Going for Growth in Canada: key challenges and how the OECD can help

 

Remarks by Angel Gurría, OECD Secretary-General

 

Ottawa, Canada, 3rd June 2011

Ladies and Gentlemen:

It is great pleasure to be in Ottawa, and a great honour to address such a distinguished audience. I’m here to share with you the OECD perspectives on the main growth challenges that Canada is facing in this critical moment of global economic metamorphosis.

The global economy is emerging from the worst crisis in our lifetimes. Global business confidence and economic activity are slowly picking up. However, the recovery remains precarious and uneven. Many OECD countries still face many challenges, including low growth, high fiscal deficits, high debts, high unemployment and rising inflation, to mention a few.

Canada is in better shape than others. And there is a lot to learn from your experience. As Ted Menzies noted at the OECD’s 50A Forum last week, even the financial sector reforms seem to have a ‘Canadian flavour to them’. Indeed, let’s start by underscoring some achievements.

Canadian resilience: ‘you make your own luck’

Overall, Canada weathered the global downturn well. Its sound financial system and strong initial fiscal position made the country more resilient than most. Subsequent government initiatives such as work-sharing, extended employment insurance benefits and training programmes were also key in cushioning the impact of the recession.

Consequently, Canada’s recovery is now more advanced than most of its economic partners. Output and employment are both back to pre-recession levels. Growth last year exceeded 3% and we expect output to continue at a healthy clip in the next couple of years. Unemployment is set to fall below 7% by mid-2012.
With employment returning, the government has appropriately begun to phase out exceptional measures. While this is done, the focus should now be on training programmes, targeted at the most vulnerable groups such as the youth, the long-term unemployed and low-skilled workers.

The government has also rightly set its sights on balancing the federal budget in the next few years, before ageing starts to bite. With expansion on track and inflationary pressures mounting, the Bank of Canada now has room to continue to reduce monetary stimulus, in order to preserve price stability in the medium term.

Looking forward, and in light of limited fiscal and monetary leeway, Canada needs to build on its successes, and implement far-reaching structural reforms aimed at raising output, jobs and living standards. The challenge here is to “go structural while going social”. Let me share some of our recommendations with you.

1. Canada must streamline expenditures and reform the tax system

Emphasis could be placed on reforms that improve fiscal positions directly, through more efficient public spending, and indirectly through growth-enhancing tax reforms.

As in many OECD countries, Canada’s health care system is straining budgets and threatens to crowd out other spending priorities. Better value for health care dollars therefore needs to be near the top of the policy agenda. 

Another area to look at closely is how governments raise revenues. Canada has already shifted some of the burden from labour taxation to less distorting consumption taxation, but it could do more.

This should include a greater role for consumption, property and environmental taxes, and further progress to harmonise provincial sales taxes with the federal GST. Simplifying the personal and corporate tax codes, notably by closing loopholes, would allow even lower income tax rates, which would stimulate savings and investment.

2. A second priority must be to enhance competitiveness

Canada’s economy is still adjusting to the long-term decline in the manufacturing sector. The country has been particularly affected by a strong real exchange rate, crowding out traditional tradable activities and increasing inter-provincial inequalities. This difficult structural adjustment can be facilitated through various policy initiatives as identified in the OECD’s flagship publication Going for Growth.

Active labour market policies are one example. These include training programmes and job-search assistance to address skills mismatches and avoid persistent unemployment. Canada needs to identify what new skills these workers should be learning to best add value and stay competitive under a strong Canadian dollar.

Canada’s transition to a greener growth model can also be a very powerful driver in this direction. This country has unique advantages to assemble a green growth strategy. It combines a rich and varied mix of energy sources with cutting edge knowledge and capital. There is considerable untapped potential in the country's wind, solar and biomass resources, and there is further scope to foster green innovation.
The OECD’s Green Growth Strategy will provide Canada with an actionable policy framework to build on these comparative advantages and turn green growth into a source of enhanced competitiveness and employment.

3. A third challenge is to catch up on productivity

Increasing productivity is essential for Canada to regain competitiveness and boost longer-term potential output. Although Canada has made great strides over the past decade to increase labour force participation and reduce structural unemployment, ageing population means that growth will need to come increasingly from improvements in productivity.

Canada has in many ways already laid the foundations for high-productivity growth. Among OECD countries, Canada ranks near the top in terms of its highly educated workforce, its multicultural population, and its public support for research and development (R&D). Tax rates on new business investment have come down considerably. It has a diversified and sophisticated knowledge-based economy.

Yet, despite all of this, Canada has lagged behind in productivity performance, ranking in the bottom half of OECD countries. Based on a number of structural policy indicators flagged in our Going for Growth work, we assess that Canada could lock in greater productivity gains through a number of reforms.

Recent OECD work shows that removing barriers to competition can quickly and substantially boost employment and productivity. One way is to continue to lower restrictions on foreign direct investment. The Canadian government has already signalled its intention to relax foreign investment restrictions in telecommunications and air transport industries, and we encourage it to take action in this direction. 

Productivity can also benefit from reducing barriers to competition in network industries such as electricity and postal services, which are still largely owned by the government.

4. Fourthly, Canada must focus on harnessing innovation

In order to help the manufacturing sector move up the value chain, Canada will need to search for new, inclusive and environmentally-sustainable sources of growth through knowledge and innovation. This will require a continued focus on investing in education and research.

Canada has displayed a strong commitment to building research capabilities. You rank among the highest in the OECD for government funding of private research and development. Unfortunately, these policies have thus far borne little fruit in terms of business sector R&D, which continues to be lower than average.
While Canada produces a healthy amount of academic research, it has found less success at commercialising this research into improved business products, performance and productivity. The government has taken welcome steps to encourage better connectivity between university research and commercial innovation.

Stimulating innovation will require a broader approach that goes beyond policies targeted at R&D or specific technologies. Innovation can be nurtured through a combination of factors including better management systems, distribution channels, creative relationships, well-functioning venture capital markets and firm-level training.

Work supporting the OECD’s Innovation Strategy shows that new firms are often the most inventive. A policy environment that facilitates market entry and expansion of start-up businesses is thus crucial for innovation. The Canadian government is moving in the right direction, through recent initiatives, which include support for young entrepreneurs and measures to reduce administrative burdens for small businesses.

5. And finally, Canada should concentrate on education

Innovation requires a wide variety of skills, coupled with the capacity to learn and adapt to new processes or products. Critical thinking, creativity, teamwork and communication are becoming increasingly important.

An education system that equips students with these skills will produce a workforce that can thrive in today’s competitive global economy. Promoting international mobility of talent helps to create and spread knowledge, and it is important to better integrate and recognize foreign-trained workers into the Canadian labour market.

It will also be necessary to overcome remaining weaknesses in the formal education system. In particular, Canada needs to improve academic outcomes among the Aboriginal population. It must also encourage more students to get post-graduate degrees in the areas of science, engineering, and business administration in order to improve both management and technical skills. Beyond formal education, continued life-long skills acquisition should also be encouraged.

Ladies and Gentlemen,

Before the crisis hit, Canada had enjoyed 17 consecutive years of economic growth and one of the highest progressions in real income per capita in the OECD. This impressive track-record earned Canada the title of “the best county in which to live” according to the OECD Better Life Index, which we released last week.
Looking ahead, Canada’s challenge is to keep building on these achievements to develop a sustainable green growth strategy centred on innovation and human capital, and design “even better policies for even better lives”.

Thank you.

 

 

 

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