26 — Sunday, October 3, 1999 — North Shore News — Canada’ S prt Mare Law Jason Clemens WHETHER cr not Canada has a productiv- ity problem is one of . the most hotly debated ' issues in Ottawa these days. In recent statements to the public, both Prime Minister Chretien and Finance Minister Paul Martin have said that ‘they do not believe that pro- ductivity is a problem in Canada. But studies released by orher organizations, inciud- ing Industry Canada and the « Cente for the Study of Living Standards, make the opposite * chin: that Canada suffers : from a significant productivity . -. problem, and without major improvements on this frent, © Hving standards in Canada are . likely to suffer. In support of their posi- tion, both the Prime Minister and the Minister of Finance have cited a recently released study by KPMG. According to this study, which compares business costs in all G-?7 coun- tries as Well as Austria, Canada takes the tep position as the country with ihe lowest over- all business costs. The study finds that averaged, over nine major industries, Canada’s costs are 7.8% lower than the USS., 14.6% lower than Germany, and 24.4% lower than Japan. According to the Chretien government, this implies that Canada is an attractive place to invest. From this inference, Chretien and Martin conclude that Canada is in good shape and we need not worry about productivity. What both Mr. Chretien and Mr. Martin are talking about is cost competitiveness, not productivity. Productivity refers to the efficiency with which an economy transforms inputs — labour and capital — into outputs (i.e. goods and services). A more productive economy requires fewer inputs to praduce a given quantity af output. Economists agree that productivity growth is essential for long run increases in living standards. Cost competitiveness, in contrast, is simply a ranking of the amount it costs in a given currency, to produce a given amount of Output in a particu- lar country at a given point in time. While more productive economies are likely to have lower business casts, other fac- tors, such as exchange rates, tax rates, and regulations will also affect costs. In the KPMG study, costs in each country are measured in current U.S. dollars. Hence, fluctuations in the exchange rate will affect cach country’s position in the ranking. A quick glance at the KPMG study reveals that one major source of Canada’s cost com- petitiveness is the low valuc of the Canadian doliar (relative to the U.S. dollar). According to the study, Canada’s cost advantage over the U.S. van- ishes if the Canadian dollar appreciates to $0.79 US or higher. Many economists esti- mate that the purchasing power parity value of the Canadian dollar is roughly $0.83 US. Hence, an appreci- ation cf the Canadian dollar would eliminate Canada’s cost advantage relative to the United States. A more instructive way to gauge Canada’s economic per- formance is to examine pro- ductivity statistics. Productivity is the corner- stone of economic growth. We are wealthier than our ances- tors and our Third World neighbours largely because we are. Productivity also affects our position relative to other countries in the world: che move productive we are in Canada, the more effectively we can compete in world mar- kets. A slowdown in the rate of productivity growth neces- sarily implies a slowdown in the rate at which living stan- dards increase. Unfortunately, the recent productivity numbers are not encouraging. The data reveals With the money saved, celebrate frozen Grade A Turkey, 9 ke "op lees. dust our-way of saying. ” |. thenks to our best customers. : ete var points to get some great * (gkeluding Rutterbell and*.. | - * Western Cisasic Basted, Frozen) are more productive than they that Canada’s productivity growth has been among the worst in the Organization for Economic Cooperation and Development (OECD) since the 1970s, Among G-7 countries, Canada is the only nation to experience negative productiv- ity growth during the 1979. 96 period. As a result, real ” income per capita has. stagnat- ed in Canada: during the 1990s, Canada’s per capita. . : income dropped from third. | place to ninth place among’; the OECD couniries. This is: ° 5: why Industry Canada and «;.: many other observers believe thar Canada does in i a productivity proble Hence, if the Chretien * government is truly inte in impraving the economic well being of Canadians; it. should start by listening to one of its own. ministri There is a growing body of: research aie g ‘ander the auspices of Industry Canad; - that identifies some of the’ improvement.) Undoubtedly, the time come for the federal cabinet seriously examine this body research and fa: . -On this basi Clemens ave polity. taabee The Fraser. Institute, © Vancouver-based econat think-tank.