The core hypothesis—and we have the evidence to show this—is that Canada has been slipping in terms of wealth creation within our economy for at least 15 years now.
We believe we're slipping for two reasons: one is the structural change on how the world economy is organized—what I call the shifting tectonic plates of the global economy—and two is the fact that the model for international business has changed. I came up with a phrase to describe this about five years ago. I call it integrative trade, which is really businesses repositioning parts of their supply chain around the world because of lower barriers to trade over the last 20 to 25 years.
Here's some of the evidence. This shows you Canada's productivity growth rate compared to the other countries in the OECD, the major industrial countries, since 1999. You can see where we are: we're the red bar pretty close to two-thirds of the way across the chart. The United States has stronger productivity growth. You can see that countries like Slovakia, Korea, and Ireland have double or even triple our annual growth rate for productivity. That, accumulated over time, of course, turns into things like real wages not going up very rapidly.
Mr. Julian last time talked about income disparity and the fact that family incomes don't go up. That flows directly back to very weak productivity performance relative to most other countries. It becomes even more striking when you compare Canada to the United States. This gives you a 25-year comparison of Canada-U.S. productivity performance. There's where we are and there's where the Americans are. That translates to a gap of probably about $8,000 to $9,000 per capita across the country. That's equivalent to Ontario's spending on education per student.
So it shows you that basically if we could close the productivity gap somehow, you could have a health care system and an education system functioning at a very high level. It really translates into the wealth of the society. The 2006 data, which are very preliminary, show that Canada has again fallen well below the United States. It's very striking—the only period on that whole chart for 25 years when Canada actually matched the United States was in 2005, and that was as America was going through a serious adjustment in the value of their currency.
I personally believe that the idea of closing the gap with the United States is folly. I think we should be trying to stop the gap from growing any further. If we set that as a first step, that would be a significant step ahead. We are now at 83% of U.S. levels of productivity. We have years of analysis showing that. In fact, there's very strong consensus. Almost all economists in the country agree on the data and on the prognosis.
On the integrative trade side, this just gives you some evidence for why I believe so strongly and why in fact the Conference Board believes so strongly that foreign investment is such a key driver of international business today. The two bars show you annual growth rates in FDI—foreign direct investment—exports, and GDP. It's fairly simple to see what the driver is today, what the fastest growing component is: it's international investment at pretty close to double exports and more than double GDP.
So rather than thinking about trade and investment, arguably, we should be talking about investment and trade, creating an investment climate in Canada that attracts our fair share of global investment and at the same time does things to encourage Canadian businesses to use outward investment to position themselves around the world.
This is just another piece of evidence of integrative trade. This shows you—and it's a very busy slide, but I'll walk you through it very quickly—the domestic content of our exports by various sectors.
On the far left we have mineral fuels—oil and gas—and you can see that domestic content, of course, is very high. We import a little bit of technology machinery to support the oil and gas sector, but it's very high.
On the far right you have the auto industry; it's below 50%. In fact, Canadian content in many of the vehicles manufactured in Canada is only about 32% or 33%. The majority of the vehicle actually consists of parts and services that come from abroad. That's evidence of very deep integration within North America and the global economy.
It's almost like a saddle. You have high Canadian content for resources and for services, and then for manufacturing you have much lower levels of Canadian content—much higher levels of integration—largely within North America.
Again, this is part of the evidence as to why I thought the concept of integrative trade was so important. Of course, I spent 10 years of my career at Export Development Canada. It's now quite fundamental to their business model to try to figure out how to support Canadian business internationally, mindful of the fact that we're deeply integrated on investment and on imports as a key element of exports.
In volume one of our report, we then point to some immediate challenges, and as you'll note, we've put sustainability at the top of the list.
Our project went on for three and a half years. This didn't emerge yesterday; it is something the board has thought about for a long time. In fact, Gilles has led that business over the last 15 years. We really think we have to find a way to get the balance right between economic growth and environmental protection. Recommendations in the report address that issue directly.
Second, the huge global economic imbalances that exist are an immediate risk. The last time I checked the numbers, the United States had a current account deficit of almost $900 billion. That is 6.5% of the U.S. GDP. They are massively dis-saving—they're consuming more than they earn—but the rest of the world, because the rest of the world is in a cash surplus, has the liquidity available to actually keep feeding American consumption and investment habits. That money has come from Japan; then China was added to the list; and now it's the gulf states and the oil exporters who are the sources of funds.
