Productivity and Prosperity

May 4, 1999

Chairman, Honourable Members, Ladies and Gentlemen,

Today, you have asked the Business Council on National Issues to address the issue of productivity. Let me say at the outset that while the public debate over productivity is important, I am worried that it has become dangerously focused on arguments over how to describe the symptoms rather than how to treat the disease.

A doctor assessing a patient will normally take his or her temperature. But the thermometer alone cannot provide a reliable diagnosis. So it is with economic health. Productivity, and the rate of productivity growth, is simply one way to assess the health of a nation’s economy. It is an important measure, but it is neither perfect nor the only measure that matters.

What do we mean by productivity? In economic terms, it means the value of goods and services produced in relation to the time, money and resources used to produce them. In more human terms, I might put it more simply — Canada’s productivity performance determines how much a Canadian can make for a day’s work.

Higher productivity leads to a better life for all Canadians. It means consumers are getting better products at lower prices. It means employees can win rising incomes and better working conditions. It means companies can reap greater profits even while selling for less. And it means that Canada’s economy generates more jobs and can support a higher quality of life for each of its citizens.

But let us be absolutely clear. A rising standard of living and an improving quality of life flow from our ability to be more productive — not the other way around.

According to media reports, the Prime Minister said last night that "our standard of living and our productivity will depend very much on the quality of our health care system". I believe very strongly that Canada’s health care system is a competitive advantage. But while healthy Canadians may be more productive, our health care system is not what fuels productivity growth. Rather, rising productivity is what is needed to fuel our desire for better health care.

Let us have no illusions. The ageing of our population means that health care is going to get dramatically more expensive in the years ahead. Health care costs will rise in absolute dollars and in terms of the burden that must be shouldered by each working Canadian.

Fewer working Canadians can only support quality health care for more retired seniors if those who work earn substantially higher incomes — or pay much more of their incomes in tax. And in a global economy, Canadians will only be able to earn a lot more for each day’s work if they are much more productive than they are today. Even if we just want to maintain the current quality of health care, we will need to achieve a dramatic increase in productivity.

Measuring productivity is difficult. We should interpret the results carefully and over the long term. And we must remember that the measures we do have are only estimates. They are not holy writ.

Measurement issues are especially troublesome in the service sector, which is also the major source of job growth. What is the extra value, for instance, of having 24-hour access to cash through automated tellers instead of having to go to a bank branch during business hours? As customers, such convenience obviously improves our productivity, but by how much? Similarly, companies have invested massive amounts in new technology. Common sense says this must have paid off for companies by increasing their competitiveness. But the productivity statistics show scant evidence of such improvements. When it comes to measuring productivity in a meaningful way, there is much we still do not know.

It is important not to get bogged down in the details. Our goal should be to adopt policies that will lead to stronger economic growth, a rising standard of living and improving quality of life for Canadians. No matter how we measure it, higher productivity is necessary to reach that goal. But how to improve productivity is a challenge with many dimensions.

Some of these dimensions involve broad macroeconomic conditions. Canada is now a land of low inflation and interest rates, balanced budgets and surpluses and borders that are open to trade and investment. All these play an essential role in creating the right conditions for strong investment and productivity growth.

But clearly macroeconomic conditions alone cannot foster sufficient productivity growth to fuel a rising standard of living. We also must find ways to influence the way institutions and individuals behave in both the public and private sectors.

What is it that makes a company invest in new technology, take chances on long-term research or take the risk of adopting innovative ways of working? What determines whether a new research project will be located here rather than somewhere else the company does business? Why does an individual choose whether or not to invest in building his or her knowledge and skills?

These are just a few of the questions that the BCNI will be addressing over the next year as part of what we are calling the Canada Global Leadership Initiative. Our goal is to figure out what must be done to make Canada a home where companies can grow successfully in the global economy and where Canadians are once again confident in their ability to build better lives for themselves and their children.

Some elements of the solution are obvious. If you want to increase the number of people who take risks with innovation and invest in greater productivity, you increase the rewards for success. The best way to do that is to cut taxes — at both the individual and corporate level. But achieving our goal requires much more than just tax cuts.

Let me be perfectly blunt. There have been suggestions that stemming the brain drain requires cutting Canadian taxes to match the levels of the United States. With respect, that is not good enough. If Canada wants to compete for investment with the United States on an equal footing, we have to be clearly better than the Americans.

This does not mean, however, that we should blindly mimic American tax rates and policies, to turn Canada into a kind of carbon copy with a conscience. We have to be better in a distinctly Canadian way.

I do not think that we can succeed without substantial tax cuts, but our search for answers must be broader. In particular, we have to come up with better ways of developing and keeping our human capital — the brainpower that fuels the knowledge economy. We have to look at the effectiveness of our schools and of our post-secondary institutions. We have to find ways of improving access to lifelong learning, in the workplace and beyond.

We need to improve the environment both for basic research and for the development of stronger linkages to the marketplace. We have to be relentless in our search for ways to make Canadians and their employers more innovative, more entrepreneurial and, yes, more productive.

If Canada can succeed in this quest, we will see more rapid growth, higher real incomes and an improving quality of life — and we will report higher productivity along the way. But the challenges of the global economy are as relentless as its opportunities are vast, and if we falter, sagging productivity will be the least of our worries.