INST Committee Meeting

37th PARLIAMENT, 1st SESSION

Standing Committee on Industry, Science and Technology

EVIDENCE

CONTENTS

Tuesday, June 11, 2002

¿

0910

The Chair (Mr. Walt Lastewka (St. Catharines, Lib.))

Ms. Renée St-Jacques (Chief Economist and Director General, Micro-Economic Policy and Analysis Branch, Department of Industry)

¿

0915

¿

0920

¿

0925

The Chair

Mr. John Baldwin (Director, Micro-Economic Studies and Analysis, Statistics Canada)

¿

0930

¿

0935

¿

0940

¿

0945

The Chair

¿

0950

Ms. Renée St-Jacques

Mr. Brian Fitzpatrick

Ms. Renée St-Jacques

Mr. Brian Fitzpatrick

Ms. Renée St-Jacques

Mr. John Baldwin

Ms. Renée St-Jacques

Mr. Someshwar Rao (Director, Strategic Investment Analysis, Department of Industry)

¿

0955

Mr. Brian Fitzpatrick

Ms. Renée St-Jacques

The Chair

Mr. Larry Bagnell (Yukon, Lib.)

Ms. Renée St-Jacques

Mr. John Baldwin

Mr. Larry Bagnell

Mr. John Baldwin

Mr. Larry Bagnell

À

1000

Ms. Renée St-Jacques

Mr. John Baldwin

Mr. Larry Bagnell

Mr. John Baldwin

Mr. Larry Bagnell

Ms. Renée St-Jacques

Mr. John Baldwin

À

1005

The Chair

Ms. Renée St-Jacques

Ms. Cheryl Gallant

Ms. Renée St-Jacques

Ms. Cheryl Gallant

Ms. Renée St-Jacques

Mr. Someshwar Rao

Ms. Cheryl Gallant

À

1010

Mr. Someshwar Rao

Ms. Cheryl Gallant

Ms. Renée St-Jacques

Ms. Cheryl Gallant

Ms. Renée St-Jacques

The Chair

Mr. Andy Savoy (Tobique—Mactaquac, Lib.)

Mr. Someshwar Rao

À

1015

Mr. John Baldwin

Mr. Andy Savoy

Mr. John Baldwin

Mr. Andy Savoy

Mr. Someshwar Rao

Mr. Andy Savoy

Ms. Renée St-Jacques

À

1020

Mr. John Baldwin

The Chair

Mr. Brian Fitzpatrick

Ms. Renée St-Jacques

À

1025

Mr. Brian Fitzpatrick

Ms. Renée St-Jacques

Mr. Someshwar Rao

Ms. Renée St-Jacques

Mr. Brian Fitzpatrick

The Chair

Mr. Brian Fitzpatrick

The Chair

Mr. Serge Marcil (Beauharnois—Salaberry, Lib.)

À

1030

Ms. Renée St-Jacques

À

1035

Mr. Serge Marcil

Ms. Renée St-Jacques

Mr. Serge Marcil

The Chair

Ms. Renée St-Jacques

Mr. James Rajotte

Ms. Renée St-Jacques

À

1040

Mr. James Rajotte

Mr. John Baldwin

Mr. James Rajotte

The Chair

---

CANADA

Standing Committee on Industry, Science and Technology

---

NUMBER 090

l

1st SESSION

l

37th PARLIAMENT

---

EVIDENCE

Tuesday, June 11, 2002

[Recorded by Electronic Apparatus]

¿  (0910)  

[English]

    The Chair (Mr. Walt Lastewka (St. Catharines, Lib.)): Pursuant to Standing Order 108(2), we are considering innovation, productivity, and growth.

    This morning, ladies and gentlemen, we have, from the Department of Industry, Renée St-Jacques, chief economist and director general of the microeconomic policy and analysis branch, and from Statistics Canada, Mr. John Baldwin, director of microeconomic studies and analysis.

    Renée.

    Ms. Renée St-Jacques (Chief Economist and Director General, Micro-Economic Policy and Analysis Branch, Department of Industry): Good morning.

[Translation]

    Let's see if technology is about to be our friend this morning. We're trying to install PowerPoint. We have the English and I hope we have the French shortly.

[English]

    Before I start, let me introduce you to Someshwar Rao, who's accompanying me, a colleague of mine at Industry Canada who for a long time has been doing much research and analysis and has published papers in the area of productivity, as well as other areas.

    I'm delighted to be here. I know the committee has invested a lot of time studying innovation and issues with the innovation system and their importance to growth in the quality of life of Canadians. The story I'm going to be telling you today is a very simple one, that productivity matters a lot for living standards of Canadians and their quality of life. Over a long period of time, indeed, it has been the key driver of growth in living standards.

[Translation]

    This morning, I'd like to show you how productivity and standard of living are closely linked. At the same time, I'd like to draw your attention to one of the consequences of a societal phenomenon with which you're all familiar, namely the aging of the Canadian population. In light of these changes, productivity and strong, sustained growth will take on even greater importance in the years ahead.

[English]

    I will not spend much time defining terms like productivity. I will be using throughout my presentation the notion of productivity as equivalent to labour productivity, measured either as output per hour of work or as output per worker. John Baldwin, my colleague from Statistics Canada, who will address you later, will spend more time defining the terms. There are various concepts of productivity, and he will spend more time explaining those to you than I will.

    So now that we've got the two presentations on screen, let's turn to the first slide. You also have a hard copy in front of you, I believe. In English it's called “Trends in Canadian Productivity and Living Standards”, in French

[Translation]

    Trends in Canadian Productivity and Living Standards.

[English]

    The first slide is really trying to show you the close link between real wages and productivity. On the first scatter diagram at the top right the green dots represent countries. And for each dot you see the level of labour productivity and the real wages in that particular country. The red line loosely connecting all these dots is the closest fitting line that could be put through this scatter of dots. And what we see there is that high-wage countries are high-productivity countries. The chart at the bottom looks at Canada over the last 20 years, with the evolution of wages in red and of labour productivity in yellow, again to reinforce the point that wages and productivity move closely together through time.

    With the next slide, as we all know, the Canadian population is aging. The ratio of the elderly, those over 65, relative to those who are of working age, those between 15 and 64, has grown already from 13% to about 18% today, but in the next 25 years that ratio will rise rapidly to 33%. Today we have about five working-age persons for each elderly one, in 25 years we will be down to only three workers per elderly person. This means it it will be particularly important to keep the focus on raising productivity if we want to ensure that we can afford services, health care in particular, for the Canadian population.

    With the next slide, to illustrate that story a bit more clearly, let me tell you a stylized story about the history of the living standards in Canada over the last 40 years. The bar charts show the growth rate in GDP per capita, that is, output per resident in Canada, for the last four decades. The total of the two bars in each box shows the average annual rate of increase in GDP per capita or in living standard for each of the decades. For instance, if you look at the 1960-1969 bar, you see 3.5 at the top of it. What this says is that on average, during the sixties real per capita GDP grew by 3.5%. The bar chart also splits that growth in two, as there are two ways to increase standard of living: you can increase your productivity--that's the part in red in the chart--or you can increase the percentage of the population that is working--that's in yellow in the chart. As you can see, in the sixties we had very remarkable productivity growth of 2.4%, on average, per year and also quite reasonable employment growth, 1.1% per year.