For the moment it looks like it's in balance, but the scale of the disequilibrium is so large that one day investors could wake up and decide to no longer keep such a massive stock of savings flowing to the United States. At that point, adjustment would have to happen; it wouldn't be pretty, and it wouldn't be an easy, direct thing, so we've flagged that.
Third on the list is the suspension of the Doha Round. There is a little glimmer of opportunity between now and July, when the U.S. President's negotiating mandate expires, but we think the likelihood of that round being completed is probably one in three, even one in five.
Because of the imbalances and because of the surplus we have with the United States, if the Doha Round fails, we go back to a very protectionist U.S. Congress, and we have to think immediately about Canada's economic interests. We've seen the whole round of softwood lumber. You know that far better than I do, and what it translates into in terms of economic cost and job losses. We have to be very mindful of the fact that if we can't proceed multilaterally, we go back to bilateral trade deals.
Last, we have the emerging markets themselves, which are competition every day. China has now surpassed Canada as an exporter to the United States in one month. Three years from now that'll be the trend: China will be more important to the United States than Canada. The flip side is that there is a huge market of consumers there, and Canadian business has to find a way to tap into it.
I'll just give you a little graphic as to how big the U.S. current account deficit is. It's gone on for a long time. It actually started with Bush, the father, and it's gone on to Bush, the son. My fear is that it'll be the next president who will have to actually solve the problem. The scale of the imbalance is unprecedented, really, in economic history.
Again, I think there's a very strong consensus among economists. We know what the problem is. How do we solve it, then? Over the three volumes of our report, we point to seven strategies. I'll go through them very quickly because I've talked about them already.
Strategy number one is to embrace productivity and competitiveness as a national priority within Canada. I spent six months coming up with this picture to try to give you a graphic image of what a national productivity strategy would look like.
At the core are human capital, physical investment, and innovation. Every business, every organization, and government policies all have to be wrapped around that, but around it you have to put a national operating environment. The Canadian economy is highly balkanized; we've created barriers at the provincial boundary lines, we have misalignment between federal and provincial regulations, we have all sorts of tiny barriers to competition that have really made it hard for our business to achieve optimal scale and to compete in the world.
Around that, we're now integrated within North America, and of course we're part of the global economy, so a national strategy has to have a plan for all of those; you have to find a way to incorporate all those elements into a national strategy.
Strategy two, therefore, of the five in volume one, is that we believe it's critically important, as we say, to create a single Canadian market. And that means reform and adjustment on many fronts, improved alignment of regulations, and reduced barriers between provinces—barriers to human beings, to goods, and to capital.
We need to develop innovation strategies within businesses and governments to foster knowledge creation and innovation within Canada.
We need to reform the tax system for productivity. There we point to things like working income tax credits, as the municipal task force in Toronto recommended, and the removal of capital taxes, but also to improved alignment of our tax system at all three levels. And cities, arguably, are the victims right now in terms of fiscal imbalance in the country. Cities don't have the same fiscal capacity as the other two levels of government, so our third volume focuses on that to a huge degree. There's been tremendous media pickup in the last week on our cities work.
Last are investment in infrastructure and of course keeping the border open. We're doing a very interesting study right now at the Conference Board, looking at how trade has been affected since 9/11 and whether the border is working as efficiently as it should. As you can see, this shows you Canada's relative R and D performance within the OECD. We're, sadly, the little black line at the bottom. We are so far behind the field it's very striking—little countries like Finland are now blowing us away in terms of investment in research and development—and too much of that is public sector investment. The private sector makes up only about a third of overall R and D investment within Canada.
Strategy three is to rethink the workforce. We've done a lot of work on immigration policy and on the need to retain older workers, change our attitudes towards older workers, raise the level of investment in education, and ultimately, embrace the concept of lifelong learning. So we have a very complete agenda there. I won't address that in more detail now.
Strategy four, and this is what you care most about, is that we need to rebuild international trade and investment into the national productivity strategy.
I see that some of you are flipping pages right now. This presentation is not identical to the one you have, but it's all in the report, if you take a look at the report.
The elements of a national trade investment strategy for us include re-becoming a major player in foreign investment. Gilles, maybe you want to speak to this, because you actually did the research on this.
