How to solve the "Canadian Productivity Puzzle"

Consider this. Canada has a very attractive investment climate:

• the cost of capital is quite low
• inflation is also at low levels
• even at current exchange rates, the Canadian dollar is still at a much stronger level than a decade before, thus making imports of needed capital goods so much cheaper
• the current Conservative government has worked to decrease levels of corporate taxation
• depreciation allowances on new equipment are among the most generous in the world
• incentives for spending on research and development are also attractive
• free trade agreements are in place with many of our large trading partners, and more are in the pipeline

But why is our productivity lagging?

• it has hardly changed at all from the early 1970s
•  there is strong evidence that Canadian businesses do not adopt best business practices with the enthusiasm shown by their foreign counterparts
• even when they do invest, they do not even get 80% of the consequential rise in productivity that similar US firms achieve

There are various reasons for why this is happening, as noted in a 2010 report from TD Bank:

•  many Canadian industries are shielded from the effects of competition that outsiders face
• there is a reluctance to invest in levels of education demanded of employees by their foreign counterparts
• there is similar reluctance to select available talent brought in by recent immigrants
• incentives appear to be concentrated on the type of inputs, as opposed to desired outcomes (the Small Business Deduction is a good example of this, as it discourages business from expanding to a more desirable size to take advantage of economies of scale)
• there is little effort to develop and protect intellectual property rights that may arise from R&D that has been undertaken
• we must not ignore the excessively risk-averse attitudes Canadian business leaders have historically exhibited

When expressed like this, the solutions would appear to be obvious, but the last factor (in my personal experience) is the most destructive. I have helped to turn several enterprises around through improving how they achieved things, only to see such improvements reversed through subsequent changes in management that wanted to return things to circumstances they were more comfortable with (usually to disastrous results). Nevertheless, the outcomes that are necessary for Canadian business to thrive must still be actively sought, and such efforts are, to not surprise, easy to achieve. As always, I am ready to help.

Jim Flaherty, the man that saved the world

At first glance, the title appears to be somewhat over the top, but consider the reaction when Jim Flaherty's death was announced yesterday:

• proceedings immediately halted in both houses of the Parliament of Canada,
• politicians on all sides welled up in tears, paying tribute to him,
• a meeting of the G20 finance ministers and central bank governors was suspended, in order for all present to publicly pay their respects,
• among comments internationally was the observation that his views were always actively sought in world meetings!

Now that is high praise.Although a social conservative, he was also a master of political economy. He helped Canada to avoid the massive aftershocks of 2008's Great Recession, raised consumer confidence, and brought about some compassion as well, by:

• making massive investments in infrastructure, ,as well as shoring up GM's and Chrysler's Canadian operations (through huge bumps in deficit spending),
• eliminating the hollowing-out of tax revenues through the abuse of income trusts,
• implementing a two-point reduction in the GST,
• tightening borrowing requirements for household mortgages,
• selecting, in a brilliant move, Mark Carney to head the Bank of Canada (which later led to his being poached by the Bank of England),
• giving investors greater flexibility through the introduction of Tax-Free Savings Accounts, and
• introducing the Registered Disability Savings Plan for helping the more vulnerable members of society.

 As a result, Canada has weathered the last few years relatively better than most other countries, and Ottawa is one year away from returning to balanced budgets.

There are missed opportunities to note:

• his initiative to introduce a national securities regulator was shot down for constitutional reasons, but he still kept working on setting up an alternative that would work (for which we should stayed tuned),
• the recession resulted in a massive hollowing-out of Canada's manufacturing capacity and an over-dependence on resource industries, which is not a long-term recipe for economic stability (but that is a failure of corporate Canada, and not of government policy),

But I digress. He will be truly missed.