¿  (0915)  

    However, as you move through the decades, productivity takes a dip. Productivity growth was much lower in the seventies, and again much lower in the eighties and early nineties. In the seventies we still managed to have a quite respectable growth in our GDP per capita of 2.9%, but we achieved that largely through a strong increase in employment of 1.8%. What was happening there, of course, was that the baby boom generation came on the market. Another phenomenon, which was not specific to the seventies, but spanned the sixties to the eighties, was the massive entry of women in the labour force. In the sixties Canada's participation rate for women in the labour force was only 30%, the lowest in the G-7, and today it's about 60%, which is about on par with other G-7 countries. So that was quite an important phenomenon.

    Now let me draw your attention to the 1990-1995 period, because I want to draw the link between aging and what did happen in that period of time. Our GDP per capita grew only by 0.2% during that five-year period. The economy did not manage to generate sufficient employment growth--that's the -0.9%--and moreover, the proportion of the population that was employed actually declined, even though our productivity performance, at 1.1% per year, was certainly no worse, but slightly better than in the previous decade and basically on par with the seventies. The reason I'm drawing your attention to that particular bar is that for different reasons, in the years ahead we can also expect that a smaller proportion of our population will be employed, as the population ages and more and more people will be in the retired portion of the population. Therefore, if we want to keep our standard of living up, it will be all the more important to keep productivity up. That's the point of that slide.

[Translation]

    Moving on to the next page, we see how the standard of living in Canada is high compared to other countries, particularly European nations. Canada ranks seven among OECD countries in terms of per capita income. Only Luxembourg and the United States surpass Canada by a significant margin. Countries like Norway, Ireland and Denmark are more or less on par with Canada, with Denmark in a virtual tie with us and Switzerland only slightly ahead. However, Norway and Ireland have only moved ahead of Canada in the last decade.

    I'd like to discuss for a moment Ireland and the remarkable miracle or phenomenon, so to speak, that we are witnessing. Did you know that during the 1960s, Ireland's per capita income was about half of ours, but that over the past 40 years, Ireland has caught up to, and even moved ahead of Canada? I believe they moved ahead of us in 1997.

    So much for the history lesson.

[English]

there's also a sadder part. Our real income lags significantly behind the U.S., and in fact, the gap has grown over the last 20 years. Today the difference in per capita income between Canada and the United States is $8,200 per head. That means, for a family of 4, we're talking about a $33,000 per year difference in real income. Over the last 20 years, on average, income in the United States has grown by about 3% per year, in Canada by about 2%, so the gap has continued to grow.

    There's a bit of a silver lining in this story, because if you look at the 1995 to 2000 period, you can see that our per capita income has been growing slightly more quickly than in the United States, 2.5% versus 2.4%. But what has to be remembered is that they're increasing $43,000 per head at 2.4%, we're increasing $35,000 per head at 2.5%. The arithmetic is relentless. They're adding more per year, about $1,000, than we are at about $875. So the gap keeps growing, despite the fact that we're growing slightly more quickly. It grows less quickly than it used to, but it still grows. In order to start closing the gap, we would need to grow at about 3% per year. That's twice the rate we've recorded. As I just told you, we grew at about 1.5% over the last 20 years, so we would need to double that in order to start closing the gap.

    Productivity is largely the reason for the gap. In particular, our labour productivity in manufacturing has taken a very significant dip, especially since the mid-eighties. Our rank amongn G-7 countries has also slipped since 1976, when were second; we're now fourth.

¿  (0920)  

[Translation]

    The productivity problem, or challenge, if you prefer, is one that is common to most industries. There are very few Canadian industries with productivity levels above those of their US counterparts.

    Key exceptions, however, include the transportation equipment industry, given that the North American market is fully integrated, and certain resource-based manufacturing industries such as paper and allied products, primary metal, lumber and wood and furniture and fixtures. In these sectors, our productivity is almost equal to that of our US counterparts.

    However, productivity levels are significantly lower in Canada than in the US in “new economy” industries such as electrical and electronic equipment and machinery.

[English]

    Provincial statistics have two graphs here, one showing levels of productivity, one growth rates in labour productivity, that is, how fast productivity is growing from year to year. We see that even the most productive provinces in Canada, Alberta and Ontario, are still far below the average for the U.S. in productivity level. With growth rates over the 1995-2001 period, which I remind you was a period where our productivity growth did pick up quite significantly, we are still not performing as well as the United States. That's true across all provinces.

    This may be a good place to point out that particularly when you're looking at productivity growth statistics, the years you choose and the cut-off point you choose matter a lot. You should always question that. Here we've chosen to show 1995-2001. Had we instead decided to do, say, 1995-2000, the U.S. number would be smaller, our number would be higher. The story on productivity cannot be quarter to quarter or even over short periods of time. You have to look at long periods of history to understand the consequences. Consistently, the U.S. has been outperforming us. I think that's the key point here with regard to levels of productivity.

    In particular, there has been a lot of talk about the information and communication technology sector. It was a key driver of productivity trends in both Canada and the U.S. during the 1995-2000 period. In Canada it was rising at an average rate of about 11% per year; that compares to 1.7% per year for the Canadian economy. That's quite a significant difference. However, in the U.S. labour productivity in ICT manufacturing was increasing even more quickly, almost twice as fast at 21.3%, during the second half of the 1990s. There have been a number of recent articles, including one by my colleague Someshwar, studying the impact of this particular sector on productivity in Canada over the last five years and showing that even though the ICT sector contributed mightily to the increase in productivity in Canada, it was also the main reason we kept falling further behind the U.S. in manufacturing productivity at the same time, because the U.S. performance was so stellar in that sector.

    I won't spend a whole lot of time on the rest of the deck, because it gets into some specifics, but one of the questions I'm sure you will want to ask is, why is it that Canadian productivity performance is not as good as the American one? I would give the explanation for that in four groups.

    One has to do with investment, if you will, the amount of capital per worker. It used to be, back in the 1960s, that we invested more or less as much as the U.S. as a percentage of GDP. Since then our investment intensity, as it is usually called, has fallen relative to theirs. Therefore, the amount of capital per worker through the years has declined relative to theirs.

¿  (0925)  

    Related to this is less innovative activity. The reason I say related to this is that there is evidence that if you're investing, you're adopting the latest technology, which is the obvious link, and there's also evidence of a more subtle variety, which I think John has studied, that has to do with the fact that you may need organizational innovation as well when you're adopting newer technology. So less innovativeness and lower investment may be related phenomena.

    There are issues to do with industrial structure. Our structure is different from theirs; in particular, our plants tend to be smaller, and that's again something John has studied, showing that smaller plants tend to be less productive. Our economy is more resource-oriented. As I showed you earlier, those sectors are more productive, but there's a longer trend towards a lower and lower share of resources in GDP, and the effect is to hurt our productivity performance relative to theirs.

    Finally, there is human capital, the skills of our workforce. We have a highly educated workforce. Our years of schooling are very comparable to the U.S., but there's a big difference, and again it's something that Someshwar recently published a paper about, in the level of university degrees; we have a significantly lower percentage of our workforce with university degrees. And it seems that for productivity performance, the difference between simply post-secondary education and university education does matter.

    I will stop there, leaving time for questions and turning the floor over to my colleague from Statistics Canada.

    The Chair: Mr. Baldwin.

    Mr. John Baldwin (Director, Micro-Economic Studies and Analysis, Statistics Canada): Thank you very much.

