Thank you, Mr. Chairman.
Good morning to members of the committee.
I'm going to give you a little bit different perspective. The Conference Board of Canada is the biggest think-tank in Canada by far. We produce about 200 studies a year, whether they're economic research or looking at human resources issues. I'm going to draw upon two or three studies we've done over the last couple of years with respect to services.
I thought I'd start by pointing out the fact that services are about 70% of our national economy right now. Often we're stuck with what I see as a fairly old paradigm, where we think about resource extraction, agriculture, and manufacturing as the core of our economy. That may have been true 50 years ago, but it's not true today.
Everybody in this room today has a service provider. None of us make anything. None of us are knocking down wheat or sawing logs. That is really the face of the modern economy. So as the committee thinks about services, think about the fact that services are the core now of Canada's economy. It's not a little subset; it really is the guts of what Canada does within the world.
I'm just going to say a few words about three studies we've done over the last few years that looked at particular aspects of the service economy. In fact, it links very nicely into Bob's comments about barriers north-south, but I'm also going to talk about barriers across the Canadian provinces that really prevent our service economy from becoming as dynamic, efficient, and competitive as it could be if we could find ways to reduce those barriers.
As to the first study, we have done a report card in Canada for about a decade now. We've just re-branded it. But I'm going to go back to 2005-06. In the fall of 2005, we published a report, called Performance and Potential, which really examined ways in which we could make the Canadian economy more competitive and more effective.
One of those particular segments looked at a Canada-U.S. comparison of productivity by sector. It was based upon work we did with Industry Canada. If you want to call industry officials, Someshwar Rao has been the leader of research in that department for a long time now. He's a first-rate economist.
It was the first time we did a Canada-U.S. comparison of productivity by sector. One of the things we discovered is that in sectors in Canada that are open to international competition—and these are often the traditional sectors, such as forestry, autos, or mining—Canadian productivity is as good as U.S. levels of productivity or even better. But it's in those parts of our economy that are protected—and a lot of those are service sectors, such as financial services, retail, telecom, and frankly, consulting services as well—in those sectors, that we have levels of productivity that are below, and sometimes far below, U.S. levels. A sector like retail, for example, which is a pure service sector, has a productivity level output per worker that is less than two-thirds of the U.S. level.
That might be due to the fact that we have a smaller economy, just a matter of scale, American firms being able to move to scale economies, but it also might be due to different levels of competition between the two economies.
It's very interesting, in the recent debate about whether Canadian retailers should be cutting their prices as the dollar rose up to U.S. levels, what the factors were that led to the slow increase. I would argue that this is a topic definitely worth examining in greater depth, because retail is clearly a service sector that touches all of us. So was it a matter of having inventories that the firms bought when the dollar was at 85¢ or 90¢ and allowing the price to rise slowly, or is there something more fundamental about the nature of our national economy and whether there's adequate competition within retail?
Secondly—and this is a corollary study to it—we put a study out in the spring of 2006, with the wonderful name of Death by a Thousand Paper Cuts. It was really an examination of all the regulatory barriers that exist to competition within Canada, what economists call non-tariff barriers, things other than prices. That gets into the guts of what Bob was talking about, into the design of regulatory practice, standards, whether you need more standardization of standards, whether you need recognition of credentials.
We examined the barriers that exist across the national economy, from east to west, and put a lot of weight on the very many barriers that continue to exist between provinces, and also the misalignment of regulation between the federal and provincial levels. But we looked at the same thing north-south. We looked at the non-tariff barriers that exist, largely in services, between Canada and the United States, hence your point about the barriers that service providers encounter at the U.S. border. You simply don't have free passage to do management consulting in the United States.
The culmination of the study was that we did an econometric analysis looking at the impact of these barriers on Canada's productivity and whether non-tariff barriers really were a factor in explaining the productivity gap already talked about. Its very original research came out with a positive result, that yes, non-tariff barriers, either east-west or north-south, were a contributing factor to the fact that Canada has been slipping in the rankings globally for 20 years now in terms of productivity output per worker. That's an interesting piece of research you might want to refer to.
The third study—and I'm going to spend just a couple of minutes on this too, because my name is on it—was called Opportunity Begins at Home, looking at service exports in particular and what we can do to enhance Canada's service exports.
The facts are a couple years old now, but I think they really do explain a long-term trend. About 13% of Canada's exports are services; 70% of our national economy is services, but only 13% of exports. How do we stack up internationally? Well, for the U.K., it's a third of all British exports; 34% are services. For the U.S., it's 28%. But even for another resource economy, like Australia.... We often use Australia as a reference point. It's roughly the same size as Canada. It has a huge natural endowment of resources. It's a major resource player. For Australia, it's 22%. So the Australians are 50% to 60% higher than Canada in terms of service exports.
We tried to probe into why that existed, and it really came down to three factors explaining why Canada is an underperformer in terms of service exports. And that really does speak, Bob, directly to your comments in terms of management services, but you could apply it to everything from health care management systems to financial services to retail.
It really came down to three factors. One was the desperate need for domestic reform. The fact of the barriers, the fact that we had balkanized our national economy, and the fact that we've had an Agreement on Internal Trade for 13 years now and have made very tepid progress in terms of actually reducing the barriers--that was really an inhibitor in terms of service exports. We looked at sectors like the financial sector, education services, and transportation, as examples of where things like interprovincial barriers have really impeded the ability of Canadian service providers to get to optimal scale.
Second, it was around trade policy, and the fact that the Doha Round has failed now, has collapsed. Services were playing a small part within that. It's been very hard for the global trade community to find a way to reduce barriers in services around the world. We tend to do it on a bilateral basis, or on a reciprocal basis. That is not the basis on which we negotiate free trade for goods. So we're really taking baby steps forward in the whole area of trade globalization around services. And because Canada cannot gain access to other markets, it's no surprise that our service exports have really been impeded.
Third, it was around trade promotion. I think the global strategy that the government has announced in the last few months is a good step forward, but trade promotion is only one part of the agenda. It really starts with reform at home, domestic reform, to allow your service exports to achieve a scale to be internationally competitive and then go forth, combining with market access, which is really critical to success in service exports.
Committee members, that really just gives you a taste of the kinds of work we've done in looking at the service economy and asking questions about how Canada could be more competitive when it comes to both trade and services and the domestic provision of services.