Will the kids be alright? Will they prosper? These are questions all parents ponder. For a child born today, their standard of living during adulthood will hinge upon the success of their parents’ generation in raising per capita gross domestic product (GDP per person). Small shifts in the trend growth rate in GDP per person lead to substantial differences in living standards over the course of a generation.
Canada ranks 22nd in the world by GDP per person, a testament to the efforts of past generations. From 1961 to 2000, GDP per person grew at an average rate of 2.3 percent per annum. It thus doubled every 31 years: a parent could expect their children to grow up and earn about twice their income, on average.
That era is a faded memory. Since 2000 in Canada, growth in GDP per person has trended at 0.9 percent per annum. It takes 74 years to double at that rate, or roughly three generations. In the past decade, growth in GDP per person has dwindled to just 0.6 percent per annum. If sustained, it will take 126 years – four to five generations – to double. Today’s parents can only expect their great-great or great-great-great grandchildren to earn twice their income today!
What’s causing living standards to stagnate? A key contributor is slower growth in labour productivity, or GDP produced per hour of work. Each year, Canadians strive to be more productive. We upskill, deploy more capital equipment, and reorganize companies and industries to produce more goods and services than we did last year. However, these days we’re doing so at a very languid rate.
For British Columbians, the good news is that the province has closed its usual 2-5 percentage point productivity deficit with the rest of Canada. The bad news is that Canada’s productivity performance is not impressive compared to other advanced economies. In the late-1970s, Canada’s productivity level was only 10 percentage points lower than that of the U.S. Today, we’re 26 percentage points below the U.S. and 22-23 percentage points below Germany and France.
How could we speed things up? First, Canada could increase its stake in the post-industrial global economy where digital technologies enable firms to produce at vast scale. Larger businesses tend to have higher productivity, pay higher wages, spend more on research and development, and are more likely to export. B.C. has one the highest concentrations of small businesses among the provinces: only 2 percent of businesses in the province employ 50 or more people. Perversely, our tax system rewards firms for staying small through significantly lower statutory rates and effective tax burdens. A smart economic policy would not discourage firms from scaling up.
Second, we should promote more open and intense competition in product markets. Sheltered markets dampen the imperative for firms to innovate – or scale up – to survive. When new firms and entrepreneurs force unsuccessful or outdated firms to exit, labour and capital are freed and reallocated to better uses elsewhere in the economy. This process of renewal, or “creative destruction,” is the beating heart of economic progress.
Third, we should streamline regulatory processes. Canada’s approvals processes for new industrial projects and infrastructure increasingly resemble the perilous labyrinth of Shelob’s Lair in J.R.R. Tolkien’s “Lord of the Rings” trilogy. Every major economy in the world ranks ahead of Canada on major project approvals. And our permitting times are four times longer than Denmark, three times longer than the U.S. and one-third longer than France.
Fourth, in the digital age, the scarce resource for scaling highly‑productive firms will be human capital, or “talent.” Firms need people with social and creative intelligence and with advanced skills in areas like entrepreneurship, management and science, technology, engineering and mathematics. We should prioritize these skills in our education and immigration policies.
Finally, Canada has world-leading research institutions but has long struggled to commercialize its innovations. When new technologies are created in Canada but sold to non-Canadian companies, we forgo the lion’s share of benefits from scaling up home-grown technologies. We should retain greater ownership of Canadian-developed ideas.
Our children’s future living standards depend on our ability to raise productivity and GDP per person. Over the course of a generation, small shifts in trend growth rates add up to substantial differences in living standards. Canada needs to get faster at finding more efficient ways to do things.
David Williams is vice-president of policy with the Business Council of British Columbia.
Published August 8 in the Vancouver Sun.