    I have a rather long slide presentation, which is in front of you, and I won't try to put all those slides up. I'm going to just talk a bit about concepts before I move to some results, because I think Renée has stolen the show, so to speak, by talking very much about Canada-foreign comparisons. I will provide some of my own and talk a bit about some of the research we're doing at the microeconomic analysis division at Statistics Canada trying to understand the reasons we have either good or bad productivity growth across different sectors.

    To start with the short definition, productivity measures the extent to which resources, in respect of labour, capital, and purchased goods and services, are efficiently used in the production of goods and services. That's what we want to try to measure. Effectively, it tells us whether or not we're finding better ways to produce what we're producing with the given amount of input we have available to us.

    Renée has talked about the concept of labour productivity and primarily about how much output per worker or per hour worked we get, comparing that to other countries. That's a very common way of looking at cross-country comparisons. The Statistics Canada program focuses not so much on levels, but on rates of growth, and we look at how much additional growth we get for the additional amount of input we effectively devote to production. You can look at this in several different ways. You can look at the amount of additional output you get per unit of labour, but labour is only one of the inputs we have in the production process, and if things are looking pretty good from the point of view of how much we get per unit of labour, they may not be from the point of view of a number of other resources we're using with regard to the amount of capital.

    So we look at several measures of what we call partial productivity growth, that is, output per unit of labour and output per unit of capital. These measures have been with us for some time as a result of our user community arguing that each of them was a partial measure and couldn't give us an overview of what's happening. We also produce something called a multifactor or total factor productivity measure, which, effectively, is the rate of increase in the output you get relative to the rate of growth of a bundle of inputs, all those inputs I just referred to weighted together.

    On page 9 in the presentation we show the course of labour productivity growth in our business sectors. Statistics Canada measures effectively only the business or commercial sector. We remove government. Labour productivity growth over the period post-1981 is quite considerable, l.4% per year. If, however, we measure the rate of growth of capital productivity, just output over capital that's being used, you can see that it's effectively flat and slightly negative. We've got a lot of growth in output per worker because we've added a lot of capital, and you have to, in some sense, put those two together if you're going to get an overview, and that's what the multifactor productivity measure does. We've shown you what multifactor productivity has been doing in the Canadian commercial sector over this period of time. It's been more or less flat, with a bit of growth at the end of the period.

    The middle part of the slide deck points out something Renée spent a fair amount of time on. There's a difference between labour productivity growth and GDP per capita growth over time. When you make international comparisons, as Renée did, the difference in GDP per capita is mainly explained by the difference in output per worker, but over a short period of time you can get substantial differences between the two, because the number of people being put to work varies.

¿  (0930)  

    Over the period of the 1980s and the 1990s we have the same type of graph as Renée presented to you. We look at GDP per capita, per unit of population, on page 13, and you can see that it's fallen from 1.84% to 1.24% from the 1980s to the 1990s. A lot of people looked at that and said, we've got some real problems with productivity. In fact, we didn't have real problems with productivity driving that difference; productivity levels are about the same. You have substantial changes going on in the underlying employment to population ratios. So productivity is only one of the things that determines what's happening with changes in real standard of living, if you will.

    If we turn now to the program we have at Statistics Canada, you will find a quarterly productivity program that looks at labour productivity. It allows us to look at short-run trends in what is happening. If you really want to know what's happening to change in technology and change in production techniques, those numbers aren't terribly useful, but if you want to track what's going on in the short run in the economy, as many people, Bank of Canada included, want to do, those numbers are terribly useful. But what we really want to do, when it comes to looking at long-run trends, is take a look at what's happening to labour productivity over long periods of time, multifactor productivity over long periods of time, and that's what our program does in that particular area.

    I turn now to slide 18, and I'm going to look at differences between Canada and the United States over the last 15 years at the macroeconomic level. Slide 19 looks at the differences in the business sector real GDP growth over this period. The U.S. is continuously above the Canadian rate of growth, except for the very last period, from 1995-2000. So our business sector has been lagging slightly behind the United States in total growth over this period.

    As to the actual input growths, let's look first at labour, and that's slide 21. You can see that over this period, as we define our labour growth, Canada has consistently done better than the United States in the 1980s. From 1981-2000 the annual rate of growth in the United States in our labour measures is 2.2%, in Canada 2.4%. These are labour measures that are carefully calculated so as to allow for comparability between the United States and Canada. In the 1981-88 period the United States did worse than Canada in providing increases in labour, increases in jobs and hours worked. In the early 1990s Canada fell behind. In the 1988-1995 period we suffered through that recession and did not generate jobs at nearly the same rate the Americans did, but in the last half of the decade, 1995-2000, the famous wealth spurt, you can see Canada did phenomenally, 2.4% in the United States versus 3.6%. We were putting people back to work in considerable numbers.

    What does that mean? I'm going to jump to capital input, slides 24 and 25. Capital input comes from increasing the amount of capital every worker has; it's essentially the sum of past investment aggregated up, with a certain amount of depreciation subtracted. If we look at what's happened to capital input over this period of time, the U.S. exceeds Canada in every one of the periods. It exceeds it over the 1981-2000 period; the rate of growth of capital is 3.9%, 3.4% in Canada. And that's happening in each one of the sub-periods, including the last sub-period, in which we had this phenomenal growth in GDP, very rapid growth in labour. We also had a rapid growth in capital, but considerably less rapid than in the United States.

¿  (0935)  

    One of the ways of looking at what's happening to labour over time--and we're asking why labour productivity may be doing well or poorly--is to look at what's happening with capital per hour growth. That is, just how much capital do we have? How much are we increasing our capital relative to the number of people we're putting to work? For the aggregate business sector, the slide on page 27 compares the rate of growth in capital per hour worked in the U.S. and Canada over this period of time. As I've already shown you, we increased the labour force we were putting to work more quickly than the United States over most of this period, and we increased our capital stock somewhat more slowly than the Americans did. Not surprisingly, the rate of growth of capital per hour worked is in favour of the United States. Over the entire period the Americans grow at 2.2% per year, we only do so at 1.7%.

    The last set of bar graphs compares the 1995-2000 period, the period in which we have this phenomenal growth in GDP, phenomenal growth in hours worked, and also pretty big growth in capital. Our labour stock was growing so fast relative to our capital that the actual amount of capital we had available for every worker fell relative to the Americans.

    So what do we get as a result of all of this when we look at productivity trends? Renée gave you a line graph that showed differences in the levels. I'm talking about rates of growth here in Canada as compared to the United States. If our rates of growth are less than the United States, you'd expect our level to have fallen behind, and she showed you that our level has fallen behind. My bar chart 29 shows what's happening to business sector labour productivity over this period of time. The Americans' average annual rate of growth between 1981 and 2000 is 1.9%, the Canadian is only 1.4%. We're different in the 1980s, 1.9% and 1.3%. We're close in the early 1990s, 1.4% and 1.2%, during the recession. We're very far behind in the last half of the 1990s. I've already shown you that the rate of growth of capital fell at this period of time. We'd expect normally in these sorts of numbers to see output per worker fall behind, and that's what you see here.

    Of course, as I've argued before, many people want to consider both labour and capital together in a multifactor productivity measure, and on the next graph we have the business sector multifactor productivity measure for Canada and the United States over this entire time period. Taking into account that we grow more quickly in labour and less quickly in capital, we're still behind in this multifactor productivity measure. The Americans grow at the rate of 0.9% per year, we grow at 0.3%. We're way behind in the early 1990s, and we're still behind in the late 1990s, though our rate of growth of multifactor productivity increased dramatically over the last half of the period.

