Uh Oh - Canada

Today I post an exerpt of a paper I am working on. I was supposed to blog on the new IPAD, but unfortunately I am too busy to write supplementary material this week. Next week I should be back on schedule with a post on the Olympic Games, just in time for the opening of the Vancouver Olympics.

Introduction
Every year, the World Economic Forum produces a report called “The Global Competitiveness Report” to assess the competitiveness of 133 countries based on specific indicators separated in 12 different pillars (see exhibit 1). In 2009, Canada ranked 9th in the world, up from 10th placed in 2008. According to the World Economic Forum metrics, the Canadian economy particularly falls short in the following pillars: macroeconomic stability, innovation, goods market efficiency and business sophistication (see exhibit 2). In this paper I will attempt to identify underlying issues that may be responsible for a lack of performance on the problematic pillars and provide short and long term recommendations that may help the Canadian economy become more competitive globally.

Analyzing Deficient Pillars

Although Canada has weathered the recent economic downturn quite well compared to its closest neighbour, the United States, Canadian Budget Officer Kevin Page has warned that the government and Bank of Canada forecasts for economic recovery were too optimistic, and in the meantime, austerity measures would be difficult to sustain when large debt payments would come to term. Additionally, Page identifies aggravating factors such as an aging population and scheduled tax cuts . Canada’s macroeconomic stability ranks 31st (out of 133) and World Economic Forum analysts warn that macroeconomic stability would be crucial for sustainable competitiveness of the Canadian economy.
Second, the Canadian economy still largely relies on its natural resources for economic growth, which is problematic since global competition, exchange rate volatility, lagging productivity trends and shortage of labour is taking a toll on the primary and secondary sectors . By and large, the sectors in question have been protected through subsidies and tariffs which come at the opportunity cost of supporting more forward looking industries. For instance, Canada ranks 12th in innovation and could be losing out in strategic industries that require expertise, research and development and innovation (see exhibit 3).
Third, Canada places 16th in goods market efficiency, which reflects its burdensome tax structure for businesses and restrictive labour policies. In fact, a World Economic Forum survey demonstrates that tax rates and restrictive labour policies came in second and third place respectively in terms of problematic factors for doing business in Canada in 2009 (see exhibit 4). Marie-Ann Carignan, originally from the United States, noticed a significant difference in labour policies when she assumed the position of CEO of Purkinje in Canada: “I am forced to hire external consultants on a regular basis to fill full-time positions because it is so difficult to fire employees .”
Fourth, business sophistication is deficient as it places 12th in the World Economic Forum report. The National Director – Manufacturing of Business Development Bank of Canada, Carl Gravel believes that this is caused by Canadian entrepreneurs being generally risk-averse, complacent and over reliant on the United States market .

Recommendations

First, to tackling the macroeconomic problem is by no means a simple task. I believe that in the short-term, the government should focus on lowering consumption taxes to spur household spending in an attempt to raise more taxes. Also, on the monetary side, the Bank of Canada should coordinate in order to ensure that inflation does not go out of hand while the economy recovers. By keeping the interest rate relatively low, and slowly rising it as the economy picks up, incentives for domestic business growth would also remain on a short-term. Further, expansionary policies should help the Canadian dollar remain competitive to encourage exports which would also help reduce the deficit. However, once the economy fully recovers, the second phase would be to further reduce the barriers to foreign trade in order to foster healthy competition within the Canadian economy. According to the Institute for Competitiveness and Prosperity, adopting policies that will encourage FDI, foreign subsidiaries and headquarters in Canada would be critical in the reform of the Canadian Economy . Specifically, lowering corporate taxes, reducing strict controls on FDI and abolishing the government support of traditional “champion industries” would help the economy move to the next level.
Second, attracting world talent and fostering local genius would help constructing industries that are more knowledge based. Concurrently, ensuring that there are opportunities for those individuals to develop strategic technologies would also help build sustainable country advantages. Motivating youth to be more proficient in math and sciences, reducing the rate of high school drop out and attracting investment in strategic technologies such as solar power should be on the agenda of the Canadian government to attack this problem. Also, lifting strict policies on certification recognition from foreign countries would definitely make Canada more attractive to international talent.
Third, Canada should learn from its Scandinavian counterparts where the leading paradigm in terms of labour policy is flexicurity, which aims to protect the employability of citizens rather than protect the particular job or position of workers. This way, the labour would be more attuned to the changing reality of structural precariousness in industry, but also give much needed flexibility to employers.
Fourth, business sophistication could be increased by adopting programs to give tax incentives to companies that implement changes in business processes that make demonstrable increases in productivity. Also, there are a disproportionate number of managers with business degrees in the United States than in Canada, which may explain why there is a lower level of business sophistication (see exhibit 5). Mandatory business training for Canada’s managers that is funded both by the private and public sectors would then help increase business sophistication.

Conclusion

Canada is certainly improving on the global competitiveness front. However, certain weaknesses must be addressed in order to ensure sustainable growth in the future. Businesses and governments must be more forward looking and opportunity seeking since the United States market may become less attractive while emerging and developing markets are largely untouched by Canadian businesses. In this context, the role of the government is to first ensure macroeconomic stability and then help foster strong domestic businesses that will be able to seek the opportunities available outside Canada, since Canada on its own is just not a large enough market to be sufficient for continued growth.

Click to view exhibits

Endnotes

Canada’s chronic deficit ‘not sustainable’: federal budget office” The Vancouver Sun, January 13, 2010, http://www.vancouversun.com/sports/Canada+chronic+deficit+sustainable+federal+budget+officer/2437579/story.html, accessed February 2010.
Carl Gravel, “Helping Canadian SMEs Becoming Globally Competitive,” MBA class discussion, January 12 2010, Desautels Faculty of Management, McGill University, Montreal, Quebec.

“Global Competitiveness Report,” The World Economic Forum, 2009 P.110.
Marie-Ann Carignan, “Managing in Canada and the United States,” MBA class discussion, February 2 2010, Desautels Faculty of Management, McGill University, Montreal, Quebec.
Carl Gravel, “Helping Canadian SMEs Becoming Globally Competitive,” MBA class discussion, January 12 2010, Desautels Faculty of Management, McGill University, Montreal, Quebec.
“Flourishing in the Global Competitiveness Game,” The Institute for Competitiveness and Prosperity, September 11, 2008, P. 11.