Industry Committee on Dec. 13th, 2007

[Colin Carrie, Conservative, Oshawa, ON]

It's interesting. When you brought up Europe, I thought of it as an area of the world where there are numerous linguistic challenges and numerous cultural challenges, but they seem to have gotten it together to a certain degree.

Now we're living in a global economy and we want to see Canada to be a global leader. Do you have any statistics to show that by making that change, European countries have become more productive and are able to export, as you mentioned, their services and can work together as a common area to increase the economies of all the countries involved?

[Glen Hodgson]

There has been a long series of academic studies done looking at the European economy. The key way to measure progress is to look at the price differentials between countries with the barriers in place, and then what happens to prices without the barriers. As the prices normalize, which is what should happen in a world without barriers.... You have to account for transportation and distance, but if you take all of those things out, as the price differentials shrink, it is a pure gain for the economy. Consumers then will usually be paying lower prices for things, which translates into more effective, more competitive companies going forward.

I think the anecdotal evidence looks at the share of those major European countries and what share of their exports are traded. In fact, there's a table on that in our report, Opportunity Begins at Home. Maybe I should just turn to it.

Of the major European countries, I mentioned the U.K., 35% of whose exports are services; and there's Ireland, which is a miracle economy, of course, whose services exports leaped from 12% of total trade in 1994 to 32% in 2004. Those two European countries are on the site, but you can delve into the data, and the committee's support from the Library of Parliament could delve into and get those data, which are probably available on the OECD website.

But the evidence is fairly clear that a country like Ireland, for example, has gone through the transition, has adopted the European standard, and has really become a platform for service exports as much as anything else.

[The Chair, Conservative, James Rajotte]

Ms. Osler wanted to comment as well.

[Heather Osler]

It's anecdotal, but we have an international body, which Bob mentioned, whose European hub now comprises over 20 countries, and it's absolutely the strongest part of our organization.

I had the privilege of going over to Italy to one of their meetings, and it reminded me so much of Canada. We have so much to learn, and they are so strong. They have broken the barriers between the different countries, and English is the common language, and while nobody speaks it perfectly, it is the language they use.

[Colin Carrie, Conservative, Oshawa, ON]

You mentioned—

[The Chair, Conservative, James Rajotte]

You've just run out of time, Mr. Carrie. I'm sorry about that.

[Colin Carrie, Conservative, Oshawa, ON]

Okay. Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Ms. Nash, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Good morning, and welcome to the witnesses.

Mr. Hodgson, you mentioned earlier that Canada's productivity was slipping. We have spent quite a bit of time on this committee discussing the manufacturing sector and, most recently, the rise of the Canadian dollar, amongst other factors, impacting the manufacturing sector, and we've heard about hundreds of thousands of jobs being lost and that the full ramifications of this job loss are still down the road.

As you said this morning, the manufacturing sector is far more productive because, I suppose, it's more capital intensive than the service sector. To what extent is the drop in Canada's productivity attributable to the loss of manufacturing jobs and growth of the service sector?

[Glen Hodgson]

First of all, we haven't lost productivity. It's a slower growth rate compared with anybody else in the world.

[Peggy Nash, NDP, Parkdale—High Park, ON]

It's a loss in our standing in productivity.

[Glen Hodgson]

That's right. We have slipped in terms of income per capita from fifth in the world in 1990 to about tenth or eleventh now, and that is purely due to a slower growth rate in output per worker, or productivity, which is the way most economists measure it.

It's actually the other way around. Productivity in manufacturing has actually kept pace with, or been even stronger than, productivity growth in services.

Some economists would say the job loss is actually a good thing, because by investing more heavily in technology and capital, by being forced to adapt their business models, firms are actually really keeping themselves very sharp.

[Peggy Nash, NDP, Parkdale—High Park, ON]

So the job loss would be a function of investing in new technology, whereas most economists would argue that the job loss is caused by other factors.

[Glen Hodgson]

I would argue that the investment in new technology is a response to the need to get more competitive. It's what economists call the shedding of labour.

[Peggy Nash, NDP, Parkdale—High Park, ON]

But I don't think manufacturers have really been making that investment in new technology. Many of them have told us they haven't been able to make those investments, and if you look over the last decade or so, I think many of the manufacturers have been a bit lazy in terms of investing—although some have invested. That's why they were arguing for greater government assistance to be able to do that.

[Glen Hodgson]

You've packed a lot of things in there. Maybe I could help you take that apart.

First of all, a weak currency generally means a slowdown of productivity growth, because firms are able to make their profits without heavy investment in new technology or new technique. Clearly firms have really been challenged the last five years, and in fact the last six months, as the dollar has soared. Arguably, the pace of investment in new technology, new machinery and equipment, has not kept pace with the rise of the dollar. That is part of the scrambling that our business community is doing right now to cope with the strong dollar.

Then add to that the meltdown of the U.S. housing market, the U.S. whole subprime mess, which is really a source of end demand for a lot of manufacturers. People who are making autos and parts are feeling it right now, because the consumer in the United States is very weak.

So those are all factors, absolutely, in explaining productivity. But at the same time, we're pretty close to full employment as a national economy. So even though we are seeing employment losses in manufacturing, many of those people are getting absorbed fairly quickly in other parts of the economy.

[Peggy Nash, NDP, Parkdale—High Park, ON]

I'm just curious about your thoughts on the impact on productivity of that shift.

[Glen Hodgson]

Ultimately it would actually boost productivity, because firms would be compelled, frankly, either to go out of business...and a lot of what happens when your currency gets strong, when you get challenged by new competition from China, from India, from other places, is that the weak fail, and then those resources are reallocated to firms that are actually able to adapt—

[Peggy Nash, NDP, Parkdale—High Park, ON]

Let me help you with what I'm asking.

[Glen Hodgson]

—so it's kind of ironic that productivity goes up.

[Peggy Nash, NDP, Parkdale—High Park, ON]

What is the impact on the growth of our productivity with greater employment in the service sector? Does it boost Canada's rate of productivity that there are more people working in the service sector?

[Glen Hodgson]

That doesn't happen automatically. Remember again, productivity is output per worker. I think what you're talking about is actually overall economic growth in the sector. Clearly the kinds of reforms we've talked about--national standards, reducing barriers between provinces--would very clearly add to both productivity growth and output growth.

[Peggy Nash, NDP, Parkdale—High Park, ON]

But what do you attribute as the major factor in the slowing of our productivity standing?

[Glen Hodgson]

There's no one factor. I wish there were a silver bullet we could point to and say, gee, if we only fixed that, we would solve all of our problems. Clearly reliance on a weak currency for a long period of time--the fact that we've relied on the dollar at 70 cents or lower--created a form of a crutch for a lot of our economy. People came to expect that to be normal. With the tremendous run-up in global commodity prices, that's driven the dollar to sky-high levels. So there's an adaptation shock we're going through right now.

[Peggy Nash, NDP, Parkdale—High Park, ON]

You attribute some of it to the rise in the currency.