    Many people have argued that this change in the late 1990s is somehow endemic or indicative of a paradigm shift in the world. I'm less inclined to believe that. As Renée has pointed out, you really shouldn't use very short periods. If you start your period at the base of the recession and go through a very expansionary period, you'll get very high productivity growth rates. We prefer to go peak to peak and ask, after you've had a full business cycle, how have you done? If you're going to do that, you really need to compare the 1978-1988 period and the 1988-2000 period, and when you do that, you see there's been virtually no change in our labour productivity growth rate or our multifactor productivity growth rate.

    That summarizes very quickly our program on what I call the macroeconomic side, which is the program that tries to provide aggregate productivity statistics for the aggregate business sector or for individual industries. We have a considerable research program that's been trying to look at where you find differences within industries and what seems to be related to good performance on the productivity side, so to speak. Renée talked about some of the factors economists have been concerned with, the extent to which we might associate our lags or our deficiencies with something other than the very simple statistics I've just referred to.

¿  (0940)  

    The simple statistics focus on investment. Our investment-to-GDP ratios, as the Bank of Canada in a recent review noted, have been behind the Americans for a considerable period of time and fell way behind them from the mid-1980s, and while we had very rapid growth in investment in the late part of the nineties--and it truly was remarkable--we were still behind them in respect of level. Whether it be levels of investment per GDP or levels of investment per hour worked, we weren't using as much capital as the Americans were in their economy. However, if you abstract from those aggregates and begin to ask whether other things were happening that might help us to understand part of what was going on, the answer is, yes.

    We've been looking very carefully at the extent to which firms that moved into export markets post-NAFTA increased their productivity relative to those that didn't, and we find a strong improvement in those firms that were domestic and moved into the export market, less in the foreign sector. We also looked at the extent to which entry and exit, that is, the turnover that's going on within our industrial structure, has been contributing to productivity growth. We did early work on this for the seventies and eighties and found that a considerable portion of productivity growth came from this entry and exit process, and we discovered that in the 1990s an even more important contribution was made by entry and exit, but it wasn't made by everybody. Whereas in the seventies and eighties virtually all new firms, both domestic and foreign, were contributing to productivity growth, in the 1990s it looks like it's large multi-plant foreign-owned firms opening new plants that were contributing mainly to the productivity growth.

    So we suddenly get a sector moving ahead of the rest of the economy. We also find that this sector rationalizes far more than the domestic sector, in the sense of reducing the number of products it's producing per plant. Prior to NAFTA a large number of economists argued we'd get gains from NAFTA if, in effect, we got larger plant size or specialization at the plant level. We found very little evidence of increasing average plant size, taking advantage of economies of scale. We have found considerable evidence of taking account of product line economies of scale, that is, specialization at the plant level, and we found that's occurring in foreign-owned plants far more than in domestic-owned plants.

    We've also looked at the contribution ICT has made to the growth rates over this period, and I brought my colleague Tarek Harchaoui with me because he's done that work. He finds that we've had a dramatic increase in ICT investment across the board in many different industries and it's contributed substantially to our increasing output level. This is at the aggregate level, at the industry level. We've done a number of microeconomic studies that confirm that those plants that are adopting ICTs more quickly than others have had much more rapid productivity growth than others.

    Finally, we're just completing a set of studies complementary to the one I referred to earlier on entry and exit and differences that are going on within industries. They look at something economists call X-efficiency. That's just the extent to which there are a large number of plants that are well away from the production frontier and aren't keeping up with the leaders in the industry. We have found evidence that over the past 20 years, as our productivity has fallen behind, a considerable number of plants have indeed fallen behind, and those plants that are falling behind, not surprisingly, are the domestic and smaller plants. So that's another reason those aggregate numbers we started off looking at have followed the trajectory they have. None of these individual studies, however, is all-revealing. They don't, of course, suggest any particular panacea for the trajectory and the productivity gap that's developed.

    That's the end of my presentation. Thank you.

¿  (0945)  

    The Chair: Thank you, Mr. Baldwin.

    Mr. Fitzpatrick.

    Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance): Thank you very much for the information you presented to us. There's a lot of challenging and interesting information to go over here.

    Ms. St-Jacques, perhaps I could refer you to the productivity charts on p. 9. I don't really want to focus on Alberta and Ontario. It's abundantly clear that those two provinces very much outperform the other provinces in that category and are more in the range of what we expect from the United States. The area I'm really concerned about is Atlantic Canada, which clearly is performing very poorly in this whole context, if these charts mean anything.

    I've just read a very in-depth book called The Road to Growth. The author studied Holland, Ireland, Georgia, Massachusetts, Maine, and Michigan and tried to identify policies that had economies converging to the mean. Ireland's convergence to the mean since 1987 has been absolutely phenomenal. It started with a per capita income below Newfoundland's in 1985 and today has a higher per capita income than Canada. Georgia is a very interesting story in the American south. Atlanta 30 years ago or so wasn't much different from Birmingham, Alabama, but nobody is saying that today. Holland and Louisiana had a rich resource base, which really worked against them at different periods of time, because they misused their resource base. But the study tries to identify policies that explain why these economies converged very rapidly to the mean. Interestingly enough, the convergence level for Atlantic Canada in this study is 1%, which is terribly low. These other economies are 3% and 4% in converging to the mean--reduced regulatory burden, flexible labour markets, efficient, smaller, targeted government, sound strategic investment in infrastructure, and last, but not least, tax policies.

    Everybody is talking about gaps in investment in this country. Ireland's corporate tax rate is 12%. They don't have a problem attracting capital investment. It's a very profitable country to do business in. They have lots of capital flowing into that country. So do Georgia, Michigan, Massachusetts, and so on. I wonder if you have any explanation of why Atlantic Canada seems to be seriously lagging in these performance figures and what sort of policies you think we need to get productivity and growth going in that part of the world.

¿  (0950)  

    Ms. Renée St-Jacques: One of the key factors, as John explained and as I explained, is the level of capital per worker. I don't know, John, if we have data on multifactor productivity by province. The difference might be less stark if we were looking at the productivity of all input combined. It's quite clear that the levels of investment in Atlantic Canada have not kept up with the rest of the country as a percentage of their GDP. So that's certainly one big part of the explanation there. I could speculate on all sorts of other reasons.

    When it comes to Ireland, I think there are more factors than the tax rate. I'm not familiar with the other examples you're talking about, but for Ireland, we had a study by Professor Pierre Fortin for the department about a year or so ago. He came to the conclusion that there were a number of factors. Sure, the low corporate tax rate was a contributor to the inflow of capital, there's no question about it, but he also points out the importance of their very significant investment in higher education. They also managed to generate a significant increase in employment, which is another reason for their increased standard of living, as opposed to just productivity.

    Mr. Brian Fitzpatrick: It's a matter of flexible labour markets and sound strategic investment and infrastructure, and as you mentioned, education and job skills.

    Ms. Renée St-Jacques: Yes, those are very important.

    Mr. Brian Fitzpatrick: I didn't just say tax, there were six things I listed.

    Ms. Renée St-Jacques: Yes, sorry. John, did you want to add anything?

    Mr. John Baldwin: We do not have multifactor productivity measures at the provincial level, so I can't comment on that issue.

