Economy: Canada needs to boost innovation and human capital to sustain living standards


13/06/12 - Canada has weathered the global economic crisis comparatively well but will have to become more productive to sustain its high standard of living, according to OECD’s latest Economic Survey of Canada.

The report, presented today in Ottawa, notes that a timely fiscal stimulus, low interest rates, a solid banking sector and revenues from natural resources helped Canada  return to a stable growth path after the global economic crisis of 2008-09. With rising real estate prices and high household indebtedness now posing new risks, the OECD projects that Canada’s economy will grow by around 2¼ per cent in 2012, and by around 2½ per cent in 2013.

The report identifies sluggish productivity growth as the main long-term challenge facing Canada’s economy. Per capita income has increased in recent years, as more people entered the labour force and oil and other commodity prices soared, pushing up the value of the Canadian dollar. However, the amount of labour, capital and natural resources needed to produce a unit of GDP has remained largely the same over the past few decades.

Canada’s overall productivity has actually fallen since 2002, while it has grown by about 30% over the past 20 years in the United States. At the same time, income has shifted towards the resource-rich western provinces, while the regional economies of Ontario and Quebec are still adapting to increased external competition resulting from the high exchange rate.

“Canada is blessed with abundant natural resources. But it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and an equitable distribution of the fruits of growth,” said Peter Jarrett, one of the authors of the study and the head of the Canada division at the OECD Economics Department.

The OECD identifies two key priorities for meeting this long-term challenge. First, Canada needs to boost innovation. Canada has world-class research institutions and provides strong public support to business investment in research and development (R&D). However, the business sector devotes only about 1% of GDP to R&D, compared with 2% in the U.S. and more than 2.5% in Japan, Korea and some of the Nordic countries. Canada remains a low performer on business investment in R&D, even when the large share of natural resource production is taken into account.

The OECD recommends more focused support for business investment in R&D. The government should maintain the current system of tax credits; however, particularly generous credits to small Canadian-owned private firms should be reined in and partly replaced by more targeted direct grants. Opening up network industries and liberal professions to more competition would also enhance incentives for innovation, thereby generating higher productivity.

Second, Canada should invest further to improve both quality and access to tertiary education, to maintain the supply of highly skilled workers as the population ages. Financial assistance to students should become more targeted and granted on a means-tested basis. This would help reduce the barriers for financially disadvantaged students and promote more socially inclusive growth.

Tertiary education should also become more flexible and facilitate lifelong learning. Canada should seek to attract more foreign students into its tertiary system and make it easier for them to work and stay in Canada after graduation. Finally, the report suggests that universities be differentiated between institutions that engage in research and those that focus primarily on teaching.

Further information on the Economic Survey of Canada is available at:


For more information journalists are invited to contact Matthias Rumpf at the OECD Washington Centre on +1 (202) 445 80 58


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