by the data we have, that it's easier to do business across Canada than north-south. We want to improve the north-south access, but I think it's important to keep in mind, as you said, the east-west access. And there are, I believe, studies showing that the natural market to expand into, for a small company that starts in one province, is still the rest of Canada.

• 1815

The Chairman: Are there any further comments?

Mr. Epp, thank you very much.

On behalf of the committee, I'd like to thank you all very much. As you probably have gathered, this is an issue that is challenging, to say the least. But there are certain factors that we as a committee are looking at: the whole notion of not having the right fiscal monetary policies in place; the promotion of trade; the issue of taxation; R and D; and investment in human resources. And today we also heard about the historical context, which I think is also quite important.

But I want to leave you with this thought. Essentially, what we are trying to do here is tackle an issue that needs to be tackled. It's an extremely important issue. But what drives this committee is the fact that we believe fundamentally this is really an issue about standard of living and quality of life and what we, as legislators, can do to improve the standard of living and the quality of life of Canadians. So this is our focus. We'll be issuing a report, and obviously your thoughts and ideas will make writing that report a little bit easier. So thank you very much.

The meeting is adjourned.