    Ms. Renée St-Jacques: In explaining the low level of labour productivity, do you have anything you might want to add?

    Mr. John Baldwin: No.

    Ms. Renée St-Jacques: Do you, Someshwar?

    Mr. Someshwar Rao (Director, Strategic Investment Analysis, Department of Industry): I think all the factors Renée has mentioned are important, investment, human capital, as well as innovation. Our research at Industry Canada suggests that Atlantic Canada lacks in human capital, physical investment, innovation, R and D, for example, and that option of new technology. They lag behind the rest of Canada in a whole host of factors, so we need to work on all those factors, as, of course, they all interact.

¿  (0955)  

    Mr. Brian Fitzpatrick: The point of it is, I think, that as policy-makers in this country, if we can look at other areas of the world that have really high narrowing of gaps on convergence and look at the policies and the strategic things they're doing, we should be learning from them and applying them in our own country. I seems to me, when I look at this, we're probably going, in a lot of areas, in exactly the opposite direction. We're saying we can't get capital, and in a lot of these countries the government isn't involved in direct subsidies or providing capital. They provide a low tax structure and a flexible labour market, businesses become profitable, they start investing in capital, and money starts flowing into these countries. They don't have a problem with investment. But there is a crowding-out factor that seems to happen in a lot of the areas that have low convergence. The government's got too big a role in the economy and private enterprise just can't find it profitable to invest in them.

    Ms. Renée St-Jacques: I'd like to go back to my first answer to some extent. If you look at standards of living, GDP per capita, as opposed to just productivity for the moment, there has been some convergence over the last few years. I'm not familiar with all the examples you cite, and as you said, it did converge, but at a slower rate than other jurisdictions. There are lessons to be learned from other jurisdictions, and we should look at some of those. I would argue that what's been happening in Atlantic Canada and our innovation strategy are precisely trying to address some of those shortcomings in innovation and skills.

    The Chair: Thank you very much, Mr. Fitzpatrick.

    Mr. Bagnell.

    Mr. Larry Bagnell (Yukon, Lib.): Thank you.

    Thank you for coming. For me, as a former director of Industry Canada, it's great to see people from my alma mater.

    Where I'm coming from, generally, is that I'd much rather live in Canada. Some places I've been in the States they told me not to go out at night. It's dangerous, there's pollution, they can't get health care, so the bottom line for me is, I don't care if our dollar is down or productivity is down, if it doesn't harm a better society. I've got about seven questions, so if you could give short answers, it would be great.

    Generally, are we confident that the other countries collect the statistics in the same way--as you said, the definitions are complicated--so that there actually are meaningful comparisons in productivity with other countries?

    Ms. Renée St-Jacques: Yes, relative to the States definitely, and most of the other comparisons are done by the OECD. There are accepted methodologies for doing it.

    Mr. John Baldwin: An awful lot of work is put into developing measures that are as comparable as they can be, and in some areas I have reasonable confidence in those measures, especially those on the labour productivity side, which are what Renée has used. As you move into the multifactor productivity side, there is less comparability, because of the greater differences across countries and how they measure changes in capital over time. But with GDP and our work, it's generally quite good.

    Mr. Larry Bagnell: Is there any way we are comparing apples and oranges? Our plants, say, may be required to have more safety things, more emission standards, things that would cost the manufacturer more, so the productivity would be lower because of those requirements. It may be a better place to work, but it may appear bad. Is that possible?

    Mr. John Baldwin: It's certainly possible.

    Mr. Larry Bagnell: If we're looking for a good place to work, necessarily, we have to take in these other factors as well as productivity.

    With GDP, standard of living, things in the graphs, some people claim we have less take-home pay than 30 years ago or whatever. Is the standard of living adjusted for inflation in your graphs? Do we have more take-home pay, adjusted for inflation, than we used to?

À  (1000)  

    Ms. Renée St-Jacques: We do, but it's not growing as fast as in America. Even though I would agree with you that the quality of life is a much broader concept than GDP, and GDP is certainly not a perfect measure for quality of life, it is still the closest one we have for the extent of choice we have as a society to make precisely those kinds of decisions on the split we want between the private and the public sector and the kinds of services we want to buy for ourselves, either privately or collectively. It's not perfect, you have a good point, but I still think it's the best we have for making measurements over a long period of time and comparisons over long periods of time. And trends matter. If a gap is growing, I think it is indicative that as a society, we are having fewer and fewer choices relative to our southern neighbours. I don't see why we should settle for it. That's the bottom line here.

    Mr. John Baldwin: Let me answer that question, because it does raise an issue that has been debated, in The Economist and Business Week and numerous places over the last two or three years. The gross domestic product is the sum of all goods and services that have been produced. Some argue that you should be careful in making comparisons across countries, that if you change the nature of your production process to require a lot more capital that is very short-lived and depreciates very quickly, a better measure would be net domestic product--you subtract the rates of depreciation.

    There is a recent article in The Economist that compares the rates of growth in the United States using that alternative measure to rates of growth in Europe using the alternative measure and finds that the Americans do not do nearly as well. It's a consideration, but if you turn to alternative measures, not GDP per capita, but something like income measures that can be derived from alternative data sources--and there have been several studies that look at income of workers in Canada relative to income in the United States--you still find this disparity growing over the last 20 years.

    What's interesting about those studies is that the mean level changes much more than the median, which means, to come back to your standard of living and quality of life, there is far more concentration of income in a smaller group in the United States than there is in Canada. There's less of a difference to the average Joe, if you define the average Joe as the guy right in the middle of the income distribution, in Canada and the United States than you get from these mean income per worker numbers. It's an alternative thing to consider when you make these comparisons.

    Mr. Larry Bagnell: We have $8,200 difference per capita, on average. Considering that we have free health care, for instance, and things like that, it would seem to me that with what we have available for spending, if they have to pay for health care, there wouldn't be nearly as large a gap. We have more things paid for that we would otherwise have to pay for out of that $8,200. Is that true?

    Mr. John Baldwin: There's a DRI study from two years ago that actually makes those corrections, compares Canada and the United States, and finds that there is less of a difference when that's done.

    Mr. Larry Bagnell: Does the level of the Canadian dollar have any effect on productivity?

    Ms. Renée St-Jacques: There's a debate going on among economists on that point, but my answer would probably be that the exchange rate is not a factor. That's my short answer. John, would you see it differently?

    Mr. John Baldwin: I would just talk about the debate. As Renée said, there isn't any consensus in the profession, there are different points of view. One point of view is that exchange rate affects the investments that are made here relative to labour, but the evidence is far from definitive one way or the other, as I read it.

À  (1005)  

    The Chair: Thank you, Mr. Bagnell.

    I'll now go to Ms. Gallant.

    Ms. Cheryl Gallant (Renfrew—Nipissing—Pembroke, Canadian Alliance): Thank you, and I'd like to thank the witnesses for such a concise presentation.

    It was particularly interesting to see the graphs on capital input and how the decreases in the input happen to coincide with the cuts to the capital gains tax exemptions. What I'm wondering is whether or not you've compared the income tax rates between the provinces and related that to your productivity graphs?

    Ms. Renée St-Jacques: We haven't done that.

    Ms. Cheryl Gallant: Okay.

    In the matter of policy, how has productivity compared since the introduction of the six-month maternity leave? Maybe it's too soon to do the one-year maternity leave, but I'd be interested to know what, if any, effect it has had on productivity.

    Ms. Renée St-Jacques: Again, that is not something we've specifically looked at. We tend to look at aggregates and pick cut-off points that have aggregates, as opposed to specific policy points. It could be done, but I think you'd have to be very careful in identifying direct causal links between a particular policy and productivity, particularly once you consider the vast array of factors that affect productivity levels and growth rates, even over a short period of time. There are just too many factors at play, I think, to be able to say one particular policy has a particularly large impact.

    Ms. Cheryl Gallant: Then have you compared, for example, the labour policies of one province with another, the number of statutory holidays, the number of hours per week, anything like that on a province-by-province basis?

    Ms. Renée St-Jacques: Not in our department, but I would not be surprised if other departments, such as Human Resources, have.

    I can turn to Someshwar here briefly to tell you the kinds of studies we're doing at the plant level or micro studies we're doing on productivity.

    Mr. Someshwar Rao: Industry Canada has been doing a lot of research, as has Statistics Canada, and on some of the research we are actually collaborating. What we are looking at is the dynamics of innovation and the role of competition at the firm level, the industry level, and the economy level, how it affects productivity, and the role of information and communication technology as a producer and as a user, how information and communication technology is affecting productivity. We have a joint project with Statistics Canada and Harvard University, a major project on this information and communication technology. In the United States there has been a lot of research suggesting that information and communication technology has made a great contribution to productivity growth in the second half of the 1990s, so we would like to develop compatible data and do industry-by-industry analysis of the role of information and communication technology in economic growth. We're also doing the small and medium-sized firms in repect of its role. And we have done a lot of work on investments and the role of foreign multinationals.

    We're also looking, to answer your question, at the linkages between social policies and productivity growth. Economists tend to agree that economic growth affects productivity and social policies. Better economic growth and better productivity growth help towards better social policies, but better social policies will also affect productivity growth. We don't have a definite answer yet on whether better social policies lead to better economic growth and better productivity growth.

    Ms. Cheryl Gallant: With innovation, has there been observed a point of diminishing returns, a point where there are no longer any productivity benefits?

À  (1010)  

    Mr. Someshwar Rao: I don't think so. We haven't reached that, because we are far below the innovation capacity of other countries. Actually, the research suggests that there are increasing returns to innovation.

    Ms. Cheryl Gallant: It was mentioned that right now we have 18% of Canadians 65 years and older, and in 2025 36% of Canadians will be in that bracket. So if we were to look at productivity alone, by how much would we have to increase productivity in order to be able to take care of our seniors and aging population?

    Ms. Renée St-Jacques: I don't think we've done the calculation precisely, but you would need a very significant increase in productivity to maintain our standard of living, that's quite clear. The kind of productivity growth we've witnessed over the last ten years or so would make it hard to maintain a standard of living in the face of the declining proportion of the population that is working. That's a good question, but I don't have the exact figures. We didn't do the calculation.

    Ms. Cheryl Gallant: It was mentioned that government services were not taken into consideration. What about the military? Has there been any study done to compare how the strength of the military or policies of the military, the rate at which we replace our vehicles, for example, affect productivity in the nation? For example, the Americans turn over their vehicles once every ten years, but we use 30- or 40-year-old vehicles. So if we were to have a different policy from that standpoint or a large military, would that create larger productivity overall?

    Ms. Renée St-Jacques: That's a difficult question to answer. One thing is often said, at least at the aggregate level, though it's a bit anecdotal, if you will: clearly, the greater investment in the military in the States has given a big impetus to their level of R and D performance. Therefore, R and D intensity, if you will, investment in R and D relative to GDP, is more because of the military. That has often been said. Also, because of spillovers coming from R and D expenditures, it's quite possible that it has some impact on innovation performance as an economy, and therefore, on productivity. But it's only at that level that I can answer that. I'm not aware of any specific study that looks at the issue precisely and tries to ascertain the impact on productivity.

    The Chair: Thank you very much, Ms. Gallant.

    Now I'll go to Mr. Savoy.

    Mr. Andy Savoy (Tobique—Mactaquac, Lib.): Thank you very much, Mr. Chair, and thank you, witnesses, very much for your excellent presentations.

    I'm quite intrigued--and I've done some reading in this area--by the fact that in specific areas we are substantially higher in productivity than the U.S., and they seem to be resource-based areas, primary metals, paper, and forestry, lumber. In trying to relate that to the size of the enterprises in these various industries, the size of the companies and the nature of the companies, has there been any correlation done between the percentage of SMEs and the percentage of large industries or multinationals in those sectors? Sitting back and looking at it, I think logically you would say that the larger the company, the more access you would have to capital, the more access you would have to R and D, the more innovative they would tend to be, and possibly the more penetration they would have within their company in regard to total quality management and continuous improvement. So has there been any correlation done between the size of the companies in those sectors relative to the size of those companies in the U.S. in those sectors?

    Mr. Someshwar Rao: We have looked at the role of size in general in the Canadian economy, how the small firms compare to the large firms in various industries. We have done cross-sections, not just particularly those sectors, but all the sectors. There is a positive correlation, you are right, between size and productivity level. The foreign-controlled firms in general are more productive, as John pointed out and our research suggests.

À  (1015)  

    Mr. John Baldwin: Someshwar talked about the general tendency, and large firms tend to have a higher labour productivity because they tend to be more capital-intensive. Those exercises that try to ask if they have an even higher level of productivity than you would expect, given that capital intensity, generally find they do not. The difference in labour productivity is primarily a difference in capital intensity.

    I don't know of any study that specifically asks whether in our natural resources sector there is something different about this relationship. One of the reasons is that it's very difficult to get American data on average plant size at that level of industry detail.

    Mr. Andy Savoy: But there is information looking at the general economies of Canada and the U.S. and the percentage of SMEs versus large companies. You have that information, correct?

    Mr. John Baldwin: For the entire economy, yes. This is a joint project we've done with Industry Canada that we just produced in the last three weeks or so. It looks at the differences in the average plant size in Canada and the United States and asks to what extent there is some indication that movement towards SMEs, which we all know has been occurring in Canada, is unique to Canada and in some sense, therefore, a problem, because they generally have lower labour productivity due to lower capital intensity. The conclusion we came to was that while there's been a trend towards more SMEs in this country and a greater percentage of total employment in SMEs, there's been that same trend in the United States. While we have, on average, more employment in the smaller size classes and have been increasing it, the Americans have been doing about the same. While the relative productivity, output per worker, in small firms has been falling in Canada relative to large firms, it has been in the United States too. So the gap probably isn't accounted for by this difference, though we haven't yet put that paper out.

    Mr. Andy Savoy: If that's the case, if we have more people employed by SMEs than in the U.S. and they're increasing in both Canada and the U.S., it's going to be very difficult, with the status quo, to make up that productivity gap. If the trends are going in the same direction and we're behind, we certainly aren't going to increase our productivity relative to the U.S. I was very intrigued by Mr. Fitzpatrick's observations in talking about solutions for the SMEs in Canada. Is there anything in your research you've come across from other jurisdictions that has addressed this?

    Mr. Someshwar Rao: Our research suggests that the SMEs could be more productive if they became much more outward-oriented, in the sense that they export more. In general, there is a strong correlation between the two. One could argue that firms that are more productive are exporting, but there seems to be causation from outward orientation to productivity as well. The small firms that export more, because of the competition and because of their exposure to new technology, new knowledge, tend to be more productive and grow much faster. So there seems to be a strong positive correlation between outward orientation and innovation and productivity growth.

    Mr. Andy Savoy: Has there been any work done by your groups on total quality management, continuous improvement, the penetration of management philosophies in the Canadian economy at the large business and SME levels?

    Ms. Renée St-Jacques: I wouldn't say we've looked at exactly those types of questions, but increasingly, because of the new workforce employer survey, which allows us to link some of those management practices in training and human relations, we've started to exploit this database to ask the kinds of questions that you're asking. With relating not only levels of education, but also levels of training and some of the management practices in the workplace to productivity, we're trying to do some of that work now, but it's not exactly the type of thing you're wondering about, because of the data limitation.

À  (1020)  

    Mr. John Baldwin: To expand on that, we've done a number of special surveys on SMEs for the past 5 to 10 years that have linked the types of management practices you've talked about, at least in the area of total quality management, and the emphasis they have on a number of practices in the human resources area, as well as in marketing, to various measures of performance. We've linked these surveys into administrative data that allow us to look at and track how well these firms have done. Those firms that have generally emphasized the types of things you're talking about, the types of things management experts say are good things to worry about, are those that have done better. There is strong evidence that firms that care about their expertise across a wide range of areas do a lot better than others.

    It's very difficult in these sorts of exercises to pick out the one that really matters. In a survey it's hard to get at that. You have 20 minutes of a very busy businessman's time, and you can only ask broad general questions. It turns out that there are good firms and there are bad firms. There are firms that are focusing on a large number of these areas and tend to do well. Where that takes us is another question. Does it take us down the road of worrying about management strategy and subsidies? I'm not sure.

    The Chair: Thank you.

    Mr. Fitzpatrick.

    Mr. Brian Fitzpatrick: As a comment, I think a worthwhile area to pursue is management approach and whether it leads to higher productivity too, because there's a lot of variation in management approaches.

    I wanted to get back to tax policy. Going back to what I said before, from what I can gather, it's not just cutting taxes holus-bolus that leads to increased productivity and so on, it's how you cut taxes and where you do it. There were some academic people here at a finance committee not long ago who put taxes in three categories, consumption taxes, personal income tax, and corporate and capital taxes. If I understood them correctly, they use a thing called marginal efficiency rates. The marginal efficiency rates basically determine how much economic output you lose for every dollar you take out under these different categories. If I understood them correctly, capital and corporate taxes in Canada are very uncompetitive compared with other countries'. They're actually working as a detriment to investment in capital and technology and equipment and all that sort of stuff. The figure they used was very high. They said we lose $1.53 in output for every $1 we collect out of this category. Has anybody done any studies on the correlation between productivity and these kinds of corporate and capital tax structures?

    Ms. Renée St-Jacques: Of course, we're not experts on tax systems. One thing for sure is that those so-called marginal efficiency costs would tend to rise with the degree of mobility of the resources involved. That is why, when you do those calculations and if you look at the taxes on capital, they will tend to have higher efficiency costs, because capital is more internationally mobile than land, for instance, or even than labour. That's the key reason those marginal efficiency costs tend to increase for capital. That's all I can say. In relating tax rates per se to productivity, the chains of causation are far too complex to make the link directly. I think you have to go through every other step along the way, the capital investment etc.

À  (1025)  

    Mr. Brian Fitzpatrick: If capital markets in the world are truly global and capital can go where it gets the better return on its investment and so on, it seems to me to make sense that countries with very complicated, difficult corporate tax structures and high rates for corporate tax are not likely to be the economies that are going to attract the capital.

    Ms. Renée St-Jacques: That, in effect, is the same as saying they have higher marginal costs for the economy because of the the higher mobility of some resources relative to others.

    Mr. Someshwar Rao: I think Renée is right, we cannot directly look at taxes and productivity, we cannot have just a direct correlation. Taxes work through investment and human capital in a complex manner. For example, investment is affected by a lot of other factors, profitability, competition, domestic innovation, the rate of growth of the economy, productivity level, exchange rate, as well as taxes. It's a complicated process through which taxes affect physical capital, human capital, and innovation. So we cannot directly link them, but we all agree that we have a problem and innovation is a problem. Nobody has yet pointed out that our tax system is the culprit.

    Another point to make is that in the past capital taxes were much higher than personal income taxes, but the budget of 2000 has made a lot of progress. By 2004 or 2005 we will be very competitive with the United States on corporate income taxes. In the past corporate taxes were higher, but we are making progress. That might have contributed to lower investment to some extent, but we are becoming competitive.

    Ms. Renée St-Jacques: Also, I would point out that in the States, as you may be aware, as a result of some devolution to states, some states are talking about raising taxes, maybe not corporate taxes, but some of their taxes. I'm thinking of Texas, of Kansas.

    Mr. Brian Fitzpatrick: I don't want to leave you with the impression that it's a one-horse show, but I agree with what you had to say. It's a question of getting the right mix to get the output you want. If the tax thing is part of the recipe, we'd better look at it, that's the only point I'm trying to make. I don't see it as a panacea for the situation, but it seems to be an indicator. When you look at high-growth economies around the world, this is part of the mix. To get to that kind of mix quickly I think would be a sound policy choice for this country.

    The Chair: Do you have one more question, Mr. Fitzpatrick?

    Mr. Brian Fitzpatrick: It's an area I'd like us to look at if we're going to look at this productivity thing. I just want to explain it, because I did have some practice in this thing. You invest in a company in this country, the company pays corporate taxes, then it pays dividends. You pay taxes again on this. This is the same money. When you sell your shares in this company, you're the same person, the shareholder who invested in the company, the owner, you get nailed again. Then you go to some provinces in Canada and they have something else called a capital tax, which I really think is a Draconian tax. It's a clear signal to drive out investment. You get taxed whether you make a profit or not, they just tax your capital. It seems to be something we have in Canada, but nobody else in this world really deals with. In a lot of ways we've got a situation here that is far from perfect. I don't like seeing my money taxed three or four times. I don't mind paying taxes once, but I don't see it as progressive to tax the same dollar into the ground, as we do here.

    The Chair: Mr. Fitzpatrick, we're dealing with another policy item now. We need to question the witnesses.

    We'll now go to Mr. Marcil.

[Translation]

    Mr. Serge Marcil (Beauharnois—Salaberry, Lib.): I'm finding this whole discussion rather complex. The focus is on productivity. We've heard how productivity levels in the US are higher than in Canada. Yet, the US is in the midst of a full-blown recession and their rate of unemployment is on the rise. Here in Canada, there is no recession and unemployment is declining. I get the impression that so many factors are taken into account when... The corporate charge is not taken into account, and neither is a country's philosophy toward life.

    The fact that a country may have social democratic leanings and a propensity to setting up social systems doesn't factor into the equation when living standards or per capita income are evaluated. Nor is account taken of the services the State provides to the population. If we were to draw comparisons with the US, these services would allow us to lower our taxes significantly, which would result in the living standards of Canadians being deemed considerably higher than that of certain other countries.

    Of course we're speaking in economic terms. If I understand correctly, your basic premise is this: a company that can produce more with less has a higher productivity level. Thus, if 25 employees can build 100 vehicles and, even though I lay off five workers the following week, the remaining employees can build the same number of vehicles, my productivity levels increases. However, I've laid off five persons in the process.

    Last week, the daily newspaper La Presse ran a story by a journalist or economists which touched on this issue of productivity levels and the emphasis placed on labour productivity. Comparisons were made between the United States and Canada and the conclusion drawn that when an increased effort was made to increase overall business productivity levels, occasionally the result was a higher rate of unemployment.

    I'd like you to explain this to me. What's important here? The rate of productivity in absolute terms? What that would mean in essence is an end of taxation of business capital and a reduction on social programs so that businesses would have fewer expenses in this area. However, this could also have a negative effect, since it's cheaper for a American company to set up shop in Canada than in the United States.

    Secondly, I find that we're often comparing apples and oranges. We take two countries, one with a population of 300 million and the other with a population of 30 million , a larger surface areas and hence, higher transportation costs and a very different critical mass. In terms of domestic trade alone, Canada is a disadvantage over the US. If I manufacture shoes in the US, there are 300 million people who need at least one pair of shoes, whereas here in Canada, the pool of potential customers is only 30 million. Therefore, domestic trade volumes will be lower as well.

    As you can see, I'm a little confused about all of this. Everywhere you look, all people are talking about is business productivity and about stimulating the economy. What about workers? When a worker is laid off, I fail to see how this can have a positive impact on a country's economy.

À  (1030)  

    Ms. Renée St-Jacques: I couldn't agree with you more, Mr. Marcil. In truth, the goal is not to lay people off; the goal is to employ workers and to increase their productivity significantly. Why? Because that's how we can maintain our standard of living. That's how, as a society, we can make the kinds of choices you talked about. Do we spend money on public services, or on private consumption?

    We're talking about our ability to make choices as a society when we talk about the GDP per capita. As Mr. Bagnell pointed out before you, obviously the Americans make different choices, but if you look at OECD countries, you'll note that Canada ranks seventh overall. Aside from the United States, the countries that rank above us, namely small countries like Denmark, Luxembourg and Norway, are similar to Canada in that they have made societal choices that more closely resemble the choices Canada has made. However, this hasn't prevented them from having a high standard of living. That's the first point I wanted to make.

    My second point is this: I find it very hard to accept that, to afford to have a society that is different, or better in many respects, from what the Americans have, we must pay an increasingly higher price over time in terms of a growing productivity gap. I don't see this as being inevitable. I believe that as a society, we have to make choices that will narrow this gap and at the same time, maintain our differences with the United States.

    Your comments about the size of our market are right on the money. Clearly this has an impact, particularly in terms of services which are not freely traded on the North-American market. As far as manufactured goods are concerned, I think we should be able to use the Free Trade Agreement to our advantage so as to share the North American market and seek out these economies of scale. Canada can do this just as well as the United States.

    However, it's more difficult to do on the services side of the equation.

À  (1035)  

    Mr. Serge Marcil: You're right, but in the case of Denmark, I can travel across the country in less than a day.

    Ms. Renée St-Jacques: I realize that.

    Mr. Serge Marcil: Take, for example, France, Japan, Spain and Italy, countries that are considerably more populous than Canada. Let's compare our economies. In terms of productivity, where does Canada rank?

    Ms. Renée St-Jacques:Canada ranks fourth among G7 countries. I can't recall our ranking among OECD countries. I think we're 14th, or something like that.

    Mr. Serge Marcil:I have nothing further, Mr. Chairman.

[English]

    The Chair: Thank you

    Mr. Rajotte.

    Mr. James Rajotte (Edmonton Southwest, Canadian Alliance): Thank you very much for coming in. I apologize for being late to the committee.

    I wanted to follow up on what my colleague Mr. Fitzpatrick was getting at. You say we cannot directly link productivity and the tax system, there's more than one factor, and we certainly agree with that, but if you were to identify the factors--and you mentioned human capital investment, the tax system--what else would there be that affects productivity, factors you would point to?

    Ms. Renée St-Jacques: There is a long list of factors that affect productivity, how production is organized in a particular plant, the level of human capital, management practices, depending on the level at which you want to have the discussion. At the aggregate economy level, which is the level we tend to look at, things that seem to matter are things like the level of capital per worker or per hour worked, the size of some sectors that seem to have particularly strong productivity growth over the last few years. The information and communications technology sector in the States is larger than in Canada. Innovation performance matters a lot, human capital, the level of education of your workforce. Those are the things that matter.

    I'm not saying taxation doesn't have an impact on those things, it does, quite clearly. I'm just saying the fundamental drivers are not taxes. Taxes are just one of the policy tools governments may choose to use to influence some of these factors and the behaviour of people.

    Mr. James Rajotte: But if you look at it from a policy-maker point of view, besides tax levels, which we can influence, besides investments in education and research, which we can influence, influencing management practices on a micro level in businesses is something we cannot do. Is it correct to say that from a policy-maker point of view, there are basically two general ways in which we can influence productivity, tax levels and investments in research and education?

    Ms. Renée St-Jacques: There are all sorts of other things. We know as well that openness matters, our trade policy matters, infrastructure investments matter--that's part of the capital a country has at its disposal. So there's a variety of factors and links. When you looked at the innovation system, I'm sure you were struck by the importance of links between the various components of it. R and D is important, but so is commercialization of R and D to reap the productivity benefits. Flexible labour markets, flexible capital markets are important. Mr. Baldwin was talking earlier about how the entry and exit of firms was important for productivity performance. There are a host of factors governments cannot influence directly, but through framework policies, they can have an impact on those particular variables and boost the productivity of the country as a whole. I think there are number of things there. I'm not saying tax is not important, it's clearly one of the important ones, but it's certainly not the only one.

À  (1040)  

    Mr. James Rajotte: In your presentation, Mr. Baldwin, on page 26, it says:

The 1995-2000 period experienced a huge gap in terms of capital intensity in favour of the U.S....; why? Canada experienced a remarkable increase in the number of hours at work; Canada experienced a slower growth in capital services.

    I missed this part in the earlier presentation, but what was the reason for that?

    Mr. John Baldwin: I don't have a final answer, but I guess I come back to Mr. Marcil's comment that countries can function differently and one has to evaluate the performance of the country across a large number of different dimensions. Our productivity fell behind the Americans at this stage, the rate at which we increased investment relative to labour fell behind the Americans, but not so much because we didn't increase our capital over this period of time. This is a period of phenomenal growth. We had massive investments being made in ICT, with companies probably ingesting things as fast as they could. We put a lot of people back to work over this period. Our rate of growth of employment is really quite large, and it's large relative to other countries' standards. Over this period of time we're decreasing our capital-labour ratio primarily because we're increasing our labour ratio, the number of people we put to work so rapidly. It would be nice to have had more capital per worker without having any less growth on the labour side. We would have had much higher unemployment rates if that's what we'd had.

    Mr. James Rajotte: So the U.S. was not doing that.

    The Chair: Mr. Rajotte, we must conclude, because we are into our next section.

    I must apologize to the members who were not able to ask questions. I can tell the witnesses that we will need you to come back as we go down this road of understanding productivity and trying to find some answers as to what has to be done in Canada to improve our productivity. I'd like to thank the witnesses for being with us this morning. Hopefully, as we construct our plan of attack on how we're going to go after this, you'll be able to come back to enlighten the committee a little more, so that when we do the study, we at least have an understanding of the measurements on productivity and where we have to go to get the answers to the many questions that have been left by the committee for the future. Thank you very much.

    [Editor's Note: Proceedings continue in camera]