Province needs to invest in productivity-based economic growth

February 20, 2023
Ken Peacock
Jock Finlayson

Last year, B.C. welcomed some 135,000 newcomers, mainly permanent and non-permanent immigrants drawn from a long list of source countries. There was also a modest net inflow of interprovincial migrants (which now appears to be reversing). The natural population growth rate, which is the difference between births and deaths, has been negative for two years, meaning inbound migration is solely responsible for B.C.’s approximately 2 per cent annual population growth.

And the province’s population looks set to continue climbing at a similar rate, one that’s far higher than is typical among advanced economy jurisdictions. In most of Europe, populations are growing by significantly less than 1 per cent per year; in Italy and many Central and East European countries, they are actually falling. In addition, Japan, China and South Korea all have shrinking populations and dwindling labour forces. In the United States, population growth is running at barely 0.5 per cent per year.

Ultimately, there are only two ways to grow the economy. One is to add more workers, which increases the quantum of “output” the economy can produce. The other strategy is to increase output per employee or per resident. In most jurisdictions, both factors -- more workers and increased productivity -- help to propel the economy forward.

However, as countries confront demographic challenges, notably population aging, the sources of economic growth tend to shift. With its population in steep decline, almost all of Japan’s economic growth over the last decade has come from higher productivity. In contrast, in B.C. (and Canada), economic growth has increasingly been fueled by population growth (and the accompanying expansion in the labour force), with innovation, productivity gains, and capital deepening in the business sector playing smaller roles. The healthiest and most sustainable type of economic growth occurs when the value of what’s produced increases for every employee or every hour worked, and more businesses move up the value chain by quickly adopting advanced technologies and leveraging new knowledge. Unfortunately, that is not the predominant Canadian economic growth model.

As evidenced by the Eby government’s Throne Speech, policymakers in B.C. are now preoccupied with managing the downstream consequences of demographically-driven growth. These consequences include surging demand for housing, health care and other public services; mounting congestion and other infrastructure stresses; and challenges around integrating large numbers of newcomers into the workforce. Based on the Throne Speech, it is clear the NDP government intends to allocate many billions of dollars of additional spending to these priority areas, while also dealing with other hot-button issues like higher living costs and escalating crime.

At a policy level, there has been less attention directed at making B.C. workers and businesses more productive. To enhance well-being, the province should look to create conditions that will support and spur investment in productive capital (including intangible capital) and encourage more B.C. businesses to innovate, export and scale.

We recognize the pressures policymakers are facing to attend to the crumbling health care system, a lack of affordable housing, and various social and environmental concerns. But neglecting the requisites for productivity-based economic growth is a recipe for stagnant and – eventually -- declining living standards.

It is worth noting that many developed countries with slow-growing or even declining populations have been outperforming Canada on the core metrics of economic success – real GDP per person, and productivity growth. Examples include the United States, Germany, France, and a number of Scandinavian countries. Unfortunately, as described in former federal Finance Minister Bill Morneau’s new book, the Trudeau government seems to have given up on trying to bolster the country’s “economic fundamentals,” preferring to focus on increasing the population and spending vast sums of money in a scattershot fashion. As we see it, on its current path Canada’s prospects are not very promising, at least from the perspective of raising real GDP per person and building a more innovative and productive economy.

Our conclusion is that B.C. can’t look to Ottawa for smart economic leadership or sound ideas to boost productivity. Instead, the province will have to focus on leveraging its own assets to craft and implement an agenda to advance prosperity. Such an agenda should aim to strengthen and grow the province’s diverse mix of export-oriented industries, which are critical to paying the bills. B.C. policymakers also need to put more emphasis on improving competitiveness, nurturing capital investment, and expanding the economy’s productive potential – all areas that received relatively little attention in the 2023 Throne Speech.

As published in Business in Vancouver, print edition, February 20, 2